Building Mega Project

1
Building Mega Project How to Maintain Economic
Stability?

1. Varang Wiriyawit
2. Sirinipha Sutatam
3. Saowanee Sittichai
4. Achara Boonyawongvirot

2
Introduction
According to building mega project, there are 2
possible outcomes.

• An increase in long-term competitiveness and
  stimulate economy

• Further pressure the current account and other
  external stabilities

3
Objectives
The methods of proceeding the Mega project
without an effect in the economic stability have
to answer these 3 questions

• What the projects size should be in order to
• maintain economic stability?

• How to choose the projects?

• How the capital assembling should be to stabilize
  
• the economy how the policies to stimulate
• saving should be pursued to narrow saving-
• investment gap, or current account deficits?

4
What is Mega Project
5
Mega Project
Mega Project is a large-scaled investment by the
public sector in a certain period of time. The
value of each project is to exceed THB 1 billion.
Mega Project can be divided into 2 groups

• Physical Infrastructure

is a project that worth more than THB 1 billion.

• Intermediate Infrastructure

is a project that aim to improve the countrys
social infrastructure. Each project of
investment can consist of several smaller
schemes of investments, but the aggregated value
must exceed THB 1 billion.
6
Mega Project Investments
Economic Sector Purposes
Mass Transit Increase transportation efficiency, reduce the lose of energy and raise the standard of living
Transportation Improve transportation system, lower cost and increase competitiveness
Housing Improve residence area for low-income
Water System Improve water system
Education Improve education systems and human resources
Health Care Improve Medical and Health under the same standard across country
Others Improve the stability of electricity and energy sectors
7
Mega Project

• Goals

• Supporting the improvement of the country

• Improving standard of living

• Increasing efficiency

• Stabilizing investment

8
Mega Project Investments by Sectors
9
The benefits of investment in Mega-project

• To compensate public investment

that have been reduce after economic crisis,
which leads to a reduction in the amount of
capital reserve.
If there are an economic expansion, there will
be a bottleneck in the economic.

• To increase competitiveness

Which can be measured by 4 factors

• Economic performance

• Government efficiency

• Business efficiency

• Infrastructure

10
The benefits of investment in Mega-project

• To increase long-term potential growth

• Increase net capital stock

11
The benefits of investment in Mega-project

• Increase labor efficiency

in order to raise ratio of capital and labor
and TFP (total Factor Productivity).

• Increase capital investment

As there is a reduction in labor force, the
government needs to increase capital investment
instead.
2538 2543 2548
The percentage change in labor force 2.15 1.79 1.3
12
The benefits of investment in Mega-project

• To reduce the long-term stability risk

As building Mega Project will increase
competitiveness, it will also lead to

• Increase income

• Increase income distribution

• less dependency on foreign countries

• solve long-term balance of payment problem

13
Impacts of Mega project on economic system
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Impacts of Mega project on Macroeconomics

• Macroeconomics Variables
• Economic Growth
• Private Investment
• Inflation Rate, and
• Current Account

15
Keynesian Economics Theory
Multiple Effect
16
Other Studies

• Easterly and Robelo(1993), and Serven(1996)
  investment in transportation, communication and
  non-military could stimulate the economy.
• Barro (1990) and Romer(1987)
• following the Endogenous Growth Theory, the
  economic expansion will permanently adjust to new
  higher equilibrium.

17
Other Studies (con.)

• Aschauer(1996)
• public investment has a negative impact on
• private investment.
• Agenor and Montiel(1996)
• in developing countries, budget deficit has a
  
• less effect on interest rate.
• Hemming, Kell and Mahfouz(2002)
• GDP multiplier is relatively a positive in
• developing countries, and vice versa.
• Enders and Lee(1990)
• Government expenditures (G) have a positive
  relationship on CA deficit.

18
Summative impacts of public investment through
other studies

• Economic expansion developing
  countries
• developed countries
• Inflation Rate
• Interest Rate

19
Summative impacts of public investment through
other studies

• Current Account Deficit
• Private Investment
• Exchange rate

20
Impacts on Thailands Macroeconomics
Increase in public investment by 10

• Private Investment 0.7

• Economic Growth 0.1

Positive Relationship

• CA Deficit 1.0

• Core Inflation Rate 0.003

By Vector Auto Regression Method (VAR)
21
Expansion of economy between regular investment,
baseline and full mega project
By National Accounting Forecasting Framework
Method (NAFF)
22
CA Deficit GDP Ratio between baseline and full
mega project
By National Accounting Forecasting Framework
Method (NAFF)
23
Summation Results from Analyzing Methods
VAR
NAFF
Macro Model
Variables

• Economic Growth 0.1 0.6
  1.0

• CA Deficit 0.6 0.8
  1.0

• Private Investment 0.2 0.7
  2.1

• Core Inflation Rate 0.004 -
  0.3

24
Impacts on Stability of Fiscal Sustainability and
Foreign Countries

• Fiscal Stability

25
Impacts on Stability of Fiscal Sustainability and
Foreign Countries

• Stability of foreign countries

26
The External Risks of the Mega project and
Economics Stability
27
The Operational Risks of the Mega project
The impacts of these risks often cause the
uncertainties to the projects and effect the
confidence of investors.

• Cost Overrun

The increase in costs of materials and damages
during the construction might expand the size of
the projects.

• Project delay

The projects delay can increase the interest rate
risks.
28
The Operational Risks of the Mega project

• Financial Risks

The interest rate risk and the exchange rate risk
are the main factors which have an impact on
the costs of Mega-project fund and also the size
the projects .
29
The External Risks

• The economic slowdown of trading partners

Moving from current account deficit into surplus
of the U.S. might cause a decrease in demand of
U.S market which could reduce Thai exported
amount and directly effect current account and
also GDP growth.

• The appreciation of Baht

The appreciation of Baht reduces the
competitiveness of Thai exporters which would
worsen the current account.
30
The External Risks

• The increase in world oil price

The increase in world oil price directly affect
the economic growth and also could worsen
current account due to the import of oil.
31
Analyze the External risks of the Mega project
Assume that

• The GDP growth of Thailand trading partner
• decrease by 1

• The Dubai crude oil price increase by 10

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The effect of the declining in GDP growth of
trading partner
Effect on Economic growth
Effect on Current Account
33
The effect of increase in Dubai crude oil price
Effect on Economic growth
Effect on Current Account
34
The effect of both decrease in GDP growth of
trading partner and increase in Dubai crude oil
price
Effect on Economic growth
Effect on Current Account
35
The effects of external risks on current account
36
Mega project Management Framework

• Set up a committee on mega-project evaluation

The government set up this committee in order to
ensure the efficiency an transparency of the
management of the mega-project management.

• Set up a holding company of the mass transit
• system

The government set up this holding company to
centralize the operational management of the
mass transit system on the basis of a single
operator or a joint owner.
37
Financing Method and its Impact on Financial
Market
38
Financing Method and its Impact on Financial
Market

• Mega project definitely need a lot of fund
  which
• governments budget and other state
  enterprises
• profits may not enough. Therefore, it is
  necessary
• to find other sources of fund.

39
Source of Fund

• Budget and Profits of State Enterprises

• Loans

• Domestic Loans
• the government can borrow from commercial
• banks directly or the government may choose
  
• to issue the government bonds.

• External Loans
• borrowing from aboard in other currencies.
• is efficient method in order to support
• enormous project, but it has currency risk.

40
Ratio of Internal and External Debt
2543 2545 2548
Internal Debt 69.1 72 80.1
External Debt 30.9 28 29.9
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Ratio of public debt by currencies
2538 2538 2547 2547
2538 2538 Value
Public Debt Dollar Yen Euro, Pound, ?????????? 6,904 8,287 474 15,091 15,031 312 4,498 10,146 373 29.81 67.25 2.47
Total 16,402 33,913 15,087 100
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Source of Fund

• Financing From Stock Exchange

• Allowing Private Sectors to invest in the project
  
• as Public Private Partnership (PPP)

• Issuing new documents

• Securitization

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Sources of Mega Projects Funding
44
Impact on Financial Systems

• Short-Term and Long-Term Interest Rates

• if mega project leads to a continuous
• investment in private sectors, then
• short-term interest rates can be higher.

• economy expanding may cause inflation in
• the future which leads to higher short-term
  
• interest rates.

• For long-term interest rates, they can reflect
• inflation in the future and unbalanced of
• demand and supply of long-term bonds.

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Impact on Financial Systems

• Impact on Excess Liquidity

This depends on the method of Financing because
each method has different impact on commercial
banks liquidity.

• Borrowing Directly From Commercial Banks
• This method will change the assets of the
• commercial banks directly.
• As a result, the liquidity will decrease
  while
• the loan reserves increase.

46
Impact on Financial Systems

• Issuing Bonds or Securitization
• If investors and bond holders are not
• commercial banks, the investment in term of
  
• savings may decrease.
• Then liquidity of commercial banks will
• decrease as well as their assets.

• Borrowing From Aboard
• After borrowing, the money will be used in
  the project.
• However, if commercial banks do not change
• the proportion of loan reserves, in the
  same
• direction of an increasing in fund, then
• commercial banks liquidities may increase.

47
Impact on Financial Systems

• Stock Exchange
• lead to a decrease in money supply because
• of a withdrawal of savings in order to
  invest
• in stock exchange.
• After spending money, the money will back
• to commercial banks, but in case that money
  
• does not back to the backs as the same
• amount it used, it will lead to a decrease
  in
• liquidity.

• Co-investment with Private Sectors
• Same as Borrowing Directly From Commercial
• Banks

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Impact on Financial Systems

• Impact on Excess Liquidity

This depends on imported goods as it leads to a
decreasing in banks money supply. However, it
depends on the amount of loans and spending.

• Mega project induces a continuous investment in
• Private Sectors

This is differ from Co-investment with Private
Sectors because there is another amount of funds
from an investment of private sectors. It is
normally in short-term financing and borrows
directly for commercial banks.
49
Impact on Changing in Interest Rates of
Commercial Banks

• changing in interest rates in short-term and
• long-term

If investing in megaproject leads to excess
liquidity of commercial banks and its reaches
the level that triggers the relationship of
interest rates in financial market and loans of
banks. Then changes in interest rates in
financial markets will lead to changes in
interest rates in loans rates of commercial
banks more quickly.
50
Impact on Stock Exchange
Financing may not has impact directly on stock
exchange but it has direct impact on
construction businesses.

• Impact on Prices

The investors expect that mega project leads to
an expansion in economy and finally leads to and
improvement of stock exchange.
51
Impact on Stock Exchange

• Impact on Bond Market

Mega project has impact on bond market both in
prices and the development of bond market
structure.

• Overview of Financial Market Development

Securitization and Structured Product are other
financial methods that government may choose.
These methods provide several patterns of
development which can lead to disintermediation
process.
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Factors that have Impacts on Financing

• Global Imbalance Unwind

Increasing in US Interest Rates can impact on
Thailands investments in other currencies .

• International Stability

An increase in current account deficit affect the
currency which can determine the amount and
term of international loans.

• Founding of DIA (Deposit Insurance Agency)

This provides more opportunity of people who
wants to save in several methods. For example,
bonds or securities with high liquidity, less
risks.
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QUESTION 1 What the projects sized should be
in order to
maintain economic stability?
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QUESTION 1
The projects sizes may need to be allow for
cushion in absorbing additional shocks.
As a result, the Government should set the
projects size that keep the budget deficit to
be lower than 3 of GDP in order to maintain
economic stability .
In order to maintain budget deficit within
3 of GDP, government should

• Reducing the budget deficit by stimulating
• household saving

• Being more flexible about size of the projects,
• and duration of the investments

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QUESTION 2 How to choose the projects?
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QUESTION 2
In order to choose the projects that effectively
manage the Mega-project funds and also improve
the competitiveness and efficiency of the
economy in long-term, government should invest
in

• The project that aim to solve the weakness of
• Thai economy for example by enhancing
• competitiveness

• The projects that have been studied about
• financial/economics possibilities

• The projects that create positive profits and can
  
• operate without additional finance from the
  
• government

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QUESTION 3 How the capital assembling should be
to stabilize the
economy?
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QUESTION 3
The important basis of the capital assembling of
the Mega-project are

• Stimulating private saving
• (especially long-term saving )

In order to avoid the external risk from
borrowing aboard, the household saving would be
the essential source of funds to finance to
projects.

• Promoting foreign direct investment (FDI) by

• Maintain financial economic stability

• Provide financial fundamentals of investment
• such as securitization and guarantee

• Promote corporate governance

• Improve human capital

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QUESTION 3

• If government has to make loans to finance the
• Mega project, these loans should be
  long-term
• loans

The external short-term debt would affect the
economic stability by creating the external risk
and reducing the Gross Reserves / Short term
Debts ratio.

• Government should be flexible to the financial
• changes from globalization that might
  affect
• financing behaviors of the public sector as
  well
• as try to reduce uncertainties in the
  projects to
• boost investors confidence.

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QUESTION 3

• The financing method should be set according to
  the projects profile, as most of projects have
  long-term pay back period and have short-term
  revenue. For example,

• For projects that have short-term revenue, the
  financing method should be securitization or
  publishing revenue bond

• For long-term projects, the financing method
• should be publishing long-term government
• bond or amortized bond.

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Suggestions on this report
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Strengths

• There are various analyzing methods. These can
• insist the results of each method to be
  accurate.

• There has a seasonal adjustment.

• The paper indicates both negative and positive
• effects of making mega project.

• The paper contains the suggestions.

63
Weaknesses

• The risk from the movement of oil price could
• have impact on the estimation of the
  variables
• in this paper.

• There has no adjustment or expectation on the
• trend of inflation, thus the analysis may
  be
• deviated.

• The paper is written in Thai which would be an
• obstacle for most of the foreign investors
  who
• interested in private investment in
  Thailand, so
• there should be an English version for
  foreign
• investors, so that they will understand
• Thailands plan of investment and be more
• confidence to invest in Thailand.

64
Possible Extension

• The paper can be extended by examining the
• performance of the projects year by year.

• The paper should further explore the impacts on
• poverty and income inequality of the Mega
• project.

• The paper can also be extended by arranging and
• examining which projects are the most
  urgent to
• invest ,and also identifying how necessary
  it is
• to invest.

65
Possible Extension

• The paper could further study the Mega project
• investments by separating it into two types
  
• which are

• The Main Investment Projects

consist of the 13 new projects, totaling THB 1.4
trillion, or 80 of the total Mega project
investments.
These include the investments on Mass Transit in
Bangkok, Water System Improvement Country-wide,
Housing for the Low-income people, Expressways,
etc.
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Possible Extension

• The Supporting Projects

are the investment projects already listed in
the government plan with their budgets having
been prepared.
However the investment frameworks have been
re-adjusted to go in line with the strategic
plan and the Main Investment Projects.
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Thank You For Your Attention