Revival of Vayupak Fund
to finance Thailand's infrastructure projects?
By Jon Fernquest |
Today's Bangkok Post business section features an article on the proposed revival of the 2003 Vayupak Fund idea to finance the expensive government infrastructure projects planned for the future.
The Vayupak Fund was a credit market innovation of Thaksinomics created during the credit crunch that followed the 1997 economic crisis.
The basic idea was to circumvent commercial banks and raise funds directly from the public:
"One major innovation of Thaksinomics was the increased role of government in the allocation of credit. In early 2001, untangling the collapsed banking system was an immediate priority" (Pasuk and Baker, Thaksin: The Business of Politics in Thailand, page 109).
State banks helped allocate credit as well as special credit schemes for the real estate sector including preferential interest rates and reduced taxes on property transactions. The Vayupak Fund attempted to bypass commercial banks entirely:
"In 2003, the government tried another method to circumvent the commercial banks. It launched the Vayupak Fund, named after a mythical bird that lays golden eggs. The aim was to raise funds directly from the public by offering a better return than currently low bank interest rates. The first fund hoped to raise 100 billion baht for buying out the Finance Ministry's shares in state enterprises and private companies (mostly finance firms had had to bail out during the crisis). However, the public response was below expectations. Plans for more Vayupak funds were quietly forgotten" (Pasuk and Baker, Thaksin: The Business of Politics in Thailand, page 111-112).
The Vayupak fund was promoted as an alternative to bank deposits with a higher return. The assets in the fund were from high quality "blue chip" companies. Government assets were "transferred" to the fund and the government also participated as part-owner of the fund:
"The first Vayupak Fund was established in late 2003 as a 10-year flexible fund with 100 billion baht in assets, mostly shares of listed companies previously held by the Finance Ministry. Investments include blue-chip stocks like PTT Plc, Thai Airways, Krung Thai Bank and Siam Commercial Bank, with a 3.5% guaranteed minimum return.MFC [Asset Management], which is 24.5%-owned by the Government Savings Bank and 16.67%-owned by the Finance Ministry, co-manages the first Vayupak Fund with Krungthai Asset Management.
The first fund was pitched to retail investors and promoted as a higher-yielding investment alternative to bank deposits. In addition to the guaranteed minimum yield offered each year, authorities also offer investors principal protection, the obligation for the Finance Ministry to maintain a 30% holding and a 30% discount from the fair value on initial assets transferred to the fund to give initial investors a premium."
The new fun will differ from the first Vayupak Fund in some important ways:
"...the second Vayupak Fund structure would be roughly similar to the first fund, but with a key difference in the protection and guaranteed yields offered to investors.......the second fund is expected to be positioned largely for institutional investors...it was unlikely that the Vayupak Fund II would have conditions such as a minimum investment by the Finance Ministry or a discounted sale price for initial assets.
But he said if units for the new fund were to be placed with retail, domestic investors, capital protection and minimum yields would probably be offered to help attract market interest."
Although securitised assets, at least in the real estate sector, have become less popular recently as a result of playing a key role in the US sub-prime crisis, they are being proposed for the new Vayupak fund:
"The Finance Ministry is expected to set up a second Vayupak Fund with 100 billion baht worth of assets split between equity shares and securitised assets...Pichit Akrathit, the president of MFC Asset Management, said after studying different structures for a second Vayupak Fund that it would most likely combine equity with securitised assets.
Securitised assets could represent future state revenues derived from property or land rentals to the private sector, or even advertising revenues from rights given to private operators to post billboards along public expressways or in mass transit stations...
Dr Pichit said securitising the infrastructure projects and establishing a second Vayupak Fund would be one way of raising funds to finance new investment while minimising the need for the state to take on new debt.
Based on current public debt levels, the government has leeway to borrow around 640 billion baht in additional funds while maintaining debt under the legal ceiling of 50% of gross domestic product."
The funds would have a time duration that matches the duration of the infrastructure projects they are financing:
The time duration for the fund also needed to be considered, and would be based in part on the commercial viability of the projects set for investment. Projects that are expected to be repaid within 15 to 20 years could be left to the private sector to operate with revenues split with the state.Other infrastructure projects could have no commercial viability, but be undertaken as a public service.
Dr Pichit said for the mass transit projects alone, covering new Skytrain and subway routes throughout Bangkok, the government has estimated civil construction costs of 500 billion baht and additional investment costs of 300 billion for rolling stock. With each route expected to take at least five years to complete, consideration was needed on the time schedule for each project.
"If each project was launched at the same time, in the end Bangkok could see dust from construction fill the entire city, which would ultimately affect the economy," Dr Pichit said.
He said past studies have shown that staggering new investment over a 20-year schedule would be the best way to minimise the impact on the environment and traffic conditions."
(Source: Bangkok Post, business section, 10-03-08, page B2, Nuntawun Polkuamdee, temp-link)
Vocabulary:
Vayupak Fund - a fund set up by the Thai government in 2003 to raise money directly from the public and bypass commercial banks
revival of Y - making Y active and popular again
credit markets - markets for borrowing and saving, investment usually requires use of a credit market,
Thaksinomics - the economic policies of Thaksin Shinawatra, Prime Minister of Thailand from 2001-2006 (See Wikipedia on Thaksinomics)
a credit crunch - when businesses and households can't get loans anymore, banks suddenly stop lending and bond market liquidity disappear after investors and holders of capital seek to avoid risk (See The Economist glossary)
circumvent - cleverly go around or bypass something
allocation - portion of the total amount given to a person or for a special purpose (See glossary)
immediate priority - important so must be done right now without delay
schemes - special plans or arrangements (See glossary)
preferential - when certain people are treated better than other people
preferential interest rates - special interest rates given to certain loans (here real estate loans)
bypass - go around, circumvent
mythical - does not really exist, is imaginary and not true
X buying out Y - X and Y own something together, X buys Y's share
response was below expectations - they thought that it would be more popular than it was
X co-manages Y with Z - X and Z manage project Y together
yield - the interest rate of an investment such as a bond, the annual income from the investment expressed as a percentage of the current market price (See The Economist glossary)
guaranteed minimum yield - the yield or return on investment cannot go below this rate
principal - the original amount of a debt or investment on which interest is calculated:
"A basic loan is the simplest form of debt. It consists of an agreement to lend a principal sum for a fixed period of time, to be repaid by a certain date. In commercial loans interest, calculated as a percentage of the principal sum per annum, will also have to be paid by that date. In some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid; the additional principal has the same economic effect as a higher interest rate (See Wikipedia on debt)
principal protection - investor protected from losing original amount invested (in worst case may not get interest payments though)
an obligation for X to do Y - a requirement for X to do Y, X must do Y
maintain a 30% holding - must continue to own 30%
30% discount from the fair value on initial assets transferred to the fund -
a premium - an amount paid over the ordinary price for something extra
the key difference - the most important difference
guaranteed yields - an amount that investors will receive for sure every year in return for their investment
institutional investors - the largest investors in financial markets, companies which have large investments as part of their business, including pension funds, fund-management companies, insurance companies, investment banks, hedge funds, and charitable endowment trusts (See The Economist glossary)
securitisation - turning a future cashflow into a tradable bond-like security, get money now instead of waiting for cash flow and investor takes on the risk that this cash flow will not materialise (See The Economist glossary)
securitised assets, securitising the infrastructure projects - assets which have had their future cash flows securitised
equity shares - stock shares of a company, part ownership of a company (not just a temporary loan of money like a bond, a bank loan, or Vayupak funds)
derived from - comes from, is produced from
billboards - a very large sign by the side of the road with advertisements on it
has leeway to Y - has the freedom and flexibilty to do Y (not restricted)
a legal ceiling - the highest amount allowed under the law
viability - having a good chance of success
the commercial viability of Y - having a good chance of commercial success and making a profit
undertaken as a public service - done to provide a benefit to the public, not for profit
rolling stock - railroad cars
staggering - spacing events over time, so that they do not all happen at the same time (for example, the vacations of the staff were staggered over several months so there would always be staff present in the department)
staggering new investments - new investments are not all made at one time, rather spaced over a long period of time (for example, 20 years)
