Thailand - Second Highway Project

RESTRICTED FILE COPY Report No. P-484 'This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF THAILAND FOR A SECOND NATIONAL HIGHWAY PROJECT June 1, 1966  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEV7,LOPMENT REPORT AND RECONiIENDATIONS OF THE FRESIDENT TO THE EXECUTIV)E DIRECTORS ON A PROPOSED LOAN TO THE KIiNGDOM OF THAILAND FOR A SECOND NATIONAL HIGHW.AY PROJECT 1. I submit the following report and recommendations on a proposed loan in an amount in various currencies equivalent to $36 million to the Kingdom of Thailand for a Second Highway Project. PART I - BACKGROUND 2. In June, 1963, the Bank made a loan of $35 million to Thailand (Loan 341-TH) for a Highway Project. The loan was reduced in 1964, at the Government's request, to `25 million because, subsequent to the appraisal of the project, work was done on some of the project roads by the Highway Department, thus postponing the need for the major works by contract envisaged in the original project. After a slow start, due to delay in appointing consultants, progress on the first project is now satisfactory, and all construction contracts have been awarded. The project is expected to be completed on schedule towards the end of 1967. 3. Consulting engineering services provided under the first loan to prepare the way for further projects included the preparation of feasibility studies and final engineering for a substantial part of the proposed project, and also provided assistance in the re-organization of the Highway Department and the training of Thai technical personnel. 4. An investment of $h00 million is envisaged during the period of Thailandts Second Development Plan, 1965-1971, for the construction of 4,500 kms. of new roads and the paving of over 3,100 kms. of existing roads, which will almost double the present road capacity. Highway construction has not kept pace with other development, and the Government is placing special emphasis on highway construction and improvement in its economic development program. The proposed second highway project is an integral part of the development program. The Government is planning to seek external assistance in financing further phases of the program at a later stage. 5. The proposed loan was negotiated by a delegation headed by H.E. Sukich Nimmanheminda, the Thai Ambassador in Washington, and Mr. Nukul Prachuabmoh, Deputy Director General of the Department of Highways. Negotiations were completed on May 23, 1966. 6. If the proposed loan is approved, it will be the fifteenth Bank loan to Thailand. Of these, five have been fully disbursed. The following is a summary statement of Bank loans to Thailand as at April 30, 1966.  -2- Year of Borrower Purpose Principal Undisbursed Loan Amount 1950 Kingdom of Thailand Railway Rehabilitation $ 3.0 Kingdom of Tlailand Port Improvement 4.4 Kingdom of Thailand Irrigation 16.0 1955 State Railways Railway Rehabilitation 12.0 1956 Port Authority Port Improvement 3.3 1957 Yanhee Electricity Multi-purpose 66.o 0.2 Authority 1961 State Railways Railway Rehabilitation 14.6 4.1 1962 Kingdom of Thailand Petchburi Irrigation 3.4 o.8 Kingdom of Thailand Third Chao Phya 5.6 1.0 Irrigation 1963 Yanhee Electricity Power- 6.6 0.3 Authority Kingdom of Thailand National Highways 25.0 21.0 1964 Industrial Finance Industry 2.5 1.8 Corporation of Thailand Kingdom of Thailand Mekiong Irrigation 22.0 19.1 1965 Yanhee Electricity Power 6.o 5.3 Authority Total (less cancellations): $ 192.4 of which has been repaid: 34.5 Total now outstanding: 157-9 Amount sold: $12.2 of which has been repaid: 7.1 5.1 Total now held by the Bank: $ 152.8 Total undisbursed: $ 53.6 No IDA credits have been made to Thailand 7. Progress under Bank-financed projects in Thailand has generally been satisfactory. Complicated procurement procedures caused some delay in making disbursements from the 1961 Railway Loan (280-TH), but arrangements havre now been made which are expected to commit the balance of the available funds. The Industrial Finance Corporation of Thailand (IFCT) has been slow to submit projects for financing under Loan 370-TH signed in March 1964. IFCT has experienced some organizational and management difficulties which are now-being resolved.  -3- The following proJects are now under conside:ration, aid are expected to be presented to the Executive Directors by the end of September: a) Vocational Education - $ 6 millicn b) Nan River Project - about$25 million c) Telecommunications - $20 million PART II - DESCRIPTION OF PROPOSED LOAN 9. The main characteristics of the proposed loan are as follows: Borrower: Kingdom of Thailand Amount: The equivalent in various currencies of ;$36 million. Purpose: To assist in financing the improvement and construction of four national primary highways, the preparation of feasibility studies and engineering for additional highway sections and the services of consulting engineers. Amortization: 24 years including 4 years of grace; semi-annual instalments from October 15, 1970 to October 15, 1990. Interest: 6% per annum. Conmitment Charges: 3/8 of 1% per annum. PART III - THE PFDJECT 10. A detailed appraisal of the project (TO-531 (a)) is attached (No. 1). 11. The Government's second Five-Year Development Plan makes provision for very substantial infrastructure investments to facilitate the growth of the national product, which is assumed to average about 7% p.a. between 1967-1971. Agricultural,'production is likely to grow at a somewhat slower pace, while manufacturing, mining and transport are expected to grow at rates close to 10%. The project is part of a comprehensive program of highway improvements included in the Plan and includes the improvement and construction of sections of four national primary highways totalling about 770 kms; the review of existing engineering designs and the supervision of construction and  improvement works on the project roads; and the preparation of feasilTility studies and the revision of engineering for about 190 kms. of road. 12. As the result of ftrther economic development, the annual increase in the vehicles using the roads, which has averaged 14% in recent years, is expected to continue. In assessing the economic benefits from the project, it has been assumed corBervatively that traffic will grow at somewhat lower rates than in recent years, without taking into account the recent increase in military traffic. In addition to normal traffic growth, the road improvements are expected to generate new traffic in areas of economic potential. The most important economic benefits resulting from the project will be a reduction in transport costs and a saving in highway maintenance costs. It is estimated that the average rate of return for the whole project will be about 25%. 13. The project will be administered by the Department of Highways of the Ministry of National Development, which is responsible for the construction, improvement and maintenance of all classes of national roads in the country. The Department is being reorganized in accordance with recommendations of consultants retained under a U.S. AID grant and implemented with assistance of consultants employed under the first Bank loan. Construction studies and designs for the project roads have already been made by consultants but some checking and minor revision of designs are necessary on the Nakhon Sawan-Chiengrai Highway. Consultants will undertake a feasibility study to determine the appropriate design standards, and then prepare final engineering for the section #f this road between Thern and Ngao, and will also supervise the construction of the project roads. 14. Unit price contracts for construction work will be placed on the basis of international competitive bidding. A contract amounting to $3.4 million was awarded in December 1965 for the first section of the Bangkok-Sriracha HiCjhway. In placing this contract the Department of Highways followed the Bank's prescribed procedures and it is proposed that this road section should be included in the project financed by the proposed loan. 15. The estimated cost of the project is $72.5 million. The proposed loan would finance the foreigi currency costs of road construction and improvement, estimated at about 48% of the costs of this work, which, including a 15 allowance for contingencies, are expected to amount to 832 million. The balance of the loan would meet the full foreign currencyr costs of employing consultants engaged on the project. The balance of the funds needed to complete the project would be provided by the Government. PART IV - LEGAL INSTRUIPNTS AND AUTHORITY 16. The draft Loan Agreement between the Bank and the Kingdom of Thailand and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to  -5- the Executive Directors separately. The Loan Agreement conforms substantially to the usual pattern for projects of this kind. PART V - THE ECONOMY 17. An economic report on the situation of Thailand (FE-53b) was distributed to the Executive Directors on May 25, 1966. A brief resume of the report is given in the following paragraphs. 18. The Thai economy has established an impressive record of economic growth. In the early 1960's real output rose by 7.5% a year. Rapidly rising exports and domestic savings ena;led the economy to support a steep increase in investment, from under 16% of gross domestic product in 1957 to 22% in 1965, while the resource gap went up only marginally. This is a remarkable achievement for a country which, despite fast growth, is still relatively poor, with an average per capita income of $120. In general, the policies of the Thai Government were well suited to the reeds of the economy as they were directed towards encouraging private activity. Proper management of fiscal affairs and monetary policy maintained overall financial stability, encouraged growth of exports, and attracted an increasing flow of foreign private capital. Public outlays were raised substantially in recent years and on the whole were directed effectively towards meeting urgent economic and social needs. 19. The five years 1967-1971 covered by Thailand's Second Plan are expected to be a period of continuing economic growth, though the pace is likely to be somewhat slower than in the recent past. Growth in real income is likely to be around 6.5 - 7% a year which would permit further substantial increases in income per head. As in the past, investment will probably increase more rapidly than gross domestic product. Given the slower growth of exports and domestic savings that is expected, Thailand's dependence on foreign capital inflows, particularly from official sources, is likely to increase somewhat. Thailand's performance and the prospect of increasing investment along satisfactory lines would justify such an increase. The additional borrowing abroad by the public sector, which would seem necessary to meet the prospective capitalinflow requirements, would raise no question of creditworthiness. PART VI - COI4PLIANCE WITH ARTICLES OF AGREE4ENT 20. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 6 - PART VII - RECON1MIDATION 21. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to Kingdom of Thailand (Second Highway Project) in the amount of the equivalent of U.Sc $36 -ri1llion RESOLVED: THAT the Bank shall grant a loan to the Kirg dom of Thailand in an amount in various currencies equivalent to thirty-six million United States dollars (U.S. $36,QCO,O0)1. to mature on and prior to October 15, 1990, to bear interest at the rate of six per cent (6%) per annum, and to be upon such other ter;.s and conditions as shall be substantially in accordance with the termas and conditions set forth in the form of Loan Agreement (Second Highway Project) between the Kingdom of Thailand and the Bank, which has been presented to this meeting. Washington, D.C. George D. Woods .!Junu 1, 1966 President