Thailand - Irrigation Projects

CiRtCULilIIN COP RESTRICTED ' NED TO A R iOVES DIMPOY Report No. P-305 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT FILE COPY REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO THE KINGDOM OF THAILAND FOR THE THIRD CHAO PHYA PROJECT AND FOR THE PETCHBURI IRRIGATION PROJECT December 12, 1962  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPi'ENT REPORT AND RECOI4MNENDATIONS OF THE FRESIDENT TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO THE KINGDOM OF THAILAND FOR THE THIRD CHAO PHYA PROJECT AND FOR THE PETCHBURI IRRIGATION PROJECT 1. I submit the following report and recommendations on two proposed loans to the Kingdom of Thailand: one, in an amount in various currencies equivalent to $5.6 million, to assist in financing a project in about 800,000 hectares of the Chao Phya irrigation area of the Central Plain, for the further development of irrigation and drainage and the improvement of transportation; the other, in an amount in various currencies equivalent to $3.4 million, to assist in financing a project in Petchburi Province, S.W. of Bangkok to improve irrigation, drainage, flood control and transportation facilities in an area of about 53,000 hectares. PART I - HISTORICAL 2. In 1950 the Bank made a loan of 818 million to the Kingdom of Thailand for an irrigation project in the Chao Phya area. The main features of the project were the Chainat barrage, which commands the Chao Phya irrigation area, and necessary main and lateral canals. Some work on the canal system included in this project still remains to be done, but it will be completed in 1964 to coincide with the completion of the second stage of development begun in 1957. 3. The Yanhee multi-purpose project, for which the Bank made a loan of $66 million in 1957, although primarily an electric power project, can be regarded as the second stage of development of irrigation in the Chao Phya area. The dam and reservoir which form part of that project are nearing completion and will help to regulate the flow of the Chao Phya river, increase the amount of water available for irrigation and provide a measure of flood control. 4. The Third Chao Phya Project would develop the present irrigation system in the Chao Phya area by providing ditches to bring a controlled supply of water to the farms. The project also provides for the improve- ment of maintenance standards, the improvement and expansion of agricul- tural services and the development of transportation facilities. 5. The Petchburi Project would develop an existing irrigation system in another part of the Central Plain by providing the means to bring an increased and controlled supply of water to farms in the Petchburi area.  - 2 - 6. The Third Chao Phya Project and the Petchburi Project were investigated by Bank Missions - in August 1961 and, following corres- pondence concerning the scope of the two projects, again in July 1962. 7. The proposed loans were negotiated with a delegation headed by H.E. Visutr Arthayukti, the Thai Ambassador in Washington, and M.R. Chakratong, Under-Secretary of the ilinistry of Agriculture. Negotiations were completed on November 30, 1962. 8. If the proposed loans are made, they will be the Bank's eighth and ninth loans in Thailand, and vill increase the total amount lent by the Bank to t130 million, net of cancellations. The status on Novpm- ber 30 of loans previously made.was as follows: Amount of Loan Year Borrower Purpose Net of Cancellations 1950 Thailand Railways Rehabilitation $ 3,000,000 1950 Thailand Port Improvement 4,400,0o0 1950 Thailand Irrigation 18,000,000 1955 State Railways Railways Rehabilitation 12,000,000 1956 Port Authority Port Improvement 3,259,078 1957 Yanhee Electricity lliulti-Purpose 66,ooo,ooo Authority 1961 State Railways Railway Rehabilitation 14,600,000 1/ Total net of cancellations ; 121,259,078 of which has been repaid 16,184,078 total now outstanding $ 105,075,000 Amount sold $ 4,503,480 of which has been repaid 2,549,000 1,954,480 Met amount held by Bank $ 103,120,520 J 9. No IDA credits have been made to Thailand. Amount of Loan was $22.0 million. The Borrower has requested cancel- lation of $7.4 million, but the exchange of letters giving formal effect to the cancellation has not yet taken place. j Includes $27,571,548 not yet disbursed as of November 30, 1962  - 3 - PART II - DESCRIPTION OF PROPOSED LOANS 10. The main characteristics of the proposed loans are as follows: Third Chao Phya Project Purpose: To assist in the financing of: the con- struction of 20,000 kilometers of distribution ditches and the necessary drains; the construction of 275 kilo- meters of feeder roads; the dredging of existing navigation canals; the construction of farm dikes; the develop- ment of improved irrigation practices; the reorganization of three existing experimental stations; the improvement and expansion of extension services; and an overall study of the existing organization of operations and maintenance in the Royal Irrigation Department. Borrower: Kingdom of Thailand. Amount: The equivalent in various currencies of $5.6 million. Interest: 51% per annum, including 1% commission. Commitment Charge: 3/4 of 1% per annum. Payment Dates: May 15 and November 15. Amortization: Semi-annual instalments from November 15, 1965 to November 15, 1977. Petchburi Irrigation Project Purpose: To assist in the financing of: the construction of a dam at Kang Krachan; the enlargement of existing diversion gates and of about 70 kilometers of main and lateral canals; the construction of about 135 kilometers of supply canals and of about 180 kilometers of drainage canals; the construction of about 1,700 kilometers of distribution ditches for delivery of water to farms and of necessary farm dikes; the construction of about 100 kilometers of feeder roads in the project area; the development of improved irrigation practices; the  4h - establishment of an experimental farm; and the improvement and expansion of extension services. Borrower: Kingdom of Thailand. Amount: The equivalent in various currencies of $3.4 million. Interest Rate: 51% per annum, including 1% commission. Commitment Charge: 3/4 of 1% per annum. Payment Dates: May 15 and November 15. Amortization: Semi-annual instalments from November 15, 1966 to November 15, 1982. PART III - LEGAL INSTRUMENTS AND AUTHCRITY 11. Attached are drafts of the following documents which would give effect to the proposed loans: (a) Loan Agreement between Kingdom of Thailand and the Bank (Third Chao Phya Project) (No. 1). (b) Loan Agreement between Kingdom of Thailand and the Bank (Petchburi Irrigation Project) (No. 2). 12. The Loan Agreements conform substantially to the customary pattern followed in projects of this kind. Both Loan Agreements provide, in addition to the usual provisions, that the Borrower shall cause works and facilities not included in the projects but necessary to or required for their efficient operation to be properly operated and adequately maintained and repaired (Section 5.02). In addition, the Loan Agreement for the Third Chao Phya Project provides that the Borrower shall continue its program of constructing feeder roads in the area of the project after the completion of the project (Section 5.09). 13. Also attached are the Reports of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank relating to the Third Chao Phya Project (No. 3) and to the Petchburi Irrigation Project (No. 4).  PART IV - APPRAISAL OF THE PROPOSED LOANS 14. Detailed appraisals of the Third Chao Phya Project (TO-343b) and of the Petchburi Irrigation Project (TO-319c) are attached (Nos. 5 and 6). Justification of the Projects 15. To enable the Thai economy to continue to grow faster than the in- crease in population, agricultural production must be increased through im- provements in yields, greater diversification and expansion of the cul- tivated area. Although there has been a notable rise in recent years in the production of such crops as maize, kenaf, cassava and sugar cane, an in- crease in the output of rice remains an important objective. For rice is not only the staple food of the population, but also the largest source of foreign exchange earnings. These irrigation projects will increase agri- cultural production, especially of rice, through improvements in yields, further diversification ad some expansion of the cultivated area. 16. The Third Chao Phya Project. In calculating the economic return on this project account has to be taken of the irrigation investment in the first Chao Phya project and in the Yanhee project. It is expected that as a result of the three projects production of paddy rice would increase by about 980,000 tons and that there would be substantial increases in the production of other crops, The total benefit to the economy from the three projects would be about $56 million equivalent annually, against an irrigation investment in the three projects of about $118 million equivalent. Without the investment of about $12 million in the proposed project, some of the potential benefits from the much larger investments in the first Chao Phya and the Yanhee projects would not be realized. The marginal return on this project should be higher than the average return on all three projects. 17. The Petchburi Irrigation Project should make possible an increase of paddy rice production of 45,000 tons per annum, and significant incieases in the output of other crops. The net benefit to the econory is estimated at $4.6 million equivalent annually, against an investment in the project of about $11 million. 18. The Government would benefit from additional yields from levies on rice exports and from taxes affecting the processing, transporting and distrib- uting of increased production of rice and other crops. Foreign exchange earnings from exports, primarily rice, are expected to increase as a result of these two projects. Project Execution 19. Both projects would be carried out principally by the Royal Irri- gation Department (RID) of the Ministry of Agriculture.  - 6- Costs of the Projects 20. The total cost of the Third Chao Phya Project is $2h2 million ($12.1 million equivalent) of which about *~'8.7 million equivalent would be in foreign exchange. The Government prefers to provide the foreign exchange for gasoline, oil and lubricants and for interest payments during construc- tion, leaving $5.6 million to be financed by the proposed loan. 21. The total cost of the Petchburi Irrigation Project is g220 mil- lion ($11.0 million equivalent) of which about $4.9 million equivalent would be in foreign exchange. Again the Government prefers to provide the foreign exchange for gasoline, oil and lubricants and for interest pay- ments during construction, leaving $3.4 million to be financed by the proposed loan. Procurement 22. llachinery and equipment to be financed under the proposed loans would be procured on the basis of international bidding. Economic Situation 23. A report "Current Economic Position and Prospects of Thailand" (No. FE-25a) was circulated to the Board on July 19, 1962 (SecM62-130). It noted that Thailand's real output has been expanding at an average annual rate of 4% to 5%. The growTth of the economy during recent years has taken place in the context of a favorable balance of payments and internal financial stability. Exports have increased steadily since 1958, reaching a record level in 1961 which was approximately maintained in the first half of 1962. This had been due partly to favorable prices but even more to increases in the quantities of virtually all commodities produced. Invisible earnings also increased substantially. Up to 1961, imports and invisible outlays rose less rapidly than total foreign exchange earnings, and in 1961 the economy experienced its first current account surplus since the late nineteen forties. Capital inflow in the form of US grants, the use of foreign loans and private investment has continued at over $50 mil- lion a year, and between the end of 1959 and early 1962 foreign exchange reserves increased by $180 million. 2h. This year, however, imports have continued to increase, but the seasonal decline in exports has been more marked than usual. In spite of the continued capital inflow, foreign exchange reserves have not in- creased since May. At the end of October they amounted to $477 million, equivalent to about one year's imports at the current level. The increase in imports appears to be associated with an expansion of government develop- ment expenditures and a consequent reduction in the deflationary influence of public finance during 1962. Private investment demand also appears to be high, and bank credit to the private sector rose substantially. The statistics show a drop in the money supply in 1962, but this appears to be due to shifts from demand to time deposits resulting from a change in the structure of interest rates on deposits brought about by a new banking act, rather than to any real reduction in the liquidity of the economy.  - 7 - 25. The recent weakening of exports is due to factors which are likely to persist for several years, namely,a decline in the exportable surplus of rice from the record 61-62 level, and falls in the prices of several key commodities. On the other hand, if investment is maintained at a level necessary to ensure an adequate rate of growth, import demand will continue to increase. The technical and administrative capacity of the public sector, with advisory assistance provided by the Bank and other agencies, is expected to increase and to enable the Government to undertake an expanded development program. The budget for 1962/63 provides for a substantial increase in expenditure and forecasts a budgetary deficit. Some customary underspending may be expected, but it is likely that the deflationary influence of public finance will be eliminated altogether in the coming year. Foreign exchange reserves may therefore decline somewhat in the next few years even if the recent rate of capital imports is main- tained. 26. The present official external debt amounts to $232 million, the service burden on which is a modest 3% of current foreign exchange earnings rising to 5% of projected earnings in 1966. The service on the proposed loans will have a minimal effect on these percentages. Prospects of Fulfilment of Obligations 27. The RID is an efficient department and its Director General is a competent and experienced irrigation engineer. With the assistance of consultants and other experts supervising and organizing certain aspects of the two projects as provided in the loan documentation, the RID should be capable of constructing, operating and maintaining the projects efficiently. 28. The Government of Thailand has given acceptable assurances with regard to the provision of funds to complete the financing of the projects and to maintain them. 29. Thailand should have no difficulty in servicing its external debt including the two proposed loans. PART V - COMPLIANCE WITH ARTICLES OF AGREEMENT 30. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Bank.  - 8 - PART VI - RECOMI,iENDATIONS 1. I recommend that the Bank make two loans to the Kingdom of Thailand: one for the Third Chao Phya Project in an amount in various currencies equivalent to $5.6 million, for a term of 15 years including a grace period of three years; the other for the Petchburi Irrigation Project in an amount in various currencies equivalent to $3.4 million, for a term of 20 years including a grace period of four years; that both loans bear inter- est (including commission) at 5-1% per annum and be subject to such other terms as are specified in the relative draft Loan Agreements attached; and that the Executive Directors adopt Resolutions to that effect in the form attached (Nos. 7 and 8). Eugene R. Black President Washington, D.C. December 12, 1962