Investment keeps Thailand's construction project pipeline well stocked

 

An important engine of growth for Thailand, the construction sector is acting as a hedge as many other sectors face challenges in the form of global economic weakness and tepid consumer demand. Together with tourism and, to an extent, finance, construction is keeping the slowdown from becoming too severe. This is a significant change from recent years. Until 2015 construction was a drag on growth, but when the current administration came to power in 2014 it prioritised the development of infrastructure in light of poor economic performance since the 2008 financial crisis. The result has been a flurry of activity that has had a major impact on the economy in the short term. It is also expected to have a positive effect in the long term as new roads, railways and power projects help ease bottlenecks and improve overall efficiency.

The process has not been completely smooth. While the government has pushed specific projects and been successful in getting long-stalled efforts moving, it has also intervened and put a halt to other projects as it investigates whether the investments make sense, and whether tenders were properly executed. The focus on governance has also resulted in caution and a slower-than-normal pace of implementation. More generally, concern has been expressed about the fact that so much of the construction work has been driven by government spending, with private spending lagging. Other issues overhanging the sector include funding, the lack of skilled labour, weak project management, political uncertainty and the relatively low-tech nature of the business in Thailand.

By The Numbers

The traditional pillars of the Thai economy have been shaky in recent years. Exports declined by 5.8% in 2015 and grew by just 0.5% in 2016, with the export of goods contributing -3.4% and 0% to GDP in those years, respectively, according to the country’s planning agency, the National Economic and Social Development Board (NESDB). Growth in light manufacturing was negative in 2015 and 2016 (-0.3% and -0.9%), while manufacturing exports were down 5.5% and 1.3%.

However, construction was a star performer and helped lead the economy during this period of spotty growth. Gross fixed capital formation in the sector rose by 15.7% in 2015 and 8.1% in 2016, with the rate hitting 12.5% in the first quarter of 2016, though it fell to 6.3% in the fourth quarter, according to the NESDB. This was significantly faster than gross fixed capital formation in the equipment category, which fell by 0.8% in 2015 and rose by just 0.1% in 2016.

Construction is now a significant driver of GDP. The sector registered year-on-year (y-o-y) growth of 17% in 2015 and 8.3% in 2016. Hotels and restaurants, finance, transport and communications also added to GDP, while agriculture, manufacturing, real estate and education acted as drags on expansion.

As of the fourth quarter of 2016 construction employed 5.5% of the workers in the country. The number of workers in the sector increased by 0.6% in 2015 and by 3.1% in 2016. Construction reported the second-fastest employment growth in Thailand after the hotel sector in 2016, while the number of people working in manufacturing fell by 2.6%.

New Heights

The construction sector was in recession in 2013 and 2014, when y-o-y growth fell by 0.2% and 2.4%, respectively. It also dropped by 4.3% in 2011. In current prices, the value of construction in Thailand did not break its 1996 high of BT349.2bn ($9.8bn) until 2015. Construction totalled BT401.9bn ($11.3bn) in 2016, up from BT380.1bn ($10.7bn) in 2015 and BT337.2bn ($9.5bn) in 2014.

The sector’s outlook remains positive, with growth of 15% expected in 2017, local media reported. In the 2016-22 period the sector is set to grow at a faster rate than it did in 2011-15, according to UK-based research company Timetric.

As is the case in many sectors, Thailand is becoming a regional standout in the construction industry, where it has the largest such market in the ASEAN Economic Community (AEC).

The government is spending considerable amounts across the board, investing in energy, housing, airports and mass transit. In the private sector, condominium development contributes to growth in the sector, as residential complexes follow new train lines into the suburbs. Other drivers of growth in the sector include the continued increase in tourist numbers and the development of special economic zones.

Construction is seen as vitally important to Thailand’s long-term prospects, as it is essential if other sectors are to prosper. Tourism especially is dependent on the building of strong transport links, and cannot continue to grow rapidly unless investments are made in airports, trains, roads and hotels.

Public Versus Private

The public-private split is significant. Growth in gross fixed capital formation in the sector from the government has stayed in the double digits in recent years, at 32.5% in 2015 and 14% in 2016, though the rate declined from 16.9% in the first quarter 2016 to 11.7% in the fourth quarter.

In the private sector, gross fixed capital formation growth in construction has been slow of late. In 2015 it grew by 0.3%, and in 2016 it reached 1.1%. It went negative after the first quarter, declining by 1.6% in the second quarter, 0.3% in the third quarter and 0.5% in the fourth quarter. While public investment is strongly supported by a government seeking to offer countercyclical support, private investment is being held back by political and economic uncertainty.

The rapid growth in construction is thought by some to be too horizontal, focusing on roads, railways and bridges and not enough on vertical activity, such as high-rise buildings. Overall growth has been strong, but it has been uneven and not particularly broad. Land transactions peaked at over BT1trn ($28.2bn) in 2016, up from BT961bn ($27.1bn) a year earlier, according to the Bank of Thailand (BOT), the central bank. Construction permits, however, were down. In 2016 a total of 87,570 were issued in the country, compared with 94,052 a year earlier and 107,615 in 2014. In Bangkok the drop has been precipitous, from 20,875 in 2015 to 14,796 in 2016.

In relative terms, however, construction remains a small part of the Thai economy. In 2016 the sector represented 2.8% of the country’s GDP. The same year it was roughly one 10th the size of manufacturing and around 60% the size of the hotel and restaurant sector.

Government Spending

In 2015, 20 large infrastructure projects valued at a BT1.4trn ($39.4bn) were approved and set for completion by 2022. However, according to a Reuters report, by early 2017 only 2% of the total budgeted had been spent as projects were held up. This was due to bureaucratic delays, as strict regulations led to excessive caution. By the end of 2016 the government began to get concerned about the delays in infrastructure spending and fast-tracked a number of projects. These included the orange, pink and yellow lines of the mass rapid transit (MRT) system and the dual tracking of three rail routes. It was expected that the measures would result in BT169bn ($4.9bn) of infrastructure spending in the first quarter of 2017, with another BT170bn ($4.9bn) of spending expected over the rest of the year, according to research by DBS Group. Securities analysts became more positive on the sector as a result.

The 2017 budget includes a number of priority infrastructure investments as well: 20 urgent transport projects under the 2016 action plan, 36 projects under the 2017 transportation infrastructure action plan and work planned under the Eastern Economic Corridor development programme (2017-21).

Projects in the 2017 action plan include the improvement of U-Tapao International Airport, the development of a BT981m ($27.6m) ferry terminal, the BT30bn ($845.1m) Hat Yai-Malaysian border highway and the establishment of logistics centres – nine at border provinces and eight within the country away from the border areas. Also included is the construction of an intermodal facility at Chiang Khong and regional airport development.

“While opportunities for Thai contractors do exist overseas, the domestic market is currently driving growth as many large-scale infrastructure and logistics projects are coming up,” Polpat Karnasuta, president of Nawarat Patanakarn, told OBG. “I expect 2017 to be a positive year for the sector.”

High Speed

Much activity has been concentrated on rail development in recent years, and it appears as though a number of sizeable projects are getting under way. The China-Thailand high-speed railway, for example, which has been the subject of negotiations since 2014, is now set to start construction.

The first section of track will run from Bangkok to Pak Chong, costing BT179bn ($5.1bn) and fully funded by Thailand. That will be followed by a 256-km high-speed line from Bangkok to Nakhon Ratchasima and then two more phases, which will take the railway to the Laotian border. Once the connection with Laos is completed, trains will be able to run from Bangkok to Vientiane in four hours and then travel onward to Kunming, China, connecting to the China rail network. The line may then be run from Bangkok all the way down to Singapore.

In April 2017 Arkhom Termpittayapaisith, the minister of transport, said that plans for the project would be submitted to the Cabinet in June 2017, with bidding for the first two sections in July or August. Work for the project will begin in 2017, and it is hoped that all three stages will be completed in five years.

At least four other high-speed train projects are also being discussed by authorities. These include another China-backed line, which will link Nong Khai, Kaeng Khoi and Map Ta Phut, a Japan-supported project running from Bangkok to Chiang Mai and two public-private partnership projects, one from Bangkok to Hua Hin and the other from Bangkok to Rayong. The 669-km Bangkok-Chiang Mai line continued to make its way through the approval processes in 2016. Construction was expected to start in 2016 and be completed in 2020, but the government has been reconsidering the original plan, which at BT400bn ($11.6bn) is now seen as too expensive.

New MRT Lines

Bangkok rail development is also an area of much activity, with work imminent on the three MRT projects. The orange line will run from the Thailand Cultural Centre to the Min Buri district of Bangkok. Bids for the BT76bn ($2.1bn) project, which will be financed by the government with the issuing of debt, were taken in late 2016 and the contract was signed in February 2017. Construction of the line will start in June 2017 and finish in 2023. The line will run 23 km and will have 30 stations.

The MRT pink line is a BT57bn ($1.6bn) monorail running 35.5 km, 30 stations in total, between Minburi district and Nonthaburi Province. The yellow line is also a monorail, connecting Lat Phrao and Samrong and costing a total of BT47bn ($1.4bn). BSR Joint Venture, a consortium which includes the BTS Group, Sino-Thai Engineering and Construction, and Ratchaburi Electricity Generating Holding, won the right in late 2016 to build both lines. The agreement calls for completion in three years and operation for 30 years. Analysts also expect the red line and the purple line projects to be open for bidding in 2017.

Double-Tracking Projects

Double tracking of State Railway of Thailand (SRT) lines has also been a major part of the government’s infrastructure push. Sections to be upgraded included the Nakhon Pathom-Hua Hin segment, valued at BT19bn ($535.2m), Lop Buri-Pak Nam Pho (BT23bn, $647.9m), Map Kabao-Thanon Chira Junction (BT28bn, $788.8m), Hua Hin-Prachuap Khiri Khan (BT9.8bn, $276.1m) and Phrachuap Khiri Khan-Chumphon (BT16bn, $450.7m), according to local media.

However, in March 2017 a board reviewing government procurement voided the terms of reference for all five, as it found irregularities in the documents. Some parties claimed they did not receive proper consideration and that a few well-known companies were favoured in the process. The review board is headed by Prasarn Trairatvorakul, former governor of the BOT, and was formed under section 44 of the constitution. The board and the SRT agreed to divide the original five contracts into 13, separating signal installation for each project from civil works and track construction, making bidding more accessible to small and medium-sized companies.

Other Projects

Other areas have also received government attention. Highways costing a total of BT161bn ($4.6bn) are being built. These include the Pattaya-Map Ta Phut link, valued at BT20bn ($563.4m), Bang Pa In-Nakhon Ratchasima (BT85bn, $2.4bn) and Bang Yai-Kanchanaburi (BT56bn, $1.6bn).

Airport development is also significant. Suvarnabhumi Phase II, a BT50.3bn ($1.4bn) project, is well under way and a plan is in the works for Phase III, which is expected to cost over BT50bn ($1.4bn) and will involve the building of a new terminal.

The National Housing Authority (NHA) is planning to undertake BT100bn ($d) worth of development as part of the government’s 10-year residential plan running until 2025. Included in the programme is the construction of new units to replace the apartments in the Din Daeng area. The 29-ha area was originally developed in 1963 and eventually became the site of around 100 structures. The NHA will construct 36 buildings with a total of 20,292 units. Works began in late 2016, marking the beginning of a complete overhaul of the Din Daeng complex.

The construction of a new headquarters for state-owned CAT Telecom in Bangkok is another major investment, budgeted at BT1.8bn ($50.7m). Other projects include those undertaken by the Metropolitan Waterworks Authority under its master plan and power plants built by the Electricity Generating Authority of Thailand (EGAT) under its five-year system expansion, which runs from 2015-20. The company is scheduled to spend BT668bn ($19.4bn) on these projects. Included in this buildout are the replacement of units 4-7 at Mae Moh Power Plant, Bang Pakong Power Plant, and coal-fired power plants in Krabi and Thepa. The Mae Moh project commenced in 2015 and is set for completion in 2018 at a cost of BT36bn ($1bn). The 1300-MW Bang Pakong Power Plant, which will help ensure energy security for Bangkok and its surroundings, is a BT33bn ($929.6m) project approved by the cabinet in early 2017 and expected to be completed in 2019. The 800-MW Krabi project, however, was put on hold in early 2017 by the government due to environmental concerns. The Thepa plant is also facing strong opposition and may be reconsidered.

EGAT has major plans for the increase in transmission assets. It is engaged in a BT106bn ($3bn) plan that runs until 2023 to improve transmission systems in the north-eastern provinces and the southern parts of the country. The company is also making significant investments up to 2036 to increase the percentage of renewables to 20-25% of the total.

Private Investment

While the Thai condominium market is doing well at the high end, development has been weak in the broader market recently. Because of high levels of consumer debt and general economic uncertainty, buyers have been holding back and banks have been hesitant to lend. At 79,194, land development licences issued in 2016 for residential buildings were at their lowest level in years, down by 8% from 2015 and by 21% from the 2011 high.

The commercial side is also weak, with new mall construction slowed by a lack of consumer demand and office buildings being crowded out by high-end downtown condominiums. While land development licences for commercial sites were up on 2015, they were less than half their 2011 peak.

Still, considerable optimism remains. Bangkok is one of the region’s most inexpensive and desirable cities to live and work in, and it is increasingly seen as a centre of the AEC. If economic stability continues, and if the enthusiasm for condominium investment at the high end trickles into the mass market, private investment could rebound and begin to become a significant driver of sectoral growth.

International Comparisons

By some measures the country stacks up well in terms of construction and its processes. In the World Economic Forum’s Global Competitiveness Index 2016-17, Thailand was ranked 49th out of 138 countries in terms of infrastructure. The country’s overall quality of infrastructure placed it at number 72.

Meanwhile, the country was ranked 42nd in the dealing with construction permits category of the World Bank’s “Doing Business 2017” report, down from 38 a year earlier. In total, 17 steps are required to acquire a construction permit, compared with the East Asia and Pacific average of 15 and the OECD high-income average of 12.1. In terms of time needed to acquire a permit, Thailand ranks well, at 103 days, against 134.1 in East Asia and Pacific and 152.1 in the OECD high-income countries. Costs for a permit as a percentage of a building’s value are also lower.

Transparency is on the rise. In early 2017 the Cabinet approved the establishment of a committee that will require mandatory information disclosure for projects above BT1bn ($28.2m) undertaken by the national government, local governments or state-owned enterprises. Under the Construction Sector Transparency Initiative, information to be disclosed includes plans and procurement detail. Having joined the programme in 2014, Thailand is the 14th member of the initiative, which is supported by the UK government.

Outlook

The construction sector will remain a driver of growth in Thailand. Regardless of what happens with manufacturing industry and exports, the government will continue to invest in infrastructure, and that will result in a large amount of building taking place. For the long-term health of both the sector and the country, more private sector participation is needed. However, if building is carried out with too much of an eye on stimulating the economy, projects might be undertaken that do not generate sufficient long-term benefits to justify the expenditure.

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The Report: Thailand 2017

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