FILE COPY Report No. P-718 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized RESTRICTED FILE COPY Report No. P-718 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF THAILAND FOR A FOURTH NATIONAL HIGHWAY PROJECT June 4, 1969

2 INTE10TATIONAL BANK FOR RECONSTRUCTION AND DEVELOP'4ITT REPORT A\D RECOT-7TIDATION OF TTIE PRESIDFI\TT TO THE ECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOWT OF THAILAND FOR A FOURTH NATIONAL HIGHWIAY PROJEC T 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to U.S. p23 million to the Kingdom of Thailand. PART I - HISTORICAL 2. Of the nineteen loans which the Bank has made to Thailand, eight have been for transportation. Two loans were for port development, three for railway improvement and expansion; and three loans, totaling $90 million equivalent, were for highway projects. The First Highwqay Project loan, (3)il-TH) for $21.8 million (net of cancellations) was made in 1963 and has been fully disbursed. The Second Highway Project loan, (455-TH) for $36 million was made in 1966; construction is more than 50$ complete and is proceeding on schedule. The Third Highway Project loan, (535-TH) for $29 million was made in JHay, Contracts have been awarded for all the construction works, which are proceeding well, and the training program of the technical staff of the Department of Highways is being negotiated with institutions in Europe and the UJnited State. Each of the Bank loans has included feasibility and engineering studies of roads for subsequent projects; thus two of the highways to be constructed under the proposed loan have been investigated and engineered under one or more of the previous loans, while the third higihway was studied and engineered œith Canadian assistance. 3. Negotiations took place in Washington between May 13 and 16, The Government of Thailand was represented by Itlr. Uthai Vodhigula, Director General, and Mr. Nukul Prachuabmoh, Deputy Director General of the Department of Highways. 4. The proposed loan would be the twentieth loan to Thailand, of which thirteen are fully disbursed. The follo,wjing is a summary statement of Bank loans to Thailand as at April 30, 1969.

3 -2- Year Number Borrower Purpose (U.S. $ mjjlf.o;i) Principal Un- Amount disbursed Thirteen loans fully disbursed TH Kingdom of Thailand Meklong Irrigation TH Kingdom of Thailand Natiornal Highways 36.o TH Kingdom of Thailand Vocational Education 6.o TH Yanhee alectricity Authority Power TH Kingdom of Thailand Sirikit Dam - Irrigation 26.0o TH Kingdom of Thailand National Highways Total (less cancellations): of' which has been repaid to Bank and others 55.7 Total now outstanding: Amount sold: 59 4 of which has been repaid: Total now held by Bank Total undisbursed 70.0 No IDA credits have been made to Thailand. IFC has made two investments in Thailand. IFC holds shares worth $192,000 in the Industrial Finance Corporation of Thailand; and this year made an investment of $22.1 million (of which $4.1 million is an equity investment) in the Siam Cement group of companies. 5. Disbursements under the Vocational Education project (loan 471-TH of 1966) have been slow because of the delay in appointing consultants, under bilateral assistance, to prepare specifications for equipment procurement. The project is now proceeding well. Otherwise, progress in the execution of Bank-financed projects has generally been satisfactory. 6. A pow^ter project, with a foreign exchange component of $23 million to finance the power facilities of the Sirikit (Phasom) Dam now being constructed under Loan 514-TH, is expected to be presented to the Executive Directors in September. The Industrial Finance Corporation of Thailand has applied for a second loan of $5 million, and an appraisal mission is scheduicau to visit Thailand in July. A project to expand and improve the facilities sf Kasetsart (Agricultural) University, with a foreign exchange component of about $4.5 million, is now being prepared for the Bank's consideration. The Government may request a loan for a railway project later this year if satisfactory financing under suppliers' credits is not available.

4 - 3 - PART II - DESCRIPTION OF THE PRT)POSED LOAN 7. Borrower: Kingdom of Thailand Amount: Purpose: Amortization: Interest: Commitment Charges: Various currencies equivalent to U.S. $ 23 million. To assist in financing the construction or improvement of three primary highways totaling about 294 km; consulting services for the supervision of works and detailed engineering of about 533 km of primary roads; purchase of workshop equipment for highway maintenance. In 20 years, including U> year period of grace, through semi-annual installments beginning April 1, 197)4 and ending October 15, Bs per cent per annum. 3/4 of 1 per cent per annum. Estimated rate of return of the Project: In excess of 20%. PART III - THE PROJ.TWT 8. An appraisal report entitled "Appraisal of a Fourth Highway Project - Thailand" (PTR-l1a) dated June 3, 1969 is attached. 9. Although the highway system of Thailand has improved considerably in the last six years, it is still inadequate to handle present traffic requirements. The Government's Second Five-Year Development Plan ( ]) makes provision for substantial infrastructure investments to facilitate the growth of the national product, which is assumed to average 7.5% or slightly more in the next few years. The transportation sector is growing at a faster pace, and is expected to maintain an average growth rate of about 13%. The "Highway Construction and Improvement Plan ( )", which forms part of the Development Plan, envisages the construction and improvement of some 4,500 lam of roads in the Plan period.

5 The project, which is part of the "1Highway Construction and Improv~ment Plan ( )", includes the inprovement or construction of three primary highways totaling about 294 km. The three highways are part of the system linking Bangkok and the Northern, Northeastern and Southern regions of the country. The project includes consulting services for the supervision of construction and for the detailed engineering of about 533 km of further primary highways, if feasibility studies now in progress demonstrate that they are economically justified. The project also includes the purchase of workshop maintenance equipment. 11. The estimated cost of the project is U.S.$ 48.7 million. The proposed loan of t23 million would finance the foreign exchange costs of road construction and improvement, estimated at about 45L of the total cost, and the foreign e:,cchange costs of consulting services and workshop fnaintenance equipment. The balance of the funds required to.complcte the pi'oj6ct owould be provided-by the Government. 12. The project will be administered by the Department of Highways of the ilinistry of National Development with the assistance of consulting engineers. The Department is responsible for the construction, improvement and maintenance of all classes of national roads in Thailand; and has demonstrated its ability to manage its activities. Financial and technical assistance under the first three Bank loans, and from other sources, has substantially increased the capacity of the Department to plan and carry out projects included in the Second Development Plan and to maintain the National Highway System. The reorganization of the Department of Highways, wihich began in , has been completed, and has resulted in improved operating anc' administrative procedures. 13. The three primary highways proposed for construction or improvement would carry substantial volumes of existing traffic, and would generate additional traffic as new economic activities develop. The road wjorks included in the project are justified economically from the resulting reduction in transportation costs. Over a 20 year period, the rate of return on the Thern-Lampang highway is about 25%, and on the Thonburi-Paktho highway about 20'i7. Parts of the Chumpae-Loei highway may be flooded by the reservoir of the proposed Pa Mong Dam, located on the KIekong between Laos and Thailand, which is being considered as the first of the mainstream Tqekong river projects. Feasibility studies for the Pa Mong project will be completed early in 1970 but the start of construction of this very large project, which would require at least eight to twelve years to complete, is uncertain. However, taking the earliest possible starting and completion dates, and assuming that the Chumpae-Loei highway is flooded in either five or ten years after completion of the dam, the useful life of the road would be long enough to ensure rates of return of 12Z and 257 respectively. For an economic life of twenty years, the rate of return would be 29'7. 'ilitary traffic was excluded in calculating the rate of return on all three highways. 14. Construction work would be carried out by contractors under unit price contracts awarded after international competitive bidding. There has

6 been widespread and keen interest by international contractors in highway construction in Thailand, and very competitive prices have been obtained for all contracts awarded under the first three highway loans. The contracts to be awarded would all be of sufficient size to interest such contractors. 15. NTYith the assistance of U.S. AID, the Government is undertaking a comprehensive transportation coordination study to assess the optimal allocation of resources among the competing modes of transport, and to determine appropriate bases for user charges for the various modes. The study, wjhich is expected to be completed by the end of 1969, will assist the Government in drawing up a better transportation coordination policy and in setting up the administrative framework to implement such a policy. With the assistance of Canada, a limited transportation coordination study of the Thonburi-Paktho region has been started, and is expected to help the Government determine the transportation needs of the region iith particular reference to rail and river traffic. Neither the U.S. nor the Canadian study of transportation coordination will affect the well-established priority of the roads included in the project. PART IV - LEGAL PTSTRUTENTS AND AUTHORITY 16. The draft Loan Agreerment between the Kingdom of Thailand and the Bank, the Report of the Committee provided for in Article III Section 4 (iii) of the Articles of Agreement and the text of a Resolution approving the proposed Loan are being distributed to the Executive Directors separately. 17. The draft Loan Agreement is substantially in the form customarily used for highway projects and follows closely the documents used for the three previous loans. In addition, the following provisions of the draft Loan Agreement are of particular interest. (i) Section 2.o5 provides that no withdrawal shall be made under the Loan for the cost of consultants' services for detailed engineering of any highway or section thereof included in the Project unless the economic feasibility of such highway has been established to the satisfaction of the Bank; (ii) Section 5.11 requires the Borrower to take all steps required to ensure the improvement and extension of city streets in Bangkok and Thonburi in order to provide congestionfree access to the Thonburi-Paktho highway; (iii) Section 5.12 requires the Borrower to take all measures required to ensure that the Thonburi-Paktho highway is operated and maintained as a controlled access highway; (iv) Section 5.13 requires the Borrower to consult with the Bank regarding any plans to relocate the town of Loei or the road leading to it in the event of flooding caused by the construction of the Pa i4ong dam.

7 PART V - THE MONC'iY 18. A report on the "Current Economic Position and Prospects of Thailand" (EAP-la) was distributed to the Executive Directors on February 12) 1969 under cover of the Secretary's memorandum R The Thai economy has grow-rn at the satisfactory rate of 8% per annua during the past five years. This was accomplished while agriculture and related sectors still provide more than two-fifths of GDP. Agricultural output grew by a year on average between 1963 and The manufactur±n, and mining and construction sectors taken together achieved an annual growth rate of 13.50, increasing their share of GDP from 18'< to 23i. Per capita income has reached 'l1)o a year, and would have been higher but for the fact that population has also continued to growf at 3.3,'', which is among the higher rates in Asia. 20. Throughout the past five years, the Thai economy has enjoyed a strong financial position. Savings, originating largely in the private sector, went up by 16.3?S a year, bringing the average savings rate to over 24% of GMP. At the same time, the annual growth of export earnings reached 13.-5', reflecting the expansion of agricultural output for export and, since late 1965, military expenditures by the TJnited States. Earnings from these sources permitted Thailand to finance the doubling of investment between 1963 and 1968, without substantial foreign assistance. The ratio of investment to GITP reached 272" in The large U.S. expenditures for local goods and services, enabled Thailand to build up its exchange reserves from UOS.$ 540 million to U.S. $ 920 million, equivalent to more than eight monthzo current payments and over three times the amount of public external debt outstanding at the end of Since its unsuccessful foray into public industries in the early 1950's, the Thai Government has largely confined its development expenditures to improving the country's infrastructure. Large and growsing amounts went into higlways, irrigation and power development. This corresponded well with economic priorities. The Bank has been closely associated with the development of these three sectors. 22. The principal shortcoming has been the failure, after many years, to produce workable plans for regional development, particularly in the Northeast. Population pressure is heavy in the remoter border areas and no family planning program has been devised. Lack of adequate coordination among government departments is largely responsible, and administrative weaknesses have also reduced returns on the large investments that have beeni made in dams and other primary irrigation facilities. On the fiscal side, rice has long borne an undesirably heavy burden in the form of export taxes which may prove disadvantageous if international rice prices fall. In any case, there is a pressing need to diversify sources of government revenue. The Government has requested the assistance of the ITF in tax administration. and reforms, and the Bank will continue to urge action in this field.

8 As a result of a slolwt-down in agriculture and related activities and in consti-uction, last year 'GUP grew by only 4-5`-. U.S. military expenditures, which du.ing the three previous years had risen to a level equivalent to more than 4h of GDP and one-fifth of foreign exchange earnings, did not increase in As the present construction program is nearing completion these expenditures may now start to decline, depending on future developments in the area. Thus, for the economy generally, present projections suggest a return to a more normal situation after the boom of the recent past: a somewhat slower expansion of irnvestment and saving, a less rapid increase in exchange earnings and a widening resource gap. 24. Because of the countr-y's strong reserve position, the Bank has limited its lending to Thailand since late 1966 to a fraction of the foreign exchange costs of selected projects, the remainder being provided by the Bank of Thailand in the form of parallel loans or participations in the loans extended for these projects. Since 1966, the Bank of Thailand has provided financing of $59 million for four projects in which the Bank's net financing was only $25 mill:ion. The Bank of Thailand also holds $50 million of the Bank's two-year (entral Bank bonds and is the largest holder of such bonds. 25. Thailand's exchange reserves are over US million and could be drav.m upon, if need be, to help finance the projected resource gap. However, in the face of the likely decline in foreign exchange income, it would not be advisable to plan any large drafts on these reserves in the near future. Thus, after several years in which Thailand has needed little development aid, there is nowi a good case for more Bank assistance. Accordingly, I have not asked the Banlc of Thailand to participate in this proposed loan or in the other prospective loans mentioned in paragraph 6 above. 26. Thailand has not accuimulated a large external debt. Projected service on official debt at its peak is equivalent to aroand 4W of estimated exchange earnings; service on private external debt is estimated at about the same amoutnt. Thlailand may thus be regarded as creditworthy for substantial additional external borrowing. PART VI - COMIPLIANCCE,TITH ARTICLES OF AGREEMEMT 27. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RBCO SIEI\TDATION 28. I recommend that the Executive Directors approve the proposed loanl Attachment Robert S. 1c`\Namara President Washington, D.C. June 4, 1969