Thailand - Telecommunications Project

z - -/ , / Y rf ( DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use FILE AOPY Repo"t No. P-1126 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE TELEPHONE ORGANIZATION OF THAILAND WITH THE GUARANTEE OF THE KINGDOM OF THAILAND FOR A TELECOMMUNICATIONS PROJECT 161a~7/7,   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPfENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TELEPHONE ORGANIZATION OF THAILAND FOR A TELECOMMNICATIONS PROJECT 1. I submit the following report and recommendation on a proposed loan to the Telephone Organization of Thailand with the guarantee of the Kingdom of Thailand for the equivalent of US$37 million to help finance a telecommunications project. The loan would have a term of 20 years, including 4 years of grace, with interest at 7V per annum. PART I - THE ECONOMY 2. An economic mission visited Thailand for four weeks in September 1972 to update the basic report on Thailand's Third Five-Year Plan (1972-76) that was distributed to the Executive Directors in January 1972 (EAP-28). The mission's preliminary findings and conclusions are as follows. 3. GDP growth has been around 6 percent a year in real terms during 1970, 1971 and 1972, a significant slowdown compared with the average annual growth of 9 percent during the preceding four years. The most notable develop- ments have been an absolute decline in private construction, which was partly offset by large increases in expenditures of the public sector (more than 10 percent in 1971 and again in 1972). 4. The chain of events underlying production performance appears to have been as follows. After growing slowly for several years, exports of goods and non-factor services showed unexpectedly large increases in 1971 (10 percent) and 1972 (13 percent) due to strong world demand for some of Thailand''s main export commodities and revival of services to the US mili- tary. As noted above, expenditures of the public sector for consumption and investment also rose rapidly. However, the incremental incomes thus generated were initially saved -- there is a lag of about 6 months in the response of private consumption to changes in income and a lag of about 18 months in the response of private investment. Imports therefore stagnated in 1971 and began to rise only in the first half of 1972, mostly for con- sumption purposes. In addition, import demand was dampened by price increases resulting from the Government decision in 1971 to peg the baht to the US dol- lar, thus in effect devaluing the baht with respect to the currencies of some of Thailand's main trading partners, Japan and Western European countries. Rapid export growth and slow import growt4 strengthened the balance of pay- ments. The external resource deficit declined from $317 million in 1970 to an estimated $165 million in 1972. An inflow of external capital, of which most was private and up to one third was short term (attracted by interest rate differentials between Thai and foreign money markets) raised foreign exchange reserves from $767 million at the end of 1970 to $920 million at the end of August 1972. On the domestic side, the marked slowdown in private investment and the simultaneous strong rise in private saving led to high liquidity in the economy., which was reflected in the position of commercial  -2- banks. Liquidity in the banking system was further increased by the lack of flexibility in the interest rate policy and lending practices of com- mercial banks. 5. EWith a strengthened balance of payments and private investment showing clear signs of improvement, the outlook earlier this year for economic perfonrance in 1973 was bright. However, a drought last summer is expected to affect adversely the production and export in 1973 of rice, kenaf and especially maize. Merchandise exports are expected to show only a very small increase and the same is expected of services to the US mili- tary. This will come at a time when private investment will respond strongly to previous increases in income. Demand for imports is therefore likely to rise sharply and to put pressure on the external position. A reserve loss of at least $50 million is forecast for 1973 despite a rising inflow of ex- ternal private capital to finance private imports of equipment and durables. However, the high level of foreign exchange reserves can be safely reduced and this will help the economy ride out the setback in agriculture, which hopefully will not occur again next year. 6. The recent trend in budgetary savings is a cause for concern. Tax revenue increased rapidly in fiscal 1972 (9 percent) and measures were taken to raise additional revenue in fiscal 1973. However, Government spending on current account is rising even more rapidly mainly to meet the needs of secur- ity, education and debt service, as well as to provide for an increase in Government salaries in fiscal 1973. As a result the current budgetary sur- plus has been virtually eliminated, and capital expenditures have been curtailed in fiscal 1972 and 1973 to keep the budget deficit within limits compatible with price and external stability. It is urgent for the Govern- ment to review its current spending and eliminate those items which lead to excessive growth; some were identified in last year's basic report. However, the Government is not well prepared to undertake such a review, which would in any case be a lengthy process. In the meantime, additional tax revenue will be needed, and the 02 billion target for this objective in the Third Plan (10 percent of 1973 tax revenue) is a strict minimum for the remainder of the Plan period. 7. Thailand began its Third Five-Year Plan on October 1, 1971 aiming at GDP growth of 7 percent a year. As noted, GDP growth was below target in 1972 and may be so again in 1973. The expected stagnation of exports in 1973 may lead to another cycle of slow growth in domestic demand as happened in 1970-72. ?hether the target growth rate can be achieved or exceeded in later years of the Plan period will depend above all on the success of Govern- ment efforts to promote production, particularly for export. Hence the neces- sity for the Government to press on with the administrative reforms that would make its support of private production activities more effective. 8. This is particularly true in agriculture. Beyond any doubt supply is the bottleneck in the expansion of agricultural production and exports;  world demand for most Thai commodities is strong and expanding. A number of crucial policy changes and development projects designed to relieve the pro- duction bottleneck were listed in last year's basic report and agreed upon with the Thai authorities. But the first year of the Plan has seen few steps towards implementation. In fact, it is reported that the promotion of agri- cultural export products and import substitutes (maize, soybean, silk, shrimp, livestock, coconut, tobacco and cotton) was held back by insufficient budgetary allocations. A major reorganization of services dealing with agriculture is about to be made. It is hoped that when the reorganization is implemented the Ministry of Agriculture will be in a position to increase-the effective- ness of its assistance to farmers. 9. In manufacturing, the situation is more promising. Fiscal incentives to exporters have been introduced and are being used. Authorization for the establishment of duty free zones for export is imminent. More importantly perhaps. several subsectors (for instance, textiles, cement, food processing and wood working) are finding export markets profitable, and receive assist- ance from the Government in their efforts to penetrate exte mal markets. The ambitious Plan targets for exports of manufactures are likely to be exceeded. Still, the collaboration between Government and industrialists could be improved further. For instance, maritime freight rates seem to be excessive and thus to reduce the price competitiveness of Thai manufactures abroad. There is a need for close coordination between the Government and Thai export- ers to negotiate rate reductions with the Conference shipping lines serving the port of Bangkok. 10. In addition to difficulties in production, problems of financial management remain. The need for an increased tax effort has already been highlighted. There is also a need to develop domestic financial institutions which would mobilize long-term savings domestically and abroad for the financing of private investment. This issue hinges essentially on changes in taxation and regulations that would eliminate the existing discrimination against finan- cial institutions other than commercial banks. In particular, institutions specializing in the financing of agriculture, small industries and residential construction should be encouraged as they could help raise the level of invest- ment in these sectors by offering more suitable terms and services to borrowers. Similarly, there is a need to develop domestic institutions which would borrow on favourable terms from official sources of external capital for onlending to private investors to finance equipment imports. These institutions could in part replace foreign suppliers' credit and thus help reduce the growth of Thailand's external debt service liabilities. 11. The proposed loan to the Telephone Organization of Thailand is part of the Government's program of external public borrowings during the Third Plan period. This program, which calls for commitments of official loans totalling about $900 million in 1972-76, was accepted by the Consul- tative Group for Thailand in February 1972. After nearly one year, some slippage may be observed due to delays in project preparation, particularly  -.4- in agriculture. Preparation of suitable projects will require a great deal of effort, and the Bank resident mission, which arrived in Bangkok on October 15. will be able to help. 12. Notwithstanding the recent improvement in the balance of pay- ments the above public borrowings and the private borrowings required to cover the prospective external resource deficit, while maintaining exchange reserves at a safe level, are expected to push external debt service obli- gations slightly above 20 percent of goods and non-factor services exports by 1976 compared to 18 percent in 1971. Longer-term prospects are for a further increase of the debt service burden. Nevertheless, Thailand has a considerable margin of creditworthiness for borrowing on conventional terms. The growth of debt service can be mitigated by softer terms on the official loans sought by the Government (for instance, IDA financing is proposed for a forthcoming education project), and especially by taking steps as explained in paragraph 10 to replace a part of suppliers' credit by more favourable official loans to finance private equipment imports in future. PART II - BANK GROUP OPERATIONS IN THAILAND 13. Since 1950, Thailand has received 24 Bank loans amounting to $403.0 million net of cancellations. The greater part of Bank assistance has been for transportation ($154 million), irrigation ($69 million), power ($91 mil- lion) and for a multi-purpose power and irrigation project ($66 million). Two loans have been made for education and one for industry. In general Bank financed projects have been carried out in accordance with expectations. Construction of the Third Bangkok Port Project, financed under Loan 702-TH, began 18 months behind schedule. The delay was mainly caused by the tinme taken by the Port Authority of Thailand and its consultants to pre-qualify bidders, amend tender documents and evaluate bids which were complicated by currency realignments. Annex I contains a summary statement of Bank loans and IFC investments as of September 30, 1972, and notes on the execution of on-going projects. 14. The bulk of Bank and IDA lending for the immediate future and pos- sibly for the next few years will be directed towards helping Thailand meet its infrastructure needs, and the Bank will address itself particularly to priority areas such as the expansion of domestic and export agriculture, education, social improvements including family planning, and regional pro- jects to achieve a wider distribution of development benefits. One of the main functions of the Resident Mission in Bangkok will be to assist the Government in developing projects in these fields. IDA financing, while softening the overall terms of our lending, will be employed to support Thailand's efforts to tackle the problems of its less favoured regions. Some financing of local costs in appropriate cases will enable the Bank to participate more fully in basic developmental projects in agriculture, education and social improvement. A Consultative Group for Thailand, which  -5- is chaired by the Bank met last in February 1972 and the next meeting is tentatively scheduled for March 1973. 15. During the balan'ce of the current fiscal year, I expect to present for your consideration loans and credits to assist the financing of seven projects in Thailand. Negotiations for a fifth highway loan amounting to about $32 million have been substantially completed. Negotiations for the first IDA credit to Thailand, in an amount of about $15 million for a third education project, are expected to begin shortly. A $5 million credit for the Chao Phya (Central Plain) irrigation improvement project is under con- sideration. A loan of about $37 million to help finance the modernization program of the Royal State Railways and a loan of about $40 million for the Bangkok water supply are also being considered. A Northeast crop improvement project and the Pitsanuloke irrigation project are scheduled to be appraised shortly. Projects which are under consideration for FY 1974 include the multi- purpose power and irrigation Quai Yai project as well as seed multiplication, agricultural credit, industrial finance, industrial estates, port development and Northeast urban infrastructure. The Government of Japan, which in April 1972 signed a credit agreement totalling Yen 64 billion with the Government of Thailand, has expressed an interest in participating in the financing of the telecommunications project which is the subject of this report as well as a number of the above-mentioned projects, in particular, the railways project, the Bangkok water supply and the Quai Yai project. 16. On December 31, 1971, Bank loans outstanding to Thailand amounted to $238.2 million representing 31% of the country's total external debt of $773 million. The level of Bank/IDA commitments is expected to increase substantially over the next five years but should not exceed 30% of the projected external debt. Japan, which had provided $60 million to help finance the Second Plan (1967-71), has agreed to provide about $210 million for the Third Plan. Other lenders to Thailand, notably the US and the Asian Develop- ment Bank, are planning to increase their commitments under the Third Plan. PART III - THE TELECOMMUNICATIONS SECTOR 17. The telecommunications sector in Thailand is undergoing rapid development in an attempt to meet the increasing flow of business and administrative information required to support Thailand's continued growth. Existing facilities (as of iptember 1971) include 161,000 telephones in Bangkok and 37,000 in the provinces. This represents a telephone density of 0.54 per 100 population which is low and generally in line with that of other countries of comparable per capita income. 18. Telecommunication services in Thailand were initially operated by the Government's Posts and Telegraphs Department (P&T). The Telephone Organization of Thailand (TOT) was established in 1954 as a State enter- prise by Act of Parliament for the purpose of organizing and improving telecommunication services in the Bangkok-Thonburi area. In 1961 provin- cial telephone services and long-distance facilities were also transferred to TOT; hence TOT now operates all national telephone services, while P&T  -6- operates all international services and domestic telegraph and telex services, and is responsible for radio frequency allocation and control. This arrangement works reasonably well. TOT operates along commercial lines with an adequate degree of autonony. Swedish consultants (Swedtel) are working with TOT to strengthen its organization and its planning and operational procedures. PART TV - THE PRDJECT 19. A report entitled "Appraisal of a Telecommunications Project of the Telephone Organization of Thailand, Thailand (No. PU-99a dated October 27, 1972)" is being circulated separately to the Executive Directors. A loan and project summary is provided in Annex III. The Program 20. The project is part of TOT's development program which includes the completion of on-going works and TOT's new 1972-1976 Development Plan. The program will about double the capacity of the national network from the present figure of around 200,000 exchange lines to 416,000 by September 1977; the long distance network will increase from 856 channels to 2,345; and sub- scriber trunk dialing (SM) will be introduced progressively from 1974. The total cost of the program including increase of working capital is estimated at $176.8 million. The 1972-1976 Development Plan 21. TOT's 1972-1976 Development Plan, which forms the major portion of the program, will be carried out in two phases, the whole costing about $14l6 million with a foreign exchange component of about $78 million. Phase I, which constitutes the present project, will concentrate on expanding exist- ing exchanges, providing new exchanges in central Bangkok, replacing small manual exchanges in provincial networks with automatic exchanges of higher capacity and providing new trunk routes to serve regional centers. Phase II, for which major expenditures will begin in 1974, will provide new exchanges in suburban Bangkok and the provinces, with associated trank provision. The Plan will greatly improve existing telephone service and extend services to rural communities at present without telephones. The vast majority of new connections will be for business and agricultural purposes. The Project 22. The project, Phase I of the 1972-1976 Development Plan, comprises the following main items: (a) Installation of approximately 88,000 lines of automatic switching equipment in the Bangkok metropolitan network (including replacement of 19,000 lines of obsolete equipment); three additional tandem exchanges to serve Greater Bangkok; associated subscriber and junction line plant.  -7- (b) Installation of approximately 43,000 lines of automatic exchange equipment in provincial networks (including 7 new exchanges and replacement of 31 obsolete manual exchanges); associated subscriber line plant. (c) Provision of approximately 500 circuits on 23 new trunk routes with television bearers on selected routes; expansion of existing routes by about 800 circuits; trunk switching equipment at 32 locations; progressive introduction of subscriber trunk dialing from 1974. (d) Studies of tariffs, organization and operations. Details are in Annex III and in the Appraisal Report (PU-99a dated October 27,1972). Financing Plan 23. The following financing plan is based on T