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“29541”,”3/25/2005 5:18″,”05BANGKOK2137″,



“This record is a partial extract of the original cable.

The full text of the original cable is not available.













E.O. 12958: N/A






1.(SBU) Summary. The economic centerpiece of Prime Minister

Thaksin\’s second term is a series of major infrastructure

projects estimated to cost US$57.5 billion over five years.

It remains unclear how the RTG will finance these projects

given self-imposed fiscal constraints, previous projects that

disadvantaged private investors and an illiquid bond market.

Given the importance Thaksin attaches to these projects, we

expect he will engineer a formula to try and attract

financing without any government guarantee of repayment.

Whether he actually convinces enough investors to put their

money where the PM\’s mouth is must await specifics. End






2.(SBU) As reported previously (reftel), the Thaksin

government has announced plans to undertake massive

infrastructure expansion and modernization projects estimated

to cost Bt2.35 trillion (US$57.5 billion) over the next five

years. The total RTG budget for FY2005 is about Bt1.2

trillion (US$30.8 billion) and 2004 GDP was Bt6.6 trillion

(US$169.3 billion). Projects the RTG describes as \”committed\”

include the purchase of new aircraft by parastatal Thai

Airways, rail links to the new Bangkok international airport

and industrial development in the area around the airport,

expansion of the existing Skytrain and subway lines,

expansion of the highway system, expansion of the gas

pipeline system and low-income housing development. Projects

that are planned but \”non-committed\” include expansion of the

railroad network, expansion and modernization of the water

grid and development of a refinery and oil pipeline

associated with the \”land bridge\” project across the Thai

isthmus between the Andaman Sea and Gulf of T






3.(SBU) The RTG has several goals in pursuing these ambitious

\”megaprojects.\” First, is to stimulate investment as the new

driver to the Thai economy now that domestic consumption and

export growth are leveling off. The second goal is to upgrade

Thailand\’s infrastructure so that the country is better able

to compete internationally. The stated intention is to reduce

the cost of logistics in Thailand to less than 10 percent of

GDP from its current level of about 19 percent (U.S. and

Japan figures are 10 and 11 percent respectively). It is also

intended to improve worker productivity by reducing the

amount of time Bangkokians spend commuting. In the aftermath

of the 1997-1998 financial crisis, little new public

infrastructure investment has been made. Finally, in keeping

with Thaksin\’s self-image as Thailand\’s CEO, he views the

on-going excess liquidity in the banking sector (estimated to

be Bt200-300 billion -US$5.1-7.7 billion) as an

under-utilized asset that should be mobilized.





4.(SBU) The RTG does not intend to pay for these projects out

of current budget expenditures or by increasing the net debt

on the government\’s balance sheet. \”Fiscal sustainability\”

is the government\’s watchword: defined, in part, as a maximum

public debt/GDP ratio of less than 50 percent (currently

about 47.9 percent – down from 52.9 percent in January 2002 –

with an RTG goal of reducing this number to 40 percent by

2009), a balanced budget and debt service comprising less

than 15 percent of the yearly RTG budget. With additional

calls on the budget ranging from increasing the salaries of

low-paid civil servants to tsunami and drought relief efforts

to expenditures related to quelling the separatist movement

in the south, there is little room in the RTG budget to

finance the megaprojects and within the defined fiscal limits

even if the economy continues to grow at 6 percent each year.





5.(SBU) The official capital-raising framework outlined by

the Ministry Of Finance plans for 26 percent of the required

capital to come from the government budget, 35 percent from

State-owned enterprises (SOEs) and 39 percent from \”other

means such as securitisation or property development of areas

adjacent to the projects.\” In fact, to bridge the apparent

gap between fiscal rectitude and an investment binge, the

Thaksin administration is studying a variety of approaches to

keep these projects off the government books. First, many of

the \’committed\’ projects will be undertaken by SOEs (Thai

Airways, Airports of Thailand, PTT) that will finance the

projects themselves either on the strength of their own

balance sheets, through asset-backed financing or by forming

joint ventures with private sector companies and/or financial

institutions. Market observers seem confident that these

established organizations can use the cash to be generated by

the projects, backed by their other substantial assets, to

secure proj

ect financing.


6.(SBU) For the mass transit expansion projects – extensions

of the Skytrain, subway and toll roads – the RTG would like

follow its previously successful method of granting long-term

concessions (typically 25 years) to Special Purpose Vehicles

– companies created specifically to build and operate these

concessions. Existing examples of such entities are Bangkok

Metro PCL – subways, Bangkok Expressway PCL – toll roads, and

Bangkok Mass Transit PCL – Skytrain. These companies are

typically joint ventures between leading Thai companies with

the key foreign infrastructure suppliers (e.g. Siemens,

Obiyashi) often taking an equity stake. The problem is that

the equity investors in these projects have not done well.

The RTG has limited the amounts the ventures may charge for

their services (fares and tolls) and is currently trying to

force operators of the Skytrain and subway to sell out to the

mass transit regulatory authority at what the companies

consider a low price. This history will make it very

difficult to

convince new private investors to commit to any equity

positions in the proposed projects.


7.(SBU) The most likely structure will be for the RTG to

create \”Public-Private partnerships\”, not-for-profit limited

liability companies with initial capital provided by the

government and granted a concession to built and operate a

subway line or toll road or some other potential asset. These

entities will issue bonds backed by the value of the

anticipated future cash flow from its concession. There would

be no RTG guarantee backing the debt.





8.(SBU) There are several problems with this model. First,

given the inherent risk of construction delays and over-runs,

the debt will have to be very attractively priced (i.e. offer

a high yield) in order to attract investors, especially in

the absence of RTG backing. Second, if Bt2.3 trillion in new

projects actually start-up over the next five years, in a

domestic bond market which currently has severe liquidity

problems and rising interest rates, the effect on corporate

borrowing rates and crowding out effect could be severe.

There is considerable skepticism among Thai market

participants whether the domestic market has sufficient depth

to absorb this much new paper. In November 2004, the total

value of all outstanding bonds in Thailand was Bt2.74

trillion (US$70.3 billion) of which Bt2.51 trillion (US$64.4

billion) was either issued or backed by the RTG.


9.(SBU) Some observers posit that the RTG will provide the

necessary capital to the PPPs with no effect on the RTG net

debt level through the proceeds from IPOs of State-Owned

Enterprises EGAT (electricity) and CAT and TOT (telecom)

while also removing the government guarantee from the debt of

these entities (thereby making room for new RTG debt to be

issued under the debt/GDP cap). While this would be a start,

the total of all RTG-guaranteed SOE bonds outstanding is only

about Bt322 billion (US$8.3 billion); not enough even with

the IPO proceeds to fund everything anticipated. Others

point to the Asian Bond market initiative as a source of

funds. There is no indication, however, that ASEAN central

banks are interested in funding Thai infrastructure

development, or even having more than a nominal exposure to

Baht. This nascent effort for a pan-Asian debt market would

have to develop much more quickly than it has to date in

order to be a source of funds for the mega-projects


10.(SBU) COMMENT. We have spoken to money managers, bond

market senior officials, academics and RTG officials

responsible for managing government debt and designing some

of the projects. None have been able to explain how the

government will follow through on its seemingly contradictory

promises of expanding investment while reducing debt. Most

are dubious it can be done, with some arguing that the entire

exercise is designed to channel funds to Thaksin family and

cronies (septel will examine the issue of corruption in

Thailand – anecdotally it appears that large scale corruption

may be getting worse while petty corruption may have

marginally improved).


11.(SBU) The mega-projects are the single most important new

plank in Thaksin\’s economic strategy for his second term. As

an economist who helped design the \”dual track\” economic

policy of Thaksin\’s first term told us, \”Keynesian demand-led

recovery is played out. We must move on to the next level for

the economy to continue to grow.\” He continued: \”In creating

economic value, Thailand is ahead of China and about ten

years behind Taiwan and Korea. We must maintain our pace to

stay ahead of fast-moving China. We can\’t do that without

significant new investment in infrastructure and improving

human resources. I just don\’t know how we will pay for it.\”

Although many here believe the PM\’s program is mostly talk

and the majority of projects won\’t get off the ground, the

Prime Minister\’s penchant for financial engineering means we

cannot rule out a scheme that, at least on its face, gets the

mega-projects underway. We suspect that Thaksin will be

aggressively marketing portfolio investment in Thailand to


beginning with a planned visit to New York in June.



Written by thaicables

July 6, 2011 at 8:02 am

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