BMI View: Significant progress has been made towards the development of a Pan-Asian high-speed railway system in the mainland of South East Asia over the last few weeks, with the government in Laos reaching agreements with the relevant parties for two sections of the railway network. However, we believe that there is still scope for delays given that specific details about both projects remain unresolved or unclear.
In early-November, the Laotian government signed a 30-year concession with Malaysia-based firm Giant Consolidated to construct and operate a 220km railway line in Laos that links the western city of Savannakhet to Lao Bao, a town located on Laos' eastern border with Vietnam. Giant Consolidated is expected to invest around US$4-5bn on the railway line over the next ten years, with the project scheduled to start construction in January 2013 and be completed by 2017. This agreement follows Laos' decision to accept a new US$7bn loan agreement with Chinese state-owned EXIM bank, allowing work to resume on a new railway line that will connect the capital city of Vientiane with Boten, a town located on the Chinese border. This 420km project is also scheduled to be completed by 2017.
|Laos - Location of the Savannakhet-Lao Bao and Vientiane-Boten Railway Lines|
We believe these agreements indicate that progress is being made towards the development of a Pan-Asian railway system. A Pan-Asian railway system in Indochina has been discussed since the 1960s, but has only begun to gain significant traction in recent years with the support of China ( see our online service, February 21 2011, 'High-Speed Rail Links In SE Asia Move Forward With Chinese Support'). This is because private investors have long been concerned about the financial viability of the network. For example, Giant Consolidated had signed the preliminary agreement for the Savannakhet-Lao Bao railway line in 2008, but had only recently secured financing for the project.
Despite the progress made, we believe there is still scope for further delays for both railway projects. China and Laos are still ironing out the details of the loan and the alignment of the Vientiane-Boten railway line, both of which could take a considerable amount of time to resolve. Indeed, the previous financial agreement for the project had stalled because the Laotian government was concerned about the conditions attached with Chinese financial sponsorship for the project. The original agreement required Laos to transfer the land along the railway line to the Chinese contractor for commercial purposes, but the Laotian government felt that this condition was unacceptable. The Laotian government was also concerned about the level of Chinese involvement in the project. The Vientiane-Boten railway line was originally scheduled to be completely built by a Chinese contractor with Chinese workers.
At present, a compromise appears to have been reached to address both of these concerns. The Vientiane-Boten railway line will now be completely owned by the Laotian government, with the Chinese loan replaced with royalties from Laos' copper, gold and bauxite reserves. In addition, local contractors in Laos are expected to play a greater role in the project, though a Chinese company would still be chosen as the main contractor.
As for the Savannakhet-Lao Bao railway project, there is a lack of details over how Giant Consolidated is financing the project or how Giant's appointed contractor, Malaysia's TMK Holdings, plans to carry out the project. Not only is there little or no information about their current operations -the parent company of Giant Consolidated, Giant Group, is based in Malaysia, but incorporated in the British Virgin Islands - but based on our Key Projects Database, both companies also do not appear to have significant experience in developing large-scale railway projects.