Premchai: The Reluctant Builder

Construction News Laos Myanmar Vietnam

Premchai Karnasuta stands on the grass-lined balcony of his 40th-floor office, surveying the Bangkok skyline as the sun sets. “We’re building that one,” he says, pointing to a hulking apartment complex. “And that one,” he adds, indicating another rising block. He pauses and waves a dismissive hand at the site. “So ugly,” he says.

Karnasuta may be the master builder of Thailand, where his family-controlled Italian-Thai Development (ITD) ranks as the construction leader. It built the passenger terminal at Bangkok’s Suvarnabhumi International Airport, the city’s elevated skytrain and its first subway line. The company has contracts for major public works in Thailand, India, Taiwan and Vietnam.

But what really gets the 57-year-old president juiced are mining concessions in Africa, where he is digging for gold, nickel and uranium. When he met FORBES ASIA he had just spent a week in Tanzania. Karnasuta’s idea of fun is sloshing through mud in Madagascar. “I love going around the world looking for minerals,” he says. ITD is also developing mines in Thailand and Laos.

Part of the appeal is being the principal, not the contractor. This extends beyond mining rights and into capitalintensive infrastructure projects where ITD can take the lead role. One such project is in Burma.

Last November ITD signed a 75-year lease with the Burmese government to build a deep-sea port and industrial estate on a 100-square-mile Special Economic Zone (SEZ) in Dawei, with fast road and rail links to Bangkok. The project could stabilize both ITD’s income stream and the Burmese economy, which is heavily geared toward volatile commodity exports. It also packs a geopolitical punch: Burma hopes to offset its dependence on China, which is building its own deep-sea port in western Burma, while Thailand gains access to a strategic Indian Ocean port.

ITD plans to start construction early next year and estimates the initial infrastructure rollout at $4 billion. The company is seeking investors in its Burma subsidiary that holds the SEZ concession, but Karnasuta insists on ITD retaining a 51% stake. “We want to be the majority until the project is developed. We have to be someone who leads the project,” he says.

Given ITD’s high leverage, that sounds like a stretch. Last year the company eked out a $10 million profit after two years of heavy losses, but this was on reduced turnover of $1.3 billion and operating margins of less than 5%. Minus asset sales worth $69 million, ITD would have ended in the red again. Even with these divestments, it still has a debt-to-equity ratio of 3.3, much higher than its industry peers.

This poses a challenge to Siam Commercial Bank, ITD’s financial advisor, which is trying to put together an international consortium for Dawei. U.S. and European sanctions on Burma and the political impossibility of securing World Bank loans put the onus on securing Asian public and private investors, who will need assurances that ITD, as concessionaire, isn’t tapped out. “For it to work ITD needs to show its [capital] strength,” says Sopon Asawanuchit, executive vice president for Siam Commercial.

In May Thailand’s TRIS Rating downgraded ITD’s local-currency bonds, saying operating performance had been weaker than expected and citing high development costs on large projects. “The downgrade also reflects the company’s relatively high leverage due mainly to its aggressive investment outlays over the past several years,” it said.

Karnasuta is still a wealthy man: He ranks No. 35 on the Thai Rich List with $240 million. His younger sister, Nijaporn Charanachitta, a director of ITD and chairman of the Oriental Hotel, places at No. 31 with $260 million ITD’s shares, and Karnasuta’s wealth, got a boost after the opposition Pheu Thai party won a landslide victory in the July 3 elections. ITD shares rose the next day by 30% on expectations that the new government will invest more in infrastructure. But investors simultaneously dumped shares in Sino-Thai Engineering & Construction, the second biggest construction company, which built Bangkok’s new airport train link.

Why the divergence? Public contracting in Thailand, as elsewhere, runs on political patronage. Sino-Thai had the inside track under former prime minister Abhisit Vejjajiva, who appointed Chavarat Charnvirakul, Sino-Thai’s founding patriarch, as interior minister under a power-sharing coalition. Thailand’s newly elected premier, Yingluck Shinawatra, is the younger sister of former PM Thaksin Shinawatra, who kept ITD well fed during his fiveyear rule until a military coup in 2006. He now lives in exile in Dubai.

Karnasuta describes Thaksin as a “good man” but denies that they’re as close as people say. “They think I’m friends with Thaksin. I’m a friend of everybody. But that’s the perception,” he tells us. Does he ever see Thaksin in Dubai? That’s a “sensitive issue,” he says, breaking into laughter. Yet Karnasuta later boasts that he advised Thaksin on doing business in Africa, where Thaksin has invested in gold mines.

Karnasuta never expected to run the family firm. He’s the second son of Chaijudh Karnasuta, a physician, who founded the company in 1958 with Giorgio Berlingieri, an Italian naval architect and Asia hand who lived in Hanoi, where he ran a dredging firm. Their first job was salvaging boats from Bangkok’s Chao Praya River, but they soon diversified into trading, construction and tourism. Berlingieri died in 1981, ending ITD’s Italian connection, though not the name.

By this time Premchai Karnasuta had returned to Thailand with an M.B.A. from the University of Southern California and an M.S. in mining engineering from Colorado School of Mines. He hankered for the outdoor life of a miner, but the death of his elder brother pulled him back to head office, and he took over as president in 1986. ITD went public in 1994, before the Asian financial crisis led to a debt restructuring that diluted the family’s ownership to 41%. Chaijudh Karnasuta died in 2004 and worked until his last day as chairman, according to Karnasuta, whose son, the eldest of three children, is now a director of ITD, continuing the line.

Since the restructuring ITD has expanded briskly overseas. It has a listed Indian joint venture, ITD Cementation, that’s building roads and airports in several cities. In Bangladesh ITD recently signed a 25-year concession to develop an elevated highway in Dhaka. International business last year accounted for 32% of project backlog but a much higher proportion of new business this year. In the first four months of 2011 new orders rose to $2.5 billion, a fivefold increase on the same period last year.

He’s building another subway line in Bangkok and bidding on a rail tender but knows that you can’t trust campaign promises about new infrastructure. “We’re ready to take on these projects. But in the past the government has always said that, but it doesn’t come as quick as they say. We can’t rely on Thailand alone,” he says.

Karnasuta rarely gives interviews, and has a reputation for ignoring investors and analysts. “We’re all in the dark when it comes to ITD,” says an equity analyst. A complex conglomerate structure, with 45 subsidiaries and joint ventures, adds to the challenge. If ITD cracks open its doors only when it needs to raise money, Dawei may be one such occasion. The company issued over $100 million in local-currency bonds in May to roll over existing paper.

Economic sanctions and capital markets aren’t the only obstacle to Dawei’s completion. Ethnic Karen rebels operate in the borderlands between Thailand and Burma and have threatened to disrupt road construction. Burma’s new semicivilian government, which took power in April, is beset with infighting even as a rapid deregulation proceeds.

Banker Asawanuchit says investors are waiting for clarification on how the SEZ will operate. “There are still some challenges in terms of rules and regulations from the Myanmar side,” he says.

Try this one: Dawei’s SEZ status allows international investors to import and export capital. But Burma’s Banking Law says foreign banks can’t operate outside Rangoon. It will be up to Karnasuta to square that circle and others so that companies will commit to building the power station, steel mill and petrochemical plants envisaged by ITD.

Karnasuta says Thai and Japanese companies have expressed interest in an industrial complex only 180 miles from Bangkok that faces far fewer land and environmental constraints than its Thai equivalents. In 2008 residents in Map Ta Phut, Thailand’s largest petrochemical node, obtained a court objection, later lifted, on operators after studies showed cancer clusters. Dawei SEZ is ten times as large as Map Ta Phut and is on a sparsely populated coastline.

Karnasuta had his eye on the site in the late 1990s until the Asian financial crisis hit. When the project came back on track he signed a framework agreement last November, just days away from a landmark election won by a promilitary party. ITD has built dams and airports in Burma but nothing on the scale of Dawei, so there’s a lot riding on Karnasuta’s ability to attract official financing, particularly from Japan.

If he can pull it off and spend his precious capital wisely, investors in ITD may look more kindly on a reclusive president. “Next year will be a new, good cycle for our company,” he says.


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