Mega-projects: the devil is in the details

Author: Sutapa Amornvivat, Ph.D.

Published in Bangkok Post newspaper / In Ponderland column 18 May 2016

In February, I discussed with cautious optimism about the reality of our transport mega-projects and the sizable impact on businesses. In particular, the service sector will subsequently flourish. As urbanization accelerates from better connectivity, property and retail development will quickly follow. Tourism businesses will expand to these new urban cities. A relatively new service business such as transport maintenance will be established in key junctions and pit-stops, as trains, planes and ships multiply.

Indeed, crowding-in effect in the form of commercial business investment will fast materialize as developers rush to capture various opportunities. Oftentimes these businesses combine to make large-scale transport projects more economically feasible.

Most recently, "market sounding" to test the viability of commercial business surrounding a new rail transportation hub in Bang Sue has been well-received by private investors. This rail plus commercial development, or the so-called “Transit-Oriented Development,” will help to shorten the break-even period. In Hong Kong, the revenues from commercial business around the MTR subway stations helped to make the rail project profitable in 8 years, or about half of a typical break-even period of a stand-alone rail development. These service business revenues have also overtaken revenues from fares.

Now with more than a trillion baht having been spent completing these mega-projects and more to come from public and private funds into our service sector, a myriad of structural shifts are bound to transpire. Here I want to highlight two.

The most pertinent structural shift is labor migration. A massive labor shift from the agricultural sector into the service sector is to be expected and welcome albeit with caution. Multi-trillion baht mega-projects will create tens of thousands of jobs in the service sector. These jobs will emerge not only in construction, but also in hypermarkets, hotels and restaurants, as well as local logistics businesses that will burgeon along with new infrastructure development. This new demand for workers will attract labor currently employed in the agricultural sector. 

In case of South Korea, the structural change in labor was drastic. Before Korea’s transport infrastructure boom, the nation’s share of labor in the agriculture sector and the service sector both stood near 35%. As soon as the first set of infrastructure projects were completed in 1980, many young workers started to leave farming to take jobs in service businesses that propped up along the new road and rail routes. This prompted the share of labor in agriculture lower than 20% and that in the service sector to above 50% in just 10 years.

For Thailand, given substantially higher compensation in the service sector, the labor transition from farming to service appears inevitable amid labor shortage. Relevant parties will need to explore mechanisms to provide adequate skill training necessary for jobs in a service business. At the same time, mitigation of food security risks is urgently warranted. Urban planning will be essential to handle fast-expanding congestion due to influx of out-of-town workers.

Secondly, we must prepare for the foreign competition in the service sector. Growth-seeking foreign franchises will be more than eager to look to Thailand to expand their businesses.

This is akin to the burst of foreign direct investment (FDI) into the service sector that China experienced after rural roads and high-speed rails were built. With the government also in support of the shift to a service-led economy, service FDI especially in real estate, leasing, retail, and logistics increased tenfold in one decade. FDI in China’s service sector now accounts for more than 60% of the total FDI into the nation.

Will Thailand witness similar influx of FDI in our service sector? Even though currently maintaining a protectionist stance, Thailand will soon be forced to liberalize our FDI rules to allow for more foreign ownership in the service sector. This shift will be crucial for Thailand to remain competitive in the battle for foreign money in the ASEAN arena.

In fact, just a few months ago, Indonesia took a big step forward to modernize its “Negative List of Investment”. The nation plans to open up 35 sectors to full foreign ownership, including many service businesses such as e-commerce, restaurants, and film industry. Several service sectors will also see an increase of foreign ownership to 67% such as distribution and warehousing (from 33%), air transport services (from 49%) and construction consultancy services (from 55%).

So, are we ready to take on this big challenge against foreign titans when the time comes? Not quite.

With more than 1 trillion baht allotted for civil work for the mega-projects, perhaps Thai contractors stand to lose the most should foreign players are able to step in. With this enormous stake in infrastructure development, construction work will attract not only local contractors but also international players who have ample experience. Currently, most foreign players lack exposure in the Thai market because of the lack of domestic track record and limited understanding of our bureaucracy.

Nonetheless, several foreign contractors have already established their footprints in infrastructure projects by partnering with Thai local contractors. These players could become serious competitors for public works in the future. Coupled with proprietary technologies and machineries, this could heat up competition in the Thai construction industry.

Foreign competition will surely aggravate problems in our aviation industry. We are already witnessing aggressive expansion by the heavily subsidized state-owned gulf carriers as well as those of several foreign low-cost carriers in Thailand. The recent ICAO and FAA’s downgrades of Thai aviation standards further put Thai airlines on a different level playing field.

Can it get worse for local airlines? Undoubtedly yes. Further liberalization would allow foreign airlines to operate on domestic routes currently restricted to Thai national airlines under the 49% foreign ownership rule. Foreign players equipped with cost competitiveness, better safety records and IT integration could likely steal market share from domestic incumbents.

Other local logistics businesses are also likely to face more invasions from foreign players. With geographical advantage, Thailand has been on the radar of many international logistic service providers (LSPs), some of which have already set up some form of presence in our country. An upcoming transport infrastructure upgrade along with the growth of trade demand among Thailand and CLMV countries will make logistics business in Thailand even more attractive.

Foreign LSPs will bring with them state-of-the-art technology. Advanced cost control technology such as Global Positioning System (GPS) and Big Data Analytics to track truck locations and manage routes would be their competitive advantage. Our remaining competitive edge, which is the knowledge of the area and the familiarity with documentation, will quickly fade away.

Note that with influx of foreign investors, competition for talent will intensify. Indeed, both unskilled and skilled labor will be subject to mass headhunting. For skilled pilots and vehicle drivers with specific operating licenses, the loss to foreign players will spell doom for incumbents. Workforce replenishment will take tremendous effort and time, and not something to take lightly.

Mega-projects will open up vast business opportunities especially in the service sector; in turn, the country must be prepared for the arising structural changes. Shrinking labor force in agriculture creates threat to food security and other social and environmental challenges from urbanization, while the influx of foreign investors means complacency is not an option for domestic incumbents. As far as public-private partnership goes, it is perhaps high time we collaborated in all aspects to control these shocks from getting out of hand; otherwise, the nation will face tough work ahead.