# Bridging Thailand’s Infrastructure Investment Gap

- Link: https://www.thailand-business-news.com/economics/150245-bridging-thailands-infrastructure-investment-gap
- Published: 2024-07-10T08:03:00+07:00
- Author: East Asia Forum

Thailand needs extensive infrastructure investment but faces growing public finance
constraints. A well-designed private sector-driven Thailand Infrastructure Investment
Bank (TIIB) could help mobilize private financing, especially from financial investors
and institutional asset managers.

## Key Takeaways

 * Thailand’s infrastructure investment needs are growing, but public finance constraints
   are limiting the government’s ability to address them.
 * Private finance, especially through public-private partnerships (PPP), is being
   sought to bridge the infrastructure gap, but faces challenges due to banking 
   regulations and project structuring complexities.
 * The establishment of a private sector-driven Thailand Infrastructure Investment
   Bank (TIIB) could complement public investment in infrastructure by mobilizing
   private financing and managing project risks.

Thailand is facing the dual challenge of tackling extensive infrastructure investment
needs and growing public finance constraints. With Thailand’s 1.9 per cent [economic growth](https://documents1.worldbank.org/curated/en/099121223123018912/pdf/P5010091ef52cc09d1b46c1af1a43820def.pdf)
in 2023 falling well below expectations, the government is introducing a 500 billion
baht (US$13.6 billion) [Digital Wallet Scheme](https://thailand.prd.go.th/en/content/category/detail/id/48/iid/282275)
to stimulate private demand. This is expected to constrain public financing for 
[structural challenges](https://documents1.worldbank.org/curated/en/099031424140547576/pdf/BOSIB138594db30dd1a7cf11bc1d58091b2.pdf)
such as infrastructure.

ADVERTISEMENT

Tackling the [infrastructure gap](https://outlook.gihub.org/countries/Thailand) 
is a [priority](https://thailand.prd.go.th/en/content/category/detail/id/49/iid/268913)
to spur [long-term growth](https://amro-asia.org/public-infrastructure-investment-and-macroeconomic-impact-in-asean3-economies/).
The government is looking to private finance for this, especially through [public–private partnerships](https://www.bangkokpost.com/business/general/2732225/more-public-private-projects-in-pipeline)(
PPP).

But private sources, particularly Thai banks, face constraints. At the institutional
level, international banking regulations such as [Basel III](https://www.bis.org/press/p230926.htm)
and [Basel IV](https://www.moodys.com/web/en/us/insights/regulations/basel-iv-and-the-butterfly-effect-a-lesson-in-unintended-consequences.html)
have significantly increased capital and liquidity requirements for banks and raised
risk weights for assets. This makes capital-intensive, illiquid and risky infrastructure
projects less attractive and [more difficult to finance](https://www.gihub.org/articles/banks-are-critical-for-closing-infrastructure-deficits-but-banking-regulations-are-not-supportive/),
particularly for banks concerned about the quality of their loan portfolios.

At the operational level, a key challenge is [structuring projects](https://ppp-certification.com/ppp-certification-guide/2-overview-structuring-phase)
to meet both public and private sector expectations. For governments, a PPP project
is worthwhile if, in addressing societal needs, it offers better [value for money](https://www.adb.org/sites/default/files/publication/783341/value-money-public-private-partnerships.pdf)
than traditional government procurement. For private investors, a PPP project is
attractive if it generates sufficient revenue to provide satisfactory [risk adjusted returns](https://www.investopedia.com/terms/r/riskadjustedreturn.asp),
compared with other investment options. This requires careful identification and
an acceptable allocation of project [risk](https://ppp.worldbank.org/public-private-partnership/allocating-risks)
among participants, making it difficult to [generate a pipeline](https://www.marsh.com/content/dam/marsh/Documents/PDF/asia/en_asia/Closing%20the%20Financing%20Gap%20Infrastructure%20Project%20Bankability%20in%20Asia-Marsh.pdf)
of [bankable](https://blogs.worldbank.org/en/ppps/preparing-bankable-infrastructure-projects)
PPP projects.

Traditional sources of funding [from government](https://eastasiaforum.org/2024/01/25/thailands-economy-remains-beset-by-low-productivity-and-slow-growth/)
and banks have failed to close Thailand’s infrastructure gap. A practical challenge
is to devise, through experimentation, more effective novel mechanisms than current
government and market arrangements.

Various national infrastructure banks (NIBs) offer examples. Most are government-
linked and funded, providing long-term loans to priority sectors and credit enhancements
such as guarantees. NIBs include Indonesia’s [PT Sarana Multi Infrastruktur](https://ptsmi.co.id/),
[China Development Bank](https://www.cdb.com.cn/English/) and the [Brazilian Development Bank](https://www.bndes.gov.br/SiteBNDES/bndes/bndes_en).

But mobilising private financing, which is often a key NIB priority, has been a 
challenge. Government-controlled NIBs, such as the [Canada Infrastructure Bank](https://www.bnnbloomberg.ca/canada-infrastructure-bank-failing-to-land-private-investment-pbo-1.1581153),
have been criticised for crowding out private investment and lending and [politicising infrastructure investment](https://financialpost.com/news/economy/why-trudeau-has-to-back-off-if-the-canada-infrastructure-bank-is-to-succeed).

Although there are no exact models, Thailand should consider a private sector-driven,
market-responsive Thailand Infrastructure Investment Bank (TIIB) to address existing
government and market constraints. This could provide a financing complement to 
Thailand’s [PPP program](https://www.unescap.org/sites/default/files/Thailand%20PPP%20Development_Mr.%20Kiattikun%20Tiamprasert.pdf).

Financial investors and asset managers — such as pension funds, insurance companies
and sovereign wealth funds — constitute significant local and global savings, much
of which is invested in low-yielding fixed income securities. While there may be
opportunities to redirect [institutional financing](https://www.adb.org/sites/default/files/publication/179166/adbi-wp555.pdf)
to higher-return, long-term infrastructure projects, such institutions [may be reluctant](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3806742)
to finance large individual infrastructure projects, which are large and relatively
illiquid investments. They may also be constrained by their ability to assess project
risks given their [fiduciary responsibilities](https://www.sec.or.th/cgthailand/EN/Pages/RulesRegulation/ICodeII.aspx).

Investing through a market-responsive TIIB may be more attractive. Its contributions
can include preparing a pipeline of well-structured projects for private finance
participation, , and spreading risks over a varied portfolio. By pooling diverse
projects, additional infrastructure financing opportunities can be realised through
the creation of tranched [security instruments](https://www.unescap.org/sites/default/d8files/5%20Mathieu%20Verougstraete_0.pdf)
with varying levels of credit risk, tailored to differing investor appetites. But
securitisation should proceed with care, considering lessons learned from the 2008
[Global Financial Crisis](https://link.springer.com/chapter/10.1007/978-3-319-60128-1_7).

For a TIIB to be a credible private sector-driven institution, ownership should 
primarily lie with the private sector. It could issue equity and debt securities
through the capital market, for example through special TIIB bonds facilitated by
incentives such as tax credits adjusted to length of investment tenure. Participation
in a TIIB can target leading financial institutions to serve as [‘anchor investors’](https://hbswk.hbs.edu/item/the-care-and-feeding-of-anchor-investors).
Shareholders would elect directors who then appoint TIIB management, ensuring that
investment decisions are free from political interference.

Government should be a minority potential anchor investor. This would allow for 
policy input through board presence but without government control, minimising political
vulnerability. Government regulatory oversight of the TIIB’s operations would ensure
that it operates broadly in the public interest. Participation by international 
financial institutions could add international experience.

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A suggestive example of this model are some characteristics of  India’s National
Investment and Infrastructure Fund ([NIIF](https://www.niifindia.in/)), an investor-
owned fund manager with participation from institutional investors and private financial
institutions. The government has minority participation at 49 per cent, while maintaining
an important oversight role. The NIIF manages three funds with differing investment
strategies, without government participation in the main investment committee.

In considering a TIIB, two issues should be noted. Large-scale infrastructure projects
are [always a challenge](https://www.penguinrandomhouse.ca/books/672118/how-big-things-get-done-by-bent-flyvbjerg-and-dan-gardner/9780771098437)—
whether public, private or PPP — often involving delays, underestimated costs and
overestimated benefits. PPP adds another layer of complexity. These projects often
take longer to prepare, have higher financing costs than publicly financed projects
and require complex alignment of differing public and private interests.

A private sector-driven TIIB should complement, not replace, public investment in
infrastructure. Many projects are [not appropriate](https://blogs.worldbank.org/ppps/who-finances-infrastructure-really-disentangling-public-and-private-contributions)
for private participation given low financial returns, even if they have potentially
high economic and social benefits, so their implementation is ultimately a political
decision based on a government’s assessment of [public priorities](https://www.researchgate.net/publication/268818692_Public_Private_Partnership_PPP_for_Asia_Infrastructure_A_Public_Investment_Perspective).
Investing in such projects remains a key [role of government](https://eastasiaforum.org/2024/02/09/thailands-post-pandemic-economic-recovery-still-trailing-behind/),
with due consideration of macro financial implications.

_George Abonyi is Senior Research Fellow and Visiting Professor at the Sasin School
of Management and Senior Advisor at the Fiscal Policy Research Institute (FisPRI),
Bangkok._

_David Abonyi is Director of the ‘Strengthening Thai-Canada Business Linkages’ project,
an initiative of the Thai-Canada Economic Cooperation Foundation (TCEF), Bangkok._

[https://doi.org/10.59425/eabc.1720260000](https://doi.org/10.59425/eabc.1720260000)