Can Laotian Lawyers’ Presence Help Materialise ADB’s Financial Support in an Attempt on the Energy Sector Reform in Laos?

 

Can Laotian Lawyers’ Presence Help Materialise ADB’s Financial Support in an Attempt on the Energy Sector Reform in Laos?

By: Xaypaseuth PHOMSOUPHA

            Author & Researcher

FACTS

  1. In November 2019, the Asian Development Bank launched a report on the Lao PDR’s Energy Sector Assessment Strategy (the “Report”) covering various issues encompassing organisation, operation, and management. The Report focusses on electricity generation and distribution. Section 3.1 of the Report under the heading “Government Institutions in the Power Sector”, page 13, of the Report states:[1]

“Due to the recent restructuring, EDL now assumes responsibility for the negotiation and preparation of documents for concession agreements (mandatory for IPPs to develop, own and operate generation assets), as well as power purchase agreements (PPAs) and credit facilities (formerly under the mandate of DEB)”

  1. In 2021, at the advice of a freelance adviser, domestic investors filed a proposal with the government of Laos (the GOL) to establish their company in Singapore as an investment entity, to which ADB-funded shares of several Lao electricity generation companies would be transferred. For some reason, the proposal was not followed and was silent.
  2. Most recently, it appeared that the same freelance adviser, self-proclaiming to have represented EDL and/or ADB in solving a negative pledge matter at the time of the Report, came up with an identical idea advising the Laotian authorities to enter into a contract, suggesting to divert ADB-funded shares in several electric power companies actively operating in Laos to be re-invested in a subsidiary of another ADB-supported company domiciled outside the Lao jurisdiction. Then, the parties inked a joint venture deal to establish an offshore value-added entity to raise more funds, using the latter to leverage a reform of the Lao energy sector.
  3. It is unknown whether ADB has ever delved into [reform] proposals at the outset and thereafter monitored the loan performance of the recipients domiciled in Laos and other jurisdictions. Also, people have argued whether ADB (i) is aware of the story mentioned above, (ii) ADB’s involvement in the preceding incidents created legal ramifications, and (iii) ADB, as an international financial institution, has adequately consulted qualified Laotian lawyers before dealing with loan and/or grant agreements in Lao PDR.
  4. The lawyers of Phomsoupha & Son Law, a Lao law firm based in Vientiane Capital, have long been familiar with undertakings involving loans or financial assistance provided by ADB and other International Financial Institutions. The author would like to offer a legal perspective.

ANALYSIS

  1. Electricité du Laos was named after the French legacy in former Indochina when Laos was part of the realm. It was the country’s only public utility dealing in electricity from 1926 until the early 2000s. Later, other state-run enterprises dealing with electricity generation, including Lao Holding State-Owned Enterprise (LSHE) and EDL-Generation (EDL-G), were segregated from EDL. Electrical Construction and Installation Corporation is another state-owned company that has bidden works against private companies in dealing with electric infrastructure in the country.[2] EDL and private investors recently established EDL-T as an affiliate for the cross-border transmission business.
  2. After segregation;[3]
    • Electricité du Laos (EDL) has maintained a branchoffice in everyprovince that is financially and administratively dependent on the headquarters, which is seated at thecentralEDL is in charge of (i) buyingelectricitygenerated by differentpowerplantsand (ii) supplyingelectricity to loaddemandcentresandhouseholdconsumption. In general, EDL is not mandated to invest in new electricity generation while leaving capital-intensive tasks for IPP owners, EDL-G, and LHSE.
    • Electricité du Laos Generation (EDL-G) has a 25% stake listed in a local stock exchange. EDL-G also invests in private projects as a minority shareholder, supplying EDL grids and exporting electricity to neighbouring countries. Public borrowing has played a crucial role in EDL-G’s investment.
      • Lao Holding State-owned Enterprise (LHSE) represents the Lao government, which holds shares in large-scale IPP projects, mainly for the export of electricity. LHSE has received G-to-G grants and loans tied to equity funding in its investment in different IPP projects. Private borrowing has made a considerable investment in the projects partaken by LHSE.
      • Electric Construction and Installation Corporation (ECIC) specialises in infrastructure development and maintenance. It also develops small-scale power projects nationwide to supply outreach communities.
      • Electricite du Laos Transmission Line (EDL-T) was recently established and is responsible for developing and operating a few routes of the 500 kV line facilities initially as conceded by the government of Laos. Most recently, the first transmission network evacuating electricity from Southern Laos to Cambodia commenced operation.
  3. While the Ministry of Energy and Mines and its subordinate departments exercise sovereign power, the first four state-run enterprises, with their corporate power functioning on substantial public spending, have carried out business activities in electricity generation and distribution.[4] Public law and various government documents articulate allocating responsibilities to the public utilities.
  4. At law, EDL is not entitled to exercise sovereign power in acting as the negotiator making an offer and/or acceptance with respect to concession agreements to which sovereign governments are the parties. EDL may not redress ethical issues if and when it is mandated to determine the concessionaires’ financial interests. At the same time, EDL sets electricity tariffs to be derived from the financial parameters thereof.
  5. If the ADB’s statement in Section 1 under Facts is applied to the current reform, EDL will be conferred upon the rights outside applicable law, thereby exceeding the power. Under such circumstances, the GOL’s action falls under a violation of public policy and change-in-law, as defined in many concession agreements being implemented;[5] consequences are gravely detrimental.
  6. If the consequences of the breaches and/or change-in-law events adversely impact the economic position of the ongoing agreement holders, the GOL will be obliged to take remedial action promptly.[6] If the GOL fails to remedy the issues to the satisfaction of the parties to the GOL agreements and their related contracts, such parties will be entitled to take legal action against the GOL in accordance with the contract provisions.
  7. On the advice of the freelance adviser, who is believed to be a non-Laos natural person, the parties entered into the joint venture deal to transfer the ADB-funded GOL equity shares in several active energy companies to other ADB-sponsored companies outside Laos. The move is characterised by the following:
  • Historically, involved in the financing of hydroelectric power projects are the International Financial Institutions (IFIs), including the Asian Development Bank, the World Bank, the European Investment Bank, Agence Française de Developpement and dozens of commercial banks. While the Lao utilities representing the GOL, as the investors, source equity capital through a G-to-G arrangement and soft loans from the IFIs, project companies, as the borrowers, mobilise commercial loans upon securitised assets; the ADB-funded equity forms part of the securities placed against borrowing by the project companies. In practice, the foregoing project financing requires the respective parties to sign the following agreements, including but not limited to:
    • With respect to concession, shareholders agreements, concession agreements, and a range of specific GOL approvals.
    • With respect to electricity sales, power purchase agreements, wheeling charge agreements, and joint transmission facility usage agreements.
    • With respect to financing, equity loan agreements, sub-loan agreements, credit facility agreements and associated financing agreements.
  • ADB and other IFI members provide funds, and the host Lao authorities accept those funds according to Lao legislation and international conventions to which the GOL has acceded. At law, bilateral and multilateral agreements, as so acceded by the GOL, shall be treated as and have modus operandi merged into the Lao national legal system.
  • As per applicable Lao law, the share transfers, as articulated above, shall result in variations of contractual arrangements under Section 7(a) (i) (ii) (iii) above. Any party initiating variation, amendment, or revision to the contracts in effect shall have procured prior written consent from the other parties. Otherwise, unilateral changes to active contracts could spell doom for all stakeholders.
  • While some agreements are internationalised, many are governed by and interpreted in accordance with Lao laws. Hence, the presence of Laotian-qualified lawyers advising the parties to the above-listed agreements on reforming the Lao energy sector and commercial transactions under applicable Lao law is mandatory.
  1. Acting for the GOL, the freelance legal adviser has inadvertently dragged the Lao authorities to carry out the Lao energy sector reform to return from the liberal public reform policy, including devolution, deregulation, and decentralisation back to private monopsony, whereby there would have been only one electricity buyer in the Lao market. After the joint development deal date, the electricity buyer, as licensed thereunder, will be the sole electricity exporter, an offshore ADB-sponsored mother company. Dozens of the existing power purchase agreements in Laos are subject to the new [purported] export license. The monopoly/monopsony may not be underpinned by the consumer protection law in Laos and the equivalent legislation of the countries importing electricity from Laos.
  2. People have meritoriously praised the ADB’s active assistance and funds provided to Lao agencies. Nonetheless, the above incidents prompt the ADB to monitor its priori and posteriori involvement in the relevant transactions from a legal and financial aspect to avoid providing financial assistance in violation of the applicable Lao laws and breach of the existing loan or grant covenants.

RECOMMENDATIONS

  1. We urge non-national parties, including international aid organisations, to familiarise themselves with Lao laws and verify the lawyer’s legitimacy before they engage qualified lawyers. It is unwise for any employer to appoint a lawyer who barely understands the Lao law context in anticipation of providing legal advice on agreements governed by and interpreted in accordance with Lao law.
  2. One should bear in mind that a state enterprise, like EdL, cannot act with the same authority as government ministries. At law, the regulatory authorities have a proper mandate to negotiate concession agreements, thereby granting concessionaires concession rights. ADB should rectify the November 2019 Report to accurately reflect Lao public legislation.
  3. ADB shall proactively help the authorities and electricity businesses in Laos to redress the legal and financial dilemma. Friendly discussions with the GOL and companies would yield the desired outcome. Likewise, adherence to the Lao applicable laws and international conventions acceded by the GOL should be instrumental.
  4. We commend the efforts of all parties involved in creating the value-added entity to improve the profitability of the Lao energy sector. Nonetheless, any changes to existing commitments must adhere to the local norms; all stakeholders shall be well-consulted. The Asian Development Bank (ADB), as the core sponsor, should be mindful of the potential costs of breaches in concessional and financial contracts, which may exceed anticipated revenues from share transfers.
  5. Although Laotian lawyers deemed qualified for the above legal tasks are not in a plethora, some Lao Bar Association members, including those from P&Son, can respond to any call to provide legal advice for clients, regardless of whether they are authorities, international organisations, or businesses.

[1] Asian Development Bank 2019 Lao’s People’s Democratic Republic: Energy Sector Assessment, Strategy, and Road Map < https://www.adb.org/documents/lao-pdr-energy-assessment-strategy-road-map>

[2] See National Power Development Plans-MIH/MEM (2006-2010), (2011-2015), (2016-2020).

[3] ibid (2006-2010), (2011-2015), (2016-2020).

[4] See Law on Electricity (2017) and by-laws of state-owned enterprises. The principle of power allocation here can be found in various public laws, including the Constitution (Recast – 2015), Law on Governance (Recast – 2016), Law on National Assembly (Recast – 2015)

[5] See the Change-in-Law clause of the IPP concession agreements

[6] See relevant Change-in-Law clause of the template Concession Agreement