Infrastructure Bill Heats Up Thai Politics

Transcription

1 THAILAND EQUITY Investment Research Veena Naidu, Head of Research +66 (2) Infrastructure Bill Heats Up Thai Politics It s High Anxiety As Govt Debates On Bills Political anxiety rises as the Parliament votes on the THB2trn Loan Bill. We expect the Bill to be approved by the Constitutional Court but remains cautious till the final outcome The parliament approved on 29 March the first reading of the government THB 2trn infrastructure bill with 284 votes in favour with 152 votes against and 21 abstentions. However, the bill has to go through two more readings with the lower house and approval from the Senate. So the opposition to the bill by the Democrat party is not over yet. The opposition cannot win in the parliament so it is seeking the Judiciary s help to nullify the bill. The opposition argues that although the country needs massive investments in infrastructure, the government s plan to seek a THB2trn loan through issuing a special decree and bypassing the annual budget is a faulty one. However, due to the government s majority, the bill should pass the Lower and Upper Houses even as the opposition and anti-thaksin group want to litigate through the Constitutional court to override the legislative process. We believe that chances of the Constitutional court overriding the legislature is minimal as benefits of the projects and the funding via a special decree is needed for economic growth and the continuity of the projects. The period in which the bill will be debated - April to July - may be one of political uncertainty and the SET Index could be volatile during that time. Only when the draft bill becomes law by August will we see more sustainable upside to the Index. The government plans to propose a THB 2trn special borrowing program that will secure funding for its investments in the logistics and transport sector over a seven-year period from 2014 to The draft bill, which has been submitted to parliament for approval, would have to go through three readings in the Lower House, before becoming law in August. The bill was tabled for First Reading to obtain parliament s approval in principle from 28 and 29 March, to be followed by voting on the draft bill. Due to the government s majority in the Lower House, the draft bill sailed through the first reading. After the first reading, a committee will be set up to scrutinize each law in the draft bill. This scrutiny process is 30 days. The second reading is expected by end-april, in which the parliament will vote on each of the articles under the bill. Again, due to support from the majority, we expect the second reading to pass without problem. The third reading will soon follow in May, and involves voting on accepting the bill in total. Thus, the process of vetting the draft bill in the Lower House will take place in April and May. After approval, it will be vetted in the Senate, which is expected to debate and vote on it within 30 days, in June. Note, however, that as the Senate can ask for a 30-day extension, voting could be completed latest in July. 1

2 After the Senate s approval, the bill will be forwarded to His Majesty the King for a royal approval for it to become law. This process takes another 20 days after the submission to the Royal Bureau. Based on this timetable, the bill will be ready for implementation by August and the disbursement of investments can commence by the end of Note, however, that there are anxieties that the infrastructure loan bill may be disqualified by the Constitutional Court, as the opposition can petition the court after the draft bill has been approved by the Senate. If that happens, the planned inflow of infrastructure investments will be delayed and the government may have to dissolve the parliament. What is the source of these fears? The opposition party, along with its allies, is determined to seek judicial intervention to override the legislature. The Democrats points of attack fall under four categories: 1. Constitutionality, i.e. whether the bill violates the Constitution s articles 169 and 170 on government spending. 2. Necessity of the projects 3. The necessity to borrow funds, as well as implement and financially discipline the management 4. Corruption in the execution of the projects. Democrats argument: Under articles 169 and 170, all government spending must be factored in the annual budget. Off-budget spending through special decree is only allowed if it is deemed an emergency or urgent in nature. The opposition s argument is over whether the government has a mandate to transform what should be budgetary spending into off-budget expenditure. Answers from the government: Firstly, Thailand desperately needs to invest in major infrastructure projects as, in the past 17 years, public investment has declined to around 5% of GDP, a far cry from the peak of 25% prior to Moreover, the government has long under-invested in the transportation and logistics sectors, so we now rely on roads for around 86% of our transport requirements, which are relatively inefficient compared to water or rail systems. As a result, logistics costs in Thailand are very high, at 15.2% of GDP, when compared to more developed countries (which are only at 8%-10% of GDP). This has led to an inefficient use of energy which has, in turn, hurt its competitiveness. Over 80% of the country s freight is transported by land, 2% by rail and 12% by water. The logistics cost for land transportation is THB1.72 per tonne per km, while the cost for rail is THB 93 satang/tonne/km and transportation by water is at 64 satang/tonne/km. Thailand also needs to invest in new infrastructure to boost the economy and promote its linkages with neighboring countries. Secondly, these investments are not included in the annual budget. 80% of the budget is allocated for expenditures, leaving very little room for investment. Thirdly, issuing borrowings in the form of a bill will also prevent subsequent governments from changing projects. Projects that fall under the annual budget can be changed depending on the government, but projects under a special decree will continue despite any change in the administration. The borrowings will ensure the continuity of the projects development into completion. 2

3 Democrats argument: Necessity of the projects. This is easy to defend, as the benefits of the projects are detailed in the following: The proportion of personal car usage will shrink from 59% to 40% The speed of freight trains will increase to 60km/hour from 39km/hour The speed of buses will rise to 150km/hour from 60 km/hour The proportion of rail transportation will grow from 2.5% to 5% The proportion of ship transportation will hike to 19% from 15% The logistics cost to GDP is set to fall by 2% to 13.2% Real GDP will grow by 1% a year The current account deficit is at 1% to GDP Energy cost savings are at USD3.14bn a year or THB100bn a year. Creates an average of 500,000 new jobs a year. Inflation will rise by 0.16% a year Public debt to GDP should peak at 50% of GDP during the investment period. Democrat s argument: The necessity to borrow and financially discipline project managers Answer from the government: Borrowings would not upset the fiscal balance as public debt to GDP during the investment period will not exceed 50% of GDP. The government could accelerate debt repayment by paying more principal back to reduce the interest burden. Most of the funds will come from the local market, so the income from interest payments will remain in the hands of the Thai public. The funding is not passed through the state budget as well, as the government s goal is to achieve a balanced budget. Democrats argument: The government should employ the public-private sector joint venture law to encourage the private sector to investment in and support the projects. This way, the government will not need to take out such a substantial loan. Answer from the government: The government will be the main investor in the projects, while the private sector would be encouraged to take part in some projects on a case-by-case basis. These projects are not aimed at generating revenue but rather at developing the economy and cutting the country s logistics costs. If the private sector takes on a leading role in the infrastructure projects, they might charge high fees or raise fares from the people. Democrats argument: There will be issues in the appointment of management and corruption during the execution of the projects. Answers from the government: Projects would be implemented with complete transparency, and auctions and e-auctions for the projects would be conducted in strict compliance with the procurement regulations of the PM s office. To ensure transparency in spending, the projects proposed by state agencies will be scrutinized by the Finance Ministry, NESDB and Budget Bureau Conclusion, we expect the bill to be approved and will not be nullified by the Constitutional court. We remain cautious till the final outcome. 3

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