Investment in infrastructure projects over the next five years is set to be the main growth engine

Prime Minister Thaksin Shinawatra and his economic team have all but staked their second term on an ambitious plan to invest at least 1.7 trillion baht in new infrastructure projects from this year to 2009.

Projects to be financed include new power and waterworks plants, extensive new roads, new extensions to the Bangkok subway and skytrain system as well as new health and education facilities nationwide.

For the past four years, economic growth has been driven mainly by domestic consumption. Over the next four years, investment will take centre stage, new investment aimed at boosting the country's fundamental infrastructure to cope with economic growth through the next decade.

In some areas, new investment is sorely needed. Reserve levels for the national power grid have fallen sharply over the past several years, raising the prospect of brownouts and blackouts in the future unless new capacity is brought online.

Water pipes, waste treatment and irrigation systems nationwide are overstretched and outdated, leading to excess waste and Bangkok's infamous traffic has only worsened thanks to recordhigh sales of new cars, making the need for new road and mass transit systems more critical than ever.

Authorities note that logistics costs in Thailand are double those of more developed countries, resulting in added costs and unnecessary waste. The overwhelming reliance on trucks for domestic transport, due in part to a weak rail system, adds to costs, road traffic and the country's oil bill.

While the new projects come even as economic growth has slowed due to the impact of soaring energy costs, policymakers say that the new investments are crucial for mediumterm growth and can be managed while maintaining fiscal prudence.

Details on the new projects have yet to be finalised, although plans approved by the cabinet in June call for 423 billion baht to be invested in Bangkok's mass transit system, 200 billion in waterworks to build a national water grid and 96 billion for new educational institutions, ranging from primary schools to the university level.

Another 96 billion baht will be devoted to public health facilities, hospital equipment and information technology and 213 billion baht will be set aside for property development.

The transport and communications sectors are set to receive 328 billion baht for new roads and rail tracks and 342 billion will be allocated to other projects.

According to the Finance Ministry, the investment plans are expected to be manageable assuming economic growth averaging 5% over the next five years. Authorities insist that financing can be managed while maintaining thecountry's broad fiscal commitments of maintaining a balanced budget, keeping public debt under 50% of gross domestic product and debt service costs to no more than 15% of annual spending.

Only around 38.5% of the total investment is expected to come directly from the state budget. Stateenterprise investment will be responsible for around 13.1% of the projects, particularly for agencies such as PTT Plc and the Electricity Generating Authority of Thailand. New loans, both local and foreign, are expected to account for only around 42% of the total financing costs.

Plans approved by the cabinet in June call for 423 billion baht to be invested in Bangkok's mass transit system.

Privatesector investment, in return for operating concessions, could be another source of income, while securitisation of future revenues for projects such as toll roads is also being considered. Commercial development of public lands held by agencies such as the Treasury Department or the State Railway of Thailand is another option to help raise funds to finance the new investments.

With the 2005 trade and current accounts likely to be in deficit, some analysts have expressed concern about whether the new infrastructure projects will further worsen the country's external accounts due to the need to import new equipment and technology.

Chalongphob Sussangkarn, the president of the Thailand Development Research Institute, cautioned early in the year that the megaproject plan could repeat the mistakes made in the mid1990s, when excess investment undermined economic stability and contributed to the crisis.

But authorities insist that the investments can be managed without affecting fiscal discipline or the country's longterm stability. A joint study by the Finance Ministry and the Bank of Thailand estimates that the import content of the megaprojects will average only 30% of total investment. With imports to be staggered over the five year investment plan, the overall impact on the country's external accounts will be minimised, the study said.

Both agencies also agree that a deterioration of the current account beyond 2% of gross domestic product over the next several years would also be a call for additional measures, including a possible delay in the new investment plans.

Most analysts agree that new investment is needed to support future growth and to compensate for the lack of spending in the years following the 1997 economic crisis.
A joint study by the Asian Development Bank, the World Bank and the Japan Bank for International Cooperation estimated earlier this year that Asian developing countries needed to invest over $1 trillion over the next five years to support growth, with China accounting for 80% of the total needs.

The investment bank Credit Suisse First Boston estimates that new infrastructure spending by Southeast Asian countries will total around $30 billion this year, and is expected to increase over the next several years.

Nexpage >