Thailand - National Highway Project

RESTRICTED Report No. P-320 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 The report may not be published nor may it be quoted as representing their views.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 RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF THAILAND FOR A NATIONAL HIGHWAY PROJECT May 21, 1963  9TATIONAL BANX Fn7', R-,CC7.TSUCT-.-, MAD A VNLOPV4I REPORT AND RECOI1,2DATIONS OF THE PRESIDENT TO T'HE EECUTIVE DIRECTORS ON A PROFOS-) LOAN TO THE KINGDOM OF THAILAND FOR A NATIOIN HIGHW7TAY PROJECT 1. I submit the following report and recommendations on a proposed loan to the Kingdom of Thailand, in an amount in various currencies equivalent to $35 million, to assist in financing a part of Thailand's program for the development of the national highways. PART I - HISTORICAL 2. The Bankts Survey Mission, which reported in 1958, drew attention to the economic importance of improving the highway system and advocated a substanitial increase in investment in highways. Ittook a long time for a suitable project to be formulated. In 1961 a Bank mission assisted the LDepartment of Highways to determine which sections of the highway system were of the highest economic priority for construction and improvement. This work was incorporated in an 8-year highway development program pre- pared in June 1962. The program envisages the construction of about 1500 kms of new highways and the improvement of about 4000 kms of existing highways at an estimated cost of $1400 million. The Government hopes that the Bank, in a series of loans, will help to finance a part of the program comprising the improvement or construction of some 1660 kms of highway, the estimated total cost of which is approximately 115 million. The proposed loan relates to an initial application made for the first stage of the program, the main element of which is the foreign exchange costs of the improvement and construction of three national highways approximately 630 kms in length. Following the visit of an appraisal mission in August 1962, consideration of the project was suspended for s me months while the Government reviewed the scope of the project which was finally defined in December 1962. 4. The proposed loan was negotiated by a delegation headed by H.E. Visutr Arthayukti, the Thai Ambassador in Washington, and General Sathien Pochananond, Director General of the Department of Highways. Negotiations were completed on May 7, 1963. 5. If the proposed loan is made, it will be the eleventh loan to Thailand, and will increase the total amount lent by the Bank to J$172 millio,, net of cancellations. Ihe status on April 30 of loans previously made was as follows:  7\'TE1\TATI0NAL BAN.'K FOi' A ?JCG, I: U 0C CrA ,A AND Th1E'1LOTh10ElIT REPORT AND RECO IFNDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROFOSED LOAN TO THE KINGDOM OF THAILAND FOR A NATTONItL HIGHWAY PROJECT 1. I submit the following report and recommendations on a proposed loan to the Kingdom of Thailand, in an amount in various currencies equivalent to 35 million, to assist in financing a part of Thailand's program for the development of the national highways. PART I - HI STORICAL 2. The Bank's Survey Mission, which reported in 1958, drew attention to the economic importance of improving the highway system and advocated a substaritial increase in investment in highways. It tok a long time for a suitable project to be formulated. In 1961 a Bank mission assisted the Dlepartment of Highways to determine which sections of the highway system were of the highest economic priority for construction and improvement. This work was incorporated in an 8-year highway development program pre- pared in June 1962. The program envisages the construction of about 15CO kms of new highways and the improvement of about 4000 kms of existing highways at an estimated cost of $400 million. ; The Government hopes that the Bank, in a series of loans, will help to finance a part of the program comprising the improvement or construction of some 1660 kms of highway, the estimated total cost of which is approximately i115 million. The proposed loan relates to an initial application made for the first stage of the program, the main element of which is the foreign exchange costs of the improvement and construction of three national highways approximately 630 kms in length. Following the visit of an appraisal mission in August 1962, consideration of the project was suspended for s me months while the Government reviewed the scope of the project which was finally defined in December 1962. 4. The proposed loan was negotiated by a delegation headed by H.E. Visutr Arthayukti, the Thai Ambassador in Washington, and General Sathien Pochananond, Director General of the Department of Highways. Negotiations were completed on May 7, 1963. 5. If the proposed loan is made, it will be the eleventh loan to Thailand, and will increase the total amount lent by the Bank to ,$172 nillio, net of cancellations. The status on April 30 of loans previously made was as follows:  Amount of Loain Year Borrower Purpose Yet of cancellations ($ million) 1950 Thailand Railways Rehabilitation 3.0 1950 Thailand Port Improvement 4.4 1950 Thailand Irrigation 1800 1955 State Railways Railways Rehabilitation 12.0 1956 Port Authority Port Improvement 3.3 1957 YEA Multi-purpose 66.o 1961 State Railways Railways Rehabilitation 1)4.6 1962 Thailand Petchburi Irrigation 3.4 1962 Thailand Third Chao Phya Irrigation 5.6 1963 YEA Second Yanhee Project 6.6 Total net of cancellations 136.9 of which has been repaid 17.7 Total now outstanding 119.2 Amount sold $8.o million of which has been repaid $2.6 million 5.4 Net amount held by Bank 113.8 l/ 6. No IDA credits have been made to Thailand. PART II - DESCRIPTION OF PROPOSED LOAN 7. The main characteristics of the proposed loan are as follows: Borrower: Kingdom of Thailand. Amount: The equivalent in various currencies of $35 million. Purpose: To assist in financing the construct- ion and improvement of sections of three national highways, the purchase of maintenance and other technical equipment, consulting engineering services, and a technical training program for Thai personnel. Interest: 5 1/2% per annum, including 1% commission4 Commitment Charges: 3/4 of 1% per annum. Amortization: Semi-annual instalments from July 15,I968 to July 15, 1983. 1/ Includes $38.3 million not yet disbursed as of April 30, 1963.  - 3 - PART III - A?PRAISAL OF THE PROPOSED LOAN 5, A detailed appraisal of the project (TO-335a) is attached (No. 1). Justification of the Project 9. Higlhway development in Thailand has not kept pace with other development. To provide adequate means of transport for agriculture, trade and industry, particularly in the wet season, and to facilitate communications between dispersed communities, some three-quarters of the highway system is in need of rehabilitation and irmprovement. 10 The 8-year program has been planned as a major effort to remove the deficiencies of the highway system. The three roads to be constructed or improved under the project are among those of highest economic priority and are the main feature of the project. The proposed loan would also finance the foreign exchange costs of feasibility studies and engineering for five additional sections of highway wvhich are expected to be put forward to the Bank for financing, iler The direct economic benefit from the construction work, when completed, would be a reduction in vehicle operating costs. Savings in ooerating costs are estimated to be in the range of 18-26%. The amount of these savings, based on conservative estimates of traffic growth me-;sured against the contemplated investment, represents annual rates of eturn ranging from 9% to 17%. 12. Indirect benefits would also accrue from the investment but are not easy to measure in money terms. Greater accesEability to markets should stimulate an increase in agricultural production, while reductions in travel tirmes and accidents, and the closer integration of communities, are addi- tional benefits likely to result from the i provement of the main highways. 13. The project also includes engineering services to supplement the capacity of the Department of Highways to undertake construction work, assistance in the reorganization of the Department's operation and maintenance procedures and in the training of Thai personnel, and provision for the pD rchase of maintenance machinery and equipment. The main benefits from these narts of the project are expected to be the shortening of the time that would otherwise be required to bring about a substantial improvement in the highway system, and an increase in the capacity of the Department of Highways to undertake further improvement works and to maintain an improved highway systemn to adequate standards.  -4 - Project Execution 14. Construction studies and designs have been made so far by the Department of Highways of the Ministry of Communications with some assistance from consulting engineers, The Department is in the process of appointing new consulting engineers to revise and complete the designs, to prepare bidding documents and to supervise the construction works, which would be completed in about 42 years. The assistance in the reorgan- ization of the Department is related to an undertaking to carry into effect specific recommendations made earlier by consultants provided by the United States. Agreement has been reached on the steps to be taken to strengthen a program of technical training for Thai personnel. Procurement 15. The construction work and equipment would be procured on the basis of international competitive bidding. It is intended that the size of individual construction contracts should be large enough to attract international construction contractors. Financing 16. The total cost of the project is estimated at about $62 million. The oroceeds of the loan would cover the foreign exchange cost and would be usod to reimburse the Borrower for the estimated foreign excihange comoonent of the construction works included in the project, and for the foreign costs of engaging consultants, purchasing equipment and machinery and meeting the cost of technical training. The foreign exchange component of the construction works would be disbursed as these works proceed as a percentage (presently estimated at 45%) of the total cost. The local costs would be financed by annual appropriations from the Budget. Economic Situation 17. A report "Current Economic Position and Prospects of Thailand" (No. FE-25a) was circulated to the Board on July 19, 1962 (SecM62-130). A memorandum on more recent economic developments, "The Economic Situation in Thailand", is attached (No. 2), and a brief appreciation of the economic position is given in the following paragraphs. 18. Thailand is a poor country with a per capita income not much above $100. Yet it has made impressive economic progress over the last decade. Growth of the economy has averaged about 5% a year with increasing diversity of economic activity including a more varied agricultural pattern and increased manufacturing. The gains of recent years have been even higher, especially during 1959-61 when exports increased by more than a  ih-rd and real output by about a quarter. There was a corresponding upsb7ing in investment to around 20% of GNP including a substantial in- crease in public investment. Meanwhile, Thailand has maintained a stable fiscal and monetary framework. As a result of this and substantial foreign grants and loans, exchange reserves have increased to 95% of the peak annuaj import level. 19. More recently in 1962 the economic picture was somewfhat less favorable. Economic growth continued but exports fell from the 1961 peak, and the rate of increase in government revenue dropped sharply. Mean- while, both imports and public expenditures continued to rise so that the balance of payments reverted to a substantial current deficit and there was also a large increase in the gap between public investment and the domestic savings of the public sector. Inflows of foreign financing more than covered these deficits so that reserves continued to accumulate. MIuch of the foreign inflow in 1962 reflected, however, a large increase in supplier credits. 20. These adverse changes in 1962 probably mark the end of the financ- ial buoyancy that Thailand has enjoyed in recent years. Prospects are that export growth will be slow for some time and this will undoubtedly be reflected in generally more difficult financing problems including the financ;ng of development. Nevertheless, with a reasonable domestic financ- ial effort, with some prudent use of reserves, and with continuing inflow of foreign financing it should be possible to increase the level of public investment over the next few years. 21. Thailand's present foreign debt amounts to $255 million with a peak debt service in 1966 of about 5% or 6% of prospective export earnings. A doubling of this debt wqould probably be within the limits of Thailand's creditworthiness provided repayment were on a long-term basis and the recent heavy reliance on supplier credits were discontinued. The proposed highway loan would absorb only a small part of Thailand's creditworthiness. Prospects of Fulfillment of Obligations 22. The Department of Highways is responsible for the development and maintenance of national highways. In recent years the Department's organization has been somewhat strained by its efforts to carry out an expanded program of works financed partly with assistance from the United States and partly from local resources. The Government is aware of the need for the improvement of the organization of the Department and, in particular, of its maintenance operations. The assistance of consultants and the measures of reorganization which are provided for in the project make it reasonable to expect that the construction works will be carried out satisfactorily and improved operating procedures and maintenance standards introduced.  21.hailand should be able to meet the local currentcy costs and to service the proposed loan in addition toits existing obligations. PART TV - LEGAL INS.IT.U,E.PTS ANiD LEGAL AUTHORITY 24., Attached is a draft Loan Agreement between the Kingdom of Thailand and the Bank (lHational Highway Project) (No. 3). The Loan Agreement conforms substantially to the custoiiary pattern for projects of this kind, but provides in addition to the usual provisions that withdrawals from the Loan Account wirith respect to construction wor's will be made in accordance with a percenta-e -hichi will be agreed from t-me to time but will not exceed the foreign exchange comp)onent of the cost of such works (Section 2.03 (b)). 250 Also attached is the Report of the Committee provided for in Article III, Section 4 (iii) of tlle Articles of. Agreement of the Bank relating to the Project (No9 ). PART V - COIVIPLIAiTNCE NT- ATI'ICLE' OF AGRRE'IENT 26. I am satisfied that the proposed loan complies with the require- ments of the Articles of Agreement of the Bank. PART VI - RECQh.g-ETNiDATIO0TIS 27. I recommend that the Bank grant a loan to the Kingdom of Thailanid tn various currencies e uivalent to 5 million for a term of 20 years at a rate of interest of 5 1/2% per anmum and on such other terms and conditions as are specified in the draft Loan Agreement attached, and that the Lxecutive D)irectors adopt a resolution to that effect in the form attached (No. 5). George D. Woods President Wvashington, D.C. May 21, 1963