Multiplier effects: Public investment is needed to support aggregate demand and lower logistics costs

While both major political parties have tabled successive large-scale infrastructure developments, centring on high-speed rail and dual-tracking of existing lines, political differences have delayed implementation over the past decade. Thailand’s ratio of public investment to GDP fell from 6.9-7.1% in 2002-08 to 5.5-5.9% in 2010-12, according to data from the National Economic and Social Development Board (NESDB). As savings continued to outpace investment, Thailand achieved only modest efficiency gains. Although logistics costs have trended downward from 18.1% of GDP in 2001 to 15% in 2012, according to World Bank data, Thailand faces higher infrastructure constraints than neighbouring Malaysia or Singapore, where the ratios stand at 13% and 8%, respectively. While the government has sought to rebalance growth towards public infrastructure investment, its two flagship programmes – for flood control and through a BT2.27trn ($74.2bn) infrastructure fund – were still delayed in early 2014 due to legal and political challenges. Amidst cooling domestic demand and lacklustre exports, the need for public investment is widely recognised by the private sector. “Given the downturn in exports, Thailand’s growth prospects depend on the government’s infrastructure investment,” Nuchjarin Panarode, head of investment research at Capital Nomura Securities, told OBG.

Flood Control 

The immediate reconstruction efforts following the severe floods in 2011 was led by the private sector and focused on replacing damaged machinery, driving a 30% year-on-year growth in investment in 2012. While the then-new government responded with emergency measures, worth a combined BT53bn ($1.7bn), to address the floods in 2012, it also enacted a comprehensive BT350bn ($11.4bn) water infrastructure plan designed to reduce flood risks by executive decree, off-budget. Ranging from preventive measures such as expanding water retention and canals to response and recovery, the programme includes several large projects requiring public consent. “With many of the water management projects requiring environmental and health impact assessments and public hearings, larger ones have been delayed, although smaller ones have already been launched,” Pisit Puapan, director of the macroeconomic analysis division at the Fiscal Policy Office (FPO), told OBG.

Larger projects such as dams, floodways, reservoirs and water-retention areas (as envisioned under the Sufficiency Economy Philosophy) were undergoing public hearings until they were temporarily suspended in December by the Election Commission pending the February 2014 elections. Originally planned over five years, disbursement on the programme remained low, at roughly BT20bn ($654m) each in 2012 and 2013, down from a planned BT54bn ($1.8bn) a year. Equivalent to 3% of GDP and 6% of the government’s total BT5.5trn ($179.9bn) investment plan over 2013-19, according to Credit Suisse, slower disbursement has delayed progress on all but the smallest projects.

Large-Scale Projects

More ambitiously, and controversially, the government tabled a BT2.27trn ($74.2bn) infrastructure fund, equivalent to 32% of all planned infrastructure investments to 2019 and 19.98% of 2012 GDP, according to Goldman Sachs. The bill was found unconstitutional by the Constitutional Court in mid-March 2014. With two-thirds of the projects’ value focusing on rail, the plan aims to cut logistics costs and stimulate domestic growth. While such large-scale projects would cause significant strains in the economy’s ability to absorb investment, with roughly 100,000 new workers needed per year over seven years, according to the Ministry of Finance, and significant additional import requirements, the impact on growth would be substantial, adding roughly one percentage point to GDP growth over the course of the programme. “We forecast the BT2.27trn ($74.2bn) infrastructure investment over seven years will add one percentage point to GDP growth annually directly and reduce our relatively high logistics costs of 15.2% of GDP by two percentage points once completed,” the FPO’s Pisit told OBG. Indeed, with roads handling 86% of all freight in 2012, according to Credit Suisse, the need to develop alternatives like rail is pressing. Thailand was ranked 57th of 142 on its rail infrastructure in the World Economic Forum’s “Global Competitiveness Report 2013-14”, behind Malaysia in 20th place. Logistics costs for road transport in Thailand are $0.057 per tonne-km, compared to $0.031 by rail, according to the World Bank.

The pipeline includes much-needed projects like the dual-tracking of 768 km of existing rail lines, adding to the 173 km in 2013 (5% of the grid), at a projected cost of BT403bn ($13.2bn), 20% of the total, and the concessioning of 495 km of new mass transit lines in Greater Bangkok, for BT472bn ($15.4bn), or 23.6% of the fund. The fund also earmarks BT176bn ($5.8bn) for road investment on top of the budgeted amount to 2019. The most controversial project has attracted the most attention, however, namely the 1915 km of high-speed rail lines for BT783bn ($25.6bn), 39.2% of the total. While the state-owned State Railway of Thailand would develop the line with foreign partners, it would incorporate a separate firm to operate the four lines. The high-speed lines will not connect to the Chinese-funded Laos lines initially; the four first lines are mainly aimed at passenger traffic and would likely require government subsidies to prove viable. Yet the Ministry of Transport expects up to a threefold multiplier effect over a 30-year period in improving connectivity for the densely populated north and north-east regions.

Off Balance Sheet

To avoid infringing on budget-deficit caps of 5-6% of GDP and to ensure continuity over seven years, insulated from annual budget debates, the government structured both programmes as off-balance sheet. The plan is to balance on-budget spending by 2017, requiring 4.5% average annual growth. This would allow for faster disbursement of funds by circumventing key budgetary processes. The Ministry of Finance has planned a mix of mainly local currency bonds and offshore bond issues to fund the project. “Although absorption capacity for such significant funds may be challenging, the Public Debt Management Office will work with the Ministry of Transport to issue bonds according to project needs,” Pisit said.

While not a new concept – the previous Democrat government’s BT400bn ($13.1bn) Thai Khem Kaeng fiscal stimulus package in 2009-11 was also off-budget – the fund encountered strong political opposition in parliament. Initially opposition focused on a bill covering public-private partnerships, which are expected to contribute around 20% of the BT2.27trn ($74.2bn) package, although it shifted to the broader accountability of such off-budget spending. Then, in January 2014 the Constitutional Court agreed to hear a Democrat Party case questioning the constitutionality of such significant off-budget projects. The relative lack of technical details on larger projects has added to the execution risk, with Credit Suisse estimating projects worth 12% of GDP and 21% of all investment were at risk of significant delays. In an April 2013 report on the fund, the bank highlights four key areas of uncertainty: technical aspects, the financial structure, administrative bottlenecks, and the risk of protests from local communities and non-governmental organisations.

Project Delays

The announcement of elections within 60 days epitomised the slowdown in implementation. In December 2013 the Election Commission halted nationwide public hearings on larger water management projects pending the elections.

Despite contingency plans for bringing on-budget some smaller projects covered by the fund, such as Bangkok’s new purple line or ASEAN border-road projects, most projects remained on hold as of early 2014. Then, on March 12, 2014, the Constitutional Court ruled that the legislation allocating around BT2trn ($65bn) for government infrastructure projects was illegal and violated the constitution.

The Ministry of Finance has said it has back-up plans to launch offshore bond issues to provide initial financing, although it is unlikely to raise significant funds before a new government is installed.

Amidst constrained exports and slowing domestic consumption, public investment is needed to support aggregate demand and lower logistics costs for the economy. Despite consensus on the long-term need for infrastructure investment, significant disagreements remain on the means of channelling such funding and on the structure of projects themselves.

The government is expecting public investment to drive multiplier effects in private investment, both in infrastructure and sectors associated with improving the connectivity of key areas in the north and northwest, the most densely populated regions of Thailand. Credit Suisse, meanwhile, estimates that public construction has traditionally had a crowding-in effect on private investment, whereby every 10% hike in public investment prompts a 3% increase in private investment within six months. With the enactment of the flagship infrastructure fund halted by the Constitutional Court in March 2014, the private sector is awaiting clear indications of the government’s investment plans as a bellwether of the next few years’ economic prospects.