The high-speed train from Nakhon Ratchasima to Bangkok, mired in delays for three successive governments, looks set to materialise after the current administration invoked the fast-track power of Section 44 of the interim charter to bypass all laws and obstacles to hire an all-Chinese consortium to build the line, contingent on US$5 billion (175 billion baht) in public debt to be raised soon.
The project will place a significant strain on the government budget and will force it to seek private funds for other planned infrastructure megaprojects. These include the "Japanese" rail line linking Ayutthaya, Bangkok and the Eastern Economic Corridor; the U-tapao airport upgrade, deep-sea ports and other high-value projects in the EEC; and other highway and mass-transit projects.
The government has vowed to launch all these major public-private partnership (PPP) projects before it leaves office in a couple of years -- similar to the proliferation of PPP projects during the golden era of the late 1980s to early 1990s -- enabled by its Section 44 magic wand. Ambitious as that might seem, it has a good chance of success.
Without Section 44, one hurdle authorities would have had to climb is the insurmountable PPP Act 2013. But why skip the law in a makeshift fashion? Given what a formidable hindrance it represents to foreign investment and Thai private interests, why not break with tradition and scrap it for good to leave the next government a clean legacy, conducive to national development?
The rationale is this: With National Executive Council Order No.58 governing the granting of concessions, and an actively enforced set of anti-corruption laws in full operation, the original PPP Act 1992 should not have come into being in the first place. Even as the culture of repealing an archaic law without any replacement has never taken root in Thailand, the PPP Act 2013 should never have been passed either.
Within the realm of the PPP Act, private businesses, foreign and local alike, continue to worry about project risks typical for concessions in Thailand. The public sector often is not willing to share these risks, which deters most foreign lenders, though Thai banks tend to unwillingly acquiesce. The trouble is, investments on such a huge scale need vigorous support from overseas financiers as well as local banks.
Compensation for foreign-exchange losses is a contentious area in Thai concession contracts. The concessionaire often needs to pay for imported equipment in US dollars or Japanese yen, financed through a foreign currency credit facility, while its income, mainly passenger fares, is in weaker local currency. If the baht weakens too much, the concessionaire runs the risk of not being able to generate enough baht in income to pay for its expensive dollar obligations -- and we all remember what happened in 1997.
The Thai government has sufficient experience in these matters that it will undertake to share this risk by agreeing in the contract to compensate the concessionaire for a loss arising from severe exchange-rate fluctuations in an unusual environment defined as an exceptional event. Such an agreement would involve establishing a foreign-exchange reserve account, from which compensation to the concessionaire could be paid.
This general risk-sharing principle seems quite fair, except that the reserve account exists only in principle and is not actually a cash reserve, readily available for withdrawal. The big question remains: When and under what exact circumstances could the concessionaire withdraw funds?
The agreement should allow the concessionaire to draw on such funds whenever the baht weakens against the dollar on the date when a foreign currency debt payment is due, perhaps by simply signing a cheque against the credit balance, in the same way the government can call on a performance bond provided by the concessionaire.
Instead, the concessionaire's ability to utilise the funds depends on the vague and impossible-to-prove condition that it is unable to repay its foreign financial obligations -- a requirement that could come too little, too late and could set off a dispute and lead to arbitration.
An arbitral award in favour of the concessionaire is also a concern as legal history in Thailand dictates that such an award -- a dispute resolution option that the concession requires to be final -- could in fact be overturned by the court. Arbitration under Thai law, routinely insisted on by the government, can be viewed as a major legal risk for foreign investors and bankers.
Another area of vulnerability is termination payment, arising when the government terminates the concession through no fault of the concessionaire. The concession would generally require the government to make a compensation payment in Thai baht. At the same time, the concessionaire still has an obligation to pay back its foreign loans in US dollars. If the value of the baht drops between the termination date and the date compensation is actually paid, the concessionaire could incur a substantial loss, given that compensation payments can take years to resolve, if at all. The loss is typically borne by the concessionaire and the government is unwilling to assume this risk.
The differences can be significant. Let's say that on the date the concession was terminated, the baht was valued at 34 to the dollar, but by the time compensation was paid -- 10 years later -- the exchange rate was 40 baht. The concessionaire's liability to pay back the dollar loan would increase by six baht for every dollar borrowed. On a loan of $1 billion, that works out to a forex loss of 6 billion baht borne by the concessionaire.
A syndicate of banks, Thai and overseas, which financed this foreign portion of the project, besides having to wait for 10 years for their loans to be repaid, would take a double hit from the concession agreement not providing for the concessionaire's ability to match its increased foreign-exchange liability.
Wirot Poonsuwan is a practising lawyer and can be contacted at wirot@brslawyers.com