By Ben Davies
The sleepy provincial town of Chachoengsao is a pleasant weekend getaway from the Thai capital, Bangkok. Perched on the banks of the Bang Pakong River, a 90-minute drive east of the capital, its charms include the revered Buddhist temple known as Wat Sothonwararam and the picturesque countryside beyond, made up of coconut plantations and fish farms that extend all the way to Chonburi and the Gulf of Thailand.
But changes are under way. The roads are being widened and large tracts of land cleared for development. Land prices in some areas have tripled in little more than three years and not just because of the region’s proximity to Bangkok. In June 2016, the government designated Chachoengsao, together with the adjoining provinces of Chonburi and Rayong, as a special economic zone called the Eastern Economic Corridor or EEC. Over the next 20 years, it plans to transform this area into a regional hub for a wide array of value-added businesses, including next-generation car production, smart electronics, wellness tourism, biotechnology and robotics.
For a country that took more than three decades to build Bangkok’s main international airport, Suvarnabhumi International, on the notorious Nong Ngu Hao or Cobra Swamp, it sounds very ambitious. But this time around, there seems little doubt that the authorities are serious about pushing ahead with the project as fast as they can.
Is the EEC a game-changer? Kanit Sangsubhan, secretary-general of the Eastern Economic Corridor Office of Thailand, thinks it is.
The EEC is just one part of a bigger national strategic plan wheeled out by the military junta after it seized power in 2014.
Prime minister Prayut Chan-o-cha, a former general in the Thai army who famously pledged to restore happiness to the Thai people, has also promised to address the country’s infrastructure woes by building better highways, railways, ports and other vital infrastructure. The aim is to improve the country’s competitiveness and reverse the slide in private investment; FDI inflows have plunged from $15.4 billion in 2013 to $7.6 billion in 2017.
How do the government’s ambitious infrastructure plans stack up? On paper at least, it all sounds rather impressive. As of early May, a total of 18 public investment projects worth Bt724 billion ($22 billion) had moved to the construction phase.
These include: the $3.3 billion Mass Rapid Transit Orange Line, which stretches 22.6 kilometres from the Thailand Cultural Centre to Minburi; the $544 million intercity motorway from Pattaya to Map Ta Phut in the heart of the EEC; a $721 million double-track railway from Jira to Khon Kaen in Thailand’s northeast region; and a $61 million container depot at Laem Chabang Port, the country’s largest deep-sea port, located in Chonburi province.
With the EEC development, Thailand will move up the global value chain towards becoming a value-based economy- Kanit Sangsubhan, EEC
However, in reality things are a little different. Almost half of the projects originally proposed by the government are still bogged down in feasibility studies and negotiations, or are under consideration by the Public Private Partnership Committee. Even when projects have been started, many of them remain far from completion.
Why all the delays? One senior foreign banker compares the situation to “drinking water out of a fire hose”. The problem, he says, is that the government has tried to launch so many infrastructure projects simultaneously that state officials have been unable to cope.
“I feel a lot of sympathy with the bureaucracy,” the banker says. “They have been inundated with stuff to do.”
Then there is the draconian Public Procurement Act. Passed in August 2017, it threatens to impose criminal penalties on state officials guilty of taking kickbacks, which has made everyone extra cautious, slowing the flow of projects even further.
This is unfortunate, given the overwhelmingly positive initial response from foreign banks and investors interested in financing the programme.
“In the early days, there was a lot of excitement, and it wasn’t just from people like us,” continues the foreign banker. “You would think that the bureaucracy would want a Siemens or some other multinational with global expertise and balance-sheet strength to be a shareholder and a managing partner in many of these projects. But we don’t see that. Is it because the government does not want to disenfranchise the state operators? I wish I knew.”
Will the EEC fare any better? Most bankers who spoke with Asiamoney believe it will.
“If anything, the Eastern Economic Corridor is under-hyped and under-appreciated,” says Prinn Panitchpakdi, Thailand country head of CLSA Securities and a member of the EEC advisory board. “Never before has the Thai government worked so hard to promote a single project.”
That is because there is a broad consensus that Thailand urgently needs a new growth engine, Panitchpakdi says.
In the early 1980s, “the government developed the Eastern Sea Board to attract foreign investment and transform the country into a low-cost manufacturing hub,” Panitchpakdi says, adding that “the project was spectacularly successful”, unleashing a wave of Japanese investment that placed Thailand squarely on the global investment map. But the old model of low-cost manufacturing is past its sell-by date. In order to break out of the middle-income trap, Thailand’s economic planners have come up with the equivalent of Eastern Seaboard phase 2, which goes by the more millennial name of Thailand 4.0.
What exactly does it mean and, more importantly, does it make sense? Pannee Chengsuttha, senior investment adviser at the Thailand Board of Investment (BOI), explains: “Thailand 4.0 is the economic model of the government to transform the country from one based on manufacturing to one driven by innovation, research and development.”
The new model, she says, will equip Thailand to survive the disruptive global forces and lay the foundations for a new era of prosperity.
The number-one constraint for all foreign investors in Thailand is finding skilled labour- Senior investment banker
Persuasive as this may sound, it clearly involves some wishful thinking. For a start, where will high-tech companies recruit their workforce? Recent surveys have indicated a shortage of 30,000 qualified technical workers in the EEC area alone. And while government officials talk of a digital era, most foreign workers in Thailand remember only too well the hours spent filling out mountains of paper forms in duplicate to obtain official work permits.
“The number-one constraint for all foreign investors in Thailand is finding skilled labour,” says one senior investment banker. “The government needs to fix the education system and build a strategy to deal with demographics. The problem is that the EEC does not address either of these issues.”
Still, from the government’s point of view, the most important way to kickstart the EEC is to make sure that incentives and physical infrastructure are in place for investors who want to set up there.
The enactment of the EEC Act passed by the National Legislative Assembly on February 8 ticks the first box. A range of incentives includes land leases of up to 99 years, permission to own land for BOI-promoted projects, as well as the lowest personal income tax rate in Asean at 17%.
With this hurdle cleared, the next step is to put in place the hardware. In late May, the EEC Office and the transport ministry jointly announced the terms of reference for the $5.7 billion high-speed railway linking Don Mueang, Suvarnabhumi and U-Tapao airports. The route will stretch 220 kilometres, with nine new stations for the high-speed trains, and will, the government hopes, breathe life into the EEC.
Next up for bidding after the high-speed train link is the $5.7 billion U-Tapao Aerotropolis – new passenger terminal as well as a maintenance, repair and overhaul centre and a cargo depot.
Several other projects are being fast-tracked, ranging from the $4.2 billion Laem Chabang Port Phase III to the $309 million Map Ta Phut Seaport extension.
Are all these projects necessary?
Therapong Vachirapong, managing director of Phatra Securities, is not entirely sure that they are.
“Do we need a high-speed train to cover a distance of around 200km when you can drive to those areas in little more than an hour? Will the project make economic or strategic sense for potential large government subsidies? What number of passengers will use these rail projects, especially for transit between airports with few schedules per day, given low population density destinations? These are all important issues to look at.”
Therapong is also concerned about long-term financing.
“Think back to the 1980s and 1990s,” he says. “It made sense for the private sector to invest in water infrastructure projects or telecommunications or power. These projects made adequate returns for private investments. But when you go into potential loss-making infrastructure, these projects are likely to require government subsidies. It can be done. But the important question is, do we really need it?”
Kanit at the EEC Office argues that the rail link is about more than just high-speed transport. It is about seamlessly linking the three airports and making the EEC an extension of the Bangkok Metropolitan area. This, in turn, will boost tourism and support development and investment in the area.
“If the high-speed train link goes ahead as planned, it will have considerable spillover benefits for the wider economy,” says Pornsanong Tuchinda, head of commercial banking at Bank of Ayudhya.
You need a strong contractual framework to attract international capital. And in the case of mass transit projects in Thailand, these tend to be large, high-risk projects- Abhay Rangnekar, Standard Chartered
The government says that the big-ticket transportation projects, including the high-speed railway, are likely to be funded through public private partnerships. Yet Thailand’s recent record on PPP is poor. Just take a look at the World Bank’s recent ‘Procuring infrastructure public private partnerships report’. Thailand scores just 27 points out of 100 for preparation of PPPs and a passable 58 for PPP contract management, whereas Vietnam scores an impressive 77 for preparation of PPPs and 62 for PPP contract management. Even Indonesia has a higher overall score than Thailand.
Abhay Rangnekar, the Singapore-based managing director and head of regional project and export finance at Standard Chartered Bank, is a 35-year veteran of structured financing solutions around Asia.
He believes that the Thai government is serious about using PPP to fund some of the country’s big-ticket infrastructure projects. However, he warns that private investors have to be able to see that the projects in Thailand offer a bankable return, otherwise they may be tempted to look elsewhere.
Rangnekar mentions several areas of particular concern in the urban rail and road sectors, including land access issues, the risk of traffic or tariff build-up and legal redress mechanisms in case of disputes.
“A good PPP regime is capable of achieving an optimal risk allocation amongst various stakeholders and project counterparties,” he says. “But you need a strong contractual framework to attract international capital. And in the case of mass transit projects in Thailand, these tend to be large, high-risk projects.”
For all those justifiable concerns, investment in the EEC is growing, although from a painfully low base. For the first quarter of 2018, the BOI registered 66 applications worth Bt160 billion, compared with 59 projects worth Bt12 billion in the same period of last year.
Some bankers are optimistic. Pornsanong at Bank of Ayudhya believes that the new infrastructure projects will attract both Thai and foreign investors to Thailand.
“It will accelerate demand for loans and bank services such as international trade finance products, which will provide a lot of opportunities for both local and foreign banks,” he says.
Bangkok Bank, Thailand’s largest commercial bank and the long-standing leader in financing infrastructure projects, is also upbeat.
“Bangkok Bank is helping connect international investors to opportunities in the EEC, and we are ready to support our customers’ investments there,” says executive vice-president Narin Opamuratawongse.
Narin rightfully points out that the completion of infrastructure projects in the EEC could also have a multiplier effect on the Thai economy, something that has been sorely missing in recent years.
“These projects should act as a catalyst that the private sector has been awaiting. This should bode well for the outlook for the Thai economy in the near future,” he says.
The EEC is likely to benefit from its strategic location next to what is known as the CLMV sub-region, which comprises Cambodia, Laos, Myanmar and Vietnam. This sub-region has a population of roughly 150 million people and ranks among the fastest-growing regions in the world, having notched up annual GDP growth of between 6% and 8% over the last three years.
“Thailand wants to be the infrastructure hub of the Greater Mekong Sub-region,” says Rangnekar at Standard Chartered. “That is the government’s ambition, and finding the right regulatory and contractual framework is key.”
China could have an even bigger impact. Some bankers see the EEC as a logical extension of the Belt and Road Initiative. No surprise then to see a photograph of a smiling Jack Ma of Alibaba shaking hands with the Thai prime minister on the front page of the Bangkok Post newspaper earlier this year.
The cheesy photo op came with the announcement that Alibaba would invest a minimum of $340 million in a smart digital hub, complete with a fully automated warehouse in the EEC. And where exactly? No less than in Chachoengsao. The regional logistics centre will serve Thailand as well as Cambodia, Laos, Myanmar and Vietnam.
The optics look good. “He came. He saw. He signed,” quips one foreign banker. “It was good publicity, but it probably doesn’t mean very much.”
The government hopes the project will attract a wave of Chinese investment, in much the same way as the Eastern Seaboard attracted the Japanese. Relations between Thailand and China have strengthened noticeably since the coup d’état four years ago. In 2017, China was Thailand’s top trade partner, accounting for $29.4 billion or 12.4% of total Thai exports.
But not everyone wants to hear that.
“Off the record, many people worry that the Eastern Economic Corridor will become an extension of China’s economy,” admits one head of research.
Ultimately, however, the biggest long-term problem facing Thailand’s infrastructure may be the same problem that has plagued it all along: politics. A general election is likely to be held next year after being repeatedly delayed since the middle of 2015. It seems likely that a party aligned to the military will gain power through the support of numerous smaller parties, ensuring a weak and fractious coalition government. This is the sort of recipe for political strife that the military government was supposed to ensure did not happen again.
How will Thailand’s ever-changing roster of prime ministers and regimes affect long-term infrastructure projects?
Tibor Pandi, country head of Citi (Thailand), smiles at the question. “Various clients ask the same question,” he says. “You can argue that although there is political volatility, there is a certain level of consensus amongst all parties that Thailand needs to develop, it needs to remain self-sufficient and economically independent from other countries. This provides stability. There is an understanding that business needs to go on.”
Clearly some bankers might take issue with just how much damage more than a decade of political paralysis has done to Thailand’s economy, as well as to the country’s standing in the world. But perhaps a more important question is, has the EEC gone past the point of no return?
Kanit says it has, and argues that the project is making good progress thanks to the commitment and support of all related parties.
Pandi is realistic about the chances. “Is development of the EEC going to be quick? No,” he says. “Is it going to be easy? No. But these people have succeeded before. They have the patience and they report directly to the prime minister.”
So what will Chachoengsao, or indeed the EEC, look like two decades from now? Kanit has high hopes.
“In 20 years, the EEC area will become a new metropolitan industrial and business hub complementing Bangkok,” he says. “The EEC has the potential to resemble a Silicon Valley development in Thailand.”