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Thailand's expanding state 'threatens future growth'

Expansion of creaking rail system may put economy on the wrong track, critics say

State Railway of Thailand hopes to increase its share of the cargo transport market from 1.4% to 6% within five years. (Photo by Peter Janssen)

Thailand is banking on its state-owned enterprises to spearhead economic growth in 2017 through massive investments in infrastructure. The push has brought one of the kingdom's biggest and oldest SOEs, the State Railway of Thailand, to a critical juncture.

The Bangkok headquarters of SRT, started by King Rama V in 1890. (Photo by Peter Janssen)

The military-led government has budgeted more than 500 billion baht ($14.1 billion) for investments by state enterprises, with the SRT receiving the largest single allocation of 76 billion baht for double-track rail expansions, an extension of Bangkok's elevated railway, and construction of bridges, fences and track improvements.

A key question, however, is whether SRT is up to the task.

In the financial year to Sept. 30, 2016, the SRT managed to disburse only 53% of its allotted investment budget of 60 billion baht, compared with an average disbursement rate of 80% among Thailand's 55 SOEs. Disbursement is a common indicator of efficient management.

"If you look at the SRT they are a bit like a patient in [intensive care] and everyone is saying to him 'you are the future' and trying to kick him out of bed when he is still moaning and groaning," said Ruth Banomyong, a logistics and transport expert at Thailand's Thammasat University.

SRT has debts of nearly 100 billion baht, and annual operating losses are estimated at a minimum of 10 billion baht. But not all the railway's problems are of its own making. Expansion of the SRT's freight service, which could earn more money than the heavily subsidized passenger service, was neglected for decades in favor of Thailand's roads.

SRT is like an ICU patient everyone is counting on, says Dr. Ruth Banomyong. (Photo by Peter Janssen)

The country has 4,034km of rail tracks compared with 390,000km of highways -- rated the world's second most unsafe by the United Nations, with more than 30,000 fatalities a year, the world's second highest per capita rate after Libya. Rail freight, which is cheaper, safer and more environmentally-friendly than road transport, accounted for only 1.4% of the market in terms of tonnage carried in 2015. SRT hopes to boost its share of cargo transport to 6% with its double track expansion over the next five years.

Staffing freeze

But there is more to running a railway than building tracks. "We tend to focus on the tangible stuff, but the success of the railway will depend on the system which is being put in place, which will depend on the people who are working on it," Ruth said. "They will need a whole new set of people to come in and handle it, and it has to be done now."

There has been a government freeze on SRT staff recruitment for years, partly because of the group's poor financial performance and resistance to reform. SRT officials estimate that the group needs to boost staff by 20% to 12,000, with new blood recruited to handle new challenges such as an information technology system.

"We need IT to help," said Ek Sittivaekin, SRT deputy governor in charge of administration. "We are doing 80% of our financial reports manually, so today's transactions will appear seven or 10 years later." The lack of IT also hampers SRT's efforts to assess how much its assets are worth.

SRT is one of Thailand's largest land holders, with an estimated 39,840 hectares. "We know roughly how much land we have but we cannot identify specifically how large each piece of land is, so we will take around a year to clear things up on our land data base," Ek said.

SRT refused to lease property around Makkasan Station to the finance ministry to write off debt. (Photo by Peter Janssen)

The Ministry of Finance has been urging the railway to lease a plot of 80 hectares of prime land in Makkassan, Bangkok, to its Treasury Department in return for writing off 60 billion baht of debt. The SRT rejected the finance ministry plan on Jan. 9 and proposed developing the Makkasan property itself through a public private partnership, but that proposal has in turn been queried by the finance ministry.

"We looked at the details of their business plan and we are still not satisfied," said Ekniti Nitithanprapas, director-general of the ministry's State Enterprise Policy Office. "That's why we asked them to revise and come back to us by February."

SEPO's Director-General Ekniti Nitithanprapas is trying to steer SRT in the right direction. (Photo by Peter Janssen)

Prime Minister Prayuth Chan-ocha set up a so-called "Superboard," with SEPO as chief facilitator, to run SOEs immediately after assuming power following a coup in May 2014. The Superboard has already told seven SOEs, including SRT, to restructure their operations, and further changes will follow under a new SOE law drafted by the finance ministry with the help of financial experts such as former Bank of Thailand Governor Prasarn Trairatvorakul.

The law was approved by the junta-led cabinet on Aug. 23, and is being vetted by the Council of State, a group of legal and constitutional experts. It is expected to be presented to the National Legislative Assembly, a parliamentary body set up after the coup, for a vote by June. "The prime minister mentioned to the Superboard [on Jan. 9] that he wants this law to be passed [as soon as possible]," Ekniti said.

Under the SOE law Thailand will set up a holding company that will own the shares of the country's 12 incorporated state enterprises, including Thai Airways International and PTT, the national petroleum company. The remaining 43 SOEs will fall under the purview of SEPO, which will be empowered, with the Superboard, to set SOE strategic plans and appoint boards of directors.

Under past governments SOEs were owned by the finance ministry but controlled by functional ministries. SOE boards are often composed of political appointees, military representatives and police officers, so a shift to more professional appointments could be a step toward improving management skills and efficiency while reducing opportunities for corruption.

Few dispute the need to make Thailand's SOEs more efficient, given that the sector's return on assets was a paltry 1.8% in the year to September. But there are growing worries that the regime is leading the country toward greater dependence on the state sector.

Low growth

Banyong Pongpanich, chairman of Kiatnakin Phatra Financial Group, and Thailand's leading privatization expert, quit his post as a key adviser on the SOE reform process on Nov. 1, and has subsequently expressed serious concerns about the growth of the state sector.

SOE assets have grown from about 4 trillion baht in 2001 to 14 trillion in 2016, while the total budget for SOEs has risen from 1.5 trillion baht to 5.1 trillion over the same period. Meanwhile the government payroll has increased from 2.1 million civil servants in 2004 to 3.2 million in 2014. Their salaries are equivalent to 7.2% of gross domestic product, the highest proportion in Southeast Asia, according to a survey by the Thailand Future Foundation, a Bangkok think tank.

"It's quite clear to me that in the past 10 to 15 years Thailand has grown by expanding the government role, while every other country is trying to reduce the government role," Banyong told the Nikkei Asian Review. Thailand's GDP growth has been relatively sluggish over the past three years, notching up 0.8% in 2014, 2.8% in 2015 and an estimated 3.2% in 2016. "Why do we have such low growth? It is because we have expanded the least efficient sector, namely the government sector," he said.

Disturbing trends include the SOEs branching out into new business activities. For example, PTT recently received permission to operate commercial property at Udon Thani Airport, in northeast Thailand. PTT is widely regarded as being better run than SRT, but critics say property development should be handled by the private sector.

"My main worry is, are they [SOEs] eating into the limited pie?" said Deunden Nikomborirak, research director at the Thailand Development Research Institute, a think tank. "If that is the case then the efficiency of the economy will be down because the state is expanding and they are inefficient, so overall we will become more inefficient. The important thing is to make sure they are operating on a level playing field with the private sector."

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