R E S T R I C T E D FILE copy Report No. P-248 This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE STATE RAILWAY OF THAILAND FOR A THIRD RAILWAY PROJECT April 19, 1961 INTERNATIONAL BANK FOR RECOONSTRUCTION AND DEVELOFMENT REPORT ANqD RECCTiAENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PTROPOSED LOAN TO THE STATE RAILWAY OF THAIL'iND FCR A THIRD RAILWIAY rROJECT 1. I submit the following report and recommendations on a proposed loan in an amount in various currencies equivalent to $22 million to the State Railway of Thailand (SRT) for the rehabilitation and modernization of the SRT. PART I - HISTORICAL 2. In 1950, prior to the establisluent of the SRT as an autonomous body, the Bank made a railway loen or $3 million to the Government mainly for the rehabilitation of the railway workshops which had been destroyed during the war, and for signaling equipment. That loan was fully disbursed in 1954. 3. In 1955 another railway loan of $12 million was made to the SRT to finance Dart of a five-year rehabilitation program and was used mainly for rails and accessories, telecommunications equipment, passenger coaches, freight wagons and automatic couplers. The loan was fully disbursed in 1960. 4. In response to a loan request from the Government in August 1960, a mission visited Thailand in November 1960 to appraise the Railwayts Six-Year Investment Program 1961-1966. Negotiations for the proposed loan were com- pleted on Aipril 6 with a delegation headed by the Thai A;mbassador to the U.S., H.E. Visutr iArthayukti. Representing the SRT was Mr. Yukta na Thalang, Comptroller. 5. If the proposed loan is made, it would be the Bank's seventh loan in Thailand and would increase the total amount lent by the Bank to '128,659,078 million, net of cancellations. Loans previously made are: Amount of Loan Year Borrower Purpose Net of Cancellations 1950 Thailand Railway rehabilitation $ 3,000,000 1950 Thailand Port improvement 4,400,000 1950 Thailand Irrigation 18,000,000 1955 SRT Railway rehabilitation 12,000,000 1956 Port Authority Port improvement 3,259,078 1957 Yanhee Electricity Hydro-electric power Authority 66.000.000 Total net of cancellations $106,659,078 of which has been repaid 11.222 ,078 Total now outstanding $ 95,437,000 iAmount Sold $2, 549,000 of which has been repaid 1.753,000 796 000 Net amount held by Bank $ 94,641,000 / 7 Includes $38,594,044 not yet disbursed as of March 31, 1961. - 2 - PART II - DESCRIPTION OF THE PROPOSED LOAN 6. Borrower: State Railway of Thailand. Guarantor: Kingdom of Thailand. Aimount: The equivalent in various currencies of `'22 million. Amortization: 34 semi-annual instalments from December 1, 1964 to June 1, 1981. Interest Rate: 5 2 % per annum, including 1% commission. Commitment Charge: 3/4 of 1% per annum. Payment Dates: June 1 and December 1. PART III - LEGAL INSTRUMENTS AND IEGAL AUTHCRITY 7. Drafts of the Loan Agreement between the Bank and the State Railway (No. 1) and the Guarantee Agreement between the Kingdom of Thailand and the Bank (No. 2) are attached. 8. The Loan and Guarantee Agreements conform substantially to the customary pattern. The Loan Agreement provides, in addition to the usual provisions, that the Borrower will give pr`ority to the carrying out of the Project (Section 5.08). 9. The Report of the Comnmittee provided for in iArticle III, Section 4 (iii) of the Articles of Agreement of the Bank is attached (No. 3). PART IV - APPRAISAL OF THE PROPOSED FPROJECT 10. The project is described in the attached resort, "Appraisal of the Six-Year Inves+ment Program 1961-66 of the State Railway of Thailand," No. TO 269c (No-4), 1j.e The project is the Six-Year Investment Program 1961-66 which is designed to rehabilitate and modernize the SRT system, increase its capacity, improve operating efficiency and decrease operating costs. It consists of the acquisition of about 65 diesel locomotives, both main line and shunting, about 1,650 freight cars, replacement of about 600 kilometers of track with heavier rail, remodeling of station yards and the construction or extension of sidings, replacement of about 350 wooden bridges with steel or concrete, signalling and telecorj;munications equipment at 100 stations and machinery and equipment for repair shops. 12. The proposed loan would finance the 65 diesel locomotives, about 1,650 freight cars and part of the steel for bridges. 13. The total cost of the project, including contingencies, is Baht 1,147 million (G54.6 million). Financing would be met from the SRT's current resources (60%) and from the proposed loan (405). Justification of the Project 14. The railway is the only all-year-round means of inter-regional transportation in Thailand. Waterways are limited to the central area. The highways, until recently, have been built primarily as feeders to the railway or waterways. A long-term program of hishway construction and improvement has been started, but will take several years to complete. The Bank is now reviewing the highway programn to ascertain whether a suitable project exists for financing. 15. The railway is faced with increasing traffic demands which, even with improvements in the highway system, are estimated to grow at an annual rate of about 2% for passengers and 4% for freight traffic. The project, by providing for additional capacity and by permitting greater operational efficiency is well designed to meet these demands. 16. The additional diesel locomotives will make it possible to haul longer trains at greater speed, and to increase the capacity of the existing track. The wagons will ba able to carry heavier loads and have higher availability than the present rolling stock. The use of the new diesels should result in annual operational savings of about $1.4 million equivalent by 1966; the use of wagons should result in similar savings of $0.75 million equivalent. 17. An important benefit to the economy will be the reduced annual fire- wood requirements as diesel locornotives replace wood burning steam locomotives. The Government has been concerned about the ranid rate of deforestation that has been taking place in the country, especially in the North East where it is a serious problem.. At the same time the SRT has been finding it increasingly difficult and exnensive to obtain the firewood it needs. As a result of diesel- ization, the SRT expects its requireLients of firewood to be reduced by 400,000 cubic meters or 40%. Procurement 18. Procurement of all items in the project will be on the basis of international competitive bidding. Economic Situation 19. A report "lEconomic Situation and Prospects of Thailand" (No. FE-15a) was circulated to the Board on September 23, 1960 (Secic 50-1l5). A memiorandi= on the recent economic situation in Thail-nd is attached (No. 5). 20. Thailand's economy has been expanding in recent years at an average rate of 4 or 5% a year with a consequent steady rise in per capita income despite annual population growth of about 2.5%. Along irith this gain in total cutput there has been a significant diversification of economic activity. Rice continues to be the most important single product of the economy, but the largest recent increases in agricultural output have been in other crops - especially rubber, corn, tapioca, kenaf and a variety of fruits, vegetables and livestock products. Tin production recovered nearly to peak levels, followfing removal of the internctional restrictions of 1958 and 1959. These increases in output have contributed to a rising trend of exports. And there has also been a marked expansion of private light manufacturing for the domestic market. 21. The favorable trends in production have taken place in a context of financial stability. Budget deficits have usually been small and in 1960 the cash accounts of the Government were balanced with no expansionary financing. The increase in bank credit in relation to money supply has been fairly well in line with the growth in real output, price movements have been small and the exchange rate has been steady. Stable finances, rising exports and a consider- able inflow of foreign grants and loans have all contributed to a satisfactory balance of foreign accounts. Exchange holdings have increased in five of the last six years and at the end of 1960 official reserves amounted to $345 mil- lion or 75% of the 1960 import level. 22. Prospects are favorable for continued growth of the Thai economy. There is large scope for additional agricultural output, even though rice production may not increase much faster than domestic requirements. And the upward trend of secondary industrial activity is likely to continue. Some of the gains in output may be offset by probable adverse movements in export prices of rubber and possibly of rice. But the opportunities for income ex- pansion are sufficient to keep per capita income on a. rising trend. A further expansion of public investment will be necessary to take advantage of these opportunities although this may be difficult to finance entirely from domestic sources. It should be possible, however, for Thailand to meet part of its financial requirements from foreign sources, including additional foreign borrowing. The service on present external debt and the proposed loan will not be a substantial balance of payments burden. It will amount to about 3.5% of 1960 exchange earnings. Prospects of Fulfillment of Obligations 23. The State Railway of Thailand was established in 1951 as an autonomous body under the general supervision of the Minister of Corumunications. A Board of Commissioners, appointed by the Council of illinisters, is entrusted with the formulation of railway policy. The management of the railwqays and its technical staff are competent. Conservative financial policies are followed. 24. The operating results for the past five years have been satisfactory though 1957 and 1958 were bad years due mainly to poor rice harvests and increas- ing highway competition. Recent action taken by the Government to regulate the bus companies has resulted in the return of passenger traffic to the railwray. The enforcement of safety regulations and maximum loads on truck operators has led to increased demands for railway wagons. These steps, together with the progreSsive improvemicnlt of service, sho.ld be reflected in higher future earninEs for the railway, The railway should be able to service the proposed loan out of earnings. 25. Thailand should have no difficulty in servicing its external debt including the proposed loan. PART V - CC PTIANCE WITI7 THE ARTICLES OF fAGREF`dI4ENT 26. I am satisfied that the proposed loan complies with the requirements of the Articles of Agreement of the Bank. PART VI - RECC3,iEINDATIONS 270 I recommend that the Bank grant a loan to the State Reilway of Thailand in various currencies in an amount equivalent to $22 million for a term of 20 years including a grace period of three and a half years at a rate of interest of 5 3/4% per annum with the guarantee of the Kingdom of Thailand and on such other terms and cDnditions as are specified in the draft Loan and Guarantee Agreements attached, and that the Executive Directors adopt a resolu- tion to that effect in the form attached (No. 6). W.A.B. Iliff, Vice President Attachments for Eugene R, Black, President Washington, D.C. April 19, 1961