Cash-strapped Laos turns to privatisation to reduce debt, Budget deficit

[VIENTIANE] With Laos’ public debt at 122 per cent of its gross domestic product (GDP) and Budget deficits of as much as 6 per cent, the country has been busy privatising or leasing some of its state-owned enterprises (SOEs) to reduce spending on subsidies and raise cash.

Two weeks ago, Electricite du Laos Transmission Co (EDL-T) was officially launched, following a joint venture (JV) between state-owned national power company Electricite du Laos (EDL) and China Southern Power Grid (CSPG), with the new entity occupying office space at the upmarket Vientiane Centre mall.

The JV grants CSPG a concession to serve as Laos’ national power grid operator, to invest in, construct and operate certain power grids in the country. EDL-T will also implement grid connections to neighbouring countries in the region under the supervision of the Lao government.

This deal was under negotiation since September 2020, when the initial shareholders agreement was signed.

“The financial annexes for the deal took some time,” said Alexander Kremer, country manager of the World Bank’s office in Laos. “But it has now been finalised, and the deal involves substantial direct payment to the Lao government.”

Analysts said more privatisation deals like these can be expected in the coming months as the government tackles its debt stock burden, accumulated over the past decade but exacerbated during the Covid-19 pandemic, when the economy slowed and tax revenues dried up.

In 2021, the government sold 70 per cent equity in two state-owned banks – Lao Development Bank and Agricultural Promotion Bank – to two private Lao companies, with the finance ministry keeping 30 per cent.

“This privatisation of the state banks has contributed to the stability of the financial sector,” said Kremer.

Laos, under one-party communist rule since 1975, has about 160 SOEs today.

“Many of the SOEs are loss-making, and the government has to provide a budget for them every year, so it is better to privatise them and let the private sector run them,” said a Lao economist working for a multilateral organisation, who requested anonymity.

While the government has put a ceiling on new commercial-term borrowing for the past three years, it has managed to avoid defaults. It has also met repayment obligations – estimated at US$1.2 billion to US$1.4 billion a year – by cutting back on Budget expenditures, especially on social services.

“What we have seen is that the combined spending on health and education has halved in the past nine years, from just under 5 per cent of GDP to 2.6 per cent. It’s likely to be lower in 2023,” World Bank senior economist Pedro Martins told a recent webinar.

To reduce its debt burden while increasing social spending, the government has opted for a major reform programme for its loss-making SOEs.

In August 2022, the Lao National Assembly targeted five SOEs that have “consistently reported a lack of liquidity and operated at a loss for several years” and placed them under reform committees, The Laotian Times news website reported.

The SOEs named were EDL, EDL-Generation Public Co (EDL-Gen), Lao Cement, Lao State Fuel Enterprise and Lao Airlines.

The government has since written off Lao Airlines’ sizeable debt, passing it on to the finance ministry and various state-owned banks. It also appointed new management to steer the airline towards more sustainable operations, and seeking a foreign partner is seen as an option.

One SOE that will be a tougher nut to crack is EDL, as its problems stem from decades of pursuing the communist party’s signature policy of transforming the landlocked mountainous nation that is rich in hydropower resources into the so-called “battery of South-east Asia”.

Laos now has over 80 hydroelectric plants, many of them exporting power to regional neighbours Thailand and Vietnam.

Laos accumulates a huge electricity surplus during the rainy season, but reaps less-than-expected returns from the power plants due to miscalculations on returns or overly generous pricing agreements with independent power producers, sources told The Business Times.

“The debt is high because EDL cannot increase the price of electricity sold in Laos,” said an economist. “So, they are buying expensive electricity and selling it cheap.”

EDL’s financial woes have been worsened by the depreciation of the country’s kip currency, which declined 21 per cent against the US dollar in 2023.

Foreign exchange reserves are at an estimated 1.5 months worth of imports, latest figures from the government indicated.

EDL-Gen and Lao Holding State Enterprise are major shareholders in the nation’s power plants, usually holding stakes of between 10 and 20 per cent, which they acquired through foreign borrowing from banks or foreign-issued bonds.

These equity stakes may now also be on the block for further sales, as the cash-strapped government may not have much of a choice, sources said.

“If it’s a question of starving or not, you will sell your house and move into a rented apartment,” said another Lao economist who also wished to remain anonymous.