Thailand: lost in litigation

Thailand was once a regional favourite for foreign investors – a status that has come under increasing challenge in recent years. As former intelligence agency analyst Craig Keating finds, a protracted legal saga over a failed Bangkok construction project offers some pointers as to why investors have been losing faith.

On 20 April, Thailand’s Central Administrative Court dismissed an attempt by the Thai government to overturn a compensation award to the Thai subsidiary of a foreign company over the cancellation of a major construction project.

But victory for Hong Kong-owned Hopewell Holdings in its battle to secure a 25.4-billion-baht (approximately A$1 billion) compensation payment is unlikely to be the last chapter in a 24-year-old dispute over the cancellation of an elevated highway and rail project connecting downtown Bangkok to one of its two main airports.

The Transport Ministry and the State Railway of Thailand (SRT) have been ordered to pay the compensation to Hopewell Thailand within 180 days of the court’s order. But the Thai government will likely yet again use the legal system in an attempt to avoid payment.

The unfinished transport project is an embarrassment to Thailand authorities – the abandoned pylons of early construction work, known as Bangkok’s ‘Stonehenge’, are a visible and constant reminder of the chaotic and breakneck development that characterised the country in the 1990s.

While the Hopewell case has been especially protracted, it is not the only instance where Thai authorities have used legal processes to disadvantage foreign investors and traders. It probably won’t be the last.

Thailand, under administrations of all stripes, has shown it is prepared to delay legal processes — or retrospectively impose new rules — in its dealing with foreigners, especially where the state’s financial interests are at stake. Even the decisions of international tribunals and organisations aren’t sacrosanct.

It is patent truth to say this is short sighted. Whatever Thailand — or any other country in the region for that matter — might gain from victory in a single commercial dispute, it stands to lose by the blow to investor confidence from the absence of legal certainty.

Thailand has been slipping as a preferred destination for new foreign direct investment (FDI) for years now. In 1998, it ranked second only to Singapore as the preferred destination for FDI flows to ASEAN members, receiving 36 per cent of the total. But by 2019, it ranked fifth, with three per cent.

Foreign investment applications over January-September 2020 in the Eastern Economic Corridor — a key plank of its government’s plan to transform Thailand into a higher-value, higher productivity economy — fell 52 per cent over the same period in the previous year. The World Bank attributes this fall in large part to a combination of COVID-19 and political unrest. But in the bigger picture, FDI has declined as a proportion of Thai Gross Domestic Product from its high of 6.4 per cent in 1998 to 0.9 per cent in 2019. Its share of total investment declined over the same period from 32 per cent to 4 per cent (Graph 1).

Data sources: World Development Indicators. 

Thailand will have to work hard to bring this investment back and has limited time to do so. Unless it can boost productivity markedly — and convincing foreigners to increase their so-far tepid support for the government plans to boost productivity would undoubtedly form part of this — an ageing Thailand risks growing old before it grows rich.

For a start, Thailand’s economic planners could reflect on and address some of the underlying reasons for the erosion of investor sentiment. A pattern of disregard for common legal protections for investors is one of them. Several cases, including the Hopewell Holdings case, illustrate the point.

Case One: Dragging out Proceedings

In 1990, the Chatichai Choonhavan government signed a contract with Hopewell for what was to be a tollway and Thailand’s first elevated railway. In 1992, the project ran into difficulties, Hopewell blaming government delays in procuring land; the government claiming Hopewell had inadequate financial resources. In 1998, the Democrat-led government — in which political firebrand Suthep Thaugsuban was Transport Minister — terminated the contract. In 2008, a Thai three-member arbitration panel ruled in favour of Hopewell, ordering the state to pay it 12 billion baht plus 7.5 per cent annual compound interest for wrongful termination of the concession.

However, the record points to unrelenting government efforts to avoid paying compensation, despite repeated rulings from Thailand’s own courts that compensation was merited. In April 2019, the Supreme Administrative Court ordered the Transport Ministry and the SRT to pay Hopewell compensation of 25.4 billion baht. An appeal to the Central Administrative Court was dismissed in August 2019. In July 2020, the Supreme Administrative Court refused another government attempt to re-open the case. In October 2020, the Central Administrative Court rejected a SRT bid to nullify the compensation order.

Notwithstanding these failures, the government appealed again. In March, it finally made some progress – the Constitutional Court ruled a key 2002 Supreme Administrative Court decision was unconstitutional. However, any prospect the Constitutional Court had opened the way for a retrial ended with the Central Administrative Court’s 20 April finding that the conditions for a stay had not been met. This ruling should be the end of the matter. However, given the state’s approach to date, this cannot be assumed.

Case Two: Ignoring International Rulings

Between 1989 and 1997, a German Company — Walter Bau AG — also invested in a tollway project. In 2002, Thaksin Shinawatra’s Thai Rak Thai government ordered the tollway operator to reduce its toll rates from a 30-43-baht range to a flat 20 baht. Three years later, Walter Bau sent the Thai government a formal notice of arbitration, alleging authorities failed to approve toll hikes allowed for in a concession contract. In 2009, an international tribunal found for the now-bankrupt Walter Bau AG’s successor company, awarding it damages of 29.2 million Euros (A$ 45.4 million).

Notwithstanding the ruling, the Thai government refused to pay the damages until 2011. It took the seizure by German insolvency officials of a Thai-owned Boeing 737 jet parked at a German airport, where it was being used by King Vajiralongkorn — a pilot — when crown prince to force payment. The plane was released only when the Democrat-led government deposited 38 million Euros (A$59 million) into an account controlled by a German court.

Case Three: Flouting International Trade Rules

In 2010, the World Trade Organisation (WTO) ordered Thailand to set one tax rate for both local and foreign cigarettes two years after the Philippines complained about its imposition of higher taxes on imports. The state-owned Tobacco Authority of Thailand — formerly the Thailand Tobacco Monopoly — was a major source of Finance Ministry revenues.

In 2011, the WTO upheld its decision when considering Thailand’s appeal against the original ruling. Bangkok missed the WTO’s 15 October 2012 deadline to comply.

Over the following four years, the Philippines repeatedly sought WTO intervention, as Thailand continued to drag its feet. In November 2018, a WTO dispute panel ruled that Thailand had failed to comply with its earlier ruling. A year later, following yet another WTO ruling that Thailand was violating international trade rules, the Thai Customs Department admitted that it was not complying with WTO procedures – but said that it would appeal to the WTO’s Appellate Body.

In January this year — nearly thirteen years after the dispute began — the Philippines lost patience and sought WTO authority to impose retaliatory measures. Thailand called the move unjust and inconsistent with its trade agreement obligations. But it has since agreed to join facilitator-assisted discussions to try to resolve the dispute – which, of course, will buy it yet more time.

Case Four: Retrospective Regulations

In 2016, the Thai Government retroactively required gas field operators to pay the decommissioning costs for all their assets, even if they no longer operated them. United States’ energy company Chevron argued that, under its original 1971 contract, it shouldn’t be liable for the costs of those assets that it was transferring free of charge to Thai company PTT Exploration and Production – in which the Thai Ministry of Finance is the majority shareholder, and in which other state organisations have stakes.

As of October 2020, Chevron resumed arbitration proceedings following a one-year suspension, during which it failed to reach agreement with the new Thai Energy Minister, Supattanapong Punmeechaow – a former PTT vice president.

The Fallout: FDI Faces Headwinds

Foreign perceptions of Thailand’s predictability and stability matter, as FDI has historically been an important driver of its economic growth. However, Thailand has reason not to be complacent. The value of foreign direct investment flows to Thailand has in real terms changed little since 2006, when Thailand began to experience heightened political insecurity and politically-motivated violence (Graph 2)^[1].

Over the same period, unprecedented Thai direct investment in other countries has more than offset these foreign inflows. Although Thailand promoted a more open approach to FDI in 1999 with the promulgation of its Foreign Business Act, it has done little substantive liberalisation since then – an OECD report notes Thailand has been overtaken in openness by many other ASEAN member states. The combined effect has been a net decline in direct investment in Thailand, particularly during the premiership of unelected Prime Minister — and 2014 coup leader — General Prayuth Chan-ocha.

Note: FDI inflows after 2011 include that to repair damage caused by massive floods that surged through Thai industrial estates in 2011. Data sources: UNCTAD.

As Thailand’s attractiveness as a FDI destination has peaked, Indonesia, Malaysia and Vietnam have increasingly reaped the benefit of the growing FDI flows into the ASEAN region (Graph 3). Indeed, over 2007-2019, Indonesia overtook Thailand to become the second most preferred FDI destination in ASEAN after Singapore.

Data sources: UNCTAD. 

Old Before It Gets Rich

Thailand is approaching a crossroads. The government is increasingly concerned about the implications of its ageing population (more than 17 per cent are sixty or older). As Thailand’s fertility rate has fallen significantly below replacement level, this trend won’t be reversed over coming decades. A 2017 National Statistical Office report shows just 2.3 per cent of Thais have financial independence in retirement. So, to adequately care for an increasing number of aged people dependent on a shrinking proportion of working age people, the Thai economy will have to become much more productive.

This does not appear likely, at least for decades. Thailand is most unlikely to achieve the long-term growth rate needed to reach the ranks of what the World Bank defines a high-income country before then. It would need to double its rate of investment, while at the same time reverse falling productivity growth – Thailand’s total factor productivity growth rate fell from an average of 3.0 per cent between 1999-2008 to an average of 1.4 per cent between 2009-2017. This is a big ask, given that FDI growth is stagnant, and that Thais are increasingly investing overseas.

FDI matters, and in more ways than just the sums invested. According to an OECD report, foreign firms in Thailand tend to be more productive, and pay higher wages. This can benefit Thai companies, too. The report noted that local firms which develop linkages with foreign firms in Thailand are more productive than those that don’t.

The current Thai government understands this, certainly from a conceptual perspective, and has made transforming the country into a higher-value, higher productivity economy, a priority through its Thailand 4.0 initiative.

It wants and needs to bring in more foreign investment. But commercial disputes — like the Hopewell and other cases highlighted here — are not going to convince investors to change their minds.

Craig Keating is a former senior analyst with Australia’s Office of National Assessments (ONA). Prior to joining ONA, he held numerous positions with the Australian Agency for International Development (AusAID).

Banner image: Supreme Court of Thailand, Bangkok - September 2, 2019. Credit: Kittipong Chararoj, Shutterstock.

^[1] Data for Indonesia prior to 2003 includes that for Timor-Leste. However, its FDI flows are negligible when compared to ASEAN as a whole.