Scoop has an Ethical Paywall
License needed for work use Register



Cablegate: Megaprojects: We Know Why, Nobody Knows How

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A


1.(SBU) Summary. The economic centerpiece of Prime Minister
Thaksin's second term is a series of major infrastructure
projects estimated to cost US$57.5 billion over five years.
It remains unclear how the RTG will finance these projects
given self-imposed fiscal constraints, previous projects that
disadvantaged private investors and an illiquid bond market.
Given the importance Thaksin attaches to these projects, we
expect he will engineer a formula to try and attract
financing without any government guarantee of repayment.
Whether he actually convinces enough investors to put their
money where the PM's mouth is must await specifics. End


2.(SBU) As reported previously (reftel), the Thaksin
government has announced plans to undertake massive
infrastructure expansion and modernization projects estimated
to cost Bt2.35 trillion (US$57.5 billion) over the next five
years. The total RTG budget for FY2005 is about Bt1.2
trillion (US$30.8 billion) and 2004 GDP was Bt6.6 trillion
(US$169.3 billion). Projects the RTG describes as "committed"
include the purchase of new aircraft by parastatal Thai
Airways, rail links to the new Bangkok international airport
and industrial development in the area around the airport,
expansion of the existing Skytrain and subway lines,
expansion of the highway system, expansion of the gas
pipeline system and low-income housing development. Projects
that are planned but "non-committed" include expansion of the
railroad network, expansion and modernization of the water
grid and development of a refinery and oil pipeline
associated with the "land bridge" project across the Thai
isthmus between the Andaman Sea and Gulf of T

Advertisement - scroll to continue reading

Are you getting our free newsletter?

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.


3.(SBU) The RTG has several goals in pursuing these ambitious
"megaprojects." First, is to stimulate investment as the new
driver to the Thai economy now that domestic consumption and
export growth are leveling off. The second goal is to upgrade
Thailand's infrastructure so that the country is better able
to compete internationally. The stated intention is to reduce
the cost of logistics in Thailand to less than 10 percent of
GDP from its current level of about 19 percent (U.S. and
Japan figures are 10 and 11 percent respectively). It is also
intended to improve worker productivity by reducing the
amount of time Bangkokians spend commuting. In the aftermath
of the 1997-1998 financial crisis, little new public
infrastructure investment has been made. Finally, in keeping
with Thaksin's self-image as Thailand's CEO, he views the
on-going excess liquidity in the banking sector (estimated to
be Bt200-300 billion -US$5.1-7.7 billion) as an
under-utilized asset that should be mobilized.


4.(SBU) The RTG does not intend to pay for these projects out
of current budget expenditures or by increasing the net debt
on the government's balance sheet. "Fiscal sustainability"
is the government's watchword: defined, in part, as a maximum
public debt/GDP ratio of less than 50 percent (currently
about 47.9 percent - down from 52.9 percent in January 2002 -
with an RTG goal of reducing this number to 40 percent by
2009), a balanced budget and debt service comprising less
than 15 percent of the yearly RTG budget. With additional
calls on the budget ranging from increasing the salaries of
low-paid civil servants to tsunami and drought relief efforts
to expenditures related to quelling the separatist movement
in the south, there is little room in the RTG budget to
finance the megaprojects and within the defined fiscal limits
even if the economy continues to grow at 6 percent each year.


5.(SBU) The official capital-raising framework outlined by
the Ministry Of Finance plans for 26 percent of the required
capital to come from the government budget, 35 percent from
State-owned enterprises (SOEs) and 39 percent from "other
means such as securitisation or property development of areas
adjacent to the projects." In fact, to bridge the apparent
gap between fiscal rectitude and an investment binge, the
Thaksin administration is studying a variety of approaches to
keep these projects off the government books. First, many of
the 'committed' projects will be undertaken by SOEs (Thai
Airways, Airports of Thailand, PTT) that will finance the
projects themselves either on the strength of their own
balance sheets, through asset-backed financing or by forming
joint ventures with private sector companies and/or financial
institutions. Market observers seem confident that these
established organizations can use the cash to be generated by
the projects, backed by their other substantial assets, to
secure proj
ect financing.

6.(SBU) For the mass transit expansion projects - extensions
of the Skytrain, subway and toll roads - the RTG would like
follow its previously successful method of granting long-term
concessions (typically 25 years) to Special Purpose Vehicles
- companies created specifically to build and operate these
concessions. Existing examples of such entities are Bangkok
Metro PCL - subways, Bangkok Expressway PCL - toll roads, and
Bangkok Mass Transit PCL - Skytrain. These companies are
typically joint ventures between leading Thai companies with
the key foreign infrastructure suppliers (e.g. Siemens,
Obiyashi) often taking an equity stake. The problem is that
the equity investors in these projects have not done well.
The RTG has limited the amounts the ventures may charge for
their services (fares and tolls) and is currently trying to
force operators of the Skytrain and subway to sell out to the
mass transit regulatory authority at what the companies
consider a low price. This history will make it very
difficult to
convince new private investors to commit to any equity
positions in the proposed projects.

7.(SBU) The most likely structure will be for the RTG to
create "Public-Private partnerships", not-for-profit limited
liability companies with initial capital provided by the
government and granted a concession to built and operate a
subway line or toll road or some other potential asset. These
entities will issue bonds backed by the value of the
anticipated future cash flow from its concession. There would
be no RTG guarantee backing the debt.


8.(SBU) There are several problems with this model. First,
given the inherent risk of construction delays and over-runs,
the debt will have to be very attractively priced (i.e. offer
a high yield) in order to attract investors, especially in
the absence of RTG backing. Second, if Bt2.3 trillion in new
projects actually start-up over the next five years, in a
domestic bond market which currently has severe liquidity
problems and rising interest rates, the effect on corporate
borrowing rates and crowding out effect could be severe.
There is considerable skepticism among Thai market
participants whether the domestic market has sufficient depth
to absorb this much new paper. In November 2004, the total
value of all outstanding bonds in Thailand was Bt2.74
trillion (US$70.3 billion) of which Bt2.51 trillion (US$64.4
billion) was either issued or backed by the RTG.

9.(SBU) Some observers posit that the RTG will provide the
necessary capital to the PPPs with no effect on the RTG net
debt level through the proceeds from IPOs of State-Owned
Enterprises EGAT (electricity) and CAT and TOT (telecom)
while also removing the government guarantee from the debt of
these entities (thereby making room for new RTG debt to be
issued under the debt/GDP cap). While this would be a start,
the total of all RTG-guaranteed SOE bonds outstanding is only
about Bt322 billion (US$8.3 billion); not enough even with
the IPO proceeds to fund everything anticipated. Others
point to the Asian Bond market initiative as a source of
funds. There is no indication, however, that ASEAN central
banks are interested in funding Thai infrastructure
development, or even having more than a nominal exposure to
Baht. This nascent effort for a pan-Asian debt market would
have to develop much more quickly than it has to date in
order to be a source of funds for the mega-projects

10.(SBU) COMMENT. We have spoken to money managers, bond
market senior officials, academics and RTG officials
responsible for managing government debt and designing some
of the projects. None have been able to explain how the
government will follow through on its seemingly contradictory
promises of expanding investment while reducing debt. Most
are dubious it can be done, with some arguing that the entire
exercise is designed to channel funds to Thaksin family and
cronies (septel will examine the issue of corruption in
Thailand - anecdotally it appears that large scale corruption
may be getting worse while petty corruption may have
marginally improved).

11.(SBU) The mega-projects are the single most important new
plank in Thaksin's economic strategy for his second term. As
an economist who helped design the "dual track" economic
policy of Thaksin's first term told us, "Keynesian demand-led
recovery is played out. We must move on to the next level for
the economy to continue to grow." He continued: "In creating
economic value, Thailand is ahead of China and about ten
years behind Taiwan and Korea. We must maintain our pace to
stay ahead of fast-moving China. We can't do that without
significant new investment in infrastructure and improving
human resources. I just don't know how we will pay for it."
Although many here believe the PM's program is mostly talk
and the majority of projects won't get off the ground, the
Prime Minister's penchant for financial engineering means we
cannot rule out a scheme that, at least on its face, gets the
mega-projects underway. We suspect that Thaksin will be
aggressively marketing portfolio investment in Thailand to
beginning with a planned visit to New York in June.


© Scoop Media

Advertisement - scroll to continue reading
World Headlines

UN News: Aid Access Is Key Priority

Among the key issues facing diplomats is securing the release of a reported 199 Israeli hostages, seized during the Hamas raid. “History is watching,” says Emergency Relief Coordinator Martin Griffiths. “This war was started by taking those hostages. Of course, there's a history between Palestinian people and the Israeli people, and I'm not denying any of that. But that act alone lit a fire, which can only be put out with the release of those hostages.” More

Save The Children: Four Earthquakes In a Week Leave Thousands Homeless

Families in western Afghanistan are reeling after a fourth earthquake hit Herat Province, crumbling buildings and forcing people to flee once again, with thousands now living in tents exposed to fierce winds and dust storms. The latest 6.3 magnitude earthquake hit 30 km outside of Herat on Sunday, shattering communities still reeling from strong and shallow aftershocks. More


Join Our Free Newsletter

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.