Thailand’s military-backed government wants to get things moving – literally.
On March 29, the cabinet approved the construction of two new lines for Bangkok’s elevated monorail (or “Skytrain”) network under a private-public partnership arrangement. A winning bidder was due to be announced in May, with construction set to start in June.
That’s not all. Four dual-track train projects are expected to be submitted for cabinet approval in May, with bidding processes scheduled before the end of June and construction of the metre-gauge routes to begin before year-end. A red line for the Skytrain has already been approved and is scheduled for completion by 2020.
And if Thailand’s road projects are executed to plan, they would add 2,647 kilometres of roads – equivalent to 20% of the amount in the country today.
New train lines and motorways form the core of a set of transportation projects planned by the government of prime minister and former general Prayut Chan-o-cha. All told, the government has earmarked Bt1.6 trillion to Bt1.9 trillion ($45.66 billion to $54.22 billion) in spending across 20 projects.
“We are seeing small steps in the right direction,” Phumchai Kambhato, chief country officer at Deutsche Bank, said. “Infrastructure development has been talked about in Thailand not just for years but decades. There are several projects that look like they’re going ahead.”
The goal is to offer a fillip to Thailand’s laggardly economy, which only grew by 2.8% last year, largely underperforming the rest of the region.
Thailand has a mixed track record for infrastructure execution but the junta-backed government seems to be making progress where predecessors have failed.
“The experiences of this government compared to previous ones leads me to believe the government has a good chance of succeeding,” Prinn Panitchpakdi, country head of Thailand for CLSA, said. “[Former Prime Minister] Thaksin Shinawatra got zero railway lines approved between 2001 and 2006, and neither did [his various succeeding associates], including his sister Yingluck. But so far three [skytrain line] projects have been approved by this government.”
Thailand has historically made great strides in power and telecommunications. The World Bank estimates that $52 billion of power and telecom infrastructure projects were rolled out in the 25 years between 1990 and 2015, helping to electrify 83% of Thai houses and creating phone penetration of 108% in 2010.
But Thailand’s railway plans, particularly in and around Bangkok, have not enjoyed the same level of success, leaving a gap in the country’s infrastructure needs. The BTS Skytrain project, for example, opened its first line in December 1999 but it took 10 more years to add the first extension. In addition, the capital has just one mass rapid transit subway line (which opened in 2004), although a new, elevated track is set to open this summer.
Prayut’s financial team, led by former finance minister Somkid Jatusripitak, intend to add many more roads and railways (see tables below) as a way to bolster GDP growth and improve the country’s efficiency.
Thailand’s logistics costs stand at around 14 percentage points of GDP. Adding roads and railways could cut this by around two percentage points, saving businesses Bt260 billion a year, according to Maybank.
CHALLENGES
To get the process rolling, the junta government has got a grip on the biggest traditional blocks to infrastructure projects.
First, it is sourcing the land. The government has allocated Bt95.4 billion towards land appropriation for these projects and it has the decisiveness to push such appropriations through.
Second, it has rapidly sought to approve projects and tender them out. Its speed in doing so appears a deliberate attempt to ensure that these projects retain momentum, even if the military government stands down on or before 2017.
“That’s one of the benefits of this type of government; they can control the bidding process,” Tim Leelahaphan, Thailand economist for Maybank Kim Eng, told FinanceAsia.
He believes the new projects could add 1% to GDP this year, and a multiplier effect of these projects could cause GDP in 2017 and 2018 to rise to 4% to 5%.
To be sure, for all the progress to date there are still headwinds, not least the traffic chaos that will inevitably ensue as the road and rail track building begins.
Thailand also has too few large construction companies capable of undertaking projects on this scale, so foreign groups will need to be involved, including China’s highly experienced railway construction companies. But it could cause due diligence headaches and differing expectations of government support between Prayut’s administration and foreign companies.
A recent example of this took place on April 1 when a China-Thailand high-speed railway project to link a string of key cities was abandoned. In the end, two years of negotiations failed to bridge differences over the investment sharing, costs, and loans backing the project. So the Thai government instead announced a less ambitious, all-Thai railway project between Bangkok and Nakhon Ratchasima, 250km northeast of the capital.
Given this precedent, it’s hard to imagine all other projects will go entirely to plan.
Then there is the danger of corruption. Infrastructure projects are enormously costly and large sums of money can easily be frittered away.
The ultimate sticking point over these projects could end up with the country’s banks. They will want strong rules and transparency around the contracts that get handed out, before offering up project financing.
“The new rules and regulations need to ensure no dodginess takes place in these contracts,” said CLSA’s Prinn, adding that he would like to see open bids to minimise the chances of shady activities winning construction contracts.
PROMISING SIGNS
Still, there are grounds for optimism.
The central government looks set to pay for around 70% of the overall costs of building the planned transportation links.
It has plenty of room to raise debt and looks willing to do so. From around 40% at the end of 2015, Prayut has said that he is prepared to see Thailand’s public-debt-to-GDP ratio rise to 50%, or another $39.5 billion. That is still well below the legally prohibited level of over 60% of GDP.
Additionally, Thailand’s local banks have plenty of spare liquidity to help support infrastructure project financing. And they will probably be willing to offer it up, so long as these projects are sufficiently transparent and come with a government guarantee.
“It could be tough for the private sector to jump in and make returns [through project finance investments] in a reasonable time, so these projects will need government support,” Deutsche Bank’s Phumchai said. “And we’ve already seen interest from other government and export credit agencies, as well as supranational and bilateral agencies.”
Thai and international private investors have also shown themselves to be very amenable to infrastructure-linked IPOs and bonds.
Skytrain operator BTS Group structured its ticket receivables into an infrastructure fund that it then sold through a hugely successful public listing in April 2013. The company looks to have kept most of the $1.2 billion war chest it earned to help bid for new lines.
Further infrastructure funds require a new structure now that international IFRS accounting standards have rendered the old model obsolete. But Phumchai is optimistic that new iterations of these funds could be developed.
That’s several years away yet. Before then, the Thai government looks more likely to call upon banks and bond investors to help funds its transportation plans.
Added into that is the potential capital that could be raised by construction companies and property developers seeking to gentrify real estate along the new railway lines and motorway links.
Thailand’s economy might be idling right now but if the government has its way it could soon be able to shift up through the gears.
