Thailand - South Bangkok Thermal Power (Unit Four) Project

RESTRICTED x ;(ftl'9j Report No. P-986 This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK POR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ELECTRICITY GENERATING AUTHORITY OF THAILAND WITH THE GUARANTEE OF THE KINGDOM OF THAILAND October 7, 1971  DiT,1NATICNAL BANK FOR RECONISTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ELECTRICITY GENERhATTG AUTHORITY OF THAIL,AND 1. I submit the followiing report and recommendation on a proposed loan to the Electricity Generating Authority of Thailand (EGAT) with the guarantee of the Kingdom of Thailand for the equivalent of US$ 27 million to help finance a project for the addition of a hth thermal unit to the South Bangkok Generating Station of EGAT. The lean would have a term of 20 years, including 5 years of grace, with interest at 71S% per annum. PART I - INTP.ODUCTION 2. The Bank has extended 22 loans but no IDA credits to Thailand. Total Bank lending mounts to $393.9 million equivalent, of which $32.2 million has been cancelled. The greater part of Bank assistance to Thai- land has been for transportation ($154 million), irrigation ($69 million), power ($64 million), and for a multipurpose power/irrigation project ($66 million). Other loans have been made for education and industry. A sum- mary statement of Bank loans to Thailand is at Annex I. Generally, Bank- financed projects have been carried out well, particularly in the power sector. As a result of unsatisfactory bidding for tools and scientific equipment when these items were first tendered, the Closing Date of Loan 471-TH (Vocational Education Project) has been postponed a second time to allow for rebidding; the first postponement was necessary due to delays in appointing experts under bilateral assistance. The Closing Date of Loan 455-TH (Second Highway Project) has recently been postponed to allow the Department of Highways to settle contractor's claims and to continue paying for the services of engineering advisers pending the Bank's consid- eration of a proposed fifth highway loan. The Third and Fourth Highway Projects being financed under Loans 535-TH and 626-TH are proceeding satis- factorily. Construction of the Sirikit Dam Project (Loan 514-TH) is on schedule. There have been no significant disbursements under Loan 65-TH (South Bangkok Unit No. 3 and Sirikit Dam Units No. 1 and 2) pending the shipment of equipment. Disbursements under Loan 702-TH (Third Bangkok Port Project) of August, 1970, have been slow to begin due to delays in awarding the main civil works contract; the contract is expected to be let this month. 3. Kasetsart University and the Government have been invited to negotiate a proposed loan for the expansion and improvement of the University's facilities but a date has not yet been agreed. Appraisal of the fifth highway project is now being completed. Consideration of these two projects by the Executive Directors is dependcnt on the Govern-  - 2 - ment obtaining legislative authority to continue borrowing from the Bank (as distinct from guaranteeing Bank loans, which presents no problem). This legislation is unlikely to be enacted by Parliament before the end of this year. A teleccamunications project, for which ADB may provide part of the financing required, is expected to be appraised in March 1972. 4. Thailand became a member of IFC in 1956. IFC has made two equity investments in the Industrial Finance Corporation of Thailand (IFCT). The first for $193,108 was made in 1964 when the Bank and IFC assisted in the reorganization and strengthening of IFCT and the second in February, 1971, when IFC exercised its rights to a new'r share issue for $191,388. IFC continues to hold all its shares in IFCT. In 1959, IFC made a loan of $300,000 to Concrete Products and Aggregate, Ltd. which has since been sold and in 1969 IFC participated in the expansion program of the Siam Cement Group of companies. The six companies in the Group are Thailand's largest producers of building materials. IFC's investment took the form of an $18 million long-term loan and an equity participation of about 'P4 million. IFC has since sold loan and equity participations totalling about $15.9 million, and $223,500 has been repaid. Currently, IFC has no projects under active consideration in Thailand, although pre- liminary consideration is being given to a steel project. However, in the longer term the prospects for new IFC investments appear to be moderately good. PA-T II - THE ECOIONMY 5. A report entitled "Current Economic Position and Prospects of Thailand" (EAP-15a, dated August 20, 1970) was distributed to the Executive Directors on September 4, 1970. An economic mission visited Thailand in July and August 1971 and reviewed the draft Third National Economic and Social Development Plan (1972-1976) which began on October 1, 1971. At the same time, sectoral missions assessed the current situation and pros- pects in agriculture, tourism and in the Northeast region. The mission's report is expected to be ready for distribution in December, 1971. Country data are at Annex II. Recent Economic Developments 6. During the 1960's Thailand achieved rapid economic growth, com- bined with surpluses in the balance of payments and a remarkable degree of price stability. Agricultural production increased in response to increas- ing external demand. There was a rapid expansion of manufacturing mainly for the domestic market, largely due to a dynamic private sector and from 1965 construction and services in particular were further stimulated by the high level of US military expenditures. GDP increased by over 8 percent annually between 1960 and 1969, reaching a per capita level of about $180 at present. 7. A period of adjustment to distinctly slower growth of foreign exchange receipts began in 1969. External demand for Thailand's main export, rice, weakened; prices fell, and sales abroad remained at around  one million tons. As a consequence, the income of rice farmers who are the vast majority of the Thai people, was reduced considerably. Simul- taneously, US military spending in the country declined gradually from $254 million in 1968 to an estimated $167 million in 1971. The slowdown in actual and expected income growth due to these two factors led after some lag to a levelling off in private investment in 1970. As a result some unemployment has appeared in urban areas. GDP growth is estimated at 6 percent in 1970 and is expected to be similar in 1971. Import growth which had been rapid until 1969, declined sharply in 1970 under the effect of slower investment and production growth. But, this decline was not enough to prevent a further widening of the current account deficit to $327 million in 1970, compared to $108 million three years earlier. Foreign exchange reserves declined from V150 million in June 1968 to about ',800 million in June 1971. 8. Thailand's traditionally cautious fiscal and monetary policies have come under pressure in recent years. Substantial increases in ex- penditures on external and domestic security, as well as on development, have been accompanied by slower growth of revenue and non-expansionary borrowing, so that the cash deficit financed by borrowing from the banking system increased considerably in 1971. Nevertheless, Thailand continued to enjoy remarkable price stability, thanks to expanding production and imports. 9. While the Government has taken a number of remedial measures, such as an increase in import duties and other indirect taxes and the removal of rice export taxes, fundamental problems of economic and social development remain to be solved. These are the focus of the Third Plan, which began on October 1, 1971. Third Five-Year Economic and Social Development Plan 10. The major objective of the Third Plan is to achieve average GDP growth of 7 percent. The basic strategy is to diversify and accelerate ex- ports of agricultural commodities and manufactured goods. To reach this target, major policy measures to stimulate diversification and export growth are required, and the Government would have to deal more effectively than in the past with the required structural changes. 11. The major constraint to economic development over the next five years will probably be the balance of payments. Given the structure of the current account and the expected further decline in US military expendi- tures, exports will have to increase at more than twice the rate of imports to prevent an unduly sharp increase in the current account deficit. 12. Nevertheless,the current account deficit is likely to increase considerably during the Third Plan period. Only a small part of the deficit can be financed by further drawdown on external reserves; thus a large increase in net capital inflow is required if development is not to be disrupted. In the past, Thailand relied heavily on private capital  particularly suppliersI credits, to finance most of the foreign exchange requirements of industrial investment and part of the infrastructural needs. Ifhile the Plan expects a further considerable increase in private credit, a slowdown in the growth of suppliers' credits seems to be called for within the framework of a more selective investment promotion policy. 13. Although Thailand has achieved a remarkable rate of national savings at about 22 percent of GDP, primarily generated in the private sec- tor, there are not enough channels to mobilize private savings for public investment. Improvements are required in the revenue system on grounds of economic efficiency and social equity. The collection of customs, income and business taxes is lax and, if improved, could significantly raise revenues even at existing rates. For revenue purposes a number of excise taxes and import duties might be raised; and the Cabinet is present- ly considering new property and inheritance tax measures. i4. Although some 80 percent of the labor force is engaged in agri- culture, it accounts for only about 30 percent of GD? - a measure of the imbalance in incomes between agriculture and the rest of the economy. From 1960 to 1969, the growth rate of agricultural output averaged nearly 9i percent annually, largely through the cultivation of additional land areas. Rice, accounting for 31.2 percent of agricultural output in 1969, is the dormiinant commodity and Thailand's major export. Unfavorable world markets for rice have sharply reduced export volume and prices. Because of the unfavorable prospects for rice exports, the strategy for agricultural de- veloprnent in the Third Plan calls for the diversification of agriculture towards ccrmnodities with more favorable export potential. The target of the Plan is to increase the value of agricultural exports by some 33 per- cent. Maize alone, which developed rapidly in the 1960's, is expected to account for about one-third of the projected increase and together with rubber and tapioca would account for about two-thirds. 15. The export targets mentioned above emphasize the necessity of developing rainfed agriculture if the goals of the Plan are to be achieved. Multiple cropping under rainfed conditions has great potential; the crop season can be stretched out to take advantage of early rains and residual soil moisture after the main crop has been harvested. More important, however, is the need to increase crop productivity. Past increases in production have been obtained through the extension of cultivated areas with only minimal improvement in yields. Further encroachment on the large forest areas which are available will probably continue; but without higher yields, incomes of farmers wrill continue to be depressed. There are pressing needs for quality seeds which are responsive to fertilizers, and for a price policy which provides incentives to use fertilizer. There is also an urgent need to improve the marketing system, particularly for food grains. Up-country drying and storage facilities are inadequate and thus reduce prices to farmers - particularly at harvest time. Inadequate port facilities are an obstacle to efficient export marketing. 16. The manufacturing sector, which enjoys considerable protection, is mainly oriented towards import substitution. The rapid growth rate of  value added of nearly 11 percent annually during 1960-1969 slowed down to 7.5 percent in 1970. The Plan expects continued growth at an annual rate of 8 percent and a tripling of industrial exports from a low base to pl65 million by 1976. Major increases would come from a number of industries concentrating on exports, including fruit and vegetable canning, watch parts, wood products, as well as some industries, such as textiles and cement, which produce both for the domestic and export markets. The planned production and export targets seem feasible if adequate export incentives are provided and if measures are taken to raise efficiency by reducing tariff protection. 17. Distance from markets, both domestic and foreign, unfavorable soil condition and problems of security have all held back development in the Northeast, where per capita income is one-half of the national average and only one-third of that of the Central Region (including metropolitan Bangkok). Over the last 18 months considerable bilateral assistance and Government resources have been devoted to the preparation of a Northeast regional development plan. The extent to which the Northeast plan dill form the basis for Government policy and investment in the Northeast has not yet been decided. It is now recognized that a concentrated effort to raise per capita income in the Northeast will require more than the creation of infrastructure and the elimination of obvious marketing bottlenecks. In support of the national policy to diversify and increase exports, emphasis is expected to be given to increasing production and improving the quality of kenaf, cassava and ground nuts. However, the development of agro-business and manufacturing based on the region's own resources will also be required. 18. Family planning has made encowraging progress in Thailand. Although it was unofficially initiated only some years ago, acceptance rates in Bangkok and the provinces are already high. Family planning is now offi- cial policy of the Government and the Plan aims at reducing the population growqth rate fron 3.1 percent in 1970 to 2.5 percent in 1976. This target, while ambitious, appears attainable provided the family planning program receives the wholehearted support of the Government and the relatively modest funds required. 19. External gross capital requirements, official and private, are estimated at $2h80 million in 1972-1976, compared to about $1740 million in 1967-1971. To avoid a heavy debt service burden, efforts are needed to increase steeply the official capital inflow. Major bilateral donors (as well as the Asian Development Bank) are willing to consider increasing lending to Thailand. However, a major constraint to achieving the considerably higher level of official capital inflows required to maintain an adequate level of growth is the shortage of suitable projects designed to implement the strategy of the Third Plan. A great deal of effort will be required to prepare projects in priority sectors such as agriculture (together with supporting services and infrastructure) and education, and possibly mining, industrial estates, urban development and provincial water supplies. Preparation of suitable projects will take time, partic- ularly in the case -f rainfed agriculture, in -ibich the Bank is seeking ways to assist Thailand. In the meantLme, the main emphasis of Bank  - 6 - lending in the next year or so will continue to be on lnfrastructure pro- jects where there is a justifiable need for Bank assistance. 20. Notwithstanding some deterioration in the balance of payments and the prospective increase in debt service as a proportion of export earnings, Thailand has a considerable margin of creditworthiness. The debt service burden can be mitigated if Thailand takes in time the necessary measures to diversify and accelerate export growth and is able to increase the share of official capital in overall external financing.  Part III - THE PROJECT A. Sector Background 21. In 1969 three public electricity authorities, the Yanhee ELectric- ity Authority, the Northeast Electricity Authority and the Lignite kathor- ity were merged to form the Electricity Generating Authority of Thailand (BIAT) with national responsibility for generating and transmitting power. EGAT now accounts for 96% of Tha-land's electrical energy production. Distribution is the responsibility of two publicly owned organizations, the Metropolitan Electricity Authority (MEA) and the Provincial ELectricity Authority (PEA). MEA services the Bangkok area while PEA is responsible for distribution outside Bangkok, and, in areas not accessible to EGAT's transmission, also generates electrical energy (30 of national production); the remaining 1% is generated by private industrial plant. In FY 19711/ 71% of EDATIs total sales were made to MEA, reflecting the importance of the Bangkok market, and 20% to PEA with the balance going to large individual consumers; these percentages are likely to be maintained over the next several years. While EGAT comes under the Ministry of National Development and MEA and PEA under the finistry of Interior, the authorities maintain a close relationship and sector coordination and planning are satisfactory. 22. As of December 1970 MAT had a generating capacity of 1,182 MW of which about 38