Thailand - Third Industrial Finance Corporation of Thailand Project

r--)L, -;Z (CR Report No. 1157-TH FILE COP Appraisal of the COPY Industrial Finance Corporation of Thailand August 10, 1976 East Asia and Pacific Projects Department Agricultural Credit and DFC Division FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1 - Bt. 20.0 Baht 1 US$0.05 Bt. 1 million - US$509,00 Bt. 1 billion - US$50 million IFCT's FISCAL YEAR January 1 - December 31 ABBREVIATIONS AD - Administration Department, IFCT ADB - Asian Development Bank BAAC - Bank for Agriculture and Agricultural Co-operatives BOI - Board of Investments BOT - Bank of Thailand EXIM - Export-Import Bank of Japan GDP - Gross Domestic Product GSB - Government Savings Bank IFC - International Finance Corporation IFCT - Industrial Fiinance Corporation of Thailand IMF - International Monetary Fund KfW - Kreditanstalt fur Wiederaufbau KTB - Krung Thai Bank NESDB - National Economic and Social Development Board OD - Operations Department, IFCT PD - Projects Department, IFCT RPD - Research and Planning Department, IFCT SET - Securities Excihange of Thailand SIFO - Small Industries Finance Office SMI - Small and Medium Industries  FOR OFFICL41 USE ONLY THAILAND APPRAISAL OF THE INDUSTRIAL FINANCE CORPORATION OF THAILAND Table of Contents Page No. SUMMARY AND RECOMMENDATIONS ......... .. ........... i-v I. INTRODUCTION ...................1.................. II. THE THAI ECONOMY ............... ..1................ III. THE INDUSTRIAL AND FINANCIAL SECTORS .... ......... 2 A. The Industrial Sector ....................... 2 Economic Role and Growth ..... ............... 2 Industrial Employment and Small Industry Development ............................... 3 Industrialization Strategy ..... ............. 3 Industrial Protection and Promotion .... ..... 4 Investment in Manufacturing ..... ............ 5 B. The Financial Sector ........................ 5 Overview ........ ............................ 5 Financial Sector Development ..... ........... 6 Policy Measures ............................. 6 Interest Rates .............................. 7 IV. IFCT - INSTITUTIONAL CHARACTERISTICS .... ......... 8 Charter and Ownership ...... ................. 8 Board of Directors ...... .................... 8 Management ......... ......................... 9 Organization ........ ........................ 9 Staffing .......... .......................... 10 Advisors .......... .......................... 10 Training and Staff Development ..... ......... 11 Branch Offices ........ ...................... 11 Policies and Procedures ..... ................ 11 Project Appraisal ....... .................... 12 Project Follow-Up ....... .................... 13 Project Screening and Monitoring .... ........ 13 Procurement and Disbursement ..... ........... 13 This report was prepared by Messrs. P.S. Mistry, K. Siraj, A. Soulard and S. Ogtira following their visit to Thailand in February 1976. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -2- Page No. V. IFCT - OPERATIONS, FINANCES AND PORTFOLIO QUALITY. 14 Lending Operations ............. ............. 14 Equity Investments and Guarantees ........... 15 Financial Position and Performance .......... 15 Foreign Exchange Risk .. .................... 16 Portfolio Quality ............ .. ............. 17 Audit ........ ............................... 17 VI. IFCT's DEVELOPMENTAL IMPACT AND ROLE .... ......... 17 Overall Impact ...... ........................ 17 Efficiency of Investment ... ................. 18 Resource Allocation ..... .................... 19 Long-Term Resource Mobilization .......... ... 19 Capital Market Development ............... ... 20 Promotional Efforts ..... .................... 20 IFCT's Development Strategy .............. ... 21 VII. IFCT's RESOURCE POSITION AND PROSPECTS .... ....... 22 Resource Position ............ .. ............. 22 Operational Projections and Prospects ....... 23 Financial Projections and Prospects ......... 23 VIII. JUSTIFICATION FOR THE LOAN AND ITS MAIN FEATURES . 24 Justification ...... ......................... 24 Rates of Return on Projects Financed ........ 25 Main Features of the Loan ................ ... 25 IX. AGREEMENTS REACHED AT NEGOTIATIONS .... ........... 27  -3- LIST OF ANNEXES AND CHARTS Annex No. 1 The Economy 2 Industry and Manufacturing in Thailand (with Tables) 3 The Financial Sector 4 List of Shareholders of ICFT as of December 31, 1975 5 IFCT - Board of Directors as of December 31, 1975 6 IFCT - Policy Statement 7 IFCT - Operations (with Tables) 8 IFCT - Financial Position and Performance (with Tables) 9 IFCT - Quality of Portfolio (with Tables) 10 IFCT - Details of Long-Term Resources as of December 31, 1975 (with Tables) 11 IFCT - Projected 'Operations, Resource Requirements and Financial Situation (with Tables) 12 IFCT - Estimated Disbursement Schedule for the Proposed Loan Chart No. 15863 IFCT Organization as of February 29, 1976   THAILAND APPRAISAL OF THE INDUSTRIAL FINANCE CORPORATION OF THAILAND SUMMARY AND RECOMMENDATIONS i. The Industrial Finance Corporation of Thailand (IFCT) has requested a third loan from the Bank. This report recommends a Bank loan of US$25 mil- lion to IFCT with the guarantee of the Kingdom of Thailand on the terms and conditions usual for loans to development finance companies (DFCs). The loan would help IFCT cover part of its untied foreign exchange resource needs between FY76-78. ii. The Thai economy responded well to stimulative government policies and began to show signs of recovery in 1975. The growth rate rose to 6.4% in 1975 following a dip to 3.2% in the depressed economic climate of 1974. Inflation was curbed sharply (from 24% in 1974 to 4% in 1975), labor unrest subsided and increased energy costs were gradually absorbed. Nevertheless, investment levels continued to decline as did the inflow of foreign capital. The balance of payments was in overall deficit for the first time since 1971 and international reserves dropped by about US$100 million. iii. With the rapid exhaustion of new land available for cultivation, Thailand will need to rely, more heavily than it has in the past, on further industrialization to achieve its growth and employment objectives over the next decade. The industrial sector, in which manufacturing predominates, is already the second largest in the economy accounting for 26% of GDP, about 25% of the total investment and employing 7% of the total labor force. The pattern of industrialization through the 1960's, when manufacturing's share of GDP grew from 11.6% of GDP to 18.5%, was almost entirely import substitu- tion oriented. Since 1970 an increasing export orientation in manufacturing output resulted in manufactured exports increasing from US$34 million in 1969 to US$367 million in 1974. Thai manufacturing is, at present, fairly capital intensive and has not yet made a major contribution to employment creation. However, open unemployment and underemployment have not been of significance in Thailand until very recently. With the emerging need to absorb a rapidly growing labor force Thailand will need to expand and broaden manufacturing activity, particularly of a labor-intensive nature; this implies the need, among othier things, for the development of a larger number of small and medium-sized industrial enterprises. In this connection, IFCT has been instrumental in initiating a study aimed at determining the magnitude of the small industry assistance problem and at exploring alternatives for cost effective delivery of financial and technical assistance to SMI. Reforms are needed in present tariff and incentive policies to promote efficient indus- trialization; mechanisms for coordinating and implementing these policies also need to be improved. On the investment side, despite present 1ncertain- ties, private sector investment (i.e., disbursements) in man!fzicturing alone is expected to be around Bt. 20 billion in the two-year period 1976 and 1977; with investment activity being expected to pick up in late !q76 commitments are expected to be between Bt. 25-28 billion in the two-year period 1977-78. The proposed loan would account for roughly 2% of this aroouu1t.  - ii - iv. The Thai financial system is still in the early stages of its development. There is a lack of diversity in both institutions and financial instruments to meet the various preferences of savers, especially small savers, in terms of risk, yield and liquidity combinations. There is also a need for developing more effective vehicles for long-term inter- mediation especially in the agricultural and housing sectors. The pace of future financial system development in a desirable direction depends on: reducing the extent to which commercial banks presently dominate all forms of intermediation; and emphasizing continued development of the capital market. The Bank of Thailand (BOT) has now initiated work on a review of the finan- cial sector which is aimed at making concrete recommendations on the policy and institutional changes required to improve the operations of the finan- cial system. The IMF has already begun providing BOT with assistance on a review of commercial banking; Bank assistance may need to be provided, in the future, on a similar review of long-term lending institutions. v. The interest rate structure in Thailand is governed by the commer- cial banks' prime lending rate which has for the past several years fluctuated around 12%. Commercial bank rates are constrained within the lending rate ceiling of 15% and the deposit rate ceiling of 8% applied by the BOT. IFCT has, since 1974, been charging a rate of 10.5% on foreign currency loans and 9.5% on its domestic currency loans. In May 1976 IFCT raised its standard interest rate to 12.0%. At negotiations for the proposed loan IFCT and the Bank reached an understanding that ]:FCT's lending rate would be increased again to 12.5% before July 1, 1977. This would mean that sub-borrowers would be paying a real rate of around 6% to 6.5% (under present estimates of infla- tion in Thailand) over the foreseeable future. vi. IFCT is the only specialized long-term industrial financing institu- tion in Thailand. Although privately-owned (with a 47% foreign shareholding), largely by other financial institutions, IFCT has close relationships with the Government and takes care to ensure that investment is channelled in general accord with the framework of industrial priorities. With an actively interested Chairman of the Board, generally sound management (especially at the department level) and staff of good professional calibre, IFCT has suc- ceeded in expanding its operations dramatically in FY74-75 and has now shed its dependence on expatriate advisors. To strengthen its top management, IFCT has undertaken to appoint a Deputy General Manager by September 30, 1976. IFCT's appraisals have shown gradual but consistent improvement. An increase is, therefore, recommended in the individual sub-loan free limit to US$750,000 and in the aggregate free limit to US$10 million. A reorganization was recent- ly effected to incorporate functions (especially long-term corporate planning) which were not previously being systematically carried out and to improve operational efficiency. It is expected that the changes made will prove to be beneficial. IFCT's project supervision is sound, as are its procedures for procurement and disbursement under its subloans and for project application screening. It eventually hopes to acdopt the Project Monitoring System now being developed within the Bank and is already taking steps to utilize the DFC financial projections model which has been developed. In 1975 IFCT opened  - iii - its first branch office in Haat Yai (the Southern Region) as a first step to- ward an intensive program to promote projects outside the Central Region. In 1976 two more offices were opened in Khon Khaen (the Northeast) and Lampang (the North). vii. IFCT's volume of lending operations in FY74 and FY75 increased beyond all expectations. Loan approvals of Bt. 1.49 billion in those two years exceeded total approvals in its preceding 14-year history (Bt. 1.08 billion) and marked IFCT's emergence as an institution of stature on the Thai financial scene. As of December 31, 1975 IFCT had cumulatively made 301 loans for a total amount of Bt. 2.57 billion and had Bt. 1.34 billion in 146 loans outstanding to 120 borrowers. Since 1973 two distinct types of business have emerged: "large business" in which loan sizes average around Bt. 36 million and "regular operations" with average loan sizes of Bt. 8 million. IFCT's loan portfolio is reasonably well diversified by industry but reflects the general geographic concentration of industry in Thailand. FY75 also saw an unprecedented increase in equity investments; four investments were approved amounting to Bt. 24.6 million. IFCT provides guarantees largely as a financial service to existing borrowers and does not consider guarantee operations a separate and special facet of its business; as of end-FY75 guarantees outstanding amounted to Bt. 59.7 million. A detailed analysis of IFCT's operations is provided in Annex 7. viii. Reflecting its growth in business, IFCT's financial position and performance improved significantly in FY75 with assets increasing by 37% and amounting to Bt. 1.48 billion (US$74 million) at year-end. Asset growth was financed entirely by an increase in its long-term debt with available loans from the ADB, the Bank and the EXIM Bank of Japan being drawn down at a faster than expected rate. Long-term debt, which increased by 115% between FY73-75 stood at Bt. 1.15 billion at end-FY75; over the same period IFCT's equity grew, entirely through reserves build-up, by only 23% resulting in an increase in IFCT's debt/equity ratio from 2.9 to 4.8 (well within the contractual 6:1 limit). IFCT's liquidity position has also been main- tained at prudent levels throughout. In view of its increased leverage and growing asset base IFCT's profitability has increased at a respectable rate. Net income grew by 42% in FY75 to Bt. 38.3 million, triple the FY71 level. However in relative terms it has stayed fairly stable at 3% of aver- age total assets. The increase in income raised returns to average equity from 12.5% to 16% and allowed IFCT to increase its dividend to 10%. ix. In view of the limitations posed by its equity base on further borrowings to finance its expanded program, IFCT proposes to increase its share capital by Bt. 100 million in 1976. As of July 31, 1976, Bt. 55 mil- lion had been fully subscribed and paid-in. IFCT plans to issue the remain- ing Bt. 45 million to the general public to widen its ownership base and assist development of the securities market. Following the advice of its underwriters IFCT proposes to proceed with the public issue in December 1976. It is expected that the issue will be fully taken up by January 1977. With the capital increase, the present debt/equity limit does not need to be raised. Additions to reserves have raised the book value of IFCT's shares  - iv - to Bt. 1,689 (par Bt. 1,000); these shares are not yet traded publicly. In a recent private transaction IFC sold its entire shareholding of 8,000 shares to the Mitsui Bank at a price of Bt. 1,600 per share. IFCT's cash flow has been soundly managed in the past and the debt service cover has been maintained at a prudent level. The quality of IFCT's portfolio remains quite sound; arrears amounted to 2% of the principal outstanding while principal affected amounted to 11%. Although this represents a higher level of overdues than in the previous year it reflects the temporary impact of the economic downturn on Thai manufacturing industries and not a structural deterioration in the quality of IFCT's portfolio. IFCT's accounts have been regularly audited by independent auditors acceptable to the Bank and have always been certified without qualification. IFCT's projected operational and financial performance between 1976-80 is analysed in Annex 11 and is expected to be satisfactory. x. While IFCT's overall role in investment financing remains small, its influence is exercised over about 25% of manufacturing investment in Thailand (paragraph 6.01). Paradoxically, IFCT's investment levels have been rising in a declining investment climate. This suggests that IFCT has over the past two years been playing a significant developmental role in maintain- ing investment momentum when other financial institutions are adopting a wait-and-see attitude until the extant uncertainties in the Thai economic and political environment are resolved. xi. The projects financed by IFCT during FY74-75 involve a total invest- ment of around Bt. 6.4 billion and, on completion, are expected to generate 24,500 jobs resulting in an annual incremental payroll of about Bt. 430 mil- lion. Incremental annual value-added by these projects is expected to amount to nearly Bt. 1 billion. The ex-ante calculations of economic rates of re- turn (ERR) for projects financed by IFCT in the past have varied from 13% to 80%; the weighted average ERR for the sub-projects financed under the last Bank loan being around 46%. These projects are also expected to yield satis- factory financial rates of return (between 12% and 42%, with the weighted average being around 19%). Sub-projects to be financed under the proposed loans are expected to yield similar returns. IFCT has played an active role in promoting both capital market development (paragraph 6.06) and industrial investment (paragraph 6.07). It is continuing to step up its efforts in these directions. IFCT's performance in pursuing the development strategy enunciated by it at the time of the last Bank loan has, on balance, been creditable. xii. In view of IFCT's performance over the last two years in efficiently allocating resources and playing a significantly stepped-up developmental role in encouraging sound industrial investment, the proposed loan is justified. It would allow IFCT to continue pursuing the successful course presently char- ted and would continue the process of internal institution-building to which the Bank has, so far, made a significant contribution.  - v xiii. At negotiations with IFCT for the proposed loan, the following matters were discussed and agreed upon: (a) an increase in IFCT's lending rate to 12.5% before July 1, 1977 (paragraph 3.12); (b) appointment of the Deputy General Manager (paragraph 4.04); (c) an individual sub-loan free limit of US$750,000 and an aggregate free limit of US$10 million (paragraph 4.12); (d) maintaining the debt/equity limit at 6:1 (paragraph 5.05); and (e) a sub-loan size limit of US$3.0 million (paragraph 8.07).   THAILAND APPRAISAL OF THE INDUSTRIAL FINANCE CORPORATION OF THAILAND I. INTRODUCTION 1.01 The Industrial Finance Corporation of Thailand (IFCT) has, with the support of the Government, requested further Bank assistance for fi- nancing capital goods imports to expand the productive capacity of the Thai industrial sector. This report recommends a Bank loan of US$25 mil- lion to IFCT with the guarantee of the Kingdom of Thailand. The loan would be made on standard terms and conditions applicable to DFC loans and a flex- ible amortization schedule would be applied. 1.02 IFCT was established in 1959, under a special legislative act, to encourage private investment in indigenous productive enterprises. It was re-organized in 1963 and its capital base restructured with the assistance of the Bank and IFC. At that time the Bank made its first loan of US$2.5 million and IFC bought 4,000 shares (at a cost of US$193,108) in IFCT. 1/ Between 1963-70 IFCT was in the doldrums; it suffered from internal manage- ment problems, an uncompetitive posture vis-a-vis commercial banks and a clientele generally unwilling to accept the scrutiny of rigorous project appraisal or to assume the foreign exchange risk on external lines of credit on-lent through IFCT. Consequently, less than US$1.05 million of the first Bank loan was utilized and the balance cancelled. The loan has now been fully repaid. 1.03 Since 1970 there has been a noticeable and continuing improvement in IFCT's performance and its stature in the Thai financial community. Its project appraisal procedures are gradually being accepted and its increased level of operations has widened the number of investment decisions being subjected to tests of financial and economic rationality. A second Bank loan to IFCT for US$12.0 million was made in June 1974; its rate of commit- ment and disbursement has exceeded earlier expectations. In addition to Bank financing IFCT has received loans from other foreign sources including the Asian Development Bank (ADB), Kreditanstalt fur Wiederaufbau (KfW), the Export-Import Bank of Japan (EXIM) and the Japanese and Danish Governments. II. THE THAI ECONOMY 21 2.01 Aided by rapidly rising commodity prices and booming international demand the Thai economy achieved a real growth rate of over 10% in 1973. In 1/ In December 1970 IFC bought a further 4,000 shares under a one-for-one rights issue. All 8,000 shares were sold to the Mitsui Bank in February 1976 for US$640,000. 2/ The latest Bank Economic Report on Thailand (No. 924-TH, dated Novem- ber 14, 1975) provides a recent review of developments in the economy and of its prospects. An updating Economic Mission visited Thailand in June 1976 and its report will be issued in the coming months.  - 2 - 1974 poor weather and worsening terms of trade coupled with recession in its major export markets caused the growth rate to dip to 3.2%. Since then the economy has begun to show signs o01 recovery and has responded well to stimu- lative government policies despite continued weakness in the external sector. Although an uncertain political climate co-Ln;, t: prevrai, a respectable real growth rate of 6.4% was registered in 1975. With the abatement of in- flation (which dropped from 24% in 1974 to 4% in 1975), good weather, qui- escence on the labor front and the absorption of increased energy costs, agricultural and industrial production led recovery. Nevertheless world- wide recession and exaggerated perceptions of instability on the part of the business community dampened private investment and the inflow of foreign capital. The latter, coupled with lower export prices and volumes, led to Thailand's incurring its first balance of payment deficit since 1971 and a resultant decline in its international reserves of about US$100 million. 2.02 While prospects for continued recovery in 1976-77 appear reasonably bright it is expected that the balance-of-payments situation will be tight through the rest of this decade. At this stage, an insufficiency of needed foreign exchange resources could effectively brake medium and long-term eco- nomic growth. To avert this prospect the Thai government is (i) actively stepping up its efforts to attract the inflow of official assistance; and (ii) proceeding to restore stability, thus encouraging the resumption of pri- vate capital flows at previous levels. Annex 1 provides a more detailed account of relevant economic characteristics and recent developments. III. THE INDUSTRIAL AND FINANCIAL SECTORS A. The Industrial Sector 3.01 Economic Role and Growtlh: Industry (manuifacturing, mining and construction) constitutes the second largest sector of economic activity. In 1975 it accounted for: 26% of GDP (at 1962 constant prices); about 25% of total investment; and 7% of tot:al employment. Manufacturing alone ac- counted for over 20% of GDP in 1975 and for about 5% of the total labor force. The characteristics of the sector are outlined in Annex 2. In 1960 manufacturing output accounted for less than 12% of GDP and was oriented almost entirely toward producing basic consumer goods. With substantial opportunities for import substitution and an environment which encouraged investment, manufacturing output grew at an-annual average rate of around 12% between 1960-69. A sharp shift in orientation towards exports led manufactur- ing output to grow at an even higher rate of 14% between 1970-73. At the end of 1969 manufactured exports amounted to barely US$34 million or about 4.8% of total merchandise exports and 3.5% of total value-added in manufacturing. By 1974 they amounted to US$367 million, accounting for 14.6% of total exports and 15.6% of total value-added in rmanufacturing, having grown at a rate three times faster than that of the sector. By size, the most prominent industries are food processing, beverages, tobacco, textiles, apparel, transport equipment and petroleum refining; together they account for 70% of value-added in the sector. Manufacturing industries remain heavily concentrated around Bangkok  and the Government's measures to encourage plant location in other areas have not met with much success (Annex 2, paragraphs 10-11). 3.02 Industrial Employment and Small Industry Development: At the end of 1974 the industrial sector employed about 1.4 million persons or 7.9% of a total labor force estimated at 17.7 million. Of these about 0.9 million, 1/ or about 5% of the labor force, were employed in the manufacturing sector (Annex 2, paragraphs 8-9). This represents a relatively low level of labor absorption for a sector which accounts for over 17% of total investment and 20% of GDP. Manufacturing employment is presently concentrated in very small cottage type enterprises on the one hand and in large firms employing more than 100 workers on the other. Investment costs per job in the very small cottage units are low but most such units are generally inefficient and re- latively unproductive. Larger firms, on the other hand, absorb considerable quantities of capital in generating employment (an estimated average fixed cost of US$7,500 per job). 2/ Consequently there are distinct limitations on their role in significantly expanding productive job opportunities along lines commensurate with Thailand's factor endowments. 3.03 At present, there are few small-medium industrial units (SMI) employ- ing between 10-100 workers to fill the gap between these two extremes; such units probably account for under 5% of the total number of enterprises, 10% of employment and 15% of value-added in the industrial sector. The Govern- ment generally recognizes that SMIs provide a promising vehicle for expand- ing and dispersing investment and employment opportunities at a reasonable capital cost without necessarily sacrificing the objectives of productivity, efficiency and competitiveness. However, very little accurate information is available on the key economic ratios of SMI (i.e. their use of capital and labor) or about their capacity utilization levels, age of their plant and equipment or their financing and technical assistance needs. Moreover, exist- ing programs aimed at assisting SMI have not been very effective. This situ- ation and the Government's commitment to SMI development over the Fourth Plan period (1977-81) have led IFCT to take the initiative in launching a study which would explore the dimensions of the SMI assistance problem and evaluate alternative approaches to tackling it. The study will involve the participa- tion of various government agencies and academic institutions and is intended to result in the development of a project package which would be suitable for financing by the Bank (Annex 2, paragraph 7). 3.04 Industrialization Strategy: Thai industrialization, so far, has not been based on the pursuit of a conscious, well articulated strategy. Its 1/ Of this about 0.6 million are employed in the Bangkok area with manufacturing providing about a third of total urban employment opportunities. Of this employment nearly a half is provided by firms with more than 100 workers. 2/ Most of the investments promoted by the BOT had investment costs per worker of around US$12,500 comparable to costs of job crea- tion in similar projects in neighboring countries in S.E. Asia.  - 4 - absence has not impeded industrial growth but it has resulted in Government's not anticipating the side effects of investment decisions on industrial con- centration, income distribution, labor absorption and patterns of foreign ownership and control. Moreover, government agencies have not had a broad frame of reference in responding to pressures applied by various fractionated lobbies resulting in frequent and uncoordinated adjustments of policy in- struments viz. taxes, tariffs and preferential access to credit. In several instances such adjustments have had effects contrary to those intended on investment, output, location and factor use. The radical political shift brought about in 1973 has compelled succeeding governments to take greater cognizance of the consequences of ad-hoc intervention in encouraging in- dustrial development. Recent measures (on foreign investment, industrial location and employment generation), provide evidence of the pressures on Government to respond. Many of these measures have been conceived in haste and some have been rendered ineffective by the inevitable need for the Gov- ernment to compromise. A kaleidoscopic political situation over the past two years has also made it difficult for successive governments to focus on establishing clear cut priorities and to formulate and pursue a strategy for industrial development acceptable to all interests. There are, however, indications of slow but distinct progress in this direction. Flagging invest- ment levels and low investor confidence have already activated the serious consideration of various strategic options. The exhaustion of new settlement areas and the limits placed on the agricultural sector's capacity to continue absorbing greater quantities of labor have caused attention to be focussed on employment absorption potential in the industrial sector. In addition, the distant possibility of regional economic co-operation in basic industry pro- jects (steel, fertilizer) has impressed upon Government the urgency of developing a sound strategic posture. Under the circumstances described above, the importance of having investment decisions subjected to tests of financial and economic acceptability by institutions such as IFCT cannot be overstated. 3.05 Industrial Protection and Promotion: As elsewhere, industrial investment in Thailand is influenced by: (i) tariff and protection poli- cies; 1/ and (ii) special fiscal incentives 2/ provided by the Government and applied on a case-by-case basis by the BOI. A recent analysis of the impact of existing protection and incentive policies suggests that, in general, these policies have not resulted in inefficient high cost production across the board. However, they have inadvertently resulted in favoring import sub- stitution with higher "effective protection" being provided to industries producing for the domestic market than to those producing for export markets. Success in increasing manufactured exports has thus been achieved in spite of rather than because of tax and tariff policies. Moreover, with frequent adjustments having been made in the tariff structure, significant variations in protection levels have resulted within and between various industry groups for which there is no underlying rationale. Also, in certain industries the Government has limited entry into the market to a few firms and intervened 1/ Annex 2, paragraphs 17-18. 2/ Annex 2, paragraph 19.  - 5 - through direct price controls to prevent excessive profit-taking resulting in realized levels of protection being much lower than the protection poten- tially accorded. 3.06 The present uncoordinated application of tariffs, controls on im- ports, exports and prices, registration and licensing policies and the case- by-case provision of incentives has resulted in an unwieldy approach to encouraging efficient industrial growth with some incentives being offset by the impact of others. It has also resulted in an immense administrative bur- den on BOI. Accordingly the Bank has, in the context of its continuing dialogue with the Government on economic matters and sector policies, recom- mended a complementary two-part incentive strategy based on: (i) a general system of non-discretionary incentives based on tariffs and tax exemptions which would be applied to broad classes of industries; and (ii) a detailed discretionary review of only major projects in basic industries. These recommendations are expected to be taken up again with the newly elected Government once it has had the opportunity to review and react to them. 3.07 Given the BOI's very broad scope of discretion and the importance of sound decision-making on its part the Bank has recommended that the in- ternal evaluation capabilities of BOI be strengthened and its focus shifted from evaluating individual projects to establishing priorities for major sub- sectors. The Government and BOI readily accept the need for such measures and, as a first step, have begun exploring avenues for grant assistance to finance a program of broad studies which would focus on issues influencing co-ordinated industrial development and on improved BOI operations (Annex 2, paragraph 20). The Government's commitment to carrying out such studies has been reaffirmed in an undertaking to the Bank included in the Guarantee Agreement for the proposed loan. 3.08 Investment in Manufacturing: After an uninterrupted trend of in- creases in manufacturing investment, estimates for 1975 suggest that it declined for the first time since 1971. In current prices investment in manufacturing has grown from Bt. 3.1 billion in 1967 to over Bt. 10 billion (US$500 million) in 1975 with roughly 90% of that investment going toward the purchase of machinery and equipment by the private sector. Since 1967 the share of manufacturing in gross fixed capital formation has risen from 12.5% to over 20% in 1974 (dipping to around 18% in 1975); it has tradition- ally accounted for about one-third of total annual expenditures on machinery and equipment. As investment and application levels to the BOI have declined substantially in 1975 it is unlikely that expenditures on manufacturing in- vestments will exceed Bt. 20 billion (US$1 billion) over the two-year period 1976-77. Commitments, however, are expected to pick up in the latter half of 1976 and may total about Bt. 25-28 billion over the two-year period 1977-78. The proposed loan would account for between 1.7% to 2% of this amount and would contribute toward the provision of needed long-term official assistance resources.  - 6 - B. The Financial Sector 3.09 Overview: The Thai financial system is still in the early stages of development. Its institutional structure and characteristics are de- scribed in Annex 3. Total assets oi- the system stood at Bt. 156 billion (US$7.8 billion) as at October 31, :L975 of which the banking system accounted for Bt. 110 billion. The organized financial sector has traditionally been dominated by sixteen Thai-owned commercial banks; between them they account for 94% of total deposits, 90% of all advances and 91% of the banking system's assets. While foreign banks have been allowed to establish themselves their role has been sharply limited (by restrictions on the number of branches they are allowed to establish) to dealing largely with multinational companies and external sector transactions. ALs is characteristic of other sectors in the Thai economy the financial system is largely privately owned. However, the Government owns the second largest commercial bank, the country' s only savings bank and most of the specialized financial institutions which have been created to channel resources into priority sectors. The Government also plays a prominent and direct role in influencing financial system behavior and development through the Bank of Thailand and the Ministry of Finance. 3.10 Financial Sector Development: The growth of Thai financial institu- tions and markets has not kept pace with: (a) the diverse demands of a domestic economy increasing in its sophistication; and (b) the pressing need for better articulation with an increasingly complex international financial system. The recent emergence and rapid growth of finance companies in the short span of five years is one indicator of the extent to which intermediation needs exceed the ability of the present financial system to meet them. The findings of a recent survey, which suggest that over 80% of the credit needs of the rural sector are met by the "unorganized" system, is another. At present, the financial system does not provide sufficiently diverse opportunities for attracting financial savings in instruments with maturities of over a year. Excessively heavy reliance is placed on deposits with commercial banks and the Government Savings Bank (GSB). The private sector, and particularly the small saver, has little direct access to investing in instruments which meet different preferences for various cormbinations of risk, yield and liquidity. Thus a lack of options results in funds flowing almost exclusively into the commercial banking system, the unorganized market and, to a much lesser extent, into Government securities through GSB. This pattern of mobiliza- tion also affects the manner in which funds are allocated. Most lending from commercial banks is (with an unjjustifiably large spread) to estab- lished borrowers in the industrial and trade sectors on the basis of secu- rity and for a short term. With government pressure a very small proportion of these funds has been made available for long-term industrial lending (through the purchase of IFCT debentures) and agricultural lending (through deposits with BAAC). Although financE companies have introduced an element of diversity into the system they cater mainly to large savers but again through a quasi-deposit device and lend to generally the same clientele as commercial banks. In fact, finance company behavior is influenced largely by commercial banks who are their principal shareholders. As a result these companies have concentrated on short-term operations and largely ignored long-term financing and merchant banking operations.  - 7 - 3.11 Policy Measures: The pace of future financial system development in a desirable direction depends on: (i) reduction of the extent to which commercial banks presently dominate all forms of intermediation; and (ii) emphasis on the growth of a capital market and of long-term financing institutions which would facilitate such growth. Policy measures which would achieve the first objective include: eliminating the exemption from income tax of interest income from commercial bank deposits; encouraging the entry of new domestic commercial banks; discouraging cartelization of the banking sector; and removing ceilings on all interest rates 1/ and allow- ing them to be determined by the play of market forces. The second objec- tive is, to some extent, being achieved through support for the newly es- tablished Securities Exchange of Thailand (SET) and for the Mutual Fund Co. being established by IFCT. However, policy measures are also needed to induce: a greater number of corporations to publicly float their issues; establishment of liquidity mechanisms to facilitate their underwriting and purchase; and development of the insurance and pension fund industries which, in turn, could spur development of the capital market. Moreover, government securities of varying kinds should be offered publicly and institutions such as IFCT and BAAC should be encouraged to raise funds directly from the public rather than mobilize them secondarily. On the other side of the coin the possibility of expanding GSB's role in lending to the rural communities from which it col- lects savings should be carefully considered. 3.12 Interest Rates: The interest rate structure in Thailand is governed by the commercial banks' prime lending rate but its movement is constrained by ceiling rates (15% for advances and 8% for deposits) set by the Bank of Thailand (Annex 3, paragraphs 30-34). The prime rate (which has fluctuated around 12% for the past ten years) was, until 1975, established by the inter- bank agreement of the Thai Bankers' Association. Since early 1975, individ- ual banks have been setting their own prime rates. The deposit rate, on the other hand, has been 5% for 3-6 month deposits, 6% for 6-12 month deposits and 7% for deposits of over 12 months until 1975 when all deposit rates were increased by 1%. Between 1966-72, with an inflation rate averaging about 2-3%, real rates of lending were in the region of 9-10% while real yields on savings were an average 3-4%. In 1973-74, the rate of inflation peaked at 24% before climbing down to 4% in 1975. resulting in a short period during which real yields on loans and deposits were highly negative. There was no evidence, however, of financial savings being significantly affected as a result. With inflation expected to level off at around 6% through the remain- der of this decade real yields on savings will still be positive although somewhat lower than pre-1973 unless rates are moved upwards marginally. IFCT had, between 1966-73, generally maintained its rate at around 9.5%. In 1974 it moved its foreign currency rate up to 10.5% to cover the cost of providing for the foreign exchange risk; in May 1976 it increased its standard lending rate to 12.0%. Taking into account the rising cost of its funds IFCT has 1/ These measures were recommended by the IMF in 1973. Legislation is now being proposed to tax interest income from Bank deposits at a flat rate of 10%. The National Assembly is considering the laws drafted and if passed such a tax would become effective by October 1, 1976.  - 8 - undertaken to revise its rates upward to 12.5% 1/ by July 1, 1977. This would result in sub-borrowers paying a real rate of around 6% to 6.5% over the commitment period of the loan and beyond. IV. IFCT - INSTI:TUTIONAL CHARACTERISTICS 4.01 Charter and Ownership. IFCT was established under a special legislative Act 2/ as a privately owned corporation. Its ownership was di- vided between domestic and foreign shareholders with the latter (including IFC) accounting for 47.4% of paid-in share capital as of December 31, 1975 (Annex 4). Commercial banks accounted for nearly 69% of the total share- holdings 3/ with the government-owned Krung Thai Bank being the largest single shareholder (accounting for 16.4% of outstanding shares). Other financial institutions accounted for a further 16.1% of the shareholding leaving a balance of only 14.9% which was owned by non-financial companies (10.3%) and private individuals (4.6%). IFCT's initial share capital of Bt. 6.1 million has been increased four times and amounted to Bt. 150 mil- lion as at end-FY75. Share capital was last increased by Bt. 50 million in September 1973; later this year, IFCT proposes to increase it again by Bt. 100 million. Although privately-owned, IFCT enjoys a close relationship with the Government at policy-making levels; the Chairman of the Board is usually the government appointed director on IFCT's Board, its General Managers have, in the past, been recruited from the Government/BOT hierar- chies, and an observer from the Ministry of Finance attends all Board meetings to provide the government point of view on IFCT's investments. 4.02 Board of Directors: IFCT has a 10-member Board which includes its General Manager (Annex 5). Three of its directors represent foreign shareholders, one represents the Government and the remaining six represent domestic shareholders. The present Board strongly reflects the predominance of financial institutions in IFCT's ownership. The banking background of nine of its directors 4/ gives the Board a fairly conservative complexion although it has the advantage of the Board's being thoroughly conversant with the nature of IFCT's business and clientele. As opportunities arise in the 1/ IFCT's borrowers do not bear the foreign exchange risk; it is shared by the Government and IFCT. 2/ The IFCT Act of 1959. It has since been amended in 1962, 1963, and 1967. 3/ With the recent sale of IFC's shareholding to the Mitsui Bank in February 1976 the commercial banks' share of ownership rose to 74.3%. 4/ One is an industrialist.  -9- future for diversifying IFCT ownership, a conscious effort should be made to widen representation on the Board in terms of directors' professions, occupations, experience and educational backgrounds. The present Chairman, Khun Sommai Hoontrakool, plays an active role in guiding IFCT's affairs and emphasizing its developmental role. Previously General Manager of IFCT for two years Khun Sommai was appointed Minister of Finance in the transition government of Premier Sanya Dhamasakdi. His ability and dynamism are a distinct asset to IFCT. 4.03 The Board normally meets monthly to review policy matters and to approve loans which exceed 5% of IFCT's net worth. 1/ Loans of a smaller amount are approved by an Executive Committee appointed by the Board which comprises four members: the Chairman, General Manager and two other directors, one of whom represents foreign shareholders. This Committee meets weekly both to approve loans within its authority and to screen larger loans before their submission to the full Board. 4.04 Management: IFCT's present management, headed by the General Manager, also includes two department managers and two deputy managers. One of the department managers, recently appointed to head the newly estab- lished Research and Planning Department (RPD), is a well qualified and able individual who is expected to lend strength to the management team. The departure of IFCT's Assistant General Manager (concurrently manager of the Projects Department) in January 1976 has left a temporary void which IFCT is actively attempting to fill by recruiting a Deputy General Manager (DGM). This position is of considerable importance in adding depth to, and balanc- ing executive capabilities in, the present management. This matter was dis- cussed by the Bank and IFCT at negotiations and agreement was reached that the DGM position would be filled by September 30, 1976 at the latest. 4.05 At the department level, the manager of the Operations Department (OD) is, at present, also managing the Projects Department (DP). He is ably assisted by two newly appointed deputy managers in each of these Departments. These positions have been created as a stop-gap measure until the deputies have gained sufficient experience to be promoted to managerial rank. The Administration Department (AD) Manager's position has remained vacant for some time and the workload has been handled directly by the General Manager. The appointment of a manager to this position has not been of urgent priority especially as excellent divisional support has been available. However, the workload has now increased significantly and such an appointment is being given active consideration. At the divisional level three experienced division chiefs in key positions have recently been promoted or transferred. Their replacements are capable, but need to acquire further experience. Sufficient strength exists within the management structure, however, to absorb the addi- tional load until they do. 1/ This loan limit was Bt. 12.7 million as of December 31, 1975. In view of the impending increase in IFCT's share capital the Board has passed a resolution setting an absolute limit of Bt. 15 million for loans which could be approved by the Executive Committee.  10 - 4.C6 Organization: Major organizational changes were made by IFCT in February 1976 which, to a large extent, reflected the Bank's previous rec- ommendations. As depicted in Chart No. 15863 these included: (a) the creation of RPD; (b) the restructuring of divisional activity in PD; (c) the (temporary) creation of two deputy manager positions (paragraph 4.05); and (d) the establishment of branch offices (paragraph 4.09). RPD's departmental functions cover: (i) long-range corporate planning; (ii) management support by way oi- policy and position papers on various issues; (iii) economic and industry/financial sector and project analysis; (iv) project planning and promotiLon; and (v) dealing with the overall in- formation requirements of external creditor agencies and management. The department is not fully staffed a1S yet but recruitment is being actively undertaken. Although RPD is a new addition to IFCT's organization it has, principally through its manager, begun playing an active and vital role in formulating policy options for IFCT's management. Staff in PD's three functional divisions (engineering, financial analysis and market analysis) have been regrouped into complete appraisal teams divided between three divisions which are specialized along sector/industry lines. This change was brought about to effect closer coordination in appraisal work and to develop greater appraisal team expertise in understanding the characteris- tics and problems of firms in particular industries. The internal struc- tures of OD (which is responsible for supervision) and AD have remained essentially intact. IFCT's present organization is sound. It incorporates functions which were previously not being carried out in IFCT and is expected to result in both greater operational efficiency and increased job satisfac- tion for IFCT staff. 4.07 Staffing: At the end olf FY75 IFCT had a total staff complement of 163 representing a net increase of 13 staff during the year. Profes- sional staff accounted for 86 or just over half the total. The two opera- tional departments accounted for 66 staff members (or just over 40% of the total staff employed). IFCT staff, taken as a whole, had a good mix of di- verse professional backgrounds and were reasonably distributed by age; how- ever, over the last two years the age distribution has been skewed down- wards by the influx of recent grad'uates into IFCT between 1974-75. Staff are generally of good calibre although the proportion of experienced staff, particularly in the operating departments, has been reduced. Staff turnover, traditionally quite high in the past, was much lower in 1974-75 with turnover in 1975 accounting for less than 4% of the average number of staff during the year. This stability is, to a significant extent, attributable to the lessen- ing capacity of the urban economy to absorb highly trained graduates and a slowdown in the number of new companies entering the financial sector. Nonetheless, part of the credit in stabilizing turnover at low levels is  - 11 - due to IFCT's efforts to ensure the competitiveness of its overall compen- sation package, the element of relatively greater job security and manage- ment's concerted attempts at maintaining high levels of motivation and job satisfaction. 4.08 Advisors: For the first time in its history, IFCT has completely shed its dependence on foreign advisors. Three foreign advisors completed their terms in 1975 and IFCT staff successfully absorbed their functions. One UNIDO-provided expert in chemical engineering completed his term in April 1976. IFCT has generally found its experience with advisors to have been beneficial and feels that the advisors have played a key role in both advis- ing ;7.nagement and developing IFCT staff to a level of reasonable institu- tic - self-sufficiency. 4.09 Training and Staff Development: IFCT now has a much greater pro- portion of new staff in PD and OD. With proportionately fewer experienced analysts to provide guidance, IFCT realizes that its continued reliance on "on-the-job" training is likely to result in a much longer period before new staff members become fully effective. Furthermore the need to provide training for older staff in newer project appraisal methods and techniques (particularly in market and economic analysis) is becoming more apparent. IFCT is, therefore, considering the possibility of providing formal training and planning staff development more systematically than it has done in the past. Attention is now being given to developing: (i) a policy/operations manual for internal use as a reference guide and for training purposes; (ii) training courses in various aspects of project appraisal with stress on economic evaluation; and (iii) courses in corporate financing aimed at upgrading IFCT staff capability to provide corporate finance advice to clients on capitalization, public flotation of shares, bonds or debentures, etc., so as to promote and develop a merchant banking aspect to IFCT's role. Management and the Chairman have begun planning a suitable internal training program geared to meet IFCT's needs. 4.10 Branch Offices: Following approval by its Board early in 1975, IFCT opened its first branch office at Haat Yai (in the South) in December 1975. In 1976, branch offices were opened in Khon Khaen (the. North East) and Lampang (the North). Launched as one-man offices, the branches' princi- pal function is to establish rapport with the local business community and acquaint it with IFCT's services. Building on that base IFCT plans to develop new business in regional centers. IFCT's approach to the establishment of its three branches has been cautious and sound; it has taken care in adequately laying the groundwork in each case by recruiting an experienced individual who knows the locality well and providing him with intensive training at the Head Office. The Haat Yai branch has, in its first two months of operation, been remarkably successful in identifying 19 new projects in the region (vs. three new applications to the Head Office in the same period). The other two branches have just been established and have yet to commence operations. 4.11 Policies and Procedures: IFCT's basic operating guidelines are set forth in a Statement of Operating Policies (Annex 6) agreed with the  - 12 - Bank. There have been no recent amendments to the policy statement. It was changed at the time of the last Bank loan to incorporate the revision of IFCT's debt/equity limit and its policies on sharing the foreign exchange risk with the Government. The statement is similar to that adopted by most DFCs associated with the World Bank Group. Its key features are: (i) a debt/equity limit of 6:1; (ii) an exposure liimit of 25% of its own net worth 1/ in any single enterprise; (iii) an equity investment limit of 10% of its net worth 2/ for any individual investment and an aggregate limit on all such investments equivalent to its own net worth; (iv) a lending "floor" of Bt. 1 million (US$50,000); (v) a limitation on IFCT's taking up more than 25% of the total outstanding shares issued by any single enterprise; (vi) a reserves policy which requires setting aside at least 30% of annual profits (25% as a bad debt reserve and 5% as legal reserves) until bad debt reserves total at least 20% of its outstanding portfolio 3/ and legal reserves are at least 10% of paid-in share capital. 4.12 Project Appraisal: The quality of IFCT's project appraisal work is satisfactory and has shown consistent improvement over the past two years. This is, in part, traceable to the influence of rigorous standards set by IFCT's previous advisors; the credit in responding to and maintaining such standards, however, belongs entirely to IFCT's staff. This achievement is especially notable in view of the rapidly increased workload 4/ in 1974 and 1975 and the fact that IFCT's borrowers are not prone to providing information, especially on financial aspects, too readily. Appraisal time generally varies between 2-6 months, the average being around 5 months largely because of problems with access to reliable information. The present quality of appraisal notwithstanding, there remains scope for continued improvement and for a reduction in processing time. With the last Bank loan IFCT began calculating economic rates of return for all projects for which sub-loans exceeded Bt. 10 million 5/ and/or the total project cost exceeded Bt. 30 million regardless of sub-loan amounts. IFCT is now expected to include the economic rates of return in all appraisals (except very small projects) as a 1/ The exposure limit covers the sum total of loans, guarantees, equity investments or preferred share/debenture holdings in any enterprise. As of December 31, 1975 this limit amounted to Bt. 63.33 million. 2/ This limit was Bt. 25.3 million as at December 31, 1975. 3/ As at December 31, 1975, reserves and provisions amounted to 7.8% of the outstanding portfolio. 4/ The number of projects appraised increased from 16 in FY73 to 44 in FY74 and 56 in FY75 while the number of staff increased from 20 to 29 in FY74 and further to only 31 in FY75. Man-months per appraisal declined from 15 in FY73 to 6.4 in FY75. 5/ This floor has now been lowered to Bt. 8 million.  - 13 - matter of course. With the entry of the Manager of RPD on the Investment Committee it is expected that the quality of economic analysis will improve further. A comparison of actual project performance with appraisal expecta- tions suggests that, in the past, IFCT's appraisals have tended to use some- what optimistic assumptions especially on capacity utilization, prices and markets. Continuous feed-back between appraisal and supervision work should be encouraged so that actual experience can influence judgements made during appraisal; closer supervisory control may need to be exercised to ensure that relatively new staff acquire the benefit of available experience. In view of the quality of IFCT's appraisals it was agreed, during negotiations, that the free limit would be increased to US$750,000 and the aggregate free limit to US$10 million under the proposed loan. 4.13 Project Follow-Up: IFCT has an exceptionally sound project super- vision system, with close follow-up being carried out during implementation and after commencement of commercial operations. Client/project performance is closely scrutinized with the frequency and intensity of scrutiny being stepped up in problem cases. Regular and thorough progress reports are pre- pared based on extensive reporting requirements and frequent field visits. Collection performance is regularly reviewed on an account-by-account basis and, when necessary, loans are rescheduled in a timely manner. The high quality of IFCT's supervision has been largely responsible for its arrears being kept under control (paragraph 5.08) and has earned IFCT the respect of many of its clients who have benefited from the advice received during the course of project follow-up. 4.14 Project Screening and Monitoring: Before appraisal, loan applica- tions are cursorily screened to establish prima facie viability and eligibi- lity for IFCT financing. With a much heavier project load than prior to 1973, IFCT s screening mechanism needs to be improved to ensure that time is not wasted unnecessarily at the appraisal stage. A review of the screen- ing report by a sub-Investment Committee, comprising the three managers of PD, RPD and OD (and including the chief legal officer), prior to its sub- mission to the General Manager for authorization to proceed with appraisal would be a useful introduction. After appraisal, project reports are re- viewed by the Investment Committee 1/ and often revised following such a review before going through the General Manager to the Executive Committee and the Board. 4.15 IFCT was among the first in a sample set of institutions to try out the Project Monitoring System being developed by the Bank on a limited number of its sub-projects. The results of that experiment were encouraging and IFCT is willing to adopt the system once it is refined. As a parallel 1/ The IC includes: the General Manager; the managers of OD, PD and RPD; the division chiefs in PD and OD; the Secretary and the Chief of the Legal Division.  - 14 - effort IFCT should consider regular evaluations of operating projects and determine whether experience has borne out appraisal expectations. 4.16 Procurement and Disbursements: IFCT's procurement procedures are designed to ensure that items financed by it are procured with due regard ;-r economy and efficiency. It generally requires borrowers to obtain at least three competitive quotations from different suppliers. These are carefully checked by PD whose technical scrutiny of the equipment procured and the competitiveness of its price is comprehensive and thorough. Dis- bursement procedures are also prudently conceived. IFCT ensures that the borrowers' own funds are applied first to project costs. Disbursements from sub-loan funds are generally staggered and are linked to the schedule of project implementation; they are only made against the submission of satis- factory documentation i.e. invoices, receipts or construction advances in the case of domestic currency disbursements and letters of credit or bills of lading for foreign currency disbursement. The procurement and disburse- ment procedures applied by IFCT satisfactorily comply with the requirements of the Bank. V. IFCT, OPERATIONS, FINANCES AND PORTFOLIO QUALITY 5.01 Lending Operations: A detailed analysis of IFCT's operations is presented in Annex 7. IFCT's level of loan approvals in FY74 and FY75 has considerably exceeded previous expectations. From an average level of around Bt. 150 million between FY70-73, net loan approvals have jumped to an annual average level of around Bt. 750 million between FY74-75 with approvals in those two years exceeding total approvals between FY60-73. Net approvals of nearly Bt. 786 million for 54 loans in FY75 brought total loan approvals since IFCT's inception to nearly Bt. 2.6 billion. As of December 31, 1975 IFCT had Bt. 1.34 billion outstanding in 146 loans to 120 borrowers. The ratio of domestic to foreign currency lending is about 40:60 representing a shift toward an increasing proportion of foreign currency financing 1/ from FY71 onwards. The average size of loan is around Bt. 13-14 million; however, this figure obscures the distinct differences between IFCT's hand- ful of large loan operations (which average Bt. 36 million in size) and its regular business (averaging around Bt. 8 million). 5.02 IFCT's loans generally have maturities averaging around 6 years. Grace and maturity periods are inclined to be somewhat short, reflecting IFCT's somewhat rigid approach to basing rescovery periods too strongly on cash flow projections without allowing sufficiently for margins of error. Lending 1/ As explained in Annex 7, paragraph 4, a sizeable portion of IFCT's foreign currency lending is in tied funds. The proposed Bank loan will enable IFCT to increase its foreign currency lending from about 60% to around 75% of total loan approvals in 1976-77.  - 15 - operations, reflecting the basic concentration of Thai industry, tend to be heavily focussed on investments in the Central Region. For reasons explained in Annex 2, paragraph 10 and Annex 7, paragraph 8, IFCT's concerted efforts at dispersing its lending operations have been thwarted by factors beyond its control. Nonetheless, management intends to step up such efforts through the establishment of branches and through the new project promotion section set up in RPD. The loan portfolio is reasonably well diversified by industry; four basic industries viz. food, textiles, chemicals and non-metallic minerals 1/ account for about 66% of total commitments between FY73-75. IFCT's lending operations also reflect the thrust toward export orientation in manufacturing which began in FY70. There is a fairly even split between new and expansion projects in IFCT's financing. One slightly disconcerting feature of IFCT's lending operations is the increasing number of applications being received for financing projects which are in a fairly late stage of development and in which IFCT's scope for exercising some influence over investment decisions is therefore restricted. 2/ This development has also concerned IFCT's Board which, in a recent resolution, instructed management to limit IFCT's financing of such operations to exceptional cases where clear justification existed for doing so. This action on the part of IFCT's Board is considered to be suffi- cient indication of the seriousness of IFCT's intent to curb such operations. 5.03 Equity Investments and Guarantees: After a four year period of relative inactivity IFCT approved 4 equity investments totalling Bt. 24.6 million (Annex 7,paragraph 11) in FY75. As of December 31, 1975 IFCT's equity investment portfolio stood at Bt. 8.2 million in four companies and undis- bursed commitments for equity investments amounted to Bt. 31.8 million. Guar- antee operations have never been of much significance since IFCT restricts the issue of guarantees to its borrowers to cover letters of credit, deben- ture repayments and payment of import duties. As of December 31, 1975 IFCT's outstanding guarantees stood at Bt. 59.7 million. Neither equity investments nor guarantee operations are likely to expand significantly in the near future. 3/ 5.04 Financial Position and Performance: Annex 8 provides full details on IFCT's financial position and performance; summarized balance sheets and income statements for the period FY71-75 are shown in Annex 8, Tables 1 and 2 respectively. On December 31, 1975 IFCT's total assets stood at Bt. 1.48 1/ These industries are also the most prominent in the mnaufacturing sector (Annex 2, paragraph 3). 2/ Because of intensive sub-project review procedures there have been very few instances in which IBRD funds have been used to finance such opera- tions. In each such instance IFCT was requested to provide special justification. 3/ The reasons are provided in Annex 7, paragraphs 15 and 17.  - 16 - billion (US$74 million) having increased by over 37% during the year, a slight dip from the 40% growth recorded in 1974. Rapid asset growth over the past two years reflects the stepped up level of long-term lending opera- tions, the proportion of outstanding long-term loans in the asset base rising from 78% to 91% between FY73 and FY75 1/. Although IFCT's equity portfolio also grew dramatically in FY75 (from Bt. 0.4 million to Bt. 8.2 million) the size of the portfolio is still too small to have any significant impact on the structure of the asset base. 5.05 The growth of long-term Loan assets was financed almost entirely by a concomitant growth in long-term debt, particularly foreign debt. Where- as IFCT's long-term debt grew by an average of 16% between FY70-73 the growth rate jumped to an average 47% in FY74-75 representing very rapid draw downs on lines of credit provided by the Bank, ADB and EXIM. While the outstanding long-term debt increased by 115% between FY73 and FY75 (from Bt. 0.53 billion to Bt. 1.15 billion), IFCT's equity grew by only 23% (from Bt. 205 million to Bt. 253 million), the growth being accounted for by additions to reserves. As a result IFCT's debt/equity ratio rose from 2.9:1 in FY73 to 4.8:1 at end FY75, still well within the ceiling, of 6:1 established under the loan agreement for the last Bank loan. IFCT's liquidity position also remains sound, the current ratio being 1.7 in FY75. W'ith its large level of undisbursed com- mitments (Bt. 320.4 million at end FY75) and the inflow of funds from its recent Bt. 150 million debenture issue, IFCT would exceed the 6:1 debt/equity limit by the third quarter of FY76. To avert this possibility IFCT is pro- ceeding with an equity issue of Bt. 100 million later this year, part of which it expects to float publicly through underwriters. As of July 31, 1976 Bt. 55 million (which had been allocated to existing shareholders, IFCT employees and to the Mutual Fund Co.) had been subscribed and paid-in. On the advice of its underwriters IFCT has decided to float the remaining BT. 45 million to the general public in December 1976 and the issue is expected to be fully paid- in by January 1977. The arrangements being entered into by IFCT with its under- writers are satisfactory. IFCT's decision to float 45% of its capital issue publicly has exceeded the Bank's earlier expectations. It should contribute significantly to widening IFCT's ownership base and toward increasing the sup- ply of securities in an embryonic capital market. On the basis of IFCT's pro- jections an increase in the present debt/equity limit of 6:1 is not considered necessary at this time; it was agreed at negotiations that this limit would be maintained for the present. 5.06 The booming volume of operations has had a salutary impact on IFCT's financial performance. Net income for FY75 was Bt. 38.3 million representing a 42% increase over the previous year; it has tripled from FY71 levels. Income growth is attributable entirely to an increase in the portfolio with increased interest charges being offset by increased financial expenses resulting in a constant gross spread. Administrative expenses have been maintained at the historical level of 1.5% of average total assets. Although IFCT's profit levels have increased, as a percentage of average total assets, net income has remained relatively constant at about 3% over the last three years. Owing to higher leverage, however, returns to aver- age equity have risen from around 12.5% to 16.1% in FY75 allowing IFCT to 1/ The Baht value of long-term loans increased from Bt. 601.1 million in FY73 to Bt. 1,342.6 million in FY75.  - 17 - raise its dividend from 9.5% in FY74 to 10.0% in FY75. In anticipation of public trading of its shares over the medium term, IFCT hopes to gradually increase its dividends to around 12.0% by FY79. Judging by competing issues in the capital market even a 12% dividend is likely to be too low to attract active interest in IFCT's shares on the part of small non-institutional in- vestors in the immediate future. 1/ 5.07 Foreign Exchange Risk: The relatively low level of IFCT's foreign currency lending operations prior to FY74 was attributable, in part, to bor- rowers being unwilling to accept a foreign exchange risk. The Baht is fully convertible and borrowers can normally borrow in Baht and swap for foreign currencies in spot transactions without incurring any risk. In March 1974, a Foreign Exchange Risk Agreement was signed between the Ministry of Finance and IFCT whereby, without being totally relieved of possible losses as a result of foreign currency realignments, IFCT could cover such losses without sudden adverse effects on its finances. Details of the agreement and the mandatory foreign exchange risk provisions which IFCT now has to make are provided in Annex 8, paragraph 9. 5.08 Portfolio Quality: IFCT's loan, equity investment and guarantee portfolios are of sound quality. Arrears (principal and interest) on the loan portfolio, at the end of FY75, amounted to Bt. 27.6 million (or 2% of the outstanding portfolio) for the accounts of 18 client companies. The principal outstanding affected by overdue accounts amounted to Bt. 149.2 million or 11% of the outstanding portfolio. In proportionate terms both arrears and principal affected have increased over FY74 levels when they were 1.1% and 6% of the loan portfolio respectively. This reflects more the temporary effects of an economic downturn, which has affected a large number of manufacturing companies (especially in export industries e.g. tapioca and textiles), rather than being indicative of a structural deter- ioration in portfolio quality. Roughly 55% of overdues are accounted for by two companies (both their accounts being more than one year overdue). 2/ IFCT's equity portfolio is generally sound; two of its investments were in companies which had not begun operating profitably until 1973. However, they have now turned the corner and their prospects for continued profitability are encouraging. Of its guarantees issued for eight companies, one (for a 1/ IFCT's shares are not publicly traded at present. Against a par value of Bt. 1,000 the book value of an IFCT share was Bt. 1,689 at end FY75. IFC sold its shares to Mitsui Bank under a private arrangement in February 1976 at Bt. 1,600 per share. 2/ One of these companies faces temporary market acceptance difficulties with a new product. The other (a deep sea fishing company) has had unforeseen mishaps with its vessels but is now operating profitably and gradually paying off its accounts. In both instances IFCT has withheld account restructuring so as to pressure these companies to take necessary actions in improving their financial performance. On April 7, 1976 IFCT informed the Bank of actions taken to resolve the problems faced by the first company. These actions are expected to result in a significant improvement in IFCT's arrearages position.  - 18 - cmipany now in liquidation) was in default for a balance of Bt. 1.2 million or 2% of the outstanding guarantee portfolio. IFCT has made sufficiently prudent provisions for losses on doubtful accounts based on a thorough L,view of each account. The arrears position is analysed in depth in Annex 9. 5.09 Audit: IFCT's auditors - Na. Thalang & Co. - are associated with the Sycip, Gorres & Velayo (SGV) Group and have audited its accounts since 1972. Their reports are thorough and satisfactorily meet the Bank's require- ments. IFCT's accounts have always been certified without qualification. VI. IFCT'S DEVELOPMENTAL IMPACT AND ROLE 6.01 Overall Impact: IFCT remains the only specialized long-term invest- ment financing institution in Thailand. Roughly 80% of its commitments are channelled to the manufacturing sector and, since 1970, increasingly to medium- large plants oriented toward export production. Its annual lending volume (disbursements) which, prior to 1973, represented a very small proportion of total private sector investment in manufacturing (averaging 2.2% between 1970-73) nearly doubled to an average 4.1% in FY74 and FY75. With disburse- ments likely to increase substantial:Ly in the future, as a result of much higher recent commitment levels, this share is expected to rise to around 6% in FY76-77. However, because IFCT's financing covered a relatively small proportion of total project cost, its influence was exerted over a larger portion of total private investment in manufacturing (estimated at around 25%) especially between FY74-75. Somewhat: paradoxically, IFCT's lending operations have been rising while overall investment levels have been falling. To a large extent this reflects IFCT's willingness to take calculated risks in the interests of medium and long-term development at a time when other financial institutions are retrenching and approaching investments with a cautious wait-and-see attitude in a climate of general uncertainty over the future. 6.02 The 95 project loans approved by IFCT in FY74 and FY75 (which account for over half its cumulative operations since 1960) involved a total investment of Bt. 6.4 billion. On completion, these projects are expected to generate about 24,500 additional jobs 1/ resulting in an incremental annual payroll of Bt. 430 million. In terms of output these projects are expected to result in additional annual sales of Bt. 13.7 billion and incremental value-added of Bt. 2.54 billion; they are also expected to result in net annual foreign exchange earnings/savings of nearly Bt. 1 billion. 6.03 Efficiency of Investments: Economic rates of return were calculated (ex ante) for 45 of the 95 projects financed during FY74-75; they varied from 13% to 80%. Financial rates of return generally ranged between 12-42%. The distribution of internal economic and financial rates of return for projects financed by IFCT during FY74 and FY75 are shown in the table below: 1/ By comparison the annual rate of employment creation in the manufacturing sector is expected to be around 21,000 jobs per year. IFCT's projects on average take about 2 years to complete.  - 19 - Distribution of Rates of Return on IFCT's Projects 1974 1975 Rates of Return ERR /1 FRR /2 ERR /1 FRR /2 Below 10% - - 10%-19% 2 11 6 27 20%-39% 9 28 21 26 40% or over 2 2 5 1 Total No. of Projects 13 41 32 54 /1 I1CT calculates economic rates of return only for projects in which IFCT's sub-loan exceeds Bt. 8 million or the total project cost exceeds Bt. 30 million. /2 Financial rates of return are calculated for all projects and are generally understated. The rates of return calculated for these projects were based on best possible estimates at the time of sub-project appraisal by IFCT. These estimates are generally in line with ex post calculations carried out for a limited sample of projects at the time of appraisal of the last Bank loan to IFCT. 6.04 Resource Allocation: In terms of ensuring, to the extent possi- ble, the allocation of resources to sound productive investments through its appraisal process, the figures above suggest that IFCT is performing cre- ditably. Its financing in FY74-75 has resulted in some concentration (to varying degrees) of investment both geographically (in Bangkok and the Central Region) and industrially (in food processing, textiles, chemicals and non-metallic minerals). By industry branch such concentra- tion, however, has been generally in accord with the investment priori- ties of the BOI. In some instances IFCT has played a significant role in the planned restructuring of an industry (e.g. tapioca). IFCT has also been venturesome in the financing of projects which result in the intro- duction of new product lines and technology. The continued concentration of investment in the Central Region is indicative of IFCT's inability to singlehandedly redress the regional investment imbalance. Moreover the concentration of nearly all IFCT's large loans for projects in the Bangkok area tends to distort the picture somewhat. Adjusting for such loans, a discernible shift of investment to other regions becomes apparent; however, the process of achieving significant changes in this direction is likely to remain a long and slow one. 6.05 Long-Term Resource Mobilization: Between FY74-75 IFCT was suc- cessful in mobilizing nearly US$73 million from various foreign bilateral and multilateral sources viz. the Bank, ADB, KfW and the Japanese EXIM Bank. To the extent that such resources represent incremental financial inflows, replace shorter-term and more expensive suppliers' credits and encourage sub-borrowers to procure equipment on an internationally competitive basis,  - 20 - IFCT's success at mobilizing such resources yields a substantial economic benefit to the country. Under present circumstances it would be unrealistic to expect IFCT to diversify its sources of financing beyond the bilateral and multilateral sources it now taps. IFCT is not yet ready to approach foreign commercial markets for long-term funds. Nonetheless it should begin to prepare for such a possibility and consider a commercial foreign borrowing (a small consortium loan or a bond issue) for around FY78. IFCT's limited efforts at raising domestic resources through its share capital and debenture issues have also been quite successful. Nonetheless, they have so far been restricted to "secondary mobilizati,on" (i.e. raising resources from other financial institutions and not directly from private savers), borrowings from the Government and the Bank of Thailand. Its ability to raise funds directly from private savers has been constrained by: a policy regime which favors savings in commercial bank deposits; artificially depressed lending rates; an undeveloped market for long-term bonds; and its inability to compete with other financial institutions in paying out the very high dividends which the local market has come to expect. With the recent and proposed increases in its interest rate, one constrainlt to mobilizing resources directly will be lowered. IFCT also hopes to tap the market directly for 45% of its next equity issue. As the capital market: develops it should become increasingly possible for IFCT to issue instruments with a medium-term maturity at rates acceptable to the market. 6.06 Capital Market Development: In 1974 and 1975 IFCT has expended considerable effort in assisting the Government with laumching the new Securities Exchange of Thailand. IFCT's General Manager is also Chairman of the Exchange. IFCT is also about to establish a mutual fund company which will provide the intermediate instrument to encourage participation by the small investor in the securities market. IFCT will be the single largest shareholder in the Mutual Fund Co. owning 29% of the paid-in capital (Bt. 20 million, authorized capital Bt. 40 million) with the Ministry of Finance taking up a 25% share and the Government Savings Bank a further 20%. In establishing the mutual fund IFCT has been successful in persuading the Government to release to the new company shares held by the Government in private and public corporations valued at about Bt. 400 million and a further Bt.100 million in the form of short-term notes and debentures. In addition IFCT has actively approached several well established private companies to go public and sell their shares to the Mutual Fund Co. The replies received so far have been encouraging. 6.07 Promotional Efforts: Through FY74-76 IFCT has continued stepping up its promotional efforts with: (i) a continuation of its program of in- dustry studies; (ii) its efforts to encourage private entrepreneurs to estab- lish pioneer industries on a joint-venture basis with foreign partners; (iii) direct industrial promotion - IFCT has been playing a lead role both as a pro- vider of technical assistance and as a representative of domestic investors in establishing joint ventures in the palm oil, sericulture, castor oil and rock salt industries; (iv) the estabLishment of three branch offices; (v) regional seminars at which interested investors and traders are invited to discuss specific investment opportunities to be taken up by IFCT; and (vi) the establishment of a special project promotion unit at the head office. These activities have yielded tangible results by way of actual investments made.  - 21 - As Annex 7, paragraph 13 indicates IFCT has financed a number of joint ventures brought about through its intervention. The palm oil project on which IFCT has spent several man-years of effort is about to come to fruition. Further- more the Haat Yai branch has identified 19 project opportunities in two months, six of which were being actively screened in February 1976. IFCT's regional seminars have also attracted wide interest and are likely to lead to specific projects being financed in the next year or two. In addition to these activi- ties IFCT is playing the lead role in launching a study on small industries in Thailand aimed at developing a "bankable" project package (paragraph 3.03). Moreover it has also actively begun strengthening its links with various business associations and chambers of commerce, with the commercial banking sector and with other government agencies (in particular, BOI, NESDB and BOT) in order to play a more effective role in the planning and development of projects in their early stages. 6.08 IFCT's Development Strategy: At the time of the last Bank loan, IFCT proposed to pursue a five-point development strategy which would aim at: (i) financing smaller 1/ riskier projects in the Bangkok area which could not attract commercial bank interest; (ii) financing a few large and complex projects which required substantial promotional inputs; (iii) promoting proj- ects, particularly agro-industrial projects, in lesser developed regions; (iv) increasing its level of equity investments; and (v) competing more aggressively with commercial banks. Performance during FY74-75 in achiev- ing these various objectives has, on balance, been creditable. The follow- ing table indicates the extent to which IFCT was successful in achieving its first objective. 1974 1975 Total Projects approved in Greater Bangkok 18 28 46 of which: total cost under Bt. 40 million 15 14 29 of which: new projects under Bt. 40 million 9 6 15 expansion projects under Bt. 40 million 6 8 14 Expansions of under Bt. 40 million by first time clients 5 7 12 As shown above 63% of the projects approved in the Bangkok area in FY74-75 had a total cost of less than Bt. 40 million (the cut-off point for "small" as used for these purposes). Of these there was a roughly even split be- tween new and expansion projects, over 85% of the latter being undertaken by first-time clients of IFCT. It is difficult to judge the number of these cases which could have obtained long-term or roll-over finance from other sources except to note that although commercial banks have been gen- erally liquid from late 1974 onwards their lending has become considerably more conservative and even more collateral-based than in the past. Since the loan/collateral ratios of all these projects is fairly high it is likely that they would not have been able to secure finance from other sources. 1/ For the purposes of the strategy statement "smaller" projects were defined as those with a total cost of Bt. 40 million or less.  - 22 - 6.09 Between 1974-75 IFCT has financed 11 very large projects with a total cost of over Bt. 200 million (US$10 million). However, all these projects have been undertaken by large "blue chip" firms (seven of which have extensive foreign participation) and had already been well planned so that when IFCT stepped in no major promotional inputs were required. The only large project (pulp and paLper) to which IFCT has devoted a great deal of time and effort in promoting has not, as yet, materialized. On the third objective, regional dispersal, IFCT had in FY74-75 committed funds totalling Bt. 130.5 million to 21 projects outside the Central Re- gion. Considering that it had financed only 28 projects for Bt. 156 mil- lion in the preceding fourteen year period (1960-73) outside the Central Region, the level of lending achieved in the past two years is noteworthy. In relative terms, however, the increase has not resulted in a discernible shift in proportions lent to other regions largely because of the increas- ing predominance of large loans which IFCT has approved since 1973. In stepping up its level of equity investments IFCT was quite successful in 1975 with four new investments totalling Bt. 24.6 million, thereby doubling the number of participations and increasing the amount of invest- ment by two and a half times. Finally, if its increased lending vol- ume in a declining investment environment is an indicator, IFCT can be assumed to have succeeded in competing more aggressively with commer- cial banks for its business especiaLly in 1975 when bank rates climbed down and banks were generally liquid. However a strategy of aggressive competition with the banks is a questionable one. To the extent that banks can service established clients they should continue to do so, and if possible, on a long-term bas.is. IFCT's role, being essentially a developmental one, should complement that of the banks rather than seek to substitute for it. With thiis last exception IFCT should continue to pursue the strategic objectives enunciated previously. One strategic objective not included in its statement is the development of the Thai capital market toward which IFCT has made a significant contribution (paragraph 6.06). VII. IFCT's RESOURCE POSITION AND PROSPECTS 7.01 Resource Position: Details of IFCT's resources are provided in Annex 10 and its resources position as of December 31, 1975 shown in Annex 10, Table 1. IFCT's approval, commitment and disbursement rates in FY74- 75 have outpaced all previous expectations and its domestic resources fell short of undisbursed commitments by about Bt. 63.5 million at the end of FY75. The recent Bt. 150 million delbenture issue which was fully sub- scribed in January 1976 should cover such commitments and leave a balance of about Bt. 40 million for further domestic currency approvals (beyond uncommitted loans already approved). During the year IFCT expects to raise a further Bt. 100 million through an increase in its share capital. These funds would suffice to meet IFCT's expected level of domestic cur- rency loan approvals through 1976. Hlowever, in the latter part of the year IFCT will, almost certainly, have to make arrangements for further  - 23 - domestic borrowings. It plans to make a debenture issue of Bt. 150-200 mil- lion in 1977 which will need to be augmented by way of extended rediscount facilities from the Bank of Thailand and/or loans from the Government Savings Bank to cover domestic lending operations through 1977. By 1978 IFCT should aim at being in a position to approach the public market directly for borrow- ings of between Bt. 100-150 million annually without relying exclusively on other financial institutions. 7.02 On the foreign resources side IFCT had resources totalling Bt. 569 million available for further approvals of which tied funds represented nearly 60%. Untied funds available for further approvals amounted to Bt. 216 million (US$10.8 million) and for commitments Bt. 394 million (or US$19.7 million). Against these available resources IFCT had an immediate pipeline of projects requiring untied funds amounting to around Bt. 200 million. On an approval basis IFCT had virtually exhausted its available untied funds by around June 1976 (on a commitment basis by around September-October 1976). On the basis of its operational projections, the proposed Bank loan of US$25 million (Bt. 500 million) should last IFCT until around March 1978 on an approval basis (or three to six months beyond on a commitment basis). The Government and IFCT have requested a limitation on the size of the Bank loan to cover IFCT's approval requirements for a 15-18 month period. ADB has expressed its willingness to augment IFCT's untied foreign resources when Bank funds are exhausted. The slightly contracted financing horizon also allows IFCT a reasonable margin of error if projected levels of operations do not material- ize under the present uncertain circumstances. IFCT's tied resources, of which it had over Bt. 352 million available for further approvals at end FY75 should suffice until around the end of 1977. 7.03 Operational Projections and Prospects: IFCT's operational projec- tions and business prospects are analyzed in Annex 11. Although IFCT's operations in FY74 and FY75 increased in the face of a declining investment trend, the sharp dip in investment decisions taken in FY74-75 is expected to be reflected in IFCT's approvals for FY76-77. However, the abatement of exaggerated fears on the part of investors and the restoration of a stable government with an enhanced ability to proceed with the pressing task of development is expected to result in a pick-up in investment from late FY76 onwards. Accordingly, IFCT has projected total approvals of Bt. 770 million for FY76 (including Bt. 40 million for equity investments) which represents an overall decline of 6% (7% for loans) from FY75 levels. Approvals are then expected to pick up by 12% in FY77 to Bt. 865 million and, more rapidly, by 20% in FY78 and beyond. Commitment levels are expected to parallel approval levels with a lag of around three to six months. IFCT's operational projec- tions are generally in line with overall business expectations and, providing broader assumptions about the environment hold good, they should be achievable. 7.04 Financial Projections and Prospects. On the basis of its opera- tional projections and assuming an increase in its interest rates to 12.5% IFCT's portfolio and income prospects appear to be bright. Spurred largely by growth in its long-term loan assets, total assets are expected to in- crease by 54% in 1976 to Bt. 2.27 billion and at an average annual rate of nearly 15% thereafter to Bt. 4.48 billion in 1980. No major structural  - 24 - change in asset composition is expected over that time with the loan port- folio (net of provisions) accounting for the bulk of the asset base (around 85%) except in those years when receipts from debentures or equity invest- ments toward the end of a financial year, placed on deposit, may temporarily boost short-term assets. To finance this increase, long-term debt outstand- ing is expected to climb by 53% in 1976 to Bt. 1.76 billion and by 18% annually thereafter to Bt. 3.42 billion in 1980. IFCT expects to increase its share capital by Bt. 100 million in 1976; over the remainder of the projection period increases in net worth will be attributable entirely to a reserves build-up. Reserves are expected to grow by 31% in 1976 to Bt. 135.3 million and by a much higher rate averaging 42% annually between 1977-80 to Bt. 544.1 million. In 1980 reserves are expected to account for 68.5% of net worth vs. 40.1% in 1975. The projected rate of reserves build-up, attributable to income performance, appears to be somewhat high. As a result of the increase in reserves the long-term debt/equity ratio is expected to decline to 4.4:1 in 1980 after rising to a peak of 5:1 in 1977. The liquidity posi- tion is expected to remain comfortable throughout with a high of 2.1:1 in 1976 (caused by the increase in short-term holdings due to receipts from the equity increase) and a low of 1.4:1 in 1977. 7.05 The combination of an increased portfolio and an increased in- terest rate will have a pronounced impact on income growth in absolute (but not relative) terms. Net income is expected to grow by 27% to Bt. 48.9 million in 1976 and by 57% to Bt. 77.5 million in 1977 when the impact of increased interest rates on a sizeable part of the portfo- lio is felt, thereafter its growtlh rate is expected to decline to 13.5% in 1980 when net income is expected to be Bt. 161.3 million. Net income as a percentage of average total assets however is expected to decline in 1976 (from 3% to 2.6%) and then rise gradually to 3.8% in 1980. The most notable trend in the projections iis the expectation of a steady decline in administrative expenses 1/ as a percentage of average total portfolio from its historical average of 1.5% to 0.9% by 1980. Expected levels of profita- bility would result in an increase of the return to equity from 15.3% in 1976 to 22.3% in 1980. IFCT is expected to raise its dividend rate by 0.5% annually from 10% in 1975 to 12% in 1979 in an effort to make its shares attractive to the market. A reasonably sound cash flow position is ex- pected to be maintained throughout with the debt service coverage ratio expected to remain at well above 1.6. VIII. JUSTIFICATION FOIR THE LOAN AND ITS MAIN FEATURES 8.01 Justification: IFCT is rapidly developing into a sound institution which applies rational project selection policies and procedures. Its manage- ment and staff are generally of good calibre. As a private institution with 1/ The present level of IFCT's administrative expenses is comparatively high and, with the full disbursement of loans already committed, is expected to decline by 1977.  - 25 - public connections it plays a unique role in encouraging private sector investment in line with the overall industrial development priorities of the government. It is pursuing a sound development strategy and has had more than moderate success in taking the first steps toward achieving fairly difficult objectives. IFCT has excellent rapport with the government and is developing better relationships with the financial and industrial communities. In an environment not favorably inclined towards accepting the discipline of thorough project appraisal and supervision, IFCT continues to do an effective job of getting clients to accept such discipline although the task has proven to be strenuous and progress has been gradual. Over the past two years, IFCT has begun to come into its own; it has played a leading role in the development of the securities market and its lending and equity investment operations have increased beyond reasonable expectations. These achievements notwithstanding, IFCT is looking toward continually upgrading the quality of its staff, its work and toward the further diversification of its activities, particularly in encouraging small industry development, with continued support and assis- tance from the World Bank Group. The availability of Bank resources and support for IFCT have, in the past, been materially significant to its increas- ing stature and its institutional growth. Its achievements notwithstanding, the continually developing Thai economy will make increasing demands on IFCT's capabilities and resources and will render it dependent on multilateral sources of finance for some time to come. The proposed loan would enable IFCT to continue on the successful course now being followed. 8.02 Rates of Return on Projects Financed: As indicated in paragraph 6.03, internal economic rates of return on IFCT financed projects have var- ied between 12% and 80% with the heaviest concentration around 30%. Internal financial rates of return have ranged between 12% to 42% with the bulk of the projects having returns of around 25%. The last Bank loan to IFCT (Loan No. 992-TH) for US$12 million has been utilized in a satisfactory manner, 1/ hav- ing gone toward financing 18 diverse projects with sub-loans varying in size from US$49,000 to US$2.7 million. Economic rates of return, calculated for 13 of these projects, have ranged between 15% to 80% with a weighted average economic rate of return of 46%. Financial rates of return for all.18 proj- ects ranged from 14% to 41% with a weighted average rate of return of 19%. These rates of return are satisfactory. While the specific projects to be financed under the proposed loan have not been identified it is expected that these projects will yield similar returns to those financed under the previous loan. 1/ The manner in which Loan No. 992-TH was utilized is analyzed in detail in Annex 7, paragraph 12 and Annex 7, Table 4. Since February 29, 1976 four additional sub-loans have been authorized for withdrawal under the loan account for a total of US$906,000 leaving an uncommitted balance of US$527,000 in the account as of July 31, 1976. The financial and economic rates of return on these projects are similar to the other sub-projects financed under the loan and result in no change in the weighted average rates of return.  - 26 - Main Features of the Loan 8.03 Purposes: The loan would be used to finance direct capital goods import requirements of eligible industrial agro-industrial, mining, shipping, tourist and other enterprises, and 65% of the cost of imported goods pur- chased from domestic suppliers. The loan would also be used to finance the permanent working capital requirements of eligible sub-projects. 8.04 Borrower: The loan would be made directly to IFCT and would be guaranteed by the Kingdom of Thailand. 8.05 Foreign Exchange Risk: The foreign exchange risk on currencies disbursed under the loan would be shared by IFCT and the Government in accordance with the terms set forth in the "Foreign Exchange Risk Agree- ment" between IFCT and the Ministry of Finance dated April 26, 1974 (para- graph 5.07). 8.06 Amortization Schedule: As is normal for the Bank's DFC projects the loan would have a flexible amortization schedule which would correspond roughly with the expected aggregate amortization schedules of the sub-loans financed under the project. The maximum term of such sub-loans would be 15 years including the grace period. The loan is expected to be committed over an 18-month period and disbursed over 3 years (Annex 12). 8.07 Free Limits and Sub-Loan Sizes: A free limit of US$750,000 with an aggregate free limit of US$10 million is recommended (paragraph 4.12). On the basis of experience with the previous loan it is expected that about 50% of the number of loans and 752% of the amount committed will require the Bank's prior approval under the proposed free limits. To ensure that IFCT continues to on-lend the proceeds of this loan to a reasonably large number of industrial projects, it is recommended that a sub-loan ceiling of US$3.0 million be established. 8.08 On-Lending Rates: IFCT would charge sub-borrowers an interest rate of 12.0% for all its domestic and foreign currency loans. This rate would be increased to 12.5% before July 1, 1977. As indicated in paragraph 3.12, this would result in sub-borrowers paying a real rate of around 6% to 6.5%. Taking into account the mandatory 1.25% to be provided by IFCT against pro- visions for foreign exchange risk, the spread for IFCT on the proposed loan will be 1.85%. During negotiations IFCT undertook to review its lending rates on a regular basis and, in consultation with the Bank, to make per- iodic changes to reflect its borrowing costs and ensure an adequate level of profitability. IX. AGREEMENTS REACHED AT NEGOTIATIONS 9.01 At negotiations for the proposed loan agreement was reached with IFCT on the following matters:  - 27 - (a) an increase in IFCT's lending rate to 12.5% before July 1, 1977 (paragraph 3.12); (b) appointment of the Deputy General Manager by September 30, 1976 (paragraph 4.04); (c) an individual sub-loan free limit of US$750,000 and an aggregate free limit of US$10 million (para- graph 4.12); (d) maintenance of the debt/equity limit at 6:1 (para- graph 5.05); (e) a sub-loan size limit of US$3.0 million (paragraph 8.07).   ANNEX 1 Page 1 THAILAND INDUSTRIAL FINANCE CORPORATION OF THAILAND The Economy 1. An Economic Report on Thailand (No. 924-TH) was issued on November 14, 1975. It covers major developments over the two-year preceding period and pro- vides a detailed analysis of Thailand's present economic position and prospects for the future. A synoptic view of relevant economic characteristics and devel- opments is provided below. 2. Growth Performance. According to the National Economic and Social Development Board's (NESDB's) preliminary estimates the economy registered real growth of 6.4% in 1975 1/ compared to 3.2% in 1974. While the growth rate was below that of 1973, when an export-led boom resulted in real GDP growth of 10%, it was a distinct improvement over the substantial economic slowdown in 1974 caused by poor weather, deterioration in the external sec- tor, and a weakening of domestic demand. Improved weather conditions, the abatement of inflation, quiescence on the labor front and the absorption of increased energy costs all contributed to aiding recovery in agricultural and industrial production. Agricultural output rose by 6.6% and industrial output by 6.1% in real terms during 1975 compared with growth rates of 3.2% and 2.5% respectively in 1974. There is little doubt, however, that industrial recovery might have been more rapid were it not for heightened political uncertainty on the domestic scene and by the impact on investment activity (foreign and domestic) of developments in Indo-China. Increased government expenditures also had a salutary impact on recovery although not to the extent expected. The services sector registered growth of 9.2% while the wholesale and retail trade sector registered a decline of 1.7% in real terms. Per capita GNP increased by 6.1% in current terms from Bt. 6,364 to Bt. 6,754 (or about US$340) registering only a nominal increase in real terms. 3. Balance of Payments. Although Thailand's imports doubled between 1972-74 as a result of escalating capital goods costs and a much higher energy bill, increased export earnings and capital flows generated sufficient foreign exchange to cover imports and retain a sound reserves position (six months 1/ 9.5% at current market prices. GDP was estimated at about Bt. 296 billion in current prices.  ANNEX 1 Page 2 imports). In 1975, however, the BOP situation worsened; there was a substan- tial deterioration in the trade balance with the rapid decline in the prices 1/ of agricultural commodities coupled with stagnation in the volume of these exports as a result of poor weather conditions in 1974 and declining world demand (especially for rice) in 1975. Manufactured exports also performed poorly owing to depressed international market conditions. Total exports for the first nine months of 1975 amounted to Bt. 35.5 billion or 8% lower than for the same period in 1974. Although an uncertain investment climate damp- ened the demand for imports, 2/ prices kept rising albeit quite slowly (about 6% over 1974 levels). The net result, for the first three quarters, was a trade deficit of Bt. 12.6 billion (US$0.63 billion) which was 34% higher than for the same period in 1974. Since net receipts from services and transfers also dropped the current- account deficit increased nearly fivefold to Bt. 5.3 billion. With net capiLtal inflows (Bt. 4.1 billion, 18% lower than 1974) over the same period being insufficient to cover the current account deficit Thailand will, in 1975, have its first overall BOP deficit (and a concommitant decline in reserves of over US$100 million) in four years. 4. Prices and Inflation. ALfter a decade of price stability (with in- flation averaging about 2% annually) Thailand experienced rapid inflation between 1972-74 with the increase in the consumer price index reaching a peak of 24% for 1974. However, the combined influence of export price declines, moderation of imported inflation, tightening of domestic credit, the appear- ance of excess capacity in several industries and a rapid rate of inventory build-up (now gradually being cleared) has resulted in a sharp decline in the rate of inflation in 1975. The wholesale price index rose by less than 1% over the first half of 1975 and its rise is not expected to exceed 4% for the whole year. The consumer price index rise is also expected to be limited to between 5-6% 3/. Long-term price inflation of about 4% annually over the Fourth Plan Period has been forecast by the NESDB (the Bank's estimates, however, range between 6-7%). 5. Investment Activity. Th,e surge in investment activity, following an 18-month boom from late 1972 to early 1974, now shows signs of petering out. Business prospects which caused private investment to increase by 19% 1/ In mid-1975 Thailand's terms of trade index had dropped to below the lows recorded at the time of the last balance of payments crisis in 1971-72. 2/ Total imports for the 9-months ending September 30, 1975 were Bt. 48.1 billion i.e. 0.6% above the level recorded for the same period in the previous year. 3/ Between 1965-70 the Consumer Price Index rose from 100.4 to 113.5 at an average rate of about 2% annually. Although at the end of 1972 it stood at 119.6 it rose very rapidy on 1973 and 1974 reaching 171.7 for the latter year. Its rate of increase moderated in 1975 averaging 180.1 for the first 10 months of the year.  ANNEX 1 Page 3 in real terms in 1973 and by a further 17% in 1974 are perceived by investors to have dimmed. A fluid political situation has undermined government's ability to formulate and provide clear policy guidance especially in the industrial sector. Apparent indecision on the part of the authorities has served to exacerbate the negative influences exerted on investment (espe- cially foreign investment) by recent events in Indo-China. Consequently, despite the general improvement in labor relations and the restoration of relative price stability private sector investment in 1975 actually declined by about 2% in real terms. 1/ Public sector capital formation, however, increased by 42% as the Government pursued an expansionary budget policy by increasing expenditures for construction and by its Bt. 2.5 billion Tambon council financing scheme which involved a large number of small local civil works projects. The increase in public sector investment seems higher than it actually was, the explanation being that in 1974 the Government suspended several projects due to record increases in the prices of construction materials. These contracts were renegotiated in 1975 and the projects resumed. 6. The impressions conveyed by the gross fixed capital formation statistics are reinforced by the sharp dip in the level of applications to the Board of Investments (BOI) as the table below shows. Since there is a lag between applications to the BOI and the actual expenditures on invest- ment (reflected in GFCF), the level of applications also provides a rough indicator of trends in the private portion of GFCF over the next two years, particularly in machinery and equipment. (Amounts in Baht Billions) 1973 1974 1975 No. of applications 552 226 111 No. of applications approved 325 176 83 Registered capital of firms /1 5.52 2.75 0.59 Total investment /1 26.23 9.22 1.95 Thai Employment-generated (000's) 115.4 38.9 13.0 /1 For approved applications. 1/ Gross capital formation in machinery and equipment (over 90% of which is accounted for by the private sector and is a good proxy indicator for industrial investment) declined by 2.6% in real terms in 1975 compared to a growth rate of 16.5% in 1974. This was the first time in four years that capital formation in machinery and equipment had declined. Private investment in machinery and equipment declined by over 5% while public investment grew by 20%.  ANNEX 1 Page 4 7. Fiscal and Monetary Developments. Following the turnaround in the economic climate government's fiscal and monetary policy was switched from combatting inflationary pressures in 1974 to stimulating economic recovery in 1975. In FY74 the Government introduced a fairly tight budget of Bt. 48 billion which represented a decrease, in real terms, over Government spend- ing in the preceding year. On the other hand the combined influence of domestic inflation, higher import prices (and, as a result, higher collec- tions from duties), increased export tax receipts (due to soaring interna- tional commodity prices), and higher tax rates introduced in 1973 resulted in a substantial increase in public revenues. The restraint on expenditure coupled with an unexpectedly sharp increase in revenues swung the public sector's budgetary position from a deficit of Bt. 5.7 billion in 1973 to a surplus of Bt. 2.0 billion in 1974 and allowed the public sector's cash balances to rise by over Bt. 5 bilLion. In FY75 the situation was reversed; expenditures were raised by 20% to Bt. 50.5 billion while revenues dropped due to a decline in the volume of imports, sharp drops in export prices and the downward adjustments of import, excise and business tax rates which were made in 1974 to mitigate cost push inflationary pressures. In FY75 the Treasury incurred a budgetary deficit of Bt. 5.4 billion. 8. Coupled with a tight budget, a restrictive credit policy was also adopted by the Bank of Thailand (BOT) in the fall of 1973 to combat inflation; these restrictions were strengthened in 1974 with increases of: 1% in commer- cial banks' required reserves (fronm 7% to 8%); 1% in the BOT-lending rate; and 1% in the deposit rate ceilings. These restrictions forced an upward movement in commercial bank lending rates. Nonetheless private credit demand remained strong through September 1974 with credit to the private sector grow- ing by 44% vs 34% in the preceding year. The resources for financing such credit came from increased commercial bank borrowings from BOT, from short- term borrowings abroad and from an increase in the growth of deposits. The fiscal operations of the Treasury, however, offset the private sector's increased appetite for funds with the deflationary budget reducing the bank- ing system's net credit to the Government by Bt. 5 billion thus slowing the rate of monetary expansion to 4% in mid-1974 from 23% in late 1973. With the BOP deficit emerging in late 1974 private credit suddenly became very tight as the ratio of commercial banks' liquid assets to deposits dropped from 33% to 23%, the lowest level ever reached. With the economy taking a recession- ary turn in late 1974 BOT began to relax credit policies in concert with the reflationary budget. The required reserve ratio for commercial banks was reduced again to 7%, and generous rediscounting facilities were made avail- able to hard-hit industries (particularly textiles). In April 1975 BOT reduced its own basic loan rate and commercial banks followed suit. However, the deceleration in inflation and the deteriorating investment climate slowed private credit demand considerably; this coupled with a decline in external reserves sharply curtailed monetary expansion. Between December 1974 and October 1975 there was a decline of 1.5% in total money supply. 9. Economic Prospects. Assuming that the political situation stabil- izes and that the government elected in April 1976 is in a better position  ANNEX 1 Page 5 than its predecessor to pursue and implement sound policies, it is likely that the recovery begun in 1975 will be sustained through 1976. This pros- pect would be further supported by recovery of the industrialized econo- mies which comprise the principal markets for Thailand's exports. On the basis of these assumptions NESDB has projected real GDP growth of 7.6% for 1976, which would bring the annual average growth for the Third Plan up to 6.4% against a target of 7.0%. NESDB's projections, however, assume a rather high growth rate for the manufacturing sector (16.7%) and a growth rate of less than 1% for the agricultural sector. Given the level of inven- tories piled up by several industries at the end of 1975 the projected growth rate for manufacturing seems optimistic (the prevalence of slack capacity notwithstanding). On the other hand, although currently depressed prices of agricultural commodities may affect production in 1976, the Government's price support programs for paddy and sugar are expected to offset to some degree their negative impact and agricultural output may grow by more than 1%. The net effect might be a slighty lower growth rate (of around 7%) than projected. To achieve growth the Government has announced a highly expan- sionary FY76 budget of Bt. 62.65 billion, along with measures to ensure the more effective implementation of government's planned capital outlays. Al- though this may revive inflationary pressures the Government aims to restrain inflation at a level of 6% for 1976 while expanding employment opportunities and achieving a better urban-rural distribution of income through its expendi- ture program. 10. Although a more favorable investment climate is expected to emerge, as the psychological fears caused by events in Indo-China gradually recede, it is unlikely that there will be any revival in private capital formation during 1976. There is a real possibility of a continued real decline in private investment. Several investment decisions have been deferred until after the April elections; it will be some time until any firm decisions taken thereafter are implemented. The effects of a prolonged hiatus in investment will not be felt until the medium term when it could significantly restrain output growth. NESDB expects a sharp increase in fixed capital formation in 1977 when domestic political uncertainties are reduced and international economic conditions are favorable. 11. The Government's budget and its policy measures follow broadly the directions mapped out in the Bank's recent economic report. The urgency of dealing with the employment and distributional problems has now impressed the Government as have the constraints on achieving desirable objectives through better directed growth. A major constraint to growth could be the balance-of-payments. With no prospect for price increases in Thailand's major commodity exports and the higher demand for imports, which growth at projected levels is certain to generate, the BOP deficit is expected to be larger in 1976. The Bank's economic report expects this situation to pre- vail for the remainder of the decade leading to a rising external resource gap. As that report suggests, apart from private capital inflows and small amounts of commercial borrowings, the government aims to attract increased commitments of official bilateral and multilateral loan assistance and is taking steps to improve its project preparation capability to this end.  ANNEX 2 Page 1 THAILAND INDUSTRIAL FINANCE CORPORATION OF THAILAND Industry and Manufacturing in Thailand 1. Overall Performance. In 1975 the industrial sector (comprising mining, manufacturing and construction) accounted for nearly 26% of GDP (at 1962 constant prices) vs 24% in 1974. Industry constituted the second largest sector of economic activity after agriculture (which accounted for 27.5% of GDP). Output in the industrial sector recovered slowly at a rate of 6.1% in 1975, still short of its average annual growth rate of over 10% prior to 1974; in real terms, mining output declined by 7% during the year while in construction it rose by 17%. The manufacturing sector, which accounted for nearly 79% of industrial output, expanded at an average rate of 14% in 1970-73, a slightly higher rate than the 12% average between 1964- 1969. The sector's role in the economy has grown increasingly prominent with its contribution to GDP having increased from 11.6% in 1960 to 20.2% in 1975. The onset of recessionary influences in 1974 reduced manufacturing output growth to 2.5%. In 1975 the growth rate picked up to 6% with output perform- ance within the sector being mixed. Declines were registered in certain food processing industries, and in the paper, rubber products, metal products and electrical goods industries. These declines were more than offset by in- creased production in the sugar, beer, tobacco, textiles, cement, and petroleun industries. However, a large part of the increased output, particularly in sugar and textiles went toward the building up of inventories. Characteristics of the Manufacturin; Sector 2. Establishments and Value-Added. Reliable data on establishments in the Thai manufacturing sector and their key characteristics are not avail- able. 1/ According to a 1968 industrial census, there were approximately 45,000 manufacturing establishments. Government estimates suggest that by 1973 these had increased to over 66,000 of which just about 35,000 were "registered." The following table indicates the rough distribution of registered establishments and value-added between three broad economic clas- sifications from data available for 1973. 1/ A limited census was undertaken in 1971 the results of which have just become available. The census which attempted to cover only establish- ments employing 10 or more workers covered 3,005 establishments (of which 727 had fewer than 10 wor,kers) whose total value-added amounted to Bt. 7.8 billion, or less than 36% of the total value-added for the sector recorded in that year.  ANNEX 2 Page 2 Table A: Establishments and Value-Added in Manufacturing - 1973 1/ Type of Industry Establishments Value-Added (Bt. Billion) No. % Amount _ Consumer Goods 27,582 78.7 19.2 52.4 Intermediate Goods 4,974 14.2 13.2 36.1 Capital Goods 2,495 7.1 4.2 11.5 Total 35,051 100.0 36.6 100.0 3. Since 1968, value-added in the manufacturing sector has grown from Bt. 17.9 billion to Bt. 36.6 billion in 1973 (current prices) 2/ with a relative shift in its composition. In 1973 consumer-goods industries contri- buted to 52.4% of value-added vs 62.3% in 1968, intermediate goods industries to 36.1% vs 29.7%, capital-goods to 11.5% vs 8%. The increase in the share of intermediate goods was due largely to the backward integration of the textile industry during that period, the manufacturing of a wider range of chemicals and chemical products and to the increased refining of petroleum and related products. The increase in the share of capital goods industries was due almost entirely to vehicle assembly operations which were established in Thailand during 1971-73. As shown in the table below, the most prominent industries (by value-added) in Thailand at the end of 1973 were: food pro- cessing, beverages and tobacco; textiles and apparel; transport equipment; and petroleum refining and coal products. Together they accounted for nearly 70% of total value-added in the manufacturing sector, over 74% of the number of registered establishments and about 56.5% of total manufacturing employ- ment (paragraph 8 below). 1/ Based on 1973 data on registered establishments of which a special analysis was undertaken for a recent Bank industrial sector mission. Value-added data is based on the national income series recorded in the last Bank economic report and includes value-added by unregistered enterprises, the distribution of which is not known. 2/ In 1975 manufacturing value-added was estimated to be about Bt. 56 billion in current market prices.  ANNEX 2 Page 3 Table 3: Major Thai Industries at End-1973 1/ Value-Added (Bt. Billions) Establishments Amount % No. % 1. Food, beverages and tobacco 12.6 34.4 23,927 68.26 2. Textiles and apparel 6.6 18.0 1,461 4.17 3. Transport equipment 3.4 9.3 625 1.78 4. Petroleum refining and coal 3.0 8.2 11 0.03 5. Other industries 11.0 30.1 9,027 25.75 Total 36.6 100.0 35,051 100.00 4. Ownership and Size of Establishments. The large majority of enter- prises in Thailand are small and f-amily-owned; nearly 95% employ less than 10 workers and fall in the cottage/home industries category. Of the 3,005 enter- prises covered by the 1971 Industrial Census only 702, or fewer than 24%, were limited companies the remaindler being individual proprietorships or juristic partnerships. However, these 702 limited companies accounted for 68.5% of the total book value of fixed assets of all establishments covered. On average, in 1970, individual proprietorships had total fixed assets of Bt. 1.2 million (about US$60,000); partnerships and other associated ownership- type firms had fixed assets of Bt. 3.0 million (or US$150,000) and limited companies had fixed assets of Bt. 13.5 million (or US$675,000). Of the total number of establishments covered by the 1971 Census fewer than 640 (or about 1% of the estimated total) employed more than 50 workers; yet these firms contributed to over 32% of total value-added in the manufacturing sector. 5. The concentration of a fairly large share of the manufacturing sector in very small family-owned units, which do not differentiate between family and business finances, complicates the task of development financing in Thailand. These enterprises have generally proven averse to institutional borrowing, particularly when such borrowing is accompanied by its usual con- comitants, e.g., the keeping of accurate business records, auditing of accounts, the analysis that accompanies project evaluation and reporting requirements for sound project sup(ervision. They often forego expansion opportunities, borrow from commercial lenders either on the basis of security or undertake unsecured borrowings at very high rates to avoid borrowing from lenders "who ask questions." In view of their record of widespread tax evasion these establishments are also suspicious of any lending institutions which require the regular submission of detailed financial statements. When 1/ The same industrial ranking wEas retained in 1974 and 1975 with these industries contributing relatively the same proportions to manufactur- ing value-added.  ANNEX 2 Page 4 they do submit to such requirements their statements generally understate the asset base and income generating capacity of the enterprise. Most small Thai businesses are resistant to the introduction of modern production and management techniques and operate at a low level of efficiency. The strong influence of family ownership also prevents the possibility of rationaliza- tion and mergers of small inefficient firms into more viable production units. Nevertheless, the entry of a new generation of Thais into industry, many educated abroad, and the promotional emphasis placed on industrial invest- ment by the Government is beginning to result in a gradual transformation of the sector. Institutional efforts such as those of IFCT and the recently established investment companies are also having an impact on bringing about gradual change in traditional attitudes. 6. Small-Scale Industries. The paucity of accurate and comprehensive data on the Thai manufacturing sector makes it difficult to develop a coherent picture of the small industry-sub-sector, the problems that it confronts and the opportunities that it promises. The limited statistical reports and surveys carried out for the Bank's last industrial sector mission suggest that the small-scale sector, 1/ including home/cottage type production units, accounted for about: 96.5% of the total number of establishments; 40% of manufacturing employment; and between 20-25% of total value-added in the sector. The modern small 2/ and medium 3/ industries (SMI) sector, however, probably accounts for about: 4-5% of the number of establishments (numbering roughly between 3,000 to 3,200 in 1975); 10% of manufacturing employment; and about 15% of value-added. SMI are generally distributed over a very wide range of industrial activities and are suspected to be the most promising vehicle for: (i) expanding and decentralizing investment and employment opportunities at a reasonable capital cost without sacrificing the objec- tives of productivity, efficiency and competitiveness; and (ii) modernizing, diversifying and balancing the growth of the industrial and services sectors in which production is presently concentrated at two extremes. However, little is known about SMI capital-output, labor-output and capital/labor ratios, their capacity utilization levels and the age of their plant and equipment or the financing and assistance problems they confront. Existing programs for providing financial (through the Small Industries Finance Office - SIFO) and technical assistance have proven to be ineffectual and are be- lieved to be geared to no more than scratching the surface of the problem. 1/ Defined in this instance as units employing 50 workers or less and with total assets of less than Bt. 2 million (US$100,000). 2/ Excluding estalishments with less than 10 workers and total assets of less than Bt. 100,000 (US$5,000). 3/ Establishments with 51-99 workers and total assets not exceeding Bt. 10 million (US$500,000).  ANNEX 2 Page 5 7. In view of these factors and the Government's interest in the devel- opment of small industries IFCT is about to initiate a study at filling the main gaps in knowledge about the SMI sub-sector. The study will also explore the pros and cons of various institutional alternatives for delivering finan- cial and technical assistance services to SMI in the most cost-effective man- ner. IFCT proposes to fund this eiffort with counterpart funds generated from previous loans from the Kreditanstalt fur Wiederaufbau (KfW) and to involve representatives from the Bank of Thailand, Ministries of Finance and Industry, the NESDB and from the Faculty of Economics at Thammsasat University. The Bank's Regional Mission in Bangkok is keeping track of developments in this area and is prepared to render any assistance it may be called upon to pro- vide. It is expected that the study will constitute the first step toward the development of a project package suitable for Bank financing within the next couple of years. 8. Manufacturing Employment. In 1973, the manufacturing sector employed about 852,000 persons, up from 682,000 in 1970 representing an annual average rate of job creation of 56,300 over the three-year period. 1/ However, with the slowdown in 1974 carrying over into 1975 it was expected that the manufacturing sector would not provide more than 21,000 new jobs annually at projected rates of investment. At the end of 1973 the sector employed just about 4.9% of the total labor force. Large firms (with over 100 workers) accounted for over 20% of total manufacturing employment in 1970 2/ (over 50% in the Bangkok area) while enterprises with fewer than 10 workers accounted for just under 70%. With the average number of new entrants into the labor market since then being estimated at about 450,000 annually the share of manufacturing employment in total employment is expected to be maintained at around this level. Although unemployment has not been a major problem in Thailand up to now, the rapid exhaustion of new settlement areas to cultivate will sharply curb the capacity of the agricultural sector to continue absorbing new entrants into the labor force at the same rates as in the past. The expected increase in migration to the urban areas (mainly Bangkok) coupled with existing unemployment there will necessitate the active exploration of alternatives for employment generation at a lower cost in the industrial, trade and services sectors. 3/ 1/ This growth of almost 25% was generated largely by capacity expansion in the food, textiles and apparel, rubber products, chemicals, petroleum products, non-metallic mineral, basic metals and transport equipment industries. 2/ By 1975 this proportion has probably increased to around 30%. 3/ The Bank's recent economic report highlights employment generation as a major priority issue in the next few years.  ANNEX 2 Page 6 9. Between 1968-72 the fixed cost per new job created in organized industry in Thailand appears to have been about Bt. 150,000 (US$7,500). 1/ The average figure for industries "promoted" by the BOI was, however, much higher at about Bt. 250,000 (US$12,500) although in 1975 it fell to Bt. 150,000 (the industry average) reflecting a shift away from capital intensive investments during the year. 10. Regional Distribution of Manufacturing. Manufacturing industries are heavily concentrated in and around Bangkok. The Central Region (includ- ing Bangkok) generates about 80% of total value-added in manufacturing, con- sumes 86% of the nation's electric power and provides 60% of total industrial employment (in fact, manufacturing accounts for just under half the total em- ployed labor force in the Bangkok area). The Central Region also accounts for about 40% of the total number of industrial enterprises and for nearly 80% of the total number of medium and large-scale factories. The remainder of manufacturing sector investment and output is fairly evenly divided bet- ween the Southern, Northern and North-Eastern Regions. Between 1969-73 new industrial investment 2/ grew at a much faster pace in the Central Region than elsewhere, as did manufacturing output thus exacerbating the concen- tration problem. This is because Bangkok is the principal market for in- dustrial products with 10% of the total population and an average level of money-income per resident about 250% of that in rural areas. It is also the hub of Thailand's transportation system, the seat of government and the center for commerce and trade. The growth of inter-industry links, concentration of trained manpower, and the ready availability of financial and commercial ser- vices, not to mention sub-contracting facilities, have all served to reinforce the continued convergence of industrial investment in Bangkok. 11. Apart from its obvious locational advantage in terms of access to infrastructure and supporting services, industrial investment in Bangkok has, at least until 1973, been inadvertently aided by the effects of several government policies e.g. lower rates for electricity and water supply, the structure of railway tariffs, the insufficient attention given to the devel- opment of a second port, and the forced narrowing of wage differentials which has reduced the incentive for industries to locate in rural areas 1/ Based on written-down values of plant and equipment the value of total assets (in 1970 prices) per job for the establishments covered by the 1971 Census was nearly Bt. 70,000 (US$3,500). A breakdown between small and large firms was, unfortunately, not available. 2/ The only industries established outside Bangkok are those based on natural resources. Rice and saw-milling operations are spread through- out all regions. Tin smelting, rubber-processing, nonmetallic minerals processing, sugar, tapioca, flour and wood-based industries are, on the other hand, located at the sites of resource availability.  ANNEX 2 Page 7 (where the labor supply is cheap and plentiful). Confronted with serious congestion in Bangkok and concerned about future prospects the Government, in 1973, devised an incentives package to encourage location outside Bangkok in ten designated "development zones." These measures (and the development of a second major port in the south) notwithstanding, the Bank's last indus- trial sector mission was not sanguine about the prospects for significantly redressing the present imbalance in the near term. It cautioned that "exces- sive" efforts to decentralize industry too quickly could lead only to slower industrial development at a higher cost because the requisite infrastructural facilities do not exist, the prospects of developing substantial "markets" outside Bangkok are bleak and the present real costs of forcing location outside Bangkok would further deter the presently none-too-confident investor. However, it is felt that over the :Longer term the ground being laid for the development of the port in the soulth coupled with appropriate incentives would attract export-oriented and "footloose" industries to locate in the Sattahiep and Songkhla/Haat Yai areas. 12. Capacity Utilization. Available data on capacity utilization in Thai manufacturing does not permit any quantitative assessment of performance in the sector as a whole. Information collected from firms often overstates available capacity (to discourage Government from licensing or promoting new investments) and, at the same time, understates actual production and sales to avoid any conflicts with respect to tax liabilities. Apart from the problem of initial overinvestment 1/ in relation to domestic market needs and temporary under-utilization due to spot input shortages, signif- icant under-utilization of capacity has not been suspected as a major problem in Thailand. In 1974, however, recession in major export markets caused substantial installed capacity to go unutilized, particularly in the textile and wood-based industries. Most factories in Thailand operate on a single shift basis with multiple shift operations being confined to industries where process requirements necessitate continuous operation e.g. sugar, chemicals, etc., or in export-oriented industries in which there is pressure to minimize costs e.g. textiles. 13. Manufactured Exports. In contrast to manufacturing growth in the 1960's which was based largely on import-substitution, Thai industry in the 1970's has become increasingly export oriented. Between 1970-73 manufactured exports boomed, growing from US$39 million in 1970 to US$275 million in 1973. The share of manufactured products in merchandise exports rose from 4.1% in 1970 to 15.1% in 1973 a significant increase considering that total exports over the same period increased by 120%. The main contributing factors to 1/ With the Government's stop-go policies on investments in particular industries, entrepreneurs often procure excess capacity in anticipation of future developments.  ANNEX 2 Page 8 export success over this period, have been a record of relative domestic price stability, low wages, and the effective devaluation of the Baht (which is fixed to the US dollar). Much of the export growth between 1970-73 was attributable to the textiles and apparel industries (which are highly labor- intensive), and to the precious stones and jewelry industries. Manufactured exports have been nominally aided by Government incentives introduced in 1970 although the tariff structure continues to introduce a negative bias (para- graph 18). 14. The growth in manufactured exports between 1970-73 was spurred largely by external factors (e.g. strong demand, more rapid price inflation in importing countries, prodding by overseas buyers and foreign trading partners in joint ventures, etc.). With the worldwide downturn in 1974, the rate of manufacturing export growth slowed down. In 1974 the value of manu- factured exports was US$367 million (representing a small real increase) with their share in merchandise exports dropping to 14.6%. In the first nine months of 1975 manufactured exports were running at the same levels as 1974 with increased exports of canned fruits, molasses, jute products, gunny bags wood products, and miscellaneous manufactures but decreases in textiles and garments, cement, petroleum products, and precious stones. Textile exports have begun to pick up at the end of 1975 but are unlikely to recover to 1973 levels very quickly. Considerable scope remains for further devel- oping sources of raw materials and intermediate products for export-oriented processing and manufacturing industries. A more aggressive exporting stance on the part of Thai manufacturers coupled with support from the Government by way of improved information services and extension of the export tax credit should result in better export performance in 1976. Industrial Promotion Policies and Incentives 15. Backdrop to Policy Developments. Industrialization in Thailand has traditionally been based on liberal support for free private enterprise. Government policies toward the development of the sector have been confined to adjustments of such instruments as taxation, tariffs, and the supply of credit. During the first two plan periods (1962-66 and 1967-71) the Govern- ment created a number of state-owned enterprises in "nationally vital" indus- tries. This was done not to exclude the private sector from participation in these areas but to ensure that necessary investments were not foregone because the private sector did not perceive adequate rewards for risk. Over the Third Plan period (1972-76), however, no new Government enterprises were established. With the present investment climate and growing national sensitivities about the role of foreign investment it is likely that the Government may adopt a more direct and active role in the industrial sector especially in mining ventures, off-shore oil and gas development, and the establishment of a fertil- izer industry. There are, at present, no licensing barriers to industrial investments and the Baht is freely convertible. The environment for indus- trialization is, in many respects, quite different from that of most countries in the region.  ANNEX 2 Page 9 16. Industrial Strategy. Thailand has, so far, lacked a reasonably well-defined strategy to promote a desirable pattern of industrialization over the near, medium and long-term. Between 1970-74, frequent modifica- tions of available policy instruments have been made, in response to imme- diate pressures, to provide support or relief to particularly strong interest groups. The absence of a strategic frame of reference in responding to these fractionated and conflicting lobbies has often resulted in achieving effects on investment, output, location and structure of production contrary to those intended. Moreover the Government has been confronted with pressing problems in redressing the imbalance between rural and urban areas and has tended to give industrialization problems lower priority and treat them with "benign neglect." 1/ 17. Industrial Protection. With the domestic market for non-traditional manufactured import substitutes being fairly limited, manufacturing industries have, as elsewhere, been established under cover of tariff walls, restrictive entry regulations and various fiscal incentives. The protective regime devel- oped under these circumstances has not, however, resulted in a generally inefficient, high-cost industrial production structure. Several Thai indus- tries have thrived with initial protection and have now become quite efficient as their ability to compete in export markets indicates. The present struc- ture of tariffs is based on the Revenue Code of 1964 to which minor amendments were made between 1964-70 to promote the establishment of specific industries. In 1970 a large number of rates were raised to stem the balance of payments deficit. This general increase was followed by another three-year period of selective tariff adjustments. In mid-1974 tariff rates on some 306 items were lowered substantially to ease the pressure on domestic production costs. The resultant tariff structure is a product of several ad-hoc decisions made with a short-term perspective almost on a product-by-product basis and does not represent an instrument shaped for rational industrialization over the long-term. 18. To provide a basis for government tariff policy formulation a Bank sponsored study of industrial protection in Thailand was undertaken. 2/ It found that the potential effective protection resulting from the tariff structure and other forms of administrative intervention introduced a heavy bias in favor of import substitution and against export orientation. Varia- tions in the rates of protection for some consumer goods, and several inter- mediate goods were found to be unsupportable by any underlying rationale. The 1/ Under these circumstances the role of institutions such as IFCT in ensur- ing the financial viability and economic soundness of industrial invest- ments assumes considerable significance. 2/ The report dated July 1975 is entitled "The Structure of Effective Protection in Thailand: A Study of Industrial and Trade Policies in the early 1970's" and was carried out by Prof. Narongchai Akrasanee of Thammasat University.  ANNEX 2 Page 10 study also found that in several industries (depending on the extent of internal competition, price controls, etc.) the protection realized was substantially lower than the potential protection accorded. The tariff structure together with quantitative restrictions, licensing practices and price control measures were found to be frequently used instruments, to which adjustments were made in response to specific short-term pressures, without reference to a basic policy framework. As a result government's actions have had unintended effects. The study has therefore recommended that a major revision of protection policies be considered with: (i) the introduction of a general system of non-discretionary incentives based on a revision of tariffs and indirect taxes; and (ii) a detailed discretionary review only of major projects in nationally important industries. In view of the uncertain political situation and other pressures on the previous caretaker government, no action has yet been taken on these measures. 19. Industrial Promotion and the Board of Investments (BOI). In addi- tion to the tariff and protection policies pursued by the Government (para- graph 13), industrial investment in desired directions is also encouraged by the provision of fiscal incentives granted by the BOI. 1/ This agency is empowered to: (i) determine the list of industries to be promoted; (ii) ap- prove individual projects to which promotion benefits will be granted; and (iii) decide upon the extent of tax exemptions to be given in each individual case. The incentives package also includes: guarantees against national- ization and freedom from competition by a new State enterprise. For foreign investors it includes permission to own land, repatriate profits freely and hire expatriate experts. Moreover, it allows full exemption from import duties and business taxes on imported machinery and equipment as well as exemption from business taxes on domestic machinery and equipment. 2/ BOI has the discretion to grant exemption from corporate income taxes for between 3-8 years and can, in any instance, recommend banning or raising tariffs on competing imports; in such instances BOI can also administer the sales prices of firms so promoted. In addition, BOI grants special locational incentives (also based on tax exemptions) to encourage investment in ten designated development zones outside Bangkok. 1/ Such promotion was provided for by the "Act for the Promotion of Industries" passed in 1954. However, machinery for its implementation was created only in 1960 when BOI was established. The Act was amended in 1962 and major revisions were made again in 1972. 2/ In view of the general suspicion that such incentives also promote capital intensity, an analysis was recently conducted to ascertain whether this had occurred in Thailand. The study concluded that there was, in fact, no significant relationship between the incentives provided and the capital intensity of investments undertaken.  ANNEX 2 Page 11 20. In view of the degree of discretion that can be exercised by BOI and the consequences of poor decisions in terms of resource dissipation, it is clear that its efficient functioning is an imperative. In the view of the Bank's industrial sector mission the BOI's capabilities needed considerable strengthening in its staffing, operating systems and procedures and through the availability of specialized expertise to focus on specific tasks. To assist BOI and relieve it of some unnecessary work in examining each case from the ground up a system of general criteria applicable to broad cate- gories of industries also needs to be developed. 21. BOI is now receiving limited technical assistance from USAID. As a first step toward addressing some of the broader issues influencing invest- ment promotion and evaluating its costs and benefits the BOI had also pre- pared for submission to the UNDP three studies which would enable it to: (i) determine priorities for investment, project possibilities, and the desired pattern of agro-industrial development; (ii) develop a policy posi- tion on foreign investment and the incentives and safeguards needed to attract it; and (iii) review alternative approaches to industrial investment promotion. However, with the recent retrenchment in UNDP commitments the BOI is actively seeking grant financing from other sources to finance the costs of consultants to carry out those studies. Following recent discus- sions with the Bank, BOI and the Government are now considering expanding the scope of these studies to incorporate a broader analysis of strategic and policy measures needed to assist more rational and co-ordinated indus- trial development. Together with such an analysis BOI proposes to launch a parallel study aimed at improving the co-ordination of investment regu- lation and at strengthening its own operational capabilities. 22. Foreign Investment. Direct foreign investment (DFI) has made a substantial contribution to the development of Thai industry. Out of the 883 firms promoted by BOI between ,L960-75, 415 (or 47%) were joint-ventures and 22 (2.5%) were wholly foreign-owned firms. The foreign contributed por- tion of the registered capital of these firms amounted to Bt. 3.94 billion (or 29%) out of total registered capital of Bt. 13.55 billion. Japan is by far the single largest source of DFI accounting for 38.5% of the inflowing foreign capital. As of the end of 1975 there were over 115 manufacturing firms in which Japanese enterprises had a direct financial interest. These firms reported total paid-in capital of about Bt. 2.8 billion of which about 48% was owned by Japanese investors. Next to the Japanese, the US and Taiwan accounted for the second and third largest share of DFI, accounting for 14% and 11.5% respectively; as a bloc, European investment accounted for about 12.6% of foreign investment. Most foreign participation has been in non-traditional sectors resulting in the inflow of new technology and in the training of Thai personnel in relatively new fields. 23. Government policy is generally to: (i) encourage DFI but to selec- tively direct it to sectors where foreign expertise and capital are most needed; and (ii) increase Thai participation in joint-ventures. The gradual reduction of the foreign share of ownership is often a major stipulation when promotional privileges are granted. An Aliens Business Act regulating DFI was promulgated in November 1972 which identified the following activity  ANNEX 2 Page 12 categories for participation: (i) industries in which existing foreign majority participation was to be ended within two years; 1/ (ii) industries in which no new foreign majority-owned companies could be established but existing ones could continue but could not expand beyond a certain limit; 2/ and (iii) industries in which new foreign majority owned companies could be established and existing ones allowed to expand indefinitely. 3/ At the same time an Alien Occupation Law was also passed banning foreigners from certain specified occupations (e.g. accounting) and requiring all aliens to obtain work permits. Enactment of these somewhat unclear and ambiguous laws coupled with unsettled political and labor conditions through 1974 created considerable uncertainty in the minds of foreign investors and may have contributed to declining levels of DFI since then. 24. Recent Policy Developments. In line with the last government's emphasis on export promotion and stimulation of investment to generate employment the BOI, in April 1975, announced new and more detailed guide- lines on investment promotion. The explicit objectives behind the changes were: (i) the creation of a favorable investment climate; (ii) the promo- tion of DFI with appropriate safeguards; (iii) greater decentralization of investment to provincial areas through special incentives and through pro- vision of improved public infrastructure; (iv) acceleration of project iden- tification effort through special studies; (v) direct relation of promotional privileges to the benefits expected to be derived in each case; and (vi) for- mulation of an explicit industrialization strategy. Promotional benefits granted are now linked to employment creation, export generation, use of locally produced raw materials and plant location in the designated develop- ment zones. Under the new rules, non-export oriented industries (less than 20% of total sales exported) are now eligible for promotional privileges only if they locate outside Bangkok, have protection of less than 30%, value- added of at least 30% and Thai participation of at least 40%. Moreover, they can receive tax exempt status (limited to a maximum of 5 years) only if they employ 200 or more workers and invest at least Bt. 50 million. Export- oriented firms, on the other hand, receive tax exempt status from a minimum of 5 years and are entitled to promotional privileges without having to meet the above criteria. 1/ Mainly rice-farming, domestic agricultural trade, construction and pro- fessional services. 2/ Agricultural production (except rice), light industry, hand-crafts, retail trades and domestic transportation. Existing firms cannot in- crease their annual sales or production over 30% above 1972 levels. Businesses granted promotional privileges are exempt from this pro- vision. 3/ Other trade activities, heavy industry and mining.  ANNEX 2 Page 13 25. In addition, in August 1975, the Prime Minister issued a policy statement further clarifying government's attitude toward DFI and announced the formation of a "Foreign Investment Advisory Council" to be comprised of prominent foreign and Thai businessmen. An Executive Committee for Exports has also been recently formed which has proposed a series of measures for promoting exports. 1/ A new and more liberal Labor Relations Act has been passed. It legalizes unions in establishments with over 50 workers, permits unions to federate on a nationwide basis and provides a formal arbitration channel through a Labor Relations Committee in the Ministry of the Interior. 26. Impact of Policy Measures. Government's fiscal incentives have undoubtedly encouraged investment but it is difficult to assess precisely their impact. Clearly, as recent irnvestment performance has shown, these incentives alone are not sufficient to encourage investment under unfa- vorable political conditions and uncertain prospects of stability. Whether the costs of providing these incentives in the form of taxes foregone have been commensurate with the benefits is also a matter on which no definitive judgements can be made at this stage. It is, however, strongly suspected that the potential impact of these measures has not been fully realized because of the absence of any relation of these measures to desirable and clear strategic objectives. In those instances where the objectives are clear, even in gen- eral terms (e.g. employment generation and decentralization), it is as yet too early to judge whether the incentives package will have an impact although the early signs are not too encouraging. In view of the growing importance of the industrial sector and its potential for addressing the problems of growth and employment, an effort to develop strategy, devise and refine appropriate policies and monitor their impact is of urgent priority. 27. Priorities for Future Action. The preceding paragraphs have alluded to several gaps in strategy, policy and information which need to be bridged if effective policies are to be formulated. To recapitulate, these are: (i) information: present data on several important features of the industrial sector are inadequate and a much better information system needs to be developed; (ii) coordination: new organizational arrangements need to be developed for all policies affecting industrial development and the BOI needs to be strengthened; (iii) review of promotional incentives: present ad hoc reviews of individual applications by the BOI should be replaced by a framework of broader policies along the lines outlined in paragraph 18, above; 1/ Please see the latest Bank economic report ("Thailand: Current Economic Prospects and Selected Development Issues"), No. 924-TH dated November 14, 1975 (paragraph 2.33, p. 38, Volume I).  ANNEX 2 Page 14 (iv) tariff reform: major reform of tariffs and indirect taxes is essential to establish a more uniform level of effective incentives; detailed recommendations are contained in a special report prepared under Bank sponsorship; (v) reduced reliance on direct controls: import, export, price and investment control should be administered within the framework of well designed investment incentives and reliance on direct control reduced; (vi) export incentives: the export tax credit scheme I/ should be expanded and its administration liberalized, the import duty exemption scheme should be phased out as recommended by the Bank's industrial sector mission; (vii) location strategy: a two-phase strategy should be adopted with initial emphasis being placed on location of new pro- jects near the ports being developed in the South and South- East. The second stage should emphasize location on devel- opment zones in other areas. Policies encouraging infra- structure and transport rate differentials in favor of the Bangkok area should be reviewed, and the over-provision of incentives to relocate should be avoided. 1/ Administered by the Fiscal Policy Office in the Ministry of Finance.  THiAILAND INDUSTHIAL FINANCE CORPORATION OF THAILAND Gross Domestic Product at Constant 1962 Market Prices by Industrial Origin (Billions of Baht) 1969 1970 1971 197