Thailand - Industrial Finance Corporation of Thailand Project

RESTRICTED FILE copy Report No. P-360 FILE CY 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 The report may not be published nor may it be quoted as representing their views.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 INTERNATIONAL FINANCE CORPORATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS OF THE BANK AND TO THE BOARD OF THE CORPORATION ON A PROPOSED LOAN BY THE BANK TO, AND INVESTMENT BY THE CORPORATION IN, THE INDUSTRIAL FINANCE CORPORATION OF THAILAND February 28, 1964  INTERNATIONAL BANK FOR ?-FCOUM.STRUCTION AND DEVELOPH-]ENT L TiRhkTIONAL FIN.-`ANCE CORPORtATTION R7EPORT AND RECOPW'iSNDATIONS OF THE PR,.SIDENT TO THE EXECUTIVE DIRECT)RS OF THE BM,L{ AND TO THE BOARD OF THE CORPO.RATIOO ON A .PROPOSED LOANQ BY THE BANE1K TO, AND INVR,STYENT BY THE CORPORI.TION IN, TI-IS INDUSTRIAL FINANCE CORPORATION OF THAILMiD 1. I submit the following report and recomnendations with respect to a proposed Bank loan, in various currencies amounting to US" 2.5 million, to the Industrial Finance Corporation of Thailand (IFCT), under the guarantee of the Government of Thailand, and a proposed IFC investment of /4 million (about US$j 192,000) in the Ordinary Shares of IFCT. PART I - BACKGROUND 2. A review of the organization and operations of the Industrial Finance Corporation of Thailand (IFCT), which had been incorporated in 1952, was requested by the Government late in 1961. From this review, the Bank and IFC developed reconmendations to the Government and IFCT for measures to reorganize IFCT, to strengthen its management and to increase its capital. Subsequently, requests were made for financial assistance from the Bank and IFC to supplement its resources in accordance with the recommended financing plan. Several missions visited Thailand, in the first place to lay out the steps necessary to reorganize IFCT and then to assess the progress made in carrying then out. An Appraisal 'eport, dated Feboruary 12, 196L is attached (io. 1,. 3. The proposed loan and investment were negotiated by a delegation headed by H.E. Sukich Nammanheminda, the Thai Ambassador in Washington, and Nai Yom Tantsetthi, General Mllanager of the IndusLrial Finance Corooration of Thailand. Negotiations were completed on December 5, 1963. 4. If the proposed loan is made, it will be the l2th loan in Thailand, and will increase the total almount lent by the Bank to $ 174 million, net of cancellations. The status on January 31, 1964 of loans previously made nas as follows:  -2- Year Amount Of Borrower rurpose (equivalent in loan $ million) 1950 ningdom of Thailand Aailway i-ehabilitation 3.00 1950 Kingdom of Thailand Irrigation 18.00 1950 Kingdom of Thailand Port Improvement 4.40 1955 State Railway of Railway Rehabilitation 12.00 Thailand 1)56 Port Authority of Port Inprovement 3.26 Thailand 1957 Yanhee Electricity Hydro-electric power 66.oo Authority 1961 State Railway of Railway Rehabilitation 14.60 Thailand 1962 Kingdom of Thailand Petchburi Irrigation 3.40 1962 Kingdom of Thailand Third Chao Phya Irrigation 5.60 1963 Yanhee Electricity Second Yanhee Project 6.60 Authority 1963 Kin;don of Thailand National Highways Project 35.00 Total net of cancellations and refundings 171.66 of which has been recald 20.03 Total now outstanding 151.03 A.;ount sold 08.85 of wjhich has been repaid $2.55 630 Net amount now held by Bank- 145.53 5. Of the total loaned to Thailand $64.0 million has not yet been disbursed. However, the Bank has entered into agreements to reim,burse commercial banks iy8O6 iilliona for payments to be made out of letters of credlit, leaving a net amount of $55.4 million not yet disburse-d or committed. Initially there was considerable delay in arranging contracts concerning the 1961 Railway Rehabilitation Loan, but contracts to commit most of the loan are now being arranged. Otherwise disbursements are generally in accordance with expectations. 6. No IDA credits have been made in Thailand. 7. The proiosed investment would be the second by TFC in Thailand. The first was a loan in 1959 of $3100,000 to The Concrete Products and Aggregate Company, Ltd. (CEPAC). This loan was sold in 1961 to Siam Cement Company, Ltd., CEPAC1s parent company, at a price 4% above face value.  -3- PAIRT II - DL.CRIFTIOH4 O:F TS ?OPOSZD LTE1 't rAr&TENIT 8. Purpose: To au-ment the resources of IFCT so as to enable it to matnHe an increasing and more effective contribution to the financing of private industry in Thailand. Bank Loan A,mount: The equivalent of US$ 2.5 million in various currencies. Guarantor: The Kingdom of Thailand. Interest, including To be determined for each part of the Commission; Loan when credited to the Loan Account in respect of a particular project. Commitment Charge: 3/L of l,2 per annum. Term: Sach part of the Loan to be repayable over a term suited to the project or projects, but not to e:ceed 15 years from the date the Loan Account is credited. Repayment: By semi-annual payments on April 1 and October 1. IFC Investment Amount and Form, h,ooo Ordinary Shares of IFCT of %I,GCO par value each, to be subscribed and purchased at par and paid in full at the time of subscription and Purchase. PART III - THE INDUSTRIAL FINANJCE CORPORATION OF THAILAND 9. ith advice from the Bank and the United States Covernment, and with financial assista-nce from the Governments of Thailand and of the United States, IFCT was established in 1959. Although established by statute, IFCT is organized as a private corporation whose shareholders are financial institutions and individuals. It was set up primarily to assist in the establishment, expansion and modernization of private industrial enterprises, and to encourage the rarticipation of private capital, both internal and external in such enterprises.  10. IFT's early operations were affetcted by the usual difficulties of set'ting un a new institution with untrained staff and by the problems normally faced in introducing modern investment criteria and business practices in an economy at an early stage of industrial growth. These difficulties were accentuated by the death of Prince Vivat, IFGT's soonsor and first Chairman, a few mlonths after its opening. TECT was also restricted by a desire to nove cautiously while building up staff and procedures. :n its first two years, TSCT made only 10 investments, committed half its resources and develooed a reputation for waiting rather than acting energetically in the development of investment business. In the course of 1961 the Government asked for Bank help in correcting the drift in IFCT's affairs. i1. Tn July 1962, the Bank and IFC, having sent a mission to Thailand, concluded that the .orosoects iL light manufacturing indcustries were good and t hat there would be substantial scope for an ISCT equipped to orovide long-term finance and technical and nanagerial help. A series of measures wvere recominended to reorganize and expand TEST. These included: (a) enlargement of its financial resources in order to enable it to make a *#reater contribution to the establishment, expansion and modernization of private industrial enterprise in Thailand; (b) provision of a capital structure to give adequate leverage to the share capital and to provide the prospect, in due course, of a reasonable dividend on shares along with a conservative reservc policy, and thus to iAve opromise of a financially soand institution cauable of attracting investors and borrowiTng frors conventional soirces on its own credit; (c) streng,thening of TCST's staff and organization in order to enable it better to appraise and follcw 7up loan projects and to make sound investment decisions. These pro posals were agreed by the Government and TFCT and considerable progress has already been made in carrying them out. 12. Since October 1962 ISFCS's resources have increased from h3h.2 million (U, 1.7 million) to the oresent level of about /65.5 iiliIlion (us-3 3.2 million) as the result of an additional subordinated loan from the Government anld of new Eubscriptions to shares. 'lans ncw in process of completion will increase thtis total to about $190 million (Uiis 9.5 iillion), partly by the issue of additional shares and partlyr by borrow-ing on conventional termas from the Kreditanstalt ftr 'Kiederaufbau and, if the loan is apzroved, from the Bank. The loan agreement with the Ireditanstalt was signed on December 20, 1963. Excluding reserves, which totalled A2.35 nillion at the end of 1962, IFT's resources will have developed on the completion of the share issue and loan negotiations as follows:  Oct. 1962 Late 1963 Procosed (Baht inill}ons) Share cairital Tnai-owned t.1 L.7 13.? Foreign-ctned 2.C 2.7 12.1 IFG - 4.o Sub-total 1 17.h 30.0 Loanis Subordinat ed Government loans 28.1 L8.1 48.1 Conventional debt -'orld DaX:k Kre&-itanstalt - 57.2 Sub-total 2 1 157.3 Total 3h.2 65.5 1.7-3 13. The new share issue is to be subscribed by IFC and by foreign private investors, both new shareholders attracted boy the participatiorn of LEC and existing shIareholders who will increase their present holdirg. Ten important financial institutions (AmerIcan, British, German and JaJanese) have indicated their intention to take :iajor positions in TFCT. As the requests for subscriptions far exceed the number of shares to be subscribed, the am-ounts allotted to private investors will have to be rea-uced. The full a-mounts requested could have beern allotted only if the total share capital were increased., but in this event foreign investors would have been ir. a majority position. IL. At present seven directors forn the Board responsible for the d_irection c-f lESL. The X:gu aticns have been amenled to increase the Doard tc nira .ir-ectcr-. One would sontinuc to be appo:nted .y the `Dveinnen; s-o long as any loan by zhe Oovevnernt, or rsaaranzee of I_F&'s external borrowing, remains in -force; tho remaining eight directors would he elected by the shareholders, the regulations providing that any share- holder or group of shareholders holdirg 12-1/5 of the shares can secure the election of one director. It is expected that the shareholders' directors will comprise four representatives of Thai sharcholders, three members nominated by foreign investcrs, who will hold abcut 405 of the shares, and one member nominated by IrC (see paragraph 23 below). 15. The present Ceneral 1,aager, ac,psinted in --ay 1962, has increased the effectiveness of IFCT. For reasons of- health he will shortly retire. A successor, who has had training abroad in business, finance and ad!cdnis- tration and has had good banking and business experience in Tlhailand , has been appointed, One of the basic problems still facing IFOT is the develop- mont of an adeouate ar1d comretent staff. On the recomonendation of the Bank and IFC an adviser has been retained for two years, beginning Januarty 1, 1964. He will advise the management on general matters relating to policy, operations and administration, and will give particular attention to staff develoorment  - 6 - 16. A Ebaterment of ITC2Ts principal operating policies was approved by its Board on November 15, 1962. That statement was revised during recent negotiations. The new text, recently appDroved by IFCTts Board, appears as Annex 4 of the Appraisal .Qeport (No. 1). 17. The statement eirovides that IFCT will finance only soundly managed undertakings and that its financial assistance may be provided in a number of ways including equity participations as well as loans. IFT will observe prudent restrictions as to its equity participations and the size cf its cormiitments to particular enterprises. The policy statement commrits IFCT to a conservative reserve policy and restricts borrowing on ccnventional terms to not more than three times the sum of its equity arLd subordinated debt, I7CT will not take the excnhange risk on its borrowin s from abroad. With respect to this last provision :t may be noted that IFCT will attemrt to uass the exchange risk to those iTho borrow from it, but to cover cases wjhere this is not possible, the Governtment, under an agreement already entered into with IFGT,will take the extchange risk for a nominal fee. 18. By September 30, 1963, IPOT had a portfolio of 729.3 million (usP i.L million) and commitments amounting to $7.1 rillion (Us C0.34 millionrl It has operated at a profit since it was set up. The net earnings reflect, to a large extent, the effect of the ;subsidy provided by interest free loans from the Government. Audited net profits amizounted to 71.1 million in 1961 and 1962, and unaudited figurcs for the f-_-.rt nine ontrhs of 1963 show a net profit of $i 5 million, In 1963 lIZC declared its first dividend: a 5% stock dividend. 19. IFCT's short history does not provide a firm basis for projecticns of its business, but I believe its prospects are good. The scale of its operations has increased Eubstantially since reorganization began in -ay 1962, and the arrangements agreed upon make it reason-az