Water Scheme Offers High Risks, High Rewards For K-Water
BMI View: The Thai government has recently approved the loan and the parties selected to implement the projects under its long-term water management and flood prevention scheme. We believe these projects represent a major opportunity for companies to diversify their earnings and gain exposure to the global water management sector. However, we highlight the projects have significant scope for delays given their scale and potential for significant public opposition. These risks are particularly concerning for South Korean utility K-Water , which has secured a majority of the projects without a local partner.
On June 18 2013, the Thai cabinet approved a plan to borrow THB314bn (US$10.2bn) for its water management and flood prevention scheme, with THB284bn reserved to finance the scheme's nine key modules (see table). On June 10 2013, the Water and Flood Management Committee had selected a South Korean consortium led by state-owned utility, Korea Water Resources (K-Water), as the preferred bidder for two of the nine modules under the plan, securing the largest share (56%) of the projects in terms of value (THB160bn). After K-Water, a Thai-Chinese consortium known as ITD Power China Joint Venture was awarded the second largest share of the projects. The consortium secured five project modules with a total value of THB107bn. The remaining two modules were awarded to a Thai and Thai-Swiss consortium, Summit SUT Joint Venture and Loxley Joint Venture respectively.
|Selected Consortiums||Modules Awarded||Module Description||Module Location||Module Value (THBbn)|
|Source: BMI, Bangkok Post, Water and Flood Management Commission|
|Korea Water Resources (K-Water)||A3||Flood retention areas||Nakhon Sawan||9.9|
|A5||Floodway construction||Chao Phraya River||150.5|
|ITD-Power China Joint Venture||A1||Reservoir construction||Ping, Yom, Nan, Sakae Krang, Pasak river basins||48.6|
|A2||Land utilisation & town planning||Chao Phraya river basin||25.0|
|A4||Waterway improvements||Yom, Nan, Chao Phraya rivers||16.7|
|B1||Reservoir construction||17 river basins||11.7|
|B3||Waterway improvements||17 river basins||4.9|
|Summit SUT Joint Venture||B2||Land utilisation & town planning||17 river basins||13.7|
|Loxley Joint Venture||A6/B4||Data management & warning systems||na||3.9|
We once again reiterate that these projects offered under Thailand's long-term water management and flood prevention scheme present an opportunity for Thai companies to achieve some diversity in their future earnings. Italian Thai Development (ITD), a major member of the ITD Power China Joint Venture, is heavily reliant on urban railway projects in Bangkok for future earnings, as well as foreign projects with significant potential for delays and cost overruns ( see 'Water Plans To Provide Earnings Diversity', February 7 2013 ). An expansion into the water management sector could therefore reduce and hedge its exposure to these sectors. We estimate that based on ITD's current project backlog, the company's share of the water modules awarded to ITD Power China Joint Venture would account for around 16% of ITD's total backlog (assuming ITD's share of the modules is 30%).
|Italian-Thai Development - Estimated Project Backlog Breakdown, as of June 19 2013|
For K-Water and its consortium partners, the two modules they had secured represent a major opportunity to increase their overseas exposure and reduce their reliance on the South Korean construction sector which has limited scope for growth ( see 'Construction Recovery Still Expected', April 5 2013 ). We estimate that the combined value of the two modules - THB160bn - accounts for a sizeable 8% of all overseas contracts signed by South Korea companies in 2012, according to data from South Korea's Ministry of Land, Infrastructure and Transport.
The Thai water modules are particularly important for K-Water. Even though the state utility appears to have significant domestic experience in implementing water management projects - K-Water was involved in completing South Korea's US$17bn Four Major Rivers Restoration Project in 2011 - the state utility has yet to implement a major overseas project of note in recent years. The Thai water projects could therefore serve as a major platform for K-Water to showcase its expertise on the global stage and make inroads into other overseas water management markets.
|Selected Consortiums||Consortium Members|
|*Withdrew From Final Bidding Round. Source: BMI, Bloomberg, Bangkok Post, Water and Flood Management Commission|
|Korea Water Resources (K-Water)||Korea Water Resources (K-Water), Hyundai E&C, GS E&C, Daewoo E&C, Daelim, Samwhan|
|ITD-Power China Joint Venture||Italian-Thai Development, Power Construction Corporation of China, China International Water & Power|
|Loxley Joint Venture||Loxley, AGT International|
|Summit SUT Joint Venture||Samprasit Partners, SKY Construction, Union Infartech|
|Thailand Team Joint Venture*||Ch. Karnchang, Team Consulting Engineering & Management, Christiani & Nielsen|
|Thai-Japan Joint Venture*||Obayashi, Taisei, Kajima, Shimizu, CTI Engineering, Yachiyo Engineering, Sanyu Consultants, Pacific Consultants|
We highlight that K-Water had secured the Thai water modules without a local partner. In our opinion, this poses a major downside risk to K-Water's ability to implement the two modules. The South Korean utility had previously faced difficulties in implementing water management projects without a local partner, with the Angat dam project in the Philippines a key example ( see 'K-Water Learns Lesson After Angat Debacle', June 27 2012 ). In 2010, K-Water had submitted the highest bid (PHP440.88mn) to acquire and operate the Angat dam, but was prevented from taking over the 218MW asset because parties opposing the sale filed a case at the Supreme Court, citing the sale as a non-conformance with the Philippine constitution on foreign ownership. As a result, the project was stuck in arbitration in 2011 and 2012. Although the Supreme Court has since upheld the legality of the sale of the Angat facility to K-Water, the asset still has not been transferred to the South Korean utility (cited from the Manila Standard Today).
|At The Lower End|
|Asian Countries - Infrastructure BE Risk/Reward Ratings, Scores Out Of 100|
We believe that K-Water (and to a lesser extent, the other successful consortiums) could face similar problems with implementing the Thai water modules and experience project delays. Several events in the past have shown that the Thai public is often determined in preventing projects that are perceived by them to be detrimental to their well-being, by carrying out protests and making it difficult for companies to secure the required land and permits from local residents and governments. This is even more pertinent for projects undertaken by foreign companies without local partnerships, as they are often perceived to have interests that are not aligned with the country ( see 'Business Environment Issues A Risk To Financials', February 15 2013 ).
Indeed, there are already signs of opposition from the Thai public. The Nation reported that an environmental group, known as the Stop Global Warming Association, had filed a petition with the Central Administrative Court over the water management and flood prevention scheme. The case is to be deliberated on June 25, with a ruling delivered by the court on June 27.
We believe that further arbitration proceedings could take place, particularly over the acquisition of land. The nine modules are expected to require mass relocations of the Thai citizens - the Engineering Institute of Thailand estimates that the A5 module undertaken by K-Water would need the relocation of 10,000 households - and the Thai government expects investors to be responsible for the compensation and negotiations.
Even without disruptions from the public, K-Water's lack of experience with Thailand's water utilities sector could result in lengthy environmental and feasibility studies, which would delay the start of construction works. Prior to bidding for the water management and flood prevention scheme, in which the company set up an academic team in Thailand to conduct geographical and water-source studies, the South Korean utility is limited to technical cooperation with Thailand's Royal Irrigation Department (cited from the Nation).
Financing Still A Question
There are also financing risks from the Thai government. It remains to be seen if Thailand will be able to secure the THB314bn loan for its water management and flood prevention scheme. Besides the water projects, the government is planning to spend around THB2.0trn (US$67bn) on transport infrastructure projects from 2013 to 2020, as well as finance costly subsidy programmes, such as the rice pledging scheme. Anecdotal evidence indicates that the scheme is expected to cost the government an estimated THB260bn in FY2013/14 (July-June), with Thailand's Commerce Minister Bonsoong Teriyapirom announcing on June 18 2013 that the government will keep the rice pledging scheme going from now till 2017 ( see 'Rice Scheme Days Numbered', June 10 2013 ).
|Ballooning Subsidies To Haunt Policymakers|
|Thailand - Public Spending On Subsidies, THBmn|
These ambitious spending plans make it increasingly likely that Thailand's fiscal position would continue to deteriorate ( see 'Policy Risks Underpin Cautious Stance On Fiscal Outlook', June 5 2013 ). Although Thailand's fiscal position remains relatively benign in comparison to the region, we believe that the government's failure to address its fiscal imbalances could eventually result in a loss of investor confidence in the country's debt, making it more costly for the government to secure debt for infrastructure projects over the coming years.
2015 The Likely Start Date
In conclusion, we see significant scope for delays to the implementation of Thailand's water management and flood prevention scheme. As such, we do not expect the modules awarded under the scheme to make a major contribution to Thailand's construction activity in 2013 and 2014, with only full-scale construction works to start in 2015 at the earliest. This means that the water scheme only represents an upside risk to our construction growth forecasts from 2015. At present we are forecasting real growth for Thailand's construction sector to average 3.2% per annum be tween 2013 and 2022 .
|Upside Risk From 2015 Onwards|
|Thailand - Construction Industry Value Forecasts|
This potential for delays is also a threat to the financial position of K-Water and the other successful module bidders. Anecdotal evidence indicates that the profit margins for the modules could be very tight and were the key reason for two of the six consortiums selected for the final bidding round - Thailand Team Joint Venture and Thai-Japan Joint Venture - to pull out. Should there be significant delays in the various studies or a need to pay higher-than-expected compensation for the required land, K-Water and the other bidders could suffer from financial losses.
At present, Thai government spokesman Teerat Ratanasevi has stated on June 18 2013 (cited from Reuters) that the contracts for the nine modules are expected to be signed in August or September 2013, with no specific date mentioned for the start of construction works.