Probing PPPs in Thailand

Stephen Jaggs and Tony Lui– Allen & Overy

27/05/2010

In Thailand, private sector involvement in the delivery of public infrastructure has

usually taken the form of concession based projects implemented using traditional
project finance structures. More recently there has been increased recognition and
support from within the Thai government for more sophisticated forms of private
sector involvement in the form of public private partnerships.

These initiatives include the drafting of a new PPP law, the release of draft PPP Guidelines and
proposals to establish a PPP taskforce. This coupled with the Thai government's Baht1.4
trillion Stimulus Package No.2. (SP2) to be spent over the next few years may present good
opportunities for PPPs in Thailand.

Background
In Thailand, PPP is a term which has historically been used in a broad sense to cover
concession based private investment in public infrastructure made on the basis of traditional
project finance structures. These traditional forms of project financing have played a major
role in many sectors of the Thai economy for more than a decade, most notably in the
energy, telecommunications and transport sectors.

A common feature of almost all project financings in Thailand is a long term concession
agreement (usually between 20-30 years) between the relevant government authority and
the investor. The type of structure used depends on the type of project being implemented
and the relevant governmental authority. The most common structures that are used in
Thailand include: BOO (Build, Own, Operate), BTO (Build, Transfer, Operate), BOT (Build,
Operate, Transfer), DBOM (Design, Build, Operate, Maintain) and BOOT (Build, Own,
Operate, Transfer).

A list of the major project financings undertaken in the last decade is set out in the table
below.

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The Private Participation in State Undertaking Act B.E 2535
(1992)
Despite having implemented a large number of projects by way of project finance, Thailand
does not have specific legislation to govern project finance or PPPs. Instead, such activities
are governed under the normal background Thai legal framework and under the Private
Participation in State Undertaking Act B.E 2535 (1992) (the PPSU Act).

The PPSU Act was enacted primarily to prevent corruption in the granting of rights to private
investors or use of state property and was not enacted with the intention of providing a legal
framework for PPPs. As a consequence, it does not contain a number of the concepts
commonly found in the PPP framework found in other international models.

Concepts like providing for (i) a method to evaluate projects, (ii) procurement methods, and
(iii) a methodology for sharing risks with the private sector are not dealt with in the PPSU
Act. The current institutional set-up is also somewhat fragmented, with regulatory power and
authority resting with several different agencies.

In recognising the limited scope the PPSU Act has for PPPs, the Thai government has been
working on a number of initiatives that are aimed at aligning the PPP framework in Thailand
closer to the PPP framework of other international models. These include the drafting of a

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new PPP law, the release of the draft PPP guidelines and proposals to establish a PPP
taskforce unit to oversee and facilitate the implementation and operation of PPP's in Thailand.

Draft PPP law

The Ministry of Finance is currently in the process of drafting a new PPP law. It is understood
that the new law will provide a clearer legal framework for the implementation and operation
of PPPs in Thailand and will incorporate concepts and best practices found in PPP enabling
legislation of other countries. The Ministry of Finance anticipates that it will take at least 2
years before a new PPP law comes into effect.

PPP Guidelines
Given the lead time before a new PPP law can come into effect, the Public Debt Management
Office of Thailand (being a department of the Ministry of Finance) issued draft PPP Guidelines
in November 2009. The PPP Guidelines have been developed as a means of providing
government departments with a better understanding of PPP projects and to serve as a guide
on how to implement PPP projects within Thailand's existing legal framework. The draft PPP
Guidelines were subject to a public consultation period of 45 days and are expected to be
revised and finalised before being submitted for review and approval by the Thai government.

The guidelines include basic principles on:

comparing investment costs between projects implemented by way of PPP versus

projects implemented via traditional procurement methods;
undertaking a project risk analysis and the allocation of those risks between the
government and the private sector;
procurement and selection processes and procedures; and
the standard terms of the contract to be entered into between the government and the
private sector.

The PPP Guidelines represent a step towards modernizing the PPP framework in Thailand and
displays the Thai government's commitment to developing this sector further. Some of
initiatives under the Thai governments SP2 programme are expected to follow the PPP
Guidelines with the first project being the purple line extension to the MRTA project which will
link metropolitan Bangkok to the western suburbs of Bangkok.

PPP taskforce
The Thai government proposes to establish a PPP taskforce to oversee the implementation
and operation of PPPs in Thailand to assist in addressing institutional obstacles. The
taskforce unit will be comprised of representatives from various departments including the
Ministry of Finance, the PDMO, the Comptroller General's Department and the National
Economic and Social Development Board (the agency responsible for infrastructure planning).
The key responsibilities of the taskforce will be to:

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 set PPP policies and guidelines;
act as the interface between the public and private sector by co-ordinating among the
various Thai authorities that are involved in a PPP project;
disseminate information about PPP project pipeline and guidelines to the public and
private sectors;
conduct market soundings for PPP projects; and
prioritise the implementation of PPP projects under the Thai government's SP2
programme.

The procedures under the PPSU Act have sometimes been criticised as being overly
bureaucratic and it is encouraging to see the establishment of a taskforce to streamline
administrative procedures. The taskforce is expected to set the foundations from which PPPs
will grow by developing predictable and transparent PPP policies.

Stimulus Package No.2 (SP2)

On 6 May and 15 June 2009, the Thai Cabinet approved a second economic stimulus package
of Baht 1.45 trillion to be spent on public infrastructure projects over the next few years. The
package is aimed at effecting substantial improvements to public infrastructure over a range
of sectors including, energy, telecommunications, transport, public health and education.

Under the SP2 programme, the Thai government has categorised projects according to their
suitability for PPP as follows:

The First Tier (commercially viable): These projects are commercially viable projects
that have a strong financial internal rate of return and are ready for private sector
participation. Projects falling within this category can earn sufficient revenues from end
users and do no require government support. These include projects in the energy,
telecom and air transport sectors.
The Second Tier (economic infrastructure): These projects are economic
infrastructure projects, including mass transit, rail, roads etc. which typically have a low
financial internal rate of return. As such, whilst users can be made to pay, government
support may be required for these projects to attract private investment. The
government recognises that projects falling within this category could be implemented
by way of PPP, so long as the government provides support that makes these projects
financially viable.
The Third Tier (social infrastructure): These projects are social infrastructure
projects (e.g those in the health, education and water resources sector) which have a
zero financial internal rate of return and the nature of the services provided by the
project are such that users cannot be made to pay. As such, full support from the
government will be required if these are to be implemented by way of PPP.

Out of the Baht 1.4 trillion to be spent on infrastructure, the Thai government hopes to fund
Baht 145 billion from PPPs. Of this, Baht 57 billion worth of projects have been identified as

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commercially viable, with projects with a value of Baht 45 billion in economic infrastructure
and projects with a value of Baht 42 billion in social infrastructure.

Stephen Jaggs is a partner at Allen & Overy's Bangkok office with extensive experience of
project financings in Thailand and Indochina. He has worked in Asia for 15 years.

Tony Lui is an associate at Allen & Overy's Bangkok office who has also advised on a number
of project financings in the region. He has wide experience in banking transactions including
project finance, property finance and syndicated finance, debt.

This article was first published by the Infrastructure Journal on May 27, 2010. An online copy
of the feature may be seen here.

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