Unlikely engine for Thai economic growth

The State Railway of Thailand (SRT), the kingdom’s most indebted and hidebound state enterprise, is in expansion mode.

The outgoing military government recently gave SRT the green light to hire over 1,900 new staff, marking the first the loss-making enterprise has recruited new full-time employees in over two decades.

The hiring spree comes as Thailand ramps up infrastructure spending on new trains, a key driver of fiscal-led economic growth as the country’s main export engine starts to sputter due to the US-China trade war.

Whether the SRT can efficiently deliver on all the planned new railways, including links in the previous junta’s flagship $44 billion Eastern Economic Corridor scheme, will in many ways be pivotal to the new elected government’s economic failure or success.

SRT was one of seven state enterprises targeted by Prime Minister Prayut Chan-ocha for rehabilitation after staging his 2014 democracy-suspending coup, a military takeover justified in part on the need to clean up endemic corruption.

Five years down the track, the railway still has a long way to travel to become a self-sustaining concern, analysts and investors say. But Prayut’s re-election as prime minister last week means the railway’s rehabilitation program will likely move on the same, some say plodding, course.

SRT is still the most indebted of Thailand’s state enterprises, with 120 billion baht (US$3.8 billion) outstanding. SRT recorded an operating loss last year of about 13 billion baht ($415 million), according to State Enterprise Policy Office (SEPO) director general Prapas Kong-led. “We expect that within the next 12 years all their current debt will be gone,” he added.

Under the supervision of SEPO, which is part of the Finance Ministry, SRT has been restructured while avoiding arguably a more efficient remedy to its troubles: privatization.

Privatization of Thailand’s state enterprises has been a political taboo since 2001, when then-prime minister Thaksin Shinawatra’s Cabinet pushed the highly profitable PTT national energy company towards an initial public offering that enraged the public by giving first dibs to the limited placement to his known associates and cronies.

That experience has made fixing Thailand’s 56 state enterprises, many of them known hotbeds of graft and corruption, politically difficult if not perilous.  Prayut vowed to fix the system but like most of the outgoing junta’s reforms efforts were half-hearted and results at best mixed.

A much debated  “Improving Governance of SOEs Law” was quietly passed on May 24, but observers feel it lacks necessary teeth as it dropped the recommendation to set up a state holding company, similar to Singapore’s Temasek, to invest in and control Thai state enterprises.

Instead, they will be under a so-called “Superboard” chaired by the prime minister, other ministers and a few select industry experts. For the SRT’s reform process, however, it is probably a good thing that Prayut remains in charge.

“Within this past five years we have seen many changes at SRT,” said SRT acting governor Voravuth Mala. “Otherwise we would die.”

The SRT was founded in 1890 by then King Chulalongkorn, or Rama V, known as Thailand’s modernizing monarch. The enterprise has its own law, and until the early 1960s was considered one of the most efficient, profitable state enterprises in the kingdom.

From the late 1960s onwards, however, construction of Thailand’s road and highway network took off and SRT slowly slipped into decline. Rail now accounts for less than 2% of Thailand’s transport load.

Trains became transport for mostly low income earners and as a result SRT turned poor and in debt. Elected governments, seeking the votes of the poor, would waive fares on third-class seats, promising to repay SRT for the  subsidy but repayments would come late, so the SRT needed to borrow money to meet its expenses.

It’s debt ballooned and there was no relief in sight from its problems because elected governments continued to ignore the railways in favor of roads, which are built quicker than rail tracks and thus can more readily be leveraged to win votes.

SRT’s business prospects brightened somewhat under Prayut’s coup-installed regime, which focused on bolstering Thailand’s infrastructure with new investments in rails, highways, airports and ports.

While investors and analysts have focused on Prayut’s promoted mega-projects, including a $7 billion, 220-kilometer high-speed rail link between Don Muang, Suvarnabhumi and U-Tapao airports that was approved last month and the slow-starting Sino-Thai high-speed link between Bangkok and Nakorn Ratchasima (Northeast).

At the same time, the SRT has been engaged in lesser noticed ventures, including a 995-kilometer extension of its slower-speed dual-track network.

The dual track, which will allow for speeds as fast as 100 kilometers per hour (kph) compared with the current 50 kph average, could conceivably allow SRT to build a competitive commuter network linking Bangkok to surrounding provinces as well as a freight link from the landlocked northeastern region to deep sea ports on the Eastern Seaboard.

SEPO’s decision to allow SRT to hire an additional 1,900 staff this year aims specifically at manning this new dual track network.

“Approval for the recruitment is our starting point for solving our real business problems,” said Voravuth in an interview. “If we cannot prove that we can run our core business at a profit, forget about all the other projects…this is the key to our success.”

The first seven-route phase of the dual track expansion will be completed in 2023 if all goes to plan. Some sections, such as the link between Nakorn Ratchasima and Khon Kaen, two cities in the country’s underdeveloped northeast, is already operational.

The big challenge for SRT is not just recruiting staff, but also training the newcomers in time to manage it’s now fast-expanding service. “One of the urgent problems is the SRT has to upgrade its training institution to produce more trained people,” said SEPO analyst Pitaya Uthaisang while suggesting the staff upgrade should have started five years ago. “Doing it now is better than nothing,” he said.

SEPO has concentrated more on restructuring SRT’s potentially profitable subsidiary businesses such as property and operating the Bangkok Skytrain’s Red Line – a new mass transit route in the capital that will feed east and west overhead routes into a new Bang Sue Grand Station scheduled for launch in 2021.

To handle these projects, SEPO has allowed SRT to hive off an asset management company and a Red Line Company. There are high hopes that the asset management company (the SRT owns one of Thailand’s biggest land banks at 32,000 hectares nationwide) will be used to alleviate the railways’ massive debts.

“For the asset management company, the business plan is that they are going to make 120 billion baht ($3.8 billion) in ten years,” SEPO’s Prapas said. If achieved, that would just pay off SRT’s current debt.

The government has so far refused to write off SRT’s debt to pressure it to capitalize on its land bank. “They cannot be a burden to the government any more, not when they are sitting on a lot of assets,” Prapas said of SRT.

The first major plots of land to be leased out with be around Bang Sue Grand Station, which will become Thailand’s modern railway hub replacing old-world Hua Lamphong station and is being touted by some as Southeast Asia’s future biggest train hub.

Other SRT properties in Bangkok include 80 hectares of land at the central Makkasan Station and another prime plot of land on the Chao Phraya River.

Because of SRT’s massive land holdings, the enterprise has been pulled in to the government’s various rail mega-projects, including the high-speed three-airports link and the Sino-Thai high-speed train project that will eventually link Bangkok to the Thai-Lao border and on to southern China.

These high-speed schemes will be built above SRT’s existing tracks serving the same routes and using the existing stations. As such, SRT has been party to negotiations and could be targeted if opposition parliamentarians call for investigations into claims of corruption in the bidding and negotiations.

“The generals have gotten it wrong, as SRT reforms should have been implemented first before they tried to embark on these mega-projects,” said Ruth Banomyong, head of the logistics and transport department at Bangkok-based Thammasat University’s Business School. “But it seems they wanted tangible results without actually knowing if the agency was capable or not.”

The state enterprise’s recent business history begs to differ.

On April 22, the Supreme Administration Court ordered SRT and the Transport Ministry to pay Hopewell Company 11.9 billion baht ($376.8 million) in compensation for the Hong Kong-based firm’s failed mass transit project in Bangkok, a hopeless deal first launched in 1990 and then cancelled at the height of the Asian financial crisis in 1998.

SRT is still seeking clarification on the ruling, which with interest could add another 58 billion baht ($1.8 billion) of its already considerable debt.

In February, Prayut’s Cabinet approved the establishment of a new Rail Department to act as a regulatory body for the country’s rail system tasked with handling negotiations on high-speed train deals and narrowing SRT’s role to just operator.

“The industry structure will be in the right place now,” SEPO’s Prapas said, “We see light at the end of the tunnel.”