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International relations

Land-locked Laos on track for controversial China rail link

Work commences on long-planned railway project but broader benefits remain in question

Tunnel drilling underway on a mountain outside Luang Prabang -- one of 75 tunnels to be drilled for the railway. (Photo by Peter Janssen)

LUANG PRABANG, Laos -- Construction of a 414km railway line linking China to mainland Southeast Asia through Laos is underway in Phonesai village, about 30km north of Luang Prabang, the country's ancient former capital and modern-day tourism center. A workers' dormitory has been built under a banner in Laotian reading: "The People of Laos are Proud to Build the Railway with Friendship, Happiness, Security and Harmony." The glaring discrepancy here is that all the workers in the dormitory are Chinese.

A sign at a dormitory for railway workers extols the harmony and happiness of the project in Laotian -- but the workers here are all Chinese. (Photo by Peter Janssen)

Tunneling has begun on a nearby hill. Across the road, work has also commenced on a bridge spanning the Mekong River. Posters of Chinese-made high-speed trains and other projects festoon Highway No. 13, which leads to the Laos-China border. Down the road from Phonesai, at Donemai village, a market has been set up to cater to the Chinese work crews. Shopkeepers, many from Yunnan, southern China, speak Mandarin. Similar scenes are visible at Vang Vieng, a tourist site half-way between Luang Prabang and Vientiane, the capital.

After a 16-year gestation period, the Laos-China railway project is happening. The railway is the biggest project in Laos to date, with an estimated cost of $6 billion -- equivalent to nearly half of the country's gross domestic product of $13.7 billion in 2016 (as estimated by the International Monetary Fund). Multinational lenders such as the World Bank and the Asian Development Bank have long questioned the viability of the railway project, raising concerns about high debt levels in Laos, which ranks among the world's least developed economies.

"The fiscal deficit widened significantly in 2016 and brought public debt to close to 70% of GDP," the World Bank said in an update on the Laotian economy in April. "The current account deficit narrowed in 2016, but is projected to widen as a few large infrastructure projects are launched, while foreign reserve buffers are low," the bank noted.

Laotian and Chinese leaders started talking in 2001 about a railway that would link their countries and cut through northern and central Laos, as part of the Lao People's Revolutionary Party's goal of transforming Laos from a "land-locked to land-linked" country. Laos has been under communist rule since 1975. The two countries' presidents finally agreed to jointly promote the project in 2009, and a memorandum of understanding was signed on April 7, 2010.

Then the project stalled. On Feb. 25, 2011, Liu Zhijun, then China's minister of railways, was sacked on corruption charges. Liu had signed the MOU on the Laos-China Railway Project with the Civil and Transport Works of Laos. It took a few years for the dust to settle. On the Laotian side there were complaints that the original deal offered too much to the Chinese, including vast land concessions on both sides of the track, although project details were not made public.

Closed-door consensus

By early 2015, the two sides had agreed to restructure the deal, but continued to discuss financial details. "In the end, we agreed we jointly develop the railway in the form of a BOT [build, operate and transfer] project," former Deputy Prime Minister Somsavat Lengsavad, who was in charge of economic production and distribution, told the Nikkei Asian Review in March 2015. "Even after agreeing on the BOT, we had to study the financial arrangement -- how each side would contribute," said Somsavat, who is no longer a minister.

Somsavat, the only leader in the ruling party's politburo who spoke fluent Mandarin, was the main mover behind the Laos-China railway plan until he left the politburo in early 2016. Some observers thought the project would be shelved without him, but it had already won the politburo's approval. "The consensus had already been reached behind closed doors," said a Vientiane-based insider, adding: "One politburo member cannot accomplish anything on his own in this one-party system." Work began officially with a ceremony in Luang Prabang, Somsavat's home town, on Dec. 25, 2016.

Ads for the Lao-China Railway project along Highway No. 13 in Phonesai, Luang Prabang. (Photo by Peter Janssen)

Some aspects of the financing of the $6 billion project were clarified on May 5 on the website of the Lao-China Railway Company, a joint venture set up between the two governments to build and operate the railway. According to the website, the project will require total investment of $5.95 billion. The Laotian government holds 30% of the joint company while China holds 70%. The initial investment stipulated is $2.38 billion, requiring contributions of $715 million from Laos and $1.67 billion from China. Laos will finance $250 million of its share from the national budget ($50 million a year over the five-year construction period) and borrow the remaining $465 million from the Export-Import Bank of China at 2.3% interest with a five-year grace period and 35-year maturity. The website is less clear about the remaining 60% of the construction costs, saying only that it will be financed by "Chinese banks."

"The rest [of the contribution required from Laos] might be provided in concessions, such as the land for the track," said one Vientiane-based Laotian economist, who asked to remain anonymous. "The government may say we will lease the land for the track to the company, and estimate that contribution as a kind of concession." Under the initial agreement the land, including 5 meters width along the track and 3 sq. km for each station, will be provided free of charge during the five-year construction period. The land agreement will be renegotiated after construction finishes, the website says.

The 414km standard gauge single track line will pass through 75 tunnels (totaling 198km,) pass over 167 bridges (61km) and include 10 passenger stations, 12 crossing stations and one freight and logistics compound. Although the project is often referred to as a high-speed railway, passenger services will have a maximum speed of 160kph, while freight trains will travel at 120kph. High-speed trains running on standard tracks in Japan, China, the U.S. and Europe run at speeds of between 240kph and 380kph.

The joint venture company hopes to make a profit of 4.35% a year on the $5.95 billion investment. Fares will be half the price of road transport. There is no mention on the website of what will happen if the railway loses money. "If the company makes a big loss, who will pay for it?" asked a Vientiane-based development banker, who requested anonymity. "That is the question."

Link with Thailand

Another big question is whether neighboring Thailand will make good on its plan to build an upgraded railway on its side of the Mekong River to link the two countries. "The development of the modern railway for the section from Vientiane to Bangkok should now be embarked, since the railway link from Kunming to Laos, China border to Vientiane, [is] now under construction," Koung Souk-Aloun, executive vice general manager of the Lao-China Railway Co., told an infrastructure seminar in Bangkok recently.

Monoluck Market in Donemai village, set up to cater to Chinese workers (Photo by Peter Janssen)

On June 16, Thai Prime Minister Prayuth Chan-ocha used his powers under the interim constitution promulgated after a military coup in 2014 to fast-track Thailand's own rail project with China. But the scheme would cover only the first construction phase between Bangkok and Nakorn Ratchasima (250km) leaving the link to Nong Khai on Thailand's northern border with Laos and to Vientiane up to the next Thai government to approve.

Thailand has already invested in a dry port in Vientiane, to be opened soon, to facilitate freight on trucks and its existing single-track, 1 meter gauge railway from the Thailand-Laos border to Laem Chabang Port south of Bangkok. Work is underway to turn this line into a double track railway.

China and Thailand stand to gain substantially from better rail connections between the two countries, which are major trading partners and fast-growing tourism markets for one another. But there are questions about the railway's benefits to Laos, a nation of 6.8 million people with few exports save hydroelectricity.

A recent review by Thammasat University and the Japan External Trade Organization of infrastructure projects in China's Belt and Road Initiative and various Association of Southeast Asian Nations projects found that China will receive 31% of the economic benefits, Thailand 8% and Laos 1%, according to Ruth Banomyong, head of Thammasat's Department of International Business, Logistics and Transport.

There are also worries about the social and environmental impact of the project, which will require an estimated 30,000 Chinese workers. "We saw already that when the Chinese built Highway Route No. 3, which links Boten [on the Laos-China border] down to Thailand, that after they built it the [Chinese] people were left there, and they became entrepreneurs, setting up shop and spreading all over Laos," said Ruth.

That fear is echoed in Luang Prabang, a UNESCO World Heritage site since 1995. "I hear 30,000 Chinese will be working on the railroad," said the owner of the Lao Coffee Shop in Luang Prabang. "I'm afraid they won't go home. Laos will become part of China."

Laos has already accommodated many Vietnamese immigrants, who moved to the country after the Vietnam war and have settled peacefully. "In Laos we are quite open, so that is a challenge for the people who are already here ... greater competition," said another Vientiane-based economist, who also requested anonymity. "We have to adapt to them or they will adapt to us. That is what ASEAN is about -- openness."

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