UV18-3§SG/3o/7 fl No. P-ll RESTRICTED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE THREE PROPOSED LOANS TO THAILAND October 23, 1950 INT7..Ni TIONAL 9fiNK FrR RECONSTRUCTION A1fr DEVELOPM1ET AC REPORT AND R7hC 7EN1TDATIONS OP TrH PRESIT)i rNT TO THE EXECUTIVE rIRECTOAS CONC.;RN1I;OT T-R PRW7OSEfD LOANrS TO T;!AILP ND 1. I submit the following report and recommendations with regard to three proposed loans to the Kingdom of Thailand in the total amount of q25,400,000 as follows: (a) ^;3,OOO,00 for the Railways Project, (b) M18,O0Oc,000 for the Irrigation Project, (c) $4,00,000 for the Port Project. PA RT I - HISTORICAL 2, During the meeting of the Governors of the Bank in Septermber 1949, the Governor for Thailand made preliminary inquiries concerning possible assistance by the Bank in financing the rehabilitation of the railways and constructing an irrigation dam on the Chao Phya river and a system of canals. He submitted technical and financial data on both these projects, and invited the Bank to send a mission to visit Thailand' Late in December 1909 the Government of Thailand requested the Bank to consider financing a hydro- electric power development at Kang Rieng, and in January 1950 financing the development of the port of Bangkok. 3. A Bank mission visited Thailand in January and February ]950. The Bank included in its mission specially engaged consultants on railways, irrigation, power and ports. 4., A proposed approach to the Thai request for a loan from the Bank was communicated to the Board on July 11, 1950. In a letter dated July l4, 1950 the Bank informed the Thai Government of the basiJ on which it was prepared to negotiate and suggested that negotiations be opened in 'ashington, D. C. 5. Negotiations for the three loans now proposed were opened on August 28, 1950. 6, The authorized negotiator on behalf of the Kingdom of Thailand was H,R.H. Prince Nan Waithayakon, Ambassador for Thailand to the United States* 7. The formal applications for the loans were submitted to the Bank by the Ambassador for Thailand in letters dated October 3 3 l950. -2- PART II - DESCRIPTION OF THE, PROPOSED LOANIS GENEIRAL 8. For all three loans, the Borrower would be the Kingdom of Thailand, a member of the Bank. 9. The Borrower has agreed that bids for equipment, supnlies and services to be financed with the proceeds of the three Droposed loans would be invited promPtly from supOliers and contractors in various countries; that as soon as practicable the Borrower would determine the bidders to whom firm contracts would be awarded; and that, if such contracts resulted in any substantial reductions in the estimates of the foreign exchange costs upon which the proposed amounts of the loans were based, the Borrower wou2cI cancel a corresponding amount of the principal of the loan or loans in-olved. A letter from the Borrower to this effect would be signed at thepsame time as the Loan Agreements. (see Appendix I) A. Railways Prolect Loan Amount 10. The loan would be in the amount of 1;3,000,00O or their equivalent in other currencies. Purnose 11. (a) The proceeds of the loan would be used to finance the acquisi- tion from abroad by the Kingdom of Thailand of equinment, supplies and services for the specific project of the rehabilitation and improvement of the Royal State Railways and, in oarticular, for (i) spare parts for rolling stock, (ii) the repair and extension of the signalling system, and (iii) the redesigning and re-equiDping of the Makkasan Wlorkshops, (b) According to present estimates, the proceeds of the loan would be apnlied to expenditures as follows; (i) Spare parts for rolling stock $ 80,000 (ii) Signalling equipment 1,120,000 (iii) Equipment for Makkasan Workshops (including consultant's fees) 1,800,000 $3,000,000 Terms of the Loan 12. The loan would be amortized by semi-annual payments beginning April 15, 1954, in the amounts set out in Schedule I to the proposed Loan Agreement. These payments would retire the entire loan by maturity on April 15, 1966. - 3 - 13. The loan would bear interest (including 1% commission) at the rate of 3 3/bla per annum. A commitment charge of 3/4% per annum has been provided for in the proposed Loan Agreement in accordance with the present policy of the Bank. This commitment charge would accrue from the effective date or fror. February 15, 1951 whichever is earlier. B. Irrigation Project Loan Amount 1). The loan would be in the amount of A.18,000,000, or their equivalent in other currencies. Purpose 15. (a) The proceeds of the loan would be used to finance tlhe acquisition from abroad by the Kingdom of Thailand of equipment, supplies and services for the specific project of irrigation, drainage and commiunica- tions of the Chao Phya river and, in particular, for (i) the construction of a barrage on the Chao Phya river; (ii) the construction of structures and penstocks for hydraulic generating units in connection with contemplated electric power development; (iii) the construction of canals and water distribution systems; and (iv) the reconstruction and expansion of the Central 17forkshop of the Royal Irrigation Department. (b) According to present estimates, the proceeds of the loan would be applied to expenditures as follows: (i) Barrage and power house $, 3,800,000 (ii) Distribution system 8,800,9000 (iii) Equipment for Central Workshops 870,000 (iv) Consulting and contractor's fees '640.,000 (v) Interest during construction for first five years 2,600,000 (vi) Contingencies 1,290j000 $18,000,000 Terms of the Loan 16. The loan would be amortized by semi-annual payments beginning April 15, 1956 in the amounts set out in Schedule I to the proposed Loan Agreement. These payments would retire the entire loan by maturity on April 15, 1971. 17. The loan would bear interest (including 1% commission) at the rate of 4% per annum. A commitment charge of 3/A% per annum has been provided for in the proposed Loan Agreement in accordance with the present policy of the Bank. This commitment charge would accrue from the effective date or from February 15, 1951, whichever is earlier. C. Port Project Loan Amount 18. The loan would be in the-amount of MI,400,000, or their equivalent in other currencies. Purpose 19. (a) The proceeds of the loan would be used to"finance the acquisition from abroad of equipment, supplies and services for the specific project of the development of the port of Bangkok, including the dredging of a channel through the sandbar at the mouth of the Chao Phya river. (b) According to present estimates, the proceeds of the loan would be applied to expenditures as follows: (i) Dredging contract %,3,OOOsOO0 (ii) Port equipment 510,000 (iii) Diesel power plant (1,500 kw) 200,000 (iv) Tugboat 160,000 (v) Navigation lights and buoys JjOpc000 (vi) Contingencies 130,000 ,%,400,000 Terms of the Loan 20. The loan would be amortized by semi-annual, payments beginning April 15, 1954 in the amounts set out in Schedule I to the proposed Loan Agreement. These payments would retire the entire loan by maturity on April 15, 1966. 21. The loan would bear interest (including 1% commission) at the rate of 3 3/L% per annum. A commitment charge of 3/14 per amnum has been provided for in the proposed Loan Agreement in accordance with the present policy of the Bank. This commitment charge would accrue from thi effective date or from February 15, 1951, whichever is earlier. LEGAL INSTRU3IENTS AND AUTHORITY. 22. Drafts of the proposed Loan Agreements between the Kingdom of Thailand and the Bank are attached-as Appendices II, III and TV. The -5- proposed agreements incorporate by reference Loan Regulations No. 3 of the Bank dated tugust 15, 1950. Pdemoranda describing the variations from the usual form of Loan Agreement are attached to each of the drafts. There is attached as Appendix V a form of letter from the Thai representative to the Bank with regard to the parliamentary action on the Loan Agreements togetller with the draft Loan Act referred to in that letter. III - APPRAISAL OF THE PROPOSED L0fNS 23. Technical Reports on the Railways, Irrigation, Port and the Chainat Hydro-Electric Project were distributed to the Board on July 12, 1950 (Document R-351). As a result of later studies and discussions betvween the Bank and the Thai negotiators, estimates of costs shown in the Tec.mical Reports on the Irrigation and Port Projects have been changed and certain modifications have been made in the Railways Project. Revised figures and justifications for the changes are shown in the "Supplements to the Technical Reports on Thailand" attached as Appendix VI. ECONOMIC JUSTIFICATION OF THE PROJECTS A. RAILVi4PYS PROJECT 24. Railway equipment is in poor condition. During the Second World Iryar the principal bridges, stations and workshops were destroyed, and about half of the rolling stock was rendered unserviceable. As a result of the destruction of the workshops and lack of spare parts, locomotives and other rolling stock have not been properly maintained. Moreover, replacement. of track is long overdue. 25. In addition to the destruction caused by the War and the lack of maintenance, the railways have had to cope with an increase in passenger traffic from 7.7 million in 1941 to about 25 million in 1948* On the other hand, freight traffic in 1949 was only 77% of the pre-war figure, although it is now on an upward trend. The proper utilization of the 2,000 wagons which are awaiting repairs could do much to expedite the movement of freight. 26. The Government of Thailand has placed orders under its Trade and Payments Agreement with Japan for rolling stock, including locomotives, It has also placed orders in the United Kingdom for the repair of three large bridges and in Japan for structural steel to repair the remaining principal bridges. 27. Of prime importance now is the rehabilitation of the workshops. They are needed not only for the day-to-day maintenance of rolling stock, but also for the vast arrears of maintenance. 28. Delays and accidents occur owing to the inadequacies of the signalling system. The Government has now undertaken the urgent task of repairing and improving the system. This is expected to reduce accidents, to speed up train movemnt and, by facilitating train movement at night. to incroase the capacity of the railways. -6- B. IRRIGATION PROJECT 29. Thailand's annual surpluses of rice available for export may be gradually reduced as a result of the growth of. population, unless there is a corresponding increase in production. New marginal lands are being opened up but their yield is low. The export of rice is Thailand's principal source of foreign exchange. 30. The Government of Thailand has prepared several plans to increase rice production. Among these the Chao Phya Irrigation Project is the most important. For this purpose a reinforced concrete barrage will be constructed on the Chao Phya river together.with the necessary canals and distribution system in the area commanded by the barrage. The Project is designed primarily to provide an assured water supply, properly controlled and distributed, to an area of about.2,260,000 acres. Further benefits will be obtained in the form of hydro-electric'power and improvements in water. communications throughout the area. Plans for the installation of hydro- electric facilities have been made and the construction of .penstocks in the barrage will allow for this development at''a later;,stage.' 31. The execution of the Project should'result in an estimated annual increase in the production of paddy in the Central Plain of 840,500 metric tons and, in addition, it should be possible to'grow lOO1OOO metric tons of soya beans annually. After allowing for increased,'internal consumption, the annual export surplus of rice from the irrigated area covered by the Project is expected to increase by 470,000 tons, and about 75,000 tons of soya beans should be available for export every year, At present prices the expected additional exports each year would have a value of the equivalent of nearly I60,000,000, or more than three times the foreign exchange component of the cost of the Project ($18,000,000). C. PORT PROJECT 32. About 90% of Thailand's foreign trade is conducted through the port of Bangkok and it is therefore of great importance that the port should be accessible and well equipped. A sandbar at the mouth of the Chao Phya river, however, prevents vessels over 4,000 to'5,000 fWT from entering the river fully laden although there is ample depth for much larger vesaels'in the river itself. Many vessels darrying cargo for Bangkok are now forced to load and unload cargo at an open roadatead in the lee of an island some 56 kilometers from the mouth of the river. Thip involves expensive lighter- age services and delays. 33. In 1939, in order to remedy this situation, the Government started dredging operations on a channel across the bar. These operations were interrupted during the vwar but have since been resumed; however, the only dredge available in Thailand is not able to remove much more material each year than the volume of natural annual shoaling? 34. Plans have now been mnade to dredge a channel sufficiently deep and wide to allow for the passage of vessels of 10,#000 DIRT. The Government estimates that this should take not more than two years. To this end, it intends to have the invward part of the channel dredged by a specialized contractor and the outer part of the channel dredged by the Government ovned dredge and a second-hand dredge to be obtained from the U. S. Government under the program of economic assistance for Thailand. 35. The port facilities at Bangkok are inadequate to tzke care of the expected increase in the volume of foreign trade. The new port terminal on which construction wvork was started in 1938 needs cargo handling equipment, track and railway equipment, a tugboat, steel sliding doors and a small powrer plant. 36. The freight handled at the port terminal in 1909 amounted to about 500,000 metric tons, of which 400,000 tons were imports and 100,000 tons exports. After completion of the channel, the freight handled annually at the new terminal is expected to reach 1 million tons, resulting in a substantial increase in port revenues. Need for the Loans 37. The rehabilitation of the railways, the improvement of the port of Bangkok and the Chao Phya irrigation project are of prime importance in the rehabilitation of Thailand's economy and its development. 'With the Bank loans Thailand should be able to carry out these projects without straining the country's gold and foreign exchange reserves, which have improved signi- ficantly over recent years. Prospects of Fulfillment of Obligations 38. An Economic .Report on Thailand was distributed on July 12, 1950. (Document R-351, No. E-89A) 39. A report entitled "Recent Economic and Financial Developments in Thailand", Mo. E-109, is attached as Appendix VII. 40. The economy of Thailand is mainly agricultural, with most of the cultivated area devoted to rice. Exports of this commodity furnish more than a half of Thailand's foreign exchange earnings. The country's ot.her major exports are rubber, tin and teak. 41. In spite of dislocation and destruction caused by the "Tar, the financial position of Thailand, both internaly and externally, is strong. The Government has been able to meet not only ordinary expenditures but also most capital expenditures from current revenues. 42. Since the war, Thailand's external trade has been steadily increas- ing and has again reached its traditional export surplus position. The long range trade prospects appear to be favorable. In view of the world shortage of rice, no difficulty should be encountered in the disposition of surpluses. Furthermore$ rubber and tin exports are rising and command good prices. 143. The balance of payments for the last two years has shown a surplus on current account and promises to be even more favorable over the next few years. Gold and foreign exchange holdings including hard'currencies have accordingly been rising steadily. 11. The relatively small internal public debt of Thailand amounted in June 1950 to Bahts 1173 million (the equivalent of $P93,840,00o at the official rate of exchange). At present Thailand's only foreign debt consists of approximately bl.5 million, and a U. S. Government surplus property credit of approximately $5.4 million. The servicing of these loans requires only very moderate payments. Tlailand's foreign'debt record has been good. The servicing on foreign loans was interrupted during the Second VWTorld War, but was resumed in 1947 with full settlement of all arrears. Thailand has/- settled almost all of its war damage claims. 45. The annual service charges for the three proposed loans from the Bank would be $2.3 million including amortization. Tiiis amount, together with the service on the surplus property credit, Is considered to be well within Thailand's capacity to service dollar obligations. h6. The sound fiscal policies of the C-overnment and its undertaking to devote its revenues from the Rice Monopoly to development projects, including the railways, irrigation and port projects, provide assurance that the necessary local currency will be made available as and when required. There is attached as Appendix VIII a letter from the Thai representative to the Bank outlining the intentions of the Thai Government with regard to its economic and fiscal policy. 47. To assure efficient operation of the railways, the Borrower will undertake that on or before April 30, 1951 there will be established an autonomous authority satisfactory to the Bank which, as a separate agency of the Borrower,will be responsible for the management, operation and development of the Royal State Railways. 48. The 'oyal Irrigation Department is a department of the Ministry of Agriculture and is in charge of a Director General. It has been found to be well organized and works with a marked degree of efficiency under the present Director General and is considered qualified to undertake and carry out the project. In addition to engaging an engineering consultant who will advise on the design of the barrage, the Thai Government will place a contract for the supervision of the construction of the barrage with an ex- perienced contracting firm satisfactcry to the Bank. 19. To assure efficient operation of the Port the Borrower will under- take that before the Loan Agreement becomes effecttve there will be established an autonomous authority satisfactory to the Bank which, as a separate agency of the Porrower, will be responsible for the operation, regulation and unified development of pol't and navigation facilities in the Bangkok area. 50. A form of letter pertaining to the undertakings of the Borrower outlined in paragraphs 47 and b9 above is attached as Appendix IX. Memoranda referred to in the form of letter are attached as Appendix X. -9_ 51. I am satisfied that due regard has been paid to the prospects that Thailand will be in a position to meet her obligations under the proposed loans, and I am satisfied that, in making these-loans, the Bank will be acting prudently in the interests both of Thailand and of the members of the Bank as a 'whole. PART ..IV - COYPLIANCES .4TH ARTICLES OF AGPE2MENT 52. I consider that the proposed schedules for the-repayment of .the principal and the rates of interest-and other charges in connection with the proposed loans are reasonable and appropriate to the projects. 53. Annexes A, B and C attached hereto contain Reports of the Committees provided for in Article III, Section h, paragraph (iii) of the Articles of Agreement of the B4ank. 54. I am satisfied that the proposed loans will comply with the re- quirements of the Articles of Agreement of the Bank. PART V - RECOOWErENDATIONS 55. I recommend that the Bank at this tine grant to the Kingdom of Thailand three loans in the total amount of A25,A0,000, one for $3 million for,a term of 15 years, another for $L.4 million for a term of 15 years, a&d4)tbe third for S18 million for a term of 20 years, all with interest, commission and commitment charges, and on such other terms as are specified in the forms of Loan Agreements attached hereto as Appendices II, III and IV respectively. /SI Eugene R. Slack Eugene R. Plack President October 23, 1950