Thailand on track for high speed mistake

The country needs infrastructure investment, but the government’s obsession on linking with neighbouring countries by high speed rail may cost it an opportunity to become more competitive.

  • 06 Aug 2013
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Thailand has had a tough few years. The country’s polarised political climate led to a coup d’etat in 2006, the global financial crisis hurt growth in 2008, sustained protests led to a brutal police putdown and multiple deaths in 2011 and, most recently, severe flooding in late 2011 caused economic growth to falter to 0.1%.

Yet of late Thailand's fortunes have been looking up. It is enjoying a period of political stability, and an improving economic climate helped its gross domestic product (GDP) to grow 6.4% in 2012.

One big thing is still missing: government investment. Public investment as a percentage of GDP has fallen from 40% between 1990 and 1997 to just 21.4%, well below regional peers Indonesia, Malaysia, Singapore and Vietnam. Thailand’s government is spending less than its neighbours on the crucial infrastructure needed to ensure its economy is modern and competitive.

This lack of investment has had consequences. The World Economic Forum considers Thailand to have fallen in terms of competitiveness from 28th out of 101 countries in 2007 to 39th in 2011.

“We’ve been running a savings surplus for the last decade and a half, so the economy is very reliant on exports,” says Chalongphob Sussangkarn, fellow at the Thailand Development Research Institute and former Minister of Finance. “This leads to problems in macroeconomic management. By increasing investment we can bring about a more balanced growth path.”

This needs to happen if Thailand is to get out of the middle income trap. Doing so requires the country’s government to spend more money on needed infrastructure. Done correctly and this can generate high growth rates and improve average wealth levels.

The government appears more than willing. It is telling investors that it intends to spend THB5.5 trillion (US$177.2 billion), or 48% of Thailand's 2012 GDP, on infrastructure between 2013 and 2019.

The trouble is that the centrepiece of this investment splurge could prove a costly error.

Grand plans

The election of Yingluck Shinawatra's government in 2011 has provided much-needed political stability in Thailand. This has allowed the government to repackage a disparate set of infrastructure projects into a comprehensive investment scheme.

The full details of this programme have not been publicly released, which has caused the opposition party and local and international media to grumble, but the government has been offering more details to investors.

An investor presentation given by the Ministry of Finance on May 13 outlines the THB5.5 trillion investment plan. Around 65% of this consists of infrastructure projects that would be funded through the government's annual budget. Water management infrastructure projects that were drafted after the 2011 flooding will comprise a further 6%.

The remaining 32% comprises THB2 trillion of railway expansion investment. This expansion scheme is made up of three main components. The first and second involve expanding the subway system in Bangkok from 87 kilometres (km) of track to 460km, and switching Thailand’s nationwide single-track rail network to dual track. These are relatively simple and should improve efficiency for a low cost.

The third part is more contentious. It involves building a high-speed nationwide rail network that links Bangkok with various second-tier cities via three long lines and one short line. The new rail lines are set to be constructed by the State Railway of Thailand, using foreign technology.

This would help to realise a decades-old dream of connecting Thailand with Myanmar to the west, Cambodia to the south and Laos to the north. Along with works from other countries this project could eventually link rail networks all the way from southern China to Singapore.

The THB2.2 trillion infrastructure bill may sound grandiose, but it passed its first reading of three in Thailand's parliament on March 29. Given the government’s strong majority, it is likely to gain the necessary approval at the other two readings and construction would then begin towards the end of 2013.



Political problems

According to government predictions the new rail link makes sense. Thailand's logistics costs stand at 15.2% of GDP, versus 8%-12% in developed countries. Pisit Piapan, director of macroeconomic policy analysis at the Ministry of Finance, predicts that the railway would lead the costs to fall by at least 2% of GDP.

But not everyone is convinced about the efficacy of the project.

Part of the problem is how to fund it. The government wants a blanket approval to borrow THB2 trillion outside the budget over seven years. All details regarding how the funds will be spent will be added as an appendix to that law.

Yingluck’s cabinet claims that such funding freedom is required to avoid breaching the country's annual budget deficit cap of 50%. It would also help the project progress quickly, as it would not have to go through the usual system of checks for on-budget expenditure.

Opposition politicians and analysts fear that a lack of any oversight would make it easy for money to be siphoned from the project into the pockets of politicians and supporters. It’s particularly concerning given the erosion of the strength of Thailand's traditional checks on authority.

“Measures of institutional strength have slipped since the 2006 coup. The effectiveness of governance in Thailand has been hampered by the persistence of deep fissures in the country’s polity,” says Thomas Byrne, senior vice president at Moody’s.

The government’s request is particularly galling for opposing politicians given that it has started splurging around US$6 billion or 2% of GDP a year on a rice subsidy policy, which is designed to put more money in the hands of the rural rice farmers the government wants to woo for the next election.

Fears also linger about the feasibility of the inter-nation railway project. Thailand does not boast a proud track record when it comes to implementing infrastructure. Its skytrain project in Bangkok, for example, took nearly 30 years from initial proposals in 1970 to its opening in 1999.

The new projects also risk delays, says Santitarn Sathirathai, an Asia economist at Credit Suisse.

“Infrastructure implementation risks depend on four key factors: the degree of uncertainty regarding technical aspects of the projects, administrative bottlenecks, risks of protest from local communities and NGOs (non-governmental organisations) and clarity regarding ownership and financial structure,” he says.

“With this in mind, high speed trains and the larger projects under the water management programme probably face the highest execution risks. If we are right, 12% of GDP investment (or more than half of the 21% of GDP off-budget investment) is at considerable risk of implementation delays.”

Even the finance minister Kittiratt Na-Ranong recently expressed his reservations about the high speed train project, and hired a local think tank to conduct a feasibility study. Local news reports in June suggest the ministry is set to hire Boston Consulting Group to advise on the project.

Even the more accepted need to expand Bangkok's mass transit line expansion hasn't managed to avoid controversy. Real estate developers have been indiscriminately building along the proposed lines, which could cause oversupply problems in the property sector, according to Supavid Saicheva, economist at Merrill Lynch in Bangkok.



Execution risks

Most worrying about the cross-border rail scheme is its effectiveness. The benefits it offers could well be smaller than the government optimistically projects, believes Sathirathai.

“Even if surface connections were good, cumbersome customs procedures make border passage to Cambodia and Myanmar frustratingly slow,” he says.

The project relies on other countries holding up their ends of the development. But while Laos had made some effort to connect with the Thai and Vietnamese borders, little is happening on the Cambodian side to link Thailand with either Phnom Penh or Ho Chi Min City. Road or rail links between Thailand and Yangon are likely to be hindered by ethnic conflicts on Myanmar’s borders.

The latter has seen intermittent fighting in the Karen state that borders Thailand, although most of the conflict is now centred to the west of the country. Plus hundreds of displaced people and asylum seekers are hiding in camps on Myanmar’s eastern border with Thailand.

Even if the proposed rail system is successfully built on time and on budget its route would take decades to become economically viable.

“Successful high speed rail lines generally require three supporting factors – multiple urban centers, high per capita incomes and potential routes within a 100km to 500km radius. Thailand looks weak on all counts,” says Sathirathai. “High-speed rail appears unusually inappropriate for Thailand, meaning that subsidies will need to be unusually high, and the opportunity costs of misallocated resources will be unusually burdensome.”

Yingluck's administration would be wise to consider less impressive, but more tried and tested ways to bolster Thailand's competitiveness. One way would be to add to its existing infrastructure.

“The government could almost certainly increase transport efficiency more effectively for much less money, by widening existing highways and expanding air capacity. Bangkok’s two airports have ample land for expansion, and some provincial airports are even now operating well below capacity,” says Sathirathai.

Bangkok should also focus on spending more on soft infrastructure, such as its education system. Neglecting that in favour of extravagant pipe dreams could cause problems in the future.

After years of economic and political instability, Thailand's government finally enjoys enough stability to implement much-needed structural reforms. Yet its ministers seem eager to make the country the epicentre of the Asean region, and believe initiating the cross country rail system before the start of the Asean Economic Community in 2015 would cement this ambition.

They would be better advised to take smaller, more efficient steps to better their country, rather than stubbornly pursuing a fast-track dream.

  • 06 Aug 2013

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