The volatility in global financial markets has recently picked up again on the back of a series of mediocre economic data across the globe. Poor results for Thai exports in 2015 could very well extend further, putting a spotlight on the need for public investment more than ever. Without a doubt, the cabinet will be called upon to churn out the public infrastructure projects as promised.
Indeed, infrastructure investment has again been placed at the top of Thailand's national agenda this year, like it has over the past five years. Unfortunately, investors will continue to cast doubt on any real investment as many previous attempts to execute large-scale projects failed to progress beyond the conceptual stage. Thailand's public investment to GDP has halved from the pre-Asian financial crisis level and now stands at around 5% to Malaysia's 11%.
So what has stalled these megaprojects from breaking ground? Political instability, it turns out, is not the only culprit. Lengthy approval processes, low investor appetite and a mismatch in the investment-political cycles are three known issues that have kept these projects stalled.
With the latest attempt to implement infrastructure projects worth 1.8 trillion baht, which include a number of new rail and airport upgrades, why should we be more hopeful this time around?
Because the three above-mentioned issues are being simultaneously addressed to drive these projects forward.
First, the Public Private Partnership (PPP) scheme has been revamped to ensure efficiency. The 2013 revision of the PPP Act will provide a much clearer path for the state and private sectors alike. For example, the content requirements of the feasibility study will be clearly laid out, approval timeframes indicated, and a contract extension clause specified.
In addition, the so-called "Fast-track PPP Programme" is on the table to speed up the most ready projects. This will shorten more than half of the existing processes by overcoming several bottlenecks.
Second, multiple private firms have already shown interest in moving into infrastructure investments. This was lacking in the past due to limited visibility on the return on investment and pay-back period. But with the first BTS lines finally breaking even, we are now witnessing several local tycoons looking to jump in as investors -- not only the typical industry players who are now well capitalised, but also new faces with handy capital. The latter invest in infrastructure in the hopes of diversifying their revenue sources, adding retail value to their existing businesses, or new opportunities springing up.
And finally, a new funding channel for government projects called the "Thailand Future Fund (TFF)" will align long-term investment benefits with the short-term political agenda. Most governments run into a mismatch between the investment and political cycle; national budgeting and public debt creation to fund large-scale projects put a heavy burden on the government initiating it, yet their political cycle ends before the long-term benefits transpire. Clearly, this mismatch disincentivises governments to pursue any type of structural reforms.
Therefore, the recent set-up of the TFF, an infrastructure fund valued at 100 billion baht to be raised by the private sector, shows a serious attempt by the government to push these megaprojects while maintaining fiscal discipline. Nonetheless, features of the TFF such as allowing the fund to invest in "greenfield" projects and offering attractive returns and tax advantages will be necessary to ensure benefits to both the government and investors.
The BTS Skytrain. There are indirect benefits from transit infrastructure projects including flourishing service businesses like real estate. (Photo by Seksan Rojjanametakun)
While the question of execution remains, these recent developments have given us some overtones of reality that we can all root for. Everyone knows that the country badly needs the long-term cure of large-scale public investment. Because such sizeable investment will surely offer sizeable positive spillovers to business sectors; the service sector will be the main beneficiary. While the manufacturing sector will be able to ramp up production to satisfy new purchasing orders, the service sector will enjoy much larger gains in the long run. In particular, construction contractors and fleet operators are expected to be the first to reap the benefits.
Often left unquantified are the indirect benefits that many service businesses like real estate and retail will be able to capture. The aftermath of the development of the BTS Green Line provides excellent proof of this phenomenon. Since 2000, the expansion of the BTS quadrupled the supply of condominiums near BTS stations. The residential growth also induced new retail shops to skyrocket to 18 shops per square kilometre compared with only eight in non-BTS areas in Bangkok.
For future metro rail projects, expect property developers to invest even before the onset of construction. We have seen land values along the unconstructed routes rising at a double-digit rate, especially near the intersections of multiple train lines like Laksi and Wat Phra Sri Mahathat.
SCB Economic Intelligence Centre (EIC) forecasts that once the metro network in Bangkok and vicinities is completed, the average land price along the metro lines will more than double that of the Bangkok Metropolitan Area average. The number of convenience stores will also mirror this similar trend.
The tourism industry will also ride along with an infrastructure build-out, encouraging travellers and businessmen to take more trips. Main tourism provinces such as Chiang Mai and Phuket can expect a surge in visitors, thanks to the expansion of their airports. Dual-track railway crossings and destination points such as Nakhon Ratchasima, Udon Thani, Chiang Rai and Nong Khai will become important pit stops and trade centres. This will eventually lead to the expansion of hotels, restaurants, fast food businesses, and tour companies as arrivals increase. Of course, integration with local transportation and professional warehouse facilities will be crucial to boost traffic in visitors and businesses. An investment incentive scheme may be needed to attract investors to offer these services at an early stage.
The media industry will be yet another beneficiary from infrastructure development. In 2015, transit advertising expenditure at and around metro stations as well as inside the trains grew surprisingly faster than internet ads, totaling over 4 billion baht and beating ad revenue in magazines for the first time. EIC projects that transit advertising could eventually rival TV advertising by 2025, as transit ad space balloons once all the metro lines are completed. LED and LCD producers will have reason to jump for joy.
In a nutshell, these megaprojects will lead to significant investments in the service sector which will insulate us better from global shocks. Investment in services will spread urbanisation beyond the capital and its vicinity, into provinces with railway crossings or the booming border trade.
With the manufacturing sector slowly losing steam, the transition to services would also open up opportunities for the labour force currently employed in uncompetitive manufacturing industries. Hinging on the success of infrastructure investment, it is not hard to imagine the service economy as new pockets of growth for decades to come.
Next is "Megaprojects, mega impact?" We will explore the wider impact of large-scale infrastructure investment including the potential influx of foreign investors, as well as the migration of the labour force into the service sector.
Sutapa Amornvivat, PhD is Chief Economist and First Executive Vice President at Siam Commercial Bank. She has international work experience at IMF, ING Group and Booz, Allen, Hamilton. She received a BA from Harvard and a PhD from MIT. eic@scb.co.th | EIC Online: www.scbeic.com.
NOTE: An earlier version of this article contained an editing error that made it seem that the fast track PPP programme was geared to advance the "worst" projects. This error has been corrected in the text above.