US embassy cable - 05BANGKOK2137

UNCLAS SECTION 01 OF 03 BANGKOK 002137 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/BCLTV AND EB 
STATE PASS TO USTR FOR WEISEL AND COEN 
TREASURY FOR OASIA 
COMMERCE FOR 4430/EAP/MAC/OKSA 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, PREL, TH 
SUBJECT: MEGAPROJECTS: WE KNOW WHY, NOBODY KNOWS HOW 
 
REF: BANGKOK 1266 
 
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 
Summary. 
 
"COMMITTED PROJECTS" NOT A PROBLEM 
---------------------------------- 
 
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 
hailand. 
 
WHY THE SUDDEN URGE TO SPLURGE 
------------------------------ 
 
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. 
 
FISCAL POLICY TO REMAIN CONSERVATIVE 
------------------------------------ 
 
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. 
 
 
SO HOW TO PAY FOR IT ALL? 
------------------------- 
 
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. 
 
BOND MARKET PROBLEMS 
-------------------- 
 
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 
foreigners 
beginning with a planned visit to New York in June. 
 
 
BOYCE