This Selected Issues paper on Thailand reviews public investment and investment recovery from financial crises. Thailand is a country with a moderate tax effort, which indicates that increases in public saving should be achieved through a mixture of tax and expenditure measures. Future budgets should accommodate the megaprojects without putting excessive pressures on public finances, inflation, and the external balance. Least present value of revenue (LPVR) auctions alleviate the demand risk inherent in the fixed-term contracts and thus eliminate a key driver for renegotiations and the provision of minimum income guarantees.


This Selected Issues paper on Thailand reviews public investment and investment recovery from financial crises. Thailand is a country with a moderate tax effort, which indicates that increases in public saving should be achieved through a mixture of tax and expenditure measures. Future budgets should accommodate the megaprojects without putting excessive pressures on public finances, inflation, and the external balance. Least present value of revenue (LPVR) auctions alleviate the demand risk inherent in the fixed-term contracts and thus eliminate a key driver for renegotiations and the provision of minimum income guarantees.

III. Public Investment in Thailand: Macroeconomic Effects and Implementation22

A. Background

37. In the aftermath of the Asian crisis, investment in Thailand collapsed. Gross fixed investment dropped from over 40 percent of GDP during 1990–96 to about 20 percent of GDP in 1999. To some extent, this sharp decline reflected the extremely high investment rates in the decade running up to the crisis. However, investment in the aftermath of the crisis was low even relative to its pre–1990 average of about 29 percent of GDP.

Investment in Thailand

(in percent of GDP)

article image
Source: Bank of Thailand

38. While the sharp fall in private investment was the main driver of the decline in overall investment, public investment also contributed to the slowness of the post–crisis investment recovery. At the onset of the crisis, the drop in investment was largely due to lower private investment, with public investment remaining broadly stable as a share of GDP. In the following years, however, public investment continued to contract in nominal terms and started to recover only in 2004, resulting in an average nominal growth rate of only 0.4 percent over the 2000–04 periods. This largely reflected the post–crisis fiscal consolidation and the marked increase in public debt associated with the financial sector bailout. In addition, the share of public investment in GDP almost halved from 12 percent in 1997 to around 6 percent in 2004.


Private and Public Investment

(in percent of GDP)

Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A003

39. Against this background, in November 2005 Thailand's authorities announced plans for B 1.8 trillion in new infrastructure spending over 2006–09, which was revised down to B 1.3 trillion in June 2006. The megaprojects will be concentrated mostly in transportation, including mass transit, and water irrigation projects. These sectors comprise about 48 percent of overall spending. Real estate investment—mainly the completion of low–cost housing projects and government building—accounts for 18 percent, and the expansion of education and public health services for the remainder. The plan has not been officially announced due to the political change in September 2006, and the envisioned expenditure may be further revised by the new authorities in line with their own priorities. Nevertheless, the need for the infrastructure investments remains, and the government has already proposed investment in three infrastructure projects: logistics, mass transit, and water management. The cabinet agreed in November 2006 to carry out five lines of mass transit projects that cost B 165 billion.

Megaproject Spending

(in billions of baht)

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Source: Public Debt Management Office, Ministry of Finance.

40. The purpose of this chapter is to assess the need for, and the effects of, the megaproject initiative, and to describe best international practices in implementing large public spending programs. The chapter shows that infrastructure development in Thailand still lags behind more advanced regional competitors, which could prove to be a drag on competitiveness and growth prospects. In Thailand the megaprojects fit within the authorities' medium–term fiscal framework without hindering debt sustainability. Regarding financing, in the face of budget constraints in most developing countries, private sector participation in the provision of infrastructure services via the channel of public–private partnerships (PPPs) has become more prominent. The paper also finds that while PPPs offer an increasingly popular vehicle for providing infrastructure, the results that they have produced around the world are mixed. In particular, in order to ensure positive results, it is imperative that the PPPs are carried out to increase efficiency rather than to move expenditure off the budget. In addition, governments have often granted generous minimum income guarantees to contract winners with potentially undesirable budgetary consequences. In that respect, the paper also considers some alternative approaches to implementing PPPs that may eliminate the incentives for renegotiating contracts and for providing generous minimum income guarantees.

41. The paper is organized as follows. Section B displays a battery of infrastructure rankings for a number of Asia Pacific countries. Section C discusses the link between public investment and growth. Section D assesses the sustainability of the public investment plans. Section E analyzes different financing options. Section F looks at international experience with PPPs, and Section G draws conclusions and offers some policy advice.

B. Does Thailand Need More Infrastructures?

42. Various indicators suggest that there is a need for improving infrastructure in Thailand. Figure 1 provides a comparison of various infrastructure indicators among selected Asia Pacific countries along a number of dimensions. Clearly ASEAN–4 and low–income countries in the region lag behind the newly–industrialized and industrial economies in Asia in terms of the provision and overall quality of infrastructure services. Thailand is no exception in this regard although in general it compares favorably to other ASEAN–4 countries and, in particular, to the low–income countries in the region.

Figure 1.
Figure 1.

Infrastructure Rankings

Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A003

Source: World Economic Forum (2005).1/ The horizontal line is the average for all surveyed countries.

43. Deficiencies in transportation figure prominently in the infrastructure ranking. The need for upgrading infrastructure seems particularly acute in the area of transportation where Thailand lags appreciably behind the newly–industrialized countries in Asia. Relieving transpiration bottlenecks would therefore be an important step in any public investment program and the megaprojects envisage that about 40 percent of all planned spending be directed to mass transit projects and other transportation–related initiatives.

C. Public Investment and Growth in an International Perspective

44. Over the last three decades, the share of public investment in GDP has declined on average in advanced OECD countries, and more significantly so in Latin America, where it has also displayed substantial volatility. This decline has been wholly or partly offset in these regions by a rising share of private investment in GDP. The share of total investment in GDP has fallen in OECD countries, while it has fluctuated around a broadly flat trend in Latin American countries. In contrast, the share of public investment in GDP has shown on average no clear upward or downward trend in Asian and African countries, albeit with significant volatility in some countries. The same is true for the shares of private and total investment in GDP in African countries. In Asian countries, these shares showed a rising trend through the mid–1990s, but fell sharply in the aftermath of the crisis that hit Southeast Asia in 1997.

45. While a declining share of public investment in GDP may in theory adversely affect economic growth, the empirical evidence in this area remains mixed. While individual infrastructure projects may often generate fairly high returns on investment, their impact on GDP growth is more uncertain.23 Empirical studies that have tried to estimate such impact have yielded a wide range of results, although evidence of a positive impact appears to be more robust for developing countries. Briceno–Garmendia and others (2004) suggest that of 102 studies that have estimated the impact of infrastructure investment on productivity or growth, 53 percent showed a positive effect, 42 percent showed no significant effect, and 5 percent showed a negative effect. In multiple country studies, 40 percent showed a positive effect, 50 percent showed no significant effect, and 10 percent showed a negative effect. In contrast, all 12–single–country developing country studies showed a positive effect.

46. The difficulty in uncovering a conclusive positive impact of public investment on growth may be due to a number of factors. These include: (i) the difficulty in controlling for all the factors, in addition to public investment, that affect growth over the long term; (ii) the fact that a sizable portion of public investment is directed to supporting broad functions of government, including redistribution and the provision of public services, maintaining law and order, and administration, which do not directly boost productive potential; (iii) the lumpy nature of infrastructure investment, which implies that the full impact of investment in roads, telecommunications, and other infrastructure on growth can only be realized with considerable lags, once effective networks have been established.

D. Sustainability of Public Investment Plans

47. The megaprojects will bring public investment closer to its historical levels. The share of public investment in GDP has hovered around 8 percent in the pre–crises period, before shooting up to 12 percent in the immediate run–up to the crisis. Staff estimates that the megaproject initiative will raise the share of public investment in GDP to about 9 percent in the medium term—closer to historical averages, but below its pre–crisis peak.


Public Investment

Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A003

48. The megaprojects should not jeopardize fiscal and external stability. Based on the authorities' plans to contain current expenditure and improve tax revenues, the megaprojects should fit within the authorities' fiscal framework without hindering debt sustainability. The projects are also consistent with external sustainability, but will contribute to the projected deterioration of the current account over the medium term.

49. A number of stress tests were developed to examine the debt sustainability of the envisaged public investment plans over the medium term. A baseline scenario inclusive of the megaprojects is calculated to assess the evolution of the public debt relative to GDP until 2011. The sensitivity of debt dynamics to interest rates, exchange rates, and growth later is examined.

50. In the baseline scenario, the public debt–to–GDP ratio inclusive of the megaprojects continues to decline over the medium term. Owing to strong growth and continued primary surpluses, public debt is projected to decline to about 33.5 percent in 2011. The cumulative contribution is projected to reduce the debt–to–GDP ratio by 13.1 percentage points through 2011. In addition, over the medium–term growth in Thailand is expected to converge towards its potential rate of about 5.5 percent; this also has a strong impact on reducing debt ratios.

Figure 2.
Figure 2.

Investment Trends in Advanced OECD and Latin American Countries, 1970–2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A003

Source: International Finance Corporation, OECD and WEO database.1/ Unweighted average for Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Norway, Portugal, Spain, Sweden, United Kingdom, and United States.2/ Unweighted average for Argentina, Brazil, Chile, Colombia, Ecuador, and Mexico.
Figure 3.
Figure 3.

Investment Trends in Selected Asian and African Countries, 1970–2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A003

Source: International Finance Corporation and WEO database.1/ Includes unweighted average of Bangladesh, China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, and Thailand.2/ Includes unweighted average of Benin, Cote D'Ivoire, Guinea–Bissau, Kenya, Madagascar, Malawi, Mauritania, Mauritius, Namibia, and Seychelles. Average is reported for 1976–2000, due to incomplete data prior to 1976.

51. As the stress tests illustrate, the profile of public debt remains favorable in the face of shocks to the baseline. The worst debt–to–GDP ratio of 41 percent is projected under the historical scenario, although this outcome is an artifact of the crisis years when variability of key macroeconomic variables rose. The rest of the scenarios, which include shocks to GDP growth, interest rate, contingent liabilities, exchange rate, and a combination of the above, generate broadly similar debt–to–GDP ratios which remain below 40 percent.

E. Financing Options

52. Traditionally, most investment in infrastructure in developing countries has been publicly funded. The public sector has provided about 70 percent of total spending; the private sector has contributed roughly 20–25 percent, while official development assistance has financed only around 5 to 10 percent. Towards the end of the 1980s, development assistance and aid agencies started to encourage private sector investment in infrastructure. As a result, private infrastructure financing accelerated especially in the developing countries in the late 1990s. This trend was abruptly reversed and total private sector project commitments plummeted from the 1997 peak of US$ 114 billion to US$ 50 billion in 2003, although they recovered somewhat in 2004.


Private Infrastructure Financing

Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A003

Source: World Bank.

53. Policy options for increasing public saving to finance public investment in infrastructure depend on country–specific circumstances. In general, countries should avoid ad–hoc revenue or expenditure measures that cannot (for political reasons) or should not (because of economic efficiency or equity concerns) be sustained over the medium term. In most cases, durable increases in public savings can only be achieved through reforms that broaden the tax base, raise efficiency in tax collection and reduce tax evasion, reduce budget rigidities, rationalize the civil service and social security systems, and strengthen public expenditure management. A recent IMF pilot study24 points to three main types of situations:

Figure 4.
Figure 4.

Thailand: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2007, 231; 10.5089/9781451969368.002.A003

Sources: International Monetary Fund; country desk data; and Fund staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one–half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten–year historical average for the variable is also shown.2/Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/One–time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2006, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
  • In countries with an already high tax effort, increased public saving should come first and foremost from reducing current expenditure. A case in point is Brazil, where further structural reforms are needed to facilitate a sustainable reduction of current spending.

  • In countries with a comparatively low tax effort, increases in public saving should be achieved by a combination of tax and expenditure measures. In India, for example, general government revenue is low by international standards. While revenue measures to broaden the tax base and further strengthen tax enforcement are important, efforts to contain current spending should focus especially on rationalizing poorly targeted subsidies and moderating the growth of the civil service wage bill.

  • In low–income countries, it is often not obvious that public investment should take precedence over current spending. Ethiopia, for example, has very large investment needs in infrastructure, but it also has urgent current spending needs in the education sector and the health care sector. Improving the quality of public primary education and public health care would probably require higher current spending (to employ more teachers, doctors, and nurses), even after allowance for needed efficiency gains in these areas. Overall, it is not clear whether infrastructure investments as such would have higher returns than current spending, and it seems likely that these will have to go hand in hand, to avoid creating new bottlenecks to economic growth.

54. However, private participation is becoming an increasingly popular option to finance provision of infrastructure services. In the face of stringent budget constraints and scarce public funds, private participation, including through PPPs, can be an attractive option for the provision and financing of infrastructure.

55. The private sector can raise financing for PPP investment in a variety of ways. Where services are sold to the public, the private sector can go to the market using the projected income stream from a concession (e.g., toll revenue) as collateral. The government may also make a direct contribution to project costs. This can take the form of equity (where there is profit sharing), a loan, or a subsidy (where social returns exceed private returns). The government can also guarantee private sector borrowing.

56. PPP financing is often provided via special purpose vehicles (SPVs). An SPV is typically a consortium of banks and other financial institutions, set up to combine and coordinate the use of their capital and expertise. Insofar as this is their purpose, an SPV can facilitate a well–functioning PPP. However, an SPV can also be a veil behind which the government controls a PPP either via the direct involvement of public financial institutions, an explicit government guarantee of borrowing by an SPV, or a presumption that the government stands behind it. Where this is the case, there is a risk that an SPV can be used to shift debt off the government balance sheet. Private sector accounting standards require that an SPV should be consolidated with an entity that controls it; by the same token, an SPV that is controlled by the government should be consolidated with the latter, and its operations should be reflected in the fiscal accounts.

57. Where a government has a claim on future project revenue, it can contribute to the financing of a PPP by securitizing that claim. With a typical securitization operation, the government would sell a financial asset—its claim on future project revenue—to an SPV. The SPV would then sell securities backed by this asset to private investors, and use the proceeds to pay the government, which in turn would use them to finance the PPP. Interest and amortization would be paid by the SPV to investors from the government's share of project revenue. Since investors' claim is against the SPV, government involvement in the PPP appears limited. However, the government is in effect financing the PPP, although recording sale proceeds received from the SPV as revenue mask this fact.

F. PPPs and Public Investment

General considerations

58. Well–structured and implemented PPPs25 offer the prospect of sizeable efficiency gains in the construction of infrastructure assets and the provision of infrastructurebased services.26 PPPs have been often praised as a third way between public provision of goods and services and privatization. Substituting private firms for public provision may bring many potential benefits, including saving scarce public funds, relieving strained budgets, and managing and maintaining infrastructure more efficiency. However, key requirements for success in this regard are that: the quality of services be contractible; there be competition or incentive–based regulation; there be adequate risk transfer from the government to the private sector; the institutional framework be characterized by political commitment, good governance, and clear supporting legislation; and the government be able to effectively appraise and prioritize public infrastructure projects, and correctly select those that should be undertaken as PPPs.

59. While PPPs can ease fiscal constraints on infrastructure investment, they can also be used to bypass spending controls, and to move public investment off budget and debt off the government balance sheet. If this is the case, the government can be left bearing most of the risk involved in PPPs and facing potentially large fiscal costs over the medium to long term.

60. From a microeconomic perspective, PPPs have also been associated with a high incidence of contract renegotiations leading to many undesirable consequences. The biggest problem with PPPs has been the high incidence of contract renegotiations shortly after their award. While, in principle, renegotiation can be a positive instrument when it addresses the inherently incomplete nature of concession contracts, it has also undermined the competitive auction allocation process, consumer welfare, and sector performance. In some countries, renegotiation practices have increased public opposition to private participation in infrastructure and compromised the credibility of the desired structural reform program in infrastructure.

Country experiences with PPPs and concessions

61. Latin American and Caribbean nations provide an excellent case study for country experiences with PPPs and concessions. While the United Kingdom was the pioneer in using PPPs for a wide variety of infrastructure projects, Latin American and Caribbean countries have resorted to concessions for many public investment projects since the mid–1980s. In particular, Mexico and Chile have well–established PPPs, and a PPP–centered proposal for a regional approach to infrastructure development has been advanced in Latin America. The relatively longer experience of these countries with rewarding concession contracts and the closer match in development levels with Thailand makes them a better case study for learning about PPPs and concessions than developed nations.

62. As was already emphasized, possibly the biggest problem with concessions has been the high incidence of contract renegotiation. The table below provides a summary statistics of concession renegotiation in more than 1000 concessions granted in Latin American and Caribbean countries during 1985–2000. Renegotiation was very common in the sample, occurring in 30 percent of them. Renegotiation was even more pronounced in transportation and water projects, occurring in 55 and 74 percent of the cases, respectively. Excluding concessions in the telecommunications sector raises the incidence of renegotiations to almost 42 percent. That renegotiation was far less common in telecommunications and electricity projects may be explained by the more competitive nature of these sectors.

Incidence of Renegotiation

(Latin America and Caribbean, 1985–2000)

article image
Source: Guasch (2004).

Excludes telecoms.

63. Most concessions were renegotiated very soon after their award. The average time of renegotiation was only 2.2 years. Renegotiations came most quickly in water concessions, occurring an average of 1.6 years after the concession award. Renegotiations of transportation concessions took place after an average of 3.1 years. Moreover, the variance in the distribution of renegotiation periods was small, with 85 percent of renegotiations occurring within 4 years of concession awards and 50 percent within 3 years.

Average Time to Renegotiation since Reward

(Latin America and Caribbean, 1985–2000, years)

article image
Source: Guasch (2004).

Variance of Time Distribution to Renegotiation

(Latin America and Caribbean, 1985–2000)

article image
Source: Guasch (2004)

64. There are many reasons why contracts are renegotiated. In a broad sense, problems with concessions occur when efficient performance—as reflected in service costs, access, quality, and operator returns—is undermined by poor decisions and actions at the design stage, including inadequate attention to political and institutional issues, and government tolerance of aggressive bidding, or after the contract award when governments do not honor contract clauses and change the rules of the game. In addition, an improper regulatory framework and poor regulatory oversight increase the chances of conflict, rent capture by operators, or opportunistic behavior by government. Finally, external shocks, although an exogenous factor, can also significantly affect the financial equilibrium of a concession and induce renegotiation.

65. One particularly pervasive driver of renegotiation has been the fixed–term nature of concession contracts. Under the fixed–term contracts, government fixes the term of the contracts, and the concession is awarded to the firm that offers to charge the lowest user fee. Inherently such contracts expose the operator to considerable demand risk, which raises the possibility of renegotiation and implicit government guarantees. Demand risk arises when demand forecasts are unreliable. This risk is usually compounded when operators have limited flexibility to adapt to unforeseen demand scenarios, as is the case in many types of infrastructure projects, in which investments are large relative to the size of the market, and tied to a particular location.

66. The least present value of revenue (LPVR) provides a viable alternative to fixedterm contracts. The most distinctive feature of the LPVR is that the concession term is variable, adjusting automatically to realized demand (Box 1). This reduces the need for renegotiations and minimum income guarantees.

G. Summary and Policy Implications

67. Medium–term growth prospects in Thailand hinge on pushing through with the megaprojects. Given the widely recognized need to upgrade infrastructure and relieve transportation bottlenecks in order to spur medium–term growth prospects in Thailand, the planned megaprojects—especially with regard to the mass transit rail system, and water and irrigation projects—seem warranted.

Fixed–Term Contracts versus Flexible–Term Contracts

Fixed–term contracts, which have been the main avenue to award infrastructure projects, suffer from a number of shortcomings:

  • The operator assumes a large fraction of the demand risk. The main defect of fixed–term mechanisms is that the operator is exposed to a significant demand risk, arising from the uncertain nature of demand forecasts. Since returns are uncertain, operators will ask for a risk premium—usually paid by users—so that profits made if outcomes are good more than compensate for losses when bad outcomes materialize. As a result, financiers have refused to participate in auctions unless governments pledge minimum income guarantees.

  • Fixed–term contracts increase the demand for renegotiation and minimum income guarantees. First, they increase the likelihood the best bid will be made by the firm that is most optimistic in predicting future demand for the infrastructure, since optimistic estimates lead to aggressive bids when the term of the contract is fixed. Second, fixed–term contracts encourage underbidding by firms that are good renegotiators and lobbyists.

Fixed–term contracts have one important virtue: they provide a powerful incentive to increase demand, since the operator appropriates the marginal income generated by its effort. This is particularly relevant when demand is elastic.

The LPVR auction aims at redressing some of the shortcomings of the fixed–term contracts:

  • The LPVR auction reduces demand risk. Most importantly, by making the length of the contract responsive to demand, the LPVR significantly reduces the demand risk borne by the operator. The term expands when demand grows more slowly than expected and shortens when it grows more rapidly than expected. Since ultimately operators receive similar amounts whether demand outcomes are better or worse than estimated, the risk premium required by the operators is smaller, and users pay less in expected value over the life of the contract.

  • The LPVR auction eliminates the winner's curse. It reduces the chance that the firm making the most optimistic demand estimate falls victim to the winner's curse, because the impact of demand forecast errors is smaller. When the term of the contract is fixed, an optimistic demand estimate translates into an aggressive bid. In contrast, under the LPVR, winning the auction by being too optimistic will only extend the term without affecting the total amount of revenue. In effect, the LPVR transforms demand–oriented into cost–oriented bids.

  • The LPVR auction creates limited scope for opportunistic renegotiations and minimum income guarantees. Common forms of renegotiations are ineffective as raising user fees has the effect of shortening the contract but does not increase the operator's revenues. Contract extensions are meaningless as by definition the contract term is variable. LPVRs also preempt needs and requests for minimum income guarantees, with their corresponding fiscal implications.

  • The LPVR auction allows for fair compensation to be easily determined. LPVRs provide clear and transparent compensation in the event that the contract has to be terminated or modified, and lessen the possibility of lengthy and protracted negotiation between the operator and the government while trying to determine a fair compensation.

The LPVR has also some disadvantages. The main disadvantage is that the operator has less incentives than under a fixed–term contract to increase demand since this would not change the overall amount of revenue that is to be collected. In addition, since the length of the contract is uncertain, financing might be more difficult to obtain. Finally, while there is no need to agree on the length of the term, governments and operators still have to agree on the proper discount rate.

68. The significant amount of infrastructure spending, however, requires that the authorities implement the megaproject initiative without jeopardizing fiscal and external stability. Future budgets should accommodate the megaprojects without putting excessive pressures on public finances, inflation, and the external balance. Therefore, it is crucial to implement the projects in a transparent and efficient manner, giving proper consideration to avoiding cost overruns and ensuring rigorous selectivity.

69. Macroeconomic sustainability can be safeguarded in a number of ways. First, public investment increases should be limited to amounts that remain consistent with a moderate or declining debt–to–GDP ratio over the medium term under a meaningful range of stress–test scenarios. Second, increases should be concentrated on high–priority and high–return projects in bottleneck sectors. Identifying such projects usually requires strengthening technical capacities to evaluate and prioritize potential projects. Third, complementarities between different infrastructure and noninfrastructure investment need to be taken into account, when increasing or reprioritizing public investment spending. Fourth, sound cost–benefit analysis will often suggest that it is preferable to invest in the rehabilitation and upkeep of existing infrastructure rather than in new projects, which may have greater political appeal. Also, in most cases priority should be given to the timely completion of ongoing projects, rather than the initiation of new ones, as interruption or delays in the execution of investment tend to result in cost overruns. And, finally, in assessing the appropriateness of new investment, it is important to take into account the recurrent costs involved in the operation and maintenance of completed infrastructure.

70. Public investment plans should be financed through a mixture of increased public saving and higher private sector involvement. Thailand is a country with a moderate tax effort, which indicates that increases in public saving should be achieved through a mixture of tax and expenditure measures. The government has to strive as well to create an environment conducive to a more pronounced private participation in the provision of public infrastructure services, including through a well–structured PPP program.

71. If the preferred way of implementing the megaprojects is PPPs, the main policy challenge will be to design a PPP program that minimizes the incidence of renegotiation. PPPs have promised to save scarce public funds while reaping the benefits of private participation in the provision of public goods. Still, the results that the PPPs have produced around the world have led many to question their advantages. In particular, the high incidence of renegotiations and the provision of minimum income guarantees have burdened public finances and, to some degree, shaken the belief in PPPs.

72. LPVR auctions should be the preferred option for rewarding PPP contracts. LPVR auctions alleviate the demand risk inherent in the fixed–term contracts and thus eliminate a key driver for renegotiations and the provision of minimum income guarantees. In addition, they make straightforward a fair compensation of operators in the event of modification or an early termination of the contract. Because LPVR auctions might provide less incentives to increase demand relative to fixed–term contracts, they need to be complemented by institutions that determine and enforce minimum quality standards.27

73. Regulators should be independent of the agency in charge of awarding contracts. Often the agency that has been in charge of awarding the contracts has also taken the role of supervising them. This has created significant tension between the pressure to bring the project to successful completion—even if this amounts to renegotiating the contract or granting minimum income guarantees—and the necessity to enforce the proper execution of the project by the operator. It is, therefore, imperative that planning and procurement be divorced form regulation and enforcement, and that the latter be placed in the hands of an independent agency.

74. Governments have a key role to play in the process. Even though the very idea of the PPPs is to strengthen private sector participation in the provision of infrastructure services, governments should remain involved in the whole process. In particular, public planning of networks and infrastructure development is necessary, even when private firms propose individual projects. In addition, governments have an essential role in conducting rigorous social cost–benefit analyses of infrastructure projects.


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Prepared by Ivan Tchakarov.


For example, World Bank–financed infrastructure projects that had at least 95 percent of loan commitments disbursed between 1999 and 2003, had an average economic return of 35 percent, with a spread ranging from 19 percent for water and sanitation projects to 43 percent for transportation projects.


Public Investment and Fiscal Policy—Lessons from the Pilot Country Studies (


While a PPP is usually characterized by a design–build–finance–operate scheme, the term PPP is commonly used to refer to a wider set of arrangements, including ones that involve only operating an existing government–owned asset (concessions). For the purposes of this paper, we will take the broader definition of the PPPs and will use PPPs and concessions interchangeably.

Thailand: Selected Issues
Author: International Monetary Fund