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.
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 in 2023 falling well below expectations, the government is introducing a 500 billion baht (US$13.6 billion) Digital Wallet Scheme to stimulate private demand. This is expected to constrain public financing for structural challenges such as infrastructure.
Tackling the infrastructure gap is a priority to spur long-term growth. The government is looking to private finance for this, especially through public–private partnerships (PPP).
But private sources, particularly Thai banks, face constraints. At the institutional level, international banking regulations such as Basel III and Basel IV 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, particularly for banks concerned about the quality of their loan portfolios.
At the operational level, a key challenge is structuring projects 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 than traditional government procurement. For private investors, a PPP project is attractive if it generates sufficient revenue to provide satisfactory risk adjusted returns, compared with other investment options. This requires careful identification and an acceptable allocation of project risk among participants, making it difficult to generate a pipeline of bankable PPP projects.
Traditional sources of funding from government 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, China Development Bank and the Brazilian Development Bank.
But mobilising private financing, which is often a key NIB priority, has been a challenge. Government-controlled NIBs, such as the Canada Infrastructure Bank, have been criticised for crowding out private investment and lending and politicising infrastructure investment.
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.
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 to higher-return, long-term infrastructure projects, such institutions may be reluctant 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.
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 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.
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’. 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.
A suggestive example of this model are some characteristics of India’s National Investment and Infrastructure Fund (NIIF), 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 — 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 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. Investing in such projects remains a key role of government, 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.
