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CLC Asia reviews Thailand's new PPP Act and Infrastrucure spending plans

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The Thai government’s multi-trillion Baht infrastructure spending plans have recently received a boost with parliament approving a new PPP law. The new legislation should, in theory, speed up and …

The Thai government’s multi-trillion Baht infrastructure spending plans have recently received a boost with parliament approving a new PPP law. The new legislation should, in theory, speed up and facilitate private investment spending into the country, particularly in infrastructure.

This policy brief examines the new legislation as well as highlighting some of the major projects slated by the Thai government under their 5.5 trillion Baht spending agenda.

We also provide CLC Asia’s take on some of the issues – and risks – both the Thai government and international investors might confront as the new law and legislation are bedded down.

This file is available for download from our website.


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  • 1. Briefing Note POLITICAL AND MARKET INTELLIGENCE 17 July 2013 CONTENTS Thailand’s new Public Private Partnership framework Key features of the PPP Act Breakdown of the government’s planned spending Our Take - Thailand’s new infrastructure czar – SEPO - Growing pains at SEPO inevitable - Expect the timetable for infrastructure projects to lag...badly • High Speed Trains to go nowhere fast • Little in the way of major water infrastructure - So what infrastructure plans are most likely to be implemented? 1 2 4 5 6 7 7 9 9 Thailand Thailand’s new Public Private Partnership framework Implications for Thailand’s planned 5.5 trillion Baht spending spree The Thai government’s multi-trillion Baht infrastructure spending plans have recently received a boost with parliament approving a new PPP law. The new legislation should, in theory, speed up and facilitate private investment spending into the country, particularly in infrastructure. This policy brief examines the new legislation as well as highlighting some of the major projects slated by the Thai government under their 5.5 trillion Baht spending agenda. We also provide CLC Asia’s take on some of the issues - and risks - both the Thai government and international investors might confront as the new law and legislation are bedded down.
  • 2. CLC ASIA BRIEFING NOTE - THAILAND 2 The new PPP Act covers investments of 1 Billion Baht (US$33m or higher) The PPP Act The new Act, aptly titled the “Private Investment in State Undertaking Act B.E. 2556 (“PPP Act”) replaces the 20-year-old Public Participation in State Undertaking Act B.E. 2535 (more commonly know as the “Joint Venture Act”). The PPP Act, for the time being, covers investments of 1 Billion Baht (US$33m) and above, though we understand consideration is being given to broadening the Act to cover budgets under this threshold. The main feature of the PPP Act is that it seeks to streamline the project approval process. Under the old Act investment was held hostage to multi agency processes, inter-agency rivalry and the need for repeat submissions and approvals to cabinet during the development phase. These obstacles meant that in some cases there were attempts to avoid the requirements of the JV Act by artificially splitting major contracts into smaller contracts under the 1 Billion Baht JV Act threshold. These artificial contract splits were often flagged by the Office of the Attorney General and the NESDB, rendering them illegal, thus slowing down progress as projects were halted and contracts redone according to the requirements of the JV Act, which included, submitting the project for cabinet approval – a timely effort. Amongst other likely benefits, streamlined procedures and clearer timeframes Key features of the new PPP Act According to the Ministry of Finance (“MOF”), the PPP Act represents a fundamental change by introducing clear systematic guidelines and proper risk allocation and management to implement PPP projects. They hope this change will enhance national competitiveness and strengthen fiscal discipline. The new framework, according to the MOF, will provide the following structure and benefits: 1. A Public Private Partnership “Master Plan”; 2. The establishment of a PPP Policy Committee to define the PPP Master Plan and Secretariat to operate as the policy advisory body to the Committee; 3. Streamlined procedures; 4. Clearer time frames; 5. Standard contract terms and guidelines on post-contract management of projects; 6. Provision for detailed and rigorous project calculation; and 7. A “Project Development Fund” aimed at providing seed money for PPP feasibility studies.
  • 3. CLC ASIA BRIEFING NOTE - THAILAND 3 ‘Value for Money’ designed to be front and centre of all new PPP proposals Overtime, service and management contracts will likely become more commonplace One of the major criticisms of the previous JV Act revolved around the lack of specificity surrounding what projects qualified as a joint venture between the state and the private sector. The new PPP Act defines a “State Undertaking” as involving activities which either involve both local and national government agencies and SOE’s, or activities which utilise the “natural resources or assets” of one or more of these agencies. To a large extent, on paper at least, the PPP Act has attempted to address a number of criticisms and deficiencies of the old Joint Venture Act. As such, the new Act provides for: a) Comprehensive institutional and regulatory framework; b) Methodology for the allocation of risk and / or project evaluation; c) Value for Money (‘VfM) Analysis; d) Contract Management; and e) A Central Agency – in this case the State Enterprise Policy Office (“SEPO”) at the MOF to oversee investments. The consideration period for new projects has also been shortened. The entire approval process for PPP projects should be approximately 7 to 12 months, instead of 20 to 30 months currently. Helping shorten this timeframe are reduced requirements for consulting cabinet during the project development phase. Additionally, the new law provides for the establishment of a ‘Project Development Fund’ to support PPP projects. The MOF plans to establish a venture fund worth 2 billion Baht to be used as seed money for investment projects. Private firms can borrow money from the fund to conduct feasibility studies and are required to pay back the money only when they receive profit from projects. Finally, there will be scope in the new law to require agencies to consider PPP alternatives and justify non-PPP options. This will force government agencies to seriously analyse whether they will be getting ‘value for money’ from PPP proposals, by comparing those to the ‘value for money’ that might be achieved via financing from the central budget. Under this legislation, options such as service contracts, management contracts, lease contracts, build-operate-transfer contracts and similar arrangements, concessions as well as joint ventures will be on the table for investors to consider, providing a broader range of partnering options with the government.
  • 4. CLC ASIA BRIEFING NOTE - THAILAND 4 Two trillion Baht in planned spending? Try more like 5.5 to 6 trillion…. ‘Connectivity Infrastructure’ forms the heart of the much publicised 2 billion Baht spending initiative Breakdown of the government’s planned spending Despite much talk in the press and from cabinet of the government’s “2 trillion Baht” cash splash, there is little in the way of comprehensive detail surrounding their plans, and little visibility surrounding the entire spending agenda. Technically, one of the first orders of business of the new PPP Committee (chaired by the Prime Minister) will be to promulgate administrative rules and procedures under the Act as well as to submit the ‘PPP Strategic Plan’ for the Cabinet’s approval. We understand that SEPO has asked relevant line ministries for their proposals for the Strategic Plan. However, based on our research it is likely that the 2 trillion Baht is likely to be only a small part of a larger spending framework. In total, we expect the government is likely to target spending in the range of 5.5 to 6 trillion Baht and that the focus of the investment from now until 2019 will fall into the categories listed below. On budget items • Investment amounting to 62% of total planned infrastructure spending, including small road projects and normal maintenance sourced from general revenue. Off budget items • Flood management schemes (6% of total spending); and • Connectivity infrastructure, predominantly high speed rail, mass transit and roads Figure 1 - Breakdown of 5.5 trillion Baht government spending plans Source: Ministry of Finance (2013), Credit Suisse (2013), CLC Asia It is the ‘Connectivity Infrastructure’ which appears to form the backbone of the much hyped ‘2 trillion Baht’ spending initiative. Within this set of spending, extensive focus has been given to big ticket items such as high
  • 5. CLC ASIA BRIEFING NOTE - THAILAND 5 speed rail. Table 1 - Break down of the 2-Trillion Baht 'Connectivity' program Sector Projects Value (THB bn) % of GDP Share Rail 37 1650 14.5% 82.6% - High Speed Rail 970 8.5% - Mass transit 445 3.9% - Double Tracking 139 1.2% Road 14 243 2.1% 12.2% Water 5 33 0.3% 1.5% Border facilities 40 12 0.1% 0.6% Contingencies 63 0.6% 3.0% Total 96 2001 17.6% 100.0% Source: Ministry of Finance (2013), Credit Suisse (2013), CLC Asia We suspect that these ‘off budget’ items - predominantly high speed rail - are likely to be the immediate focus for the upcoming ‘PPP Strategic Plan’, given that in many cases, they will require private sector expertise in government controlled areas. More importantly, keeping these projects off- budget means that nominally, the government does not breach its annual deficits limits. Our take Will the implementation of the PPP Act and the rollout of the infrastructure spending be as seamless as the investment community would like it to be? Highly unlikely. The new law does however quietly create a powerful new infrastructure czar within the MOF of Thailand - the State Enterprise Policy Office - which will house the PPP unit. We expect there will be a number of challenges to overcome; both in terms of institutional capacity at the MOF, and in the way the PPP unit will operate. Additionally we think that many of the projects that the government is likely to put forward will be much longer in coming than the government is willing to admit. The law establishes SEPO as the new infrastructure gate keeper Thailand’s new infrastructure czar – SEPO The new Act mandates that the PPP Committee will be supported by State Enterprise Policy Office (“SEPO”). The body will responsible for drafting guidelines to encourage PPPs, recommending selection methods to the PPP Committee, studying and analyzing projects, preparing a draft PPP Strategic Plan, and related matters, all at the approval of the PPP Committee. This change represents a significant power shift from sector or line
  • 6. CLC ASIA BRIEFING NOTE - THAILAND 6 Ministries to the Ministry of Finance. With the core participation in the Committee by finance and legal related personnel, it can be assumed that over time, this structure will result in a more expeditious process as well as, hopefully, a more hard-nosed look at infrastructure policy proposals, especially from a ‘Value for Money’ perspective. The government will unlikely be able to provide detailed investment guidelines for a long time to come…. Risk that SEPO becomes a bloated and technically incompetent gatekeeper Growing pains at SEPO inevitable The main risk is that SEPO, and more broadly the Thai government, will be ill-prepared and significantly under resourced to properly assess new PPP projects, and the anticipated time frames and methods for processing new applications will be many years in the making. A number of issues are immediately apparent. Guidance SEPO have yet to make clear to the public how investment decisions will be assessed. For instance, there is no clear guidance on how investment value will be calculated, whether by upfront capital outlays or the project’s lifecycle costs. We understand the Asian Development Bank has offered assistance in developing these guidelines. However more detailed guidance, for example those provided by PPP agencies such as HM Treasury in the UK and Partnerships Victoria in Australia are unlikely to be developed in the near future. As such, clear and predicable investment and partnership guidelines for investors are a long way off. Internal Politics Given that the PPP unit at SEPO will effectively be the sole gatekeeper for all major infrastructure investments in Thailand, we believe there is a real risk arising from unintended consequences of creating a powerful body. First amongst these risks is that SEPO quickly becomes the target of internal power plays and empire building by ambitious, but not necessarily technically competent officials. This creates the risk, as seen elsewhere inside the Thai government, that the PPP Unit at SEPO becoming a highly funded, bloated government department stacked with civil service ‘favourites’, and presided over by an internally powerful and politically connected head, but with little capacity to fulfill the role for which it was designed. We have already seen this play out in other parts of the government, particularly the ‘independent’ utility regulators for Energy and Telecoms. Instead of developing into centres for ‘hard headed’ economic analysis, these regulators have become repositories of sector-inexperienced with little or no formal training in economic regulatory methodologies.
  • 7. CLC ASIA BRIEFING NOTE - THAILAND 7 Expect the timetable for infrastructure projects to lag…..badly In our previous lives as Thai government advisors, we often sat across the desk from international investors outlining the ambitious plans of the Thai government in undertaking critical regulatory and infrastructure reforms one year, only to see the timeframes of these reforms be extended out. These plans then died a quiet death as priorities changed and internal champions of those reforms either moved on, or retired. We believe to a large extent, the same fate will fall upon many elements of this government’s infrastructure dreams. Figure 2 – Smaller is better. The likelihood of the governments infrastructure projects being implemented Source: Ministry of Finance (2013), Credit Suisse (2013), CLC Asia (2013) High speed trains could take 265 to 300 years to pay back investment costs…. High Speed Trains to go nowhere fast The much hyped High Speed Rail faces a mountain of technical, financial and institutional limitations. Financially, High Speed Rail makes little sense in Thailand. Analysis undertaken by Credit Suisse earlier this year estimated that even based on generous assumptions, it would take 265 to 300 years to recoup the THB970 Billion investment. A generous expansion of Bangkok’s international airport by contrast would cost 5,000 Baht (US$166) annually per passenger, versus a whopping 219,000 Baht ($US7300) annually per passenger on High Speed Rail. To make fast trains viable, this would require massive government
  • 8. CLC ASIA BRIEFING NOTE - THAILAND 8 …airport expansions would be much better value for money Financial considerations aside, putting SRT in charge of high speed rail is a recipe for disappointment We also think plans for double tracking are hard to achieve given SRT’s management and financial state subsidies, for very little value. Figure 3 - Construction cost of High Speed Train vs. Airport Expansion (per passenger/year) Source: Credit Suisse (2013), CLC Asia (2013) Even if the financial side of the equation could be made to work somehow, implementation will also be an issue given that the State Rail Authority of Thailand (‘SRT’) will undoubtedly have to be given a role to play in the operation and maintenance of any High Speed Rail venture. This is highly problematic. SRT is reportedly the government’s worst performing State Owned Enterprise. In 2010 for instance, partly due to the government’s insistence that SRT carry third class passengers for free, SRT reported a preliminary loss of 7.58 billion Baht with accumulated losses of 57.3 billion Baht. But being forced to carry passengers for free is only part of the issue. Structurally, SRT is moribund, with its powerful union having refused for more than a decade to consider any type of structural reform which would give SRT even a modicum of efficiency. SRT’s assets, mostly property, are valued at 124 billion Baht, meaning that the company is more focussed on being a property manager than running trains efficiently. Rolling stock is old and dilapidated, and attempts to have the company manage comparatively small modern rail operations, such as the Bangkok Airport Link, have been plagued with financial and technical problems. As such, despite the government’s protestations, we don’t expect there to be any real movement towards any High Speed Rail, for many years, if at all. Similarly, double tracking of existing train lines will also remain a mirage. Plans to double track have been in existence since the early 2000’s, with little progress. Despite being more technically realistic than Fast Trains, we expect that SRT intransigence, financial constraints and lack of political support will see slow progress on double tracking.
  • 9. CLC ASIA BRIEFING NOTE - THAILAND 9 Details for large dams are sketchy at best, financially unfeasible at worst Little in the way of major water infrastructure Similarly, large water management programs, such as dams on the Chao Phraya and Mae Yom rivers remain sketchy. These projects are likely to face opposition from infrastructure experts on economic grounds, as well as fierce resistance from local villagers supported by NGO’s. As such, we see a very low likelihood to the projects proceeding in the foreseeable future. Bangkok Mass Transit and Motorways are relatively easy wins for the government So what infrastructure plans are most likely to be implemented? Mass Transit and Motorway improvements and extensions appear to be the key pieces of infrastructure which have a high chance of succeeding. In Bangkok, where Mass Transit extensions are much needed and have little controversy surrounding them, construction of new lines or extensions of the Purple and Blue lines on the MRT, as well as the BTS’ Green line are ongoing, giving Bangkok another 60km of mass transit rail by the end of the decade. Similarly, the 170km motorway expansions, building a 6 to 10 lane new toll way from Bang Pa In (just north of Bangkok) to Nakhon Ratchasima at the gateway of northern Thailand seems likely to be completed by 2020, subject to no controversy surrounding needed land acquisitions for the route. Other projects, such as deepwater port expansions at Laem Chabang are also ongoing and approved, meaning that there is little risk of these projects not being completed.
  • 10. ABOUT CLC ASIA Chris Larkin Managing Director Chris is the founder of CLC Asia Chris private sector clients in Asia, Australia and the UK. After beginning his career in Australia, Chris moved to Thailand where he became an internal advisor to the Thai government on privatisation and econo privatisations of PTT and Airports of Thailand, as well as working with a variety of State Owned Enterprises. Since moving to the private sector, Chris has advised a number of private sector clients on and political risk issues non as well as helping leading energy companies on their IR strategy His analysis and views well regarded publications, including the Mining Journal and Wall Street Journal, as well as regional publications such as the Bangkok Post, The Nation, and the Phnom Penh Post. Chris has an Honours degree in Ec Policy and Management from Monash University, Australia, as well as having completed a Minerals Economics course from the University of Melbourne. Chris is fluent in English and Thai and has dual Australian and Thai citize CLC ASIA BRIEFING NOTE - Chris is the founder of CLC Asia. Chris has over 15 years experience working for both government and private sector clients in Asia, Australia and the UK. After beginning his career in Australia, Chris moved to Thailand where he became an internal advisor to the Thai government on privatisation and economic regulatory policy, working on the privatisations of PTT and Airports of Thailand, as well as working with a variety of State Owned Enterprises. Since moving to the private sector, Chris has advised a number of private sector clients on government relations, market entry, policy and political risk issues. He has also performed both financial and non-financial M&A due diligence on a number of entities as well as helping leading energy companies on their IR strategy His analysis and views have also been sought by a wide range of as well regarded publications, including the Mining Journal and Wall Street Journal, as well as regional publications such as the Bangkok Post, The Nation, and the Phnom Penh Post. Chris has an Honours degree in Economics and a Masters of Public Policy and Management from Monash University, Australia, as well as having completed a Minerals Economics course from the University of Melbourne. Chris is fluent in English and Thai and has dual Australian and Thai citizenship. He is married with two children and based in Bangkok. - THAILAND 10 years experience working for both government and After beginning his career in Australia, Chris moved to Thailand where he became an internal advisor to the Thai government on mic regulatory policy, working on the privatisations of PTT and Airports of Thailand, as well as working Since moving to the private sector, Chris has advised a number of market entry, policy He has also performed both financial and ligence on a number of entities across Asia as well as helping leading energy companies on their IR strategy. have also been sought by a wide range of as well regarded publications, including the Mining Journal and Wall Street Journal, as well as regional publications such as the Bangkok onomics and a Masters of Public Policy and Management from Monash University, Australia, as well as having completed a Minerals Economics course from the Chris is fluent in English and Thai and has dual Australian and Thai He is married with two children and based in Bangkok.
  • 11. Trevor Bull Associate Director – Governance CLC ASIA BRIEFING NOTE - Trevor has been an internal advisor to the Thai government for 15 years. Trevor joined CLC Asia in 2010 as a senior consultant and became an Associate Director in 2012. In addition to his role at CLC Asia, Trevor works as the Resident International Advisor to the Energy Regulatory Commission of Thailand (ERC) since its creation in 2008. His work with the ERC includes supporting the development of procedures and processes for the economic regulation of the power and gas sectors in Thailand as well as capacity building for Commission and Staff. Formerly, Trevor was the Manager of Sector Restructuring at the State Enterprise Policy Office at the Ministry of Finance, Thailand. His work included supporting the development of policy for market and regulatory restructuring for the transport, water, energ telecom sectors. The Sector Restructuring team supported the establishment and capacity building of economic regulators for these sectors for both price and non price regulation. Trevor was the World Bank’s Privatisation Advisor attache Thai Ministry of Finance. Trevor has also managed a team of consultants at the Thai Ministry of Finance for the Asian Development Bank funded project on developing commercial finance for local government units in Thailand. This project on municipal finance involved the design and implementation of capacity building for local government officers and the development of a regulatory framework to govern municipal borrowing. Prior to joining the Ministry of Finance in 1999, Mr. Bull was employed by the National Energy Policy Office, working on electricity and gas sector restructuring. Trevor is an Australian citizen with Thai permanent residency. He is fluent in English and speaks Thai to an advanced level. - THAILAND 11 government for 15 Trevor joined CLC Asia in 2010 as a senior consultant and works as the Resident International Advisor to the Energy Regulatory Commission of ailand (ERC) since its creation in 2008. His work with the ERC includes supporting the development of procedures and processes for the economic regulation of the power and gas sectors in Thailand as well as capacity building for Commission and Staff. was the Manager of Sector Restructuring at the State Enterprise Policy Office at the Ministry of Finance, Thailand. His work included supporting the development of policy for market and regulatory restructuring for the transport, water, energy and telecom sectors. The Sector Restructuring team supported the establishment and capacity building of economic regulators for these sectors for both price and non price regulation. Prior to this was the World Bank’s Privatisation Advisor attached to the also managed a team of consultants at the Thai Ministry of Finance for the Asian Development Bank funded project on developing commercial finance for local government units in municipal finance involved the design and implementation of capacity building for local government officers and the development of a regulatory framework to govern municipal Prior to joining the Ministry of Finance in 1999, Mr. Bull was d by the National Energy Policy Office, working on electricity Trevor is an Australian citizen with Thai permanent residency. He is o an advanced level.
  • 12. CLC Asia helps investors negotiate the complexities of working with government in Asia. In Thailand, we have over half a century of in-house experience of working with the Royal Thai government at our disposal. Market and industry analysis We provide in-depth market studies and initial non- legal/non-financial due diligence for potential investments in Asia. Our work goes beyond ‘off the shelf’ studies available elsewhere in order to give clients a clear picture of a target company, as well as relevant market dynamics and structure, key players, industry trends and market outlook. Political risk analysis Utilising our unique network of contacts and key decision makers, we offer clients comprehensive assessments of political risk events which may arise in a market. These events can include corruption, bureaucratic blockages, poor stakeholder relations, government and policy shifts, terrorism and security, legal and regulatory irregularities, religious and health related concerns. Government relations & communications The principals of CLC Asia have significant experience advising governments and state owned entities in the region. We can help private sector clients refine their message to government clients in a way which best communicates our clients’ business as well as assisting in stakeholder relationship matters. Policy advisory As policy advisors who have worked in the heart of government, we provide our clients with clear and informed background and interpretation on government strategy and policies, helping our clients align their commercial objectives with policy realities and frameworks. Our consultants are based ‘on the ground’ in Asia and have extensive experience in the region. All of our principals have worked for both the private and public sectors in the region, and can provide a unique insight to the political and business environments of the region CONTACT Bangkok All Seasons Place 26th Floor, Capital Tower 87/1 Wireless Road Bangkok 10330 Thailand Tel: +66 1 866 1002 Fax: +66 2 654 3511 Email: enquires@clc-asia.com