In the current challenging economic times, it is time to find a way to stem the steep rise of public debt and delegate the financial responsibility to build infrastructure to the private sector as Thailand did two decades ago. The idea is to spare the debt for programmes for those in need and allow investors' idle cash to work. Today we present a look at how a concession for rail system can be developed successfully.

- Concessionaire finances, government grants: An elevated train concession requires the concessionaire company to finance, design, construct, operate and maintain the transport system with the alluring privileges of collecting fares and advertising revenue, rentals and using government land to construct residential and commercial property.

The quid pro quo can be fair and appealing: the concessionaire puts in the money and bears the brunt of project risks and the government rewards it.

Train fares can be low enough to avoid irritating the public while also not hurting the concessionaire, given a lengthy concession period of 30 years and a stream of revenues from commercial activities and real estate projects in the concession area along the train route.

Moreover, part of the concession on commerce can be renewed and spun off from the train concession after the concession period runs out and transformed into a commercial lease to the concessionaire under new terms, similar to long-term leases in the prime business districts of Bangkok.

Raising ticket prices from the rates agreed upon will always be a risk, despite a set of conditions, economic or otherwise, set out in the concession allowing it. Yet it can happen when the chastened mood of the public passes. Government entities have been known to provide solutions through an extension of the concession period, indirect financial support, or even direct, well-compensated adjustments of fare rates at a deferred date.

- Fixed-price construction contracts: The concession period of an elevated rail project does not count from the commercial operation date but starts on the date construction begins. This imposes tremendous pressure for the concessionaire to complete the project, as it is likely to sign fixed-price construction contracts with several contractors of its own selection.

Besides the construction costs, the contractors are loosely controlled by the government. Such costs form the basis of the fare rates stipulated in a schedule attached to the concession that will have to be scrutinised by the government.

A fixed completion schedule for each stage of construction will not leave much room for the concessionaire to deviate. International engineering consulting firms will be appointed by the concessionaire to assist the state agency, with some local consultants also hired as a condition of the agreement.

Banks' requirements aside, to cushion against any possible cash crunch during the construction and operating periods of the entire concession, the concessionaire must make sure its shareholders keep a minimum capital level of 10-20% of the project cost.

- The financials: Train fares increase in accordance with the distance travelled. Increased rates for express trains require special approval from the government.

Rights to generate income granted represent future compensation valued on the date of the concession and payable over three decades.

Compensation amounts to the state agency for the concession, like much of the important figures, can be assumed to be at the end of the schedule of the concession opposite their payment dates.

Weeks of delays in payment will cost the concessionaire as high as 20% on a default interest rate, not the merciful 7.5% allowed under the Civil and Commercial Code. Six months of delinquency allow the government to terminate the concession.

Have you ever wondered why no major infrastructure concessions were awarded in the last decade after the concession boom in the late 1980s?

During those times of upturn, BOT (build-operate-transfer) and BTO (build-transfer-operate) projects were adopted for electric train and telecommunications projects that have benefited us at no cost to the government.

Perhaps our law is too stringent and inhibits the birth of private-sector megaprojects. The law may have played its part, but after 20 years the change of times and circumstances can be understood to call for its review.

Someone should really take a serious look at the law on public and private joint participation, described by some as a hindrance to growth. Maybe this explains the lack of infrastructure concessions.

While cash was flush before the economic slowdown, avoiding problems imposed by the law through government spending on massive infrastructure projects worked fine. When liquidity is tight, it might not be a bad idea to examine any legal hurdles.

If the concession boom can be reactivated, not only can we spare ourselves skyrocketing public debt, but wary investors the world over could turn their attention to this region and offer much-needed investments in infrastructure.

Wirot Poonsuwan is a former chairman and managing partner of Clifford Chance Wirot as well as a former partner of Baker & McKenzie in Bangkok. He now has his own firm, Poon & Poon, Attorneys at Law. He can be reached at 02-633-8867 or wirotp@poonandpoon.com

source : www.bangkokpost.com