Large-scale transport and infrastructure projects boost construction activity in Thailand

Although the construction industry contracted somewhat in 2017 following a strong performance the previous two years, the prospects for the sector remain broadly positive. Work progressed on many fronts, despite a few projects not launching as planned. Commuter rail initiatives advanced, double tracking works on intercity lines began, high-speed rail track was laid, and plans for the transformational Eastern Economic Corridor (EEC) were promoted.

Performance

Thailand’s economic performance improved in 2017, with GDP growth of 3.9% marking the fastest rate in half a decade. The construction sector’s trajectory grew in the opposite direction, however, contracting by 2.3% in 2017 after rising by 8.6% in 2016 and 17.1% in 2015, according to the National Economic and Social Development Board (NESDB). Performance was particularly poor in the fourth quarter of 2017, when building activity fell by 5.3%, but the sector rebounded to post growth of 1.2% in the first quarter of 2018. Gross fixed capital formation in the sector, meanwhile, fell by 1% in 2017, after growth of 8% in 2016.

The pace of construction works is largely influenced by trends in the real estate sector. While the office segment sees steady demand, new supply does not quickly reach the market, according to global real estate research and consultancy firm Colliers. At the same time, the residential segment is dealing with oversupply at some levels and the withdrawal of speculators. As such, construction is somewhat limited and developers are selective, especially as the price of land rises. Retail space, for its part, is witnessing overbuilding and weak demand (see Real Estate overview).

Other limiting factors include environmental and planning concerns, which are starting to have an impact on the real estate market and construction development in key tourist areas. In Phuket, for example, rules were put into place in late 2017 that restrict the size of buildings, prevent construction on steep slopes, and require the creation of green spaces and the preservation of trees. Further environmental regulations may be on the horizon as Thailand aims to protect natural areas for high-value tourism.

Land statistics also indicate a slowing of activity. Total development licences issued in 2017 fell by 13% to 76,079, according to the Bank of Thailand. That figure is down 37% from the recent peak of 120,657 in 2011. The greatest decline in 2017 was recorded in the commercial building segment, with 40% fewer licences granted than the year before.

Bright Prospects

Although the overall performance of the industry dipped last year, the future remains positive due to the large volume of public infrastructure projects under way or in the pipeline. The government invested $25.7bn in infrastructure works in 2017, according to research firm Technavio. For transport, $55bn is earmarked for investment under the Transport Infrastructure Development Master Plan 2015-22. A total of 20 projects were approved under the plan in 2016 and 36 in 2017.

Indeed, the Thai Contractors Association reported that construction in 2017 was concentrated on horizontal infrastructure projects, such as roads, railways and bridges, as opposed to vertical buildings. This trend is likely to continue, with the Thailand Development Research Institute estimating that public investment in transport infrastructure will increase by 49% in 2018 to BT184bn ($5.3bn). Technavio forecasts that the construction sector as whole will expand by an average of 8% per year between 2018 and 2022.

Airport Development

Considerable progress was made in a number of areas in 2017. The upgrade and expansion of airports, for example, continues apace. Suvarnabhumi Phase II, a project costing a total of BT53.3bn ($1.5bn), is designed to increase handling at the country’s over-capacity Suvarnabhumi Airport in Bangkok from 44m passengers per year to 60m by 2019. In August 2017 a contract was awarded by the Airports of Thailand (AoT) board for the construction of a 216,000-sq-metre mid-field terminal and the addition of 60,000 sq metres of space to the east wing of the existing terminal. The contract was won by PCS Joint Venture, a partnership between Thailand’s Power Line Engineering and China Construction Engineering.

Not far from Suvarnabhumi Airport, major expansion is also under way at Don Mueang International Airport, in the north of the capital. The BT32bn ($926.3m) development works, approved in 2017, will raise capacity to 40m passengers per year. According to the Centre for Aviation, 38m people transited the facility in 2017. The demolition of 11 old buildings will make room for a new 100,000-sq-metre terminal and other facilities.

In 2016 the AoT board approved a plan to significantly expand Chiang Mai International Airport as well. The project, which runs through 2025, will cost BT12bn ($347.4m) and almost double annual capacity to handle 20m passengers per year. A second airport for Chiang Mai has also been proposed. Phuket International Airport, meanwhile, opened a new international terminal in 2016 and upgraded its domestic terminal in 2017.

In March 2018 the authorities stated that a second runway will be built at the military-run U-Tapao Airport by 2021, increasing capacity from under 100,000 civil and military flights per year to as many as 250,000. A third terminal, to be privately operated, has also been discussed. These upgrades are part of plans for the EEC mega-project, which aims to transform the provinces of Chonburi, Rayong and Chachoengsao into centres for high-tech manufacturing and services.

Motorways

Work on roads and related infrastructure has been progressing as well. Bidding for operation and maintenance responsibilities of the 196-km Bang Pa-In to Nakhon Ratchasima motorway was opened in August 2017, as were responsibilities for the 96-km Bang Yai to Kanchanaburi motorway.

The 32-km Pattaya to Map Ta Phut highway was 46% complete in September 2017 and should open by 2020, while the 86-km Tak to Mae Sot highway was over 70% complete in March 2018. Scheduled to be finished in 2019, construction has been accelerated so that the road can connect to the Second Thailand-Myanmar Friendship Bridge, which opened to traffic in May 2018.

Bangkok Rail

Perhaps the most significant transport developments have been in rail – specifically in Bangkok intracity services. A link connecting the Blue Line and Purple Line (Bang Sue to Tao Poon) was opened in August 2017. The Green Line extension from Bearing to Samut Prakan was completed in 2017 as well, though the 13-km track will not be officially opened until late 2018 due to ongoing legal discussions.

The Mo Chit to Ku Kot Green Line extension is under construction and will likely finish in 2020; it was 49% complete in early 2018. The Dark Red Line from Thammasat Rangsit to Bang Sue was 66% complete in early 2018 and is expected to be opened in 2019. Construction on the Orange Line from the Thai Cultural Centre to Min Buri began in 2017 and will continue through 2021. The Bang Sue to Tha Phra and Bang Kae to Hua Lamphong Blue Line extensions were 96% complete in June 2018 and should be finished by the end of the year.

Meanwhile, construction on the Yellow Line from Lat Phrao to Samrong began in early 2018 and is expected to be finished by 2020. Construction on the Blue Line from Bang Kae to Phutthamonthon Sai 4 should begin in 2019 and be complete by 2023, while work on the Purple Line from Tao Poon to Rat Burana will also run from 2019 to 2023. Work on the Green Line from Ku Kot to Lam Luk Ka will begin in 2020 and last until 2024.

In March 2018 the Cabinet approved spending of BT225bn ($6.5bn) on a rail link connecting the three airports serving Bangkok and its environs: Don Mueang, Suvarnabhumi and U-Tapao. A public-private partnership (PPP) model will be used, with authorities expecting to select an operator in October 2018 and having the connection up and running in 2023. The concession will be for 45 years after five years of construction. It is expected that the fare between Suvarnabhumi and U-Tapao will be set at about BT330 ($9.55), with the trains running at a maximum speed of 250 km per hour.

Intercity Rail

In ground transport beyond the capital, work on the Bangkok-Chiang Mai high-speed rail will begin in 2020. In March 2018 Arkhom Termpittayapaisith, the minister of transport, told press that the connection will be built in two phases, with the first running between Bangkok and Phitsanulok. The entire line is estimated to cost BT420bn ($12.2bn), and tickets will be priced at around BT1000 ($28.95).

Rail development is also moving beyond Thailand’s borders. Construction of a link that will ultimately connect to China commenced in late 2017. The first phase will be a 250-km stretch from Bangkok to Nakhon Ratchasima. Completion of the entire 607-km section to Nong Khai at the Lao border is set for 2022. Disagreements over costs, design and financing have led to slow negotiations and even the outright cancellation of the project for a time. However, progress is now being made on physical construction. In March 2018 it was announced that the cost of a 3.5-km pilot stretch fell by almost 10% as the result of using more local materials.

The double tracking of existing single-track rail is also beginning. In late 2017 the State Railway of Thailand signed nine contracts valued at BT69.53bn ($2bn). Track was being laid on four lines in the first half of 2018, with work on another four to commence later in the year. When analysing the construction market around the new rail and subway lines, most of the tenders have been awarded for the next two to three years. Some infrastructure works in the resort area of Pattaya are still available, however, as well as projects in the north, east and west part of the EEC.

EEC

Indeed, alongside transport works in and around Bangkok, the EEC represents another key driver of construction activity, with a wide range of incentives being offered for the development of the area. Regulations will be streamlined and processes simplified, with a one-stop service provided for investors to help get projects off the ground quickly. The Board of Investment is allowing non-Thais to own land in the zone and extending tax breaks. The Eastern Economic Corridor Act, which came into effect in May 2018, almost doubles the period for corporate income tax exemption, caps personal income tax and offers a three-month time frame for the completion of PPP procedures (see Trade & Investment chapter).

Authorities estimate that a total of BT1.5trn ($43.4bn) in public and private funds will be invested in the area in the five years to 2023. This includes BT64.3bn ($1.9bn) for the double tracking of rail lines, BT35.3bn ($1bn) related to highway construction, BT400bn ($11.6bn) for new cities and hospitals, BT200bn ($5.8bn) for the upgrade and expansion of U-Tapao Airport, BT158bn ($4.9bn) for high-speed rail projects and almost BT100bn ($2.9bn) for the development of two ports.

Bottlenecks

Powering industries in the EEC and the country as a whole is an ongoing process of ensuring sufficient and proper energy supply. However, environmental protests have resulted in the cancellation or delay of large projects in the energy sector that would have contributed significantly to construction activity. A 2.2-GW coal-fired plant at Thepha and another 870-MW plant in Krabi were put on hold in early 2018, for example, due to calls for new environmental and health impact studies (see Energy chapter).

Additional hurdles include new regulations regarding the employment of foreign workers, which have made it difficult to recruit the necessary manpower. Passed in June 2017, the requirements mandate a fine of up to BT800,000 ($23,200) for each unregistered foreign worker employed. Individuals from Myanmar, Laos and Cambodia can legally register to engage in manual labour in the country, but the process can be expensive and time consuming.

The new regulations have, therefore, caused many foreign construction workers to leave Thailand. Reuters reported in mid-2017 that about 60,000 workers exited the country between June 23 and June 28, and that up to 80% of recruits had left some project sites. Local press suggests that departures may have been the result of confusion about the new rules and the validity of existing documentation.

The government responded by pulling back a bit on the introduction of the rules. Some aspects of the decree were delayed to January 2018, and the Ministry of Labour allowed for the temporary registration of workers. However, while the government is offering workers a means to return to Thailand, critics say that the process may still be too complicated and expensive. Opportunities in the home markets may also deter people from returning: Myanmar and Cambodia are both experiencing high rates of economic growth, albeit from a much lower base than Thailand.

Infrastructure Fund

Delays in the launch of the Thailand Future Fund (TFF) have also had an impact on the construction sector. The fund, which was scheduled for an initial public offering in March 2017, was intended to support a wide range of infrastructure projects on both greenfield and brownfield sites. The TFF’s first investments were to be in two toll roads, the Chalongrat and Burapha Withi expressways, with proceeds going to developing the Rama 3-Dao Khanong western outer ring road, and the N2 and East-West Corridor highway systems. The fund, expected to be worth BT100bn ($2.9bn), was delayed in 2017 due to concerns about the cost of financing. However, the state believes that sovereign-backed borrowings should not be compared to funds raised in the private capital markets. The fund was further delayed in 2018 when it was challenged by unions that said it would be less expensive to use existing channels to support infrastructure works.

Procurement Act

The state also worked towards passing the Government Procurement and Supplies Management Act in the beginning of 2017, improving transparency on the one hand, but slowing down some projects on the other. Effective since August 23, 2017, the bill is designed to improve public sector processes for the official purchases of goods and services – including consulting services – so they are more efficient and easily tracked.

The bill stipulates that a contract must be put out for bids by all qualified entities, and at least three bids must be considered. Both purchaser and supplier must agree not to engage in fraud. An independent monitor will observe the process, and participants will be scored on their performance. Those with particularly low marks will be precluded from bidding in the future. Due to these new requirements, some disbursements from the Ministry of Transport have slowed.

Corporate Activity

Alongside government-supported work, private participation in the sector remains steady. In local company activity, industrial conglomerate Siam Cement Group (SCG) is making significant investments in its operations, though most expansion is taking place outside of Thailand. SCG believes its business will benefit from China’s Belt and Road Initiative that passes through the region, so it is seeking opportunities both within ASEAN and in India and China. Another Thai firm, Chiangmai Rimdoi, went public in 2017, using the funds raised for domestic expansion.

Foreign firms are also active in the local construction sector. Shinwa, a Japanese developer, is planning more investments in Thailand through joint ventures. Tata Steel of India, however, observed that domestic steel sales were down in 2017 due to the slower pace of public construction. Thailand’s steel exports are insignificant compared to imports, which represent two-thirds of domestic consumption, according to Rajiv Mangal, CEO of Tata Steel Thailand. “Thailand is located near three large steel producers: China, Japan and South Korea. This puts a lot of pressure on domestic steel producers,’’ Mangal told OBG .

Going Green

A more positive trend is that of sustainable building. Thailand currently has 219 structures with the LEED certification. Many of these buildings house the local offices of foreign companies and internationally recognised brands, but domestic establishments are also being recognised under the programme. Sustainable buildings have been erected for banks, SCG, convenience store chain CP All, the Electricity Generating Authority of Thailand, Bangkok Hospital, and multiple residential and mixed-use complexes. The One Bangkok project is aiming to be the country’s first LEED Platinum-certified neighbourhood development.

Thailand is one of the major centres for green building in the region, with the government committed to upgrading its own property portfolio and that of low- and middle-income housing. However, challenges remain in promoting environmentally sustainable buildings. “People acknowledge the benefits of green buildings, but still wrongly believe they will be more expensive. The reality is that they pay back quickly for themselves and have little to no premium costs to design and build,” Armelle Le Bihan, founder of Green Building Consulting & Engineering, told OBG.

Outlook

Thailand’s construction industry is at a turning point, and prospects for the sector are largely positive. Although it contracted in 2017, the sector is poised to accelerate on the back of significant public infrastructure investment. Indeed, growth over the medium term is expected to be more steady, with large-scale works planned under the EEC and sprawling transport projects taking place across the country.