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Report No. 1157-TH FILE COPAppraisal of the COPYIndustrial Finance Corporation of Thailand

August 10, 1976

East Asia and Pacific Projects DepartmentAgricultural Credit and DFC Division

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

US$1 - Bt. 20.0Baht 1 US$0.05Bt. 1 million - US$509,00Bt. 1 billion - US$50 million

IFCT's FISCAL YEAR

January 1 - December 31

ABBREVIATIONS

AD - Administration Department, IFCTADB - Asian Development BankBAAC - Bank for Agriculture and Agricultural Co-operativesBOI - Board of InvestmentsBOT - Bank of ThailandEXIM - Export-Import Bank of JapanGDP - Gross Domestic ProductGSB - Government Savings BankIFC - International Finance CorporationIFCT - Industrial Fiinance Corporation of ThailandIMF - International Monetary FundKfW - Kreditanstalt fur WiederaufbauKTB - Krung Thai BankNESDB - National Economic and Social Development BoardOD - Operations Department, IFCTPD - Projects Department, IFCTRPD - Research and Planning Department, IFCTSET - Securities Excihange of ThailandSIFO - Small Industries Finance OfficeSMI - Small and Medium Industries

FOR OFFICL41 USE ONLY

THAILAND

APPRAISAL OF THE

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Table of Contents

Page No.

SUMMARY AND RECOMMENDATIONS ......... .. ........... i-v

I. INTRODUCTION ................... 1..................

II. THE THAI ECONOMY ............... .. 1................

III. THE INDUSTRIAL AND FINANCIAL SECTORS .... ......... 2

A. The Industrial Sector ....................... 2

Economic Role and Growth ..... ............... 2Industrial Employment and Small IndustryDevelopment ............................... 3

Industrialization Strategy ..... ............. 3Industrial Protection and Promotion .... ..... 4Investment in Manufacturing ..... ............ 5

B. The Financial Sector ........................ 5

Overview ........ ............................ 5Financial Sector Development ..... ........... 6Policy Measures ............................. 6Interest Rates .............................. 7

IV. IFCT - INSTITUTIONAL CHARACTERISTICS .... ......... 8

Charter and Ownership ...... ................. 8Board of Directors ...... .................... 8Management ......... ......................... 9Organization ........ ........................ 9Staffing .......... .......................... 10Advisors .......... .......................... 10Training and Staff Development ..... ......... 11Branch Offices ........ ...................... 11Policies and Procedures ..... ................ 11Project Appraisal ....... .................... 12Project Follow-Up ....... .................... 13Project Screening and Monitoring .... ........ 13Procurement and Disbursement ..... ........... 13

This report was prepared by Messrs. P.S. Mistry, K. Siraj, A. Soulard andS. Ogtira following their visit to Thailand in February 1976.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Page No.

V. IFCT - OPERATIONS, FINANCES AND PORTFOLIO QUALITY. 14

Lending Operations ............. ............. 14

Equity Investments and Guarantees ........... 15Financial Position and Performance .......... 15

Foreign Exchange Risk .. .................... 16

Portfolio Quality ............ .. ............. 17

Audit ........ ............................... 17

VI. IFCT's DEVELOPMENTAL IMPACT AND ROLE .... ......... 17

Overall Impact ...... ........................ 17Efficiency of Investment ... ................. 18

Resource Allocation ..... .................... 19

Long-Term Resource Mobilization .......... ... 19Capital Market Development ............... ... 20

Promotional Efforts ..... .................... 20

IFCT's Development Strategy .............. ... 21

VII. IFCT's RESOURCE POSITION AND PROSPECTS .... ....... 22

Resource Position ............ .. ............. 22Operational Projections and Prospects ....... 23

Financial Projections and Prospects ......... 23

VIII. JUSTIFICATION FOR THE LOAN AND ITS MAIN FEATURES . 24

Justification ...... ......................... 24Rates of Return on Projects Financed ........ 25

Main Features of the Loan ................ ... 25

IX. AGREEMENTS REACHED AT NEGOTIATIONS .... ........... 27

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LIST OF ANNEXES AND CHARTS

Annex No.

1 The Economy

2 Industry and Manufacturing in Thailand (with Tables)

3 The Financial Sector

4 List of Shareholders of ICFT as of December 31, 1975

5 IFCT - Board of Directors as of December 31, 1975

6 IFCT - Policy Statement

7 IFCT - Operations (with Tables)

8 IFCT - Financial Position and Performance (with Tables)

9 IFCT - Quality of Portfolio (with Tables)

10 IFCT - Details of Long-Term Resources as of December 31, 1975(with Tables)

11 IFCT - Projected 'Operations, Resource Requirements andFinancial Situation (with Tables)

12 IFCT - Estimated Disbursement Schedule for the Proposed Loan

Chart No. 15863 IFCT Organization as of February 29, 1976

THAILAND

APPRAISAL OF THE INDUSTRIAL FINANCE CORPORATION OF THAILAND

SUMMARY AND RECOMMENDATIONS

i. The Industrial Finance Corporation of Thailand (IFCT) has requesteda third loan from the Bank. This report recommends a Bank loan of US$25 mil-lion to IFCT with the guarantee of the Kingdom of Thailand on the terms andconditions usual for loans to development finance companies (DFCs). The loanwould help IFCT cover part of its untied foreign exchange resource needsbetween FY76-78.

ii. The Thai economy responded well to stimulative government policiesand began to show signs of recovery in 1975. The growth rate rose to 6.4%in 1975 following a dip to 3.2% in the depressed economic climate of 1974.Inflation was curbed sharply (from 24% in 1974 to 4% in 1975), labor unrestsubsided and increased energy costs were gradually absorbed. Nevertheless,investment levels continued to decline as did the inflow of foreign capital.The balance of payments was in overall deficit for the first time since 1971and international reserves dropped by about US$100 million.

iii. With the rapid exhaustion of new land available for cultivation,Thailand will need to rely, more heavily than it has in the past, on furtherindustrialization to achieve its growth and employment objectives over thenext decade. The industrial sector, in which manufacturing predominates, isalready the second largest in the economy accounting for 26% of GDP, about25% of the total investment and employing 7% of the total labor force. Thepattern of industrialization through the 1960's, when manufacturing's shareof GDP grew from 11.6% of GDP to 18.5%, was almost entirely import substitu-tion oriented. Since 1970 an increasing export orientation in manufacturingoutput resulted in manufactured exports increasing from US$34 million in 1969to US$367 million in 1974. Thai manufacturing is, at present, fairly capitalintensive and has not yet made a major contribution to employment creation.However, open unemployment and underemployment have not been of significancein Thailand until very recently. With the emerging need to absorb a rapidlygrowing labor force Thailand will need to expand and broaden manufacturingactivity, particularly of a labor-intensive nature; this implies the need,among othier things, for the development of a larger number of small andmedium-sized industrial enterprises. In this connection, IFCT has beeninstrumental in initiating a study aimed at determining the magnitude ofthe small industry assistance problem and at exploring alternatives for costeffective delivery of financial and technical assistance to SMI. Reforms areneeded in present tariff and incentive policies to promote efficient indus-trialization; mechanisms for coordinating and implementing these policiesalso need to be improved. On the investment side, despite present 1ncertain-ties, private sector investment (i.e., disbursements) in man!fzicturing aloneis expected to be around Bt. 20 billion in the two-year period 1976 and 1977;with investment activity being expected to pick up in late !q76 commitmentsare expected to be between Bt. 25-28 billion in the two-year period 1977-78.The proposed loan would account for roughly 2% of this aroouu1t.

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iv. The Thai financial system is still in the early stages of itsdevelopment. There is a lack of diversity in both institutions andfinancial instruments to meet the various preferences of savers, especiallysmall savers, in terms of risk, yield and liquidity combinations. Thereis also a need for developing more effective vehicles for long-term inter-mediation especially in the agricultural and housing sectors. The pace offuture financial system development in a desirable direction depends on:reducing the extent to which commercial banks presently dominate all forms ofintermediation; and emphasizing continued development of the capital market.The Bank of Thailand (BOT) has now initiated work on a review of the finan-cial sector which is aimed at making concrete recommendations on the policyand institutional changes required to improve the operations of the finan-cial system. The IMF has already begun providing BOT with assistance on areview of commercial banking; Bank assistance may need to be provided, inthe future, on a similar review of long-term lending institutions.

v. The interest rate structure in Thailand is governed by the commer-cial banks' prime lending rate which has for the past several years fluctuatedaround 12%. Commercial bank rates are constrained within the lending rateceiling of 15% and the deposit rate ceiling of 8% applied by the BOT. IFCThas, since 1974, been charging a rate of 10.5% on foreign currency loans and9.5% on its domestic currency loans. In May 1976 IFCT raised its standardinterest rate to 12.0%. At negotiations for the proposed loan IFCT and theBank reached an understanding that ]:FCT's lending rate would be increasedagain to 12.5% before July 1, 1977. This would mean that sub-borrowers wouldbe paying a real rate of around 6% to 6.5% (under present estimates of infla-tion in Thailand) over the foreseeable future.

vi. IFCT is the only specialized long-term industrial financing institu-tion in Thailand. Although privately-owned (with a 47% foreign shareholding),largely by other financial institutions, IFCT has close relationships withthe Government and takes care to ensure that investment is channelled ingeneral accord with the framework of industrial priorities. With an activelyinterested Chairman of the Board, generally sound management (especially atthe department level) and staff of good professional calibre, IFCT has suc-ceeded in expanding its operations dramatically in FY74-75 and has now shedits dependence on expatriate advisors. To strengthen its top management,IFCT has undertaken to appoint a Deputy General Manager by September 30, 1976.IFCT's appraisals have shown gradual but consistent improvement. An increaseis, therefore, recommended in the individual sub-loan free limit to US$750,000and in the aggregate free limit to US$10 million. A reorganization was recent-ly effected to incorporate functions (especially long-term corporate planning)which were not previously being systematically carried out and to improveoperational efficiency. It is expected that the changes made will prove tobe beneficial. IFCT's project supervision is sound, as are its procedures forprocurement and disbursement under its subloans and for project applicationscreening. It eventually hopes to acdopt the Project Monitoring System nowbeing developed within the Bank and is already taking steps to utilize theDFC financial projections model which has been developed. In 1975 IFCT opened

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its first branch office in Haat Yai (the Southern Region) as a first step to-ward an intensive program to promote projects outside the Central Region. In1976 two more offices were opened in Khon Khaen (the Northeast) and Lampang(the North).

vii. IFCT's volume of lending operations in FY74 and FY75 increasedbeyond all expectations. Loan approvals of Bt. 1.49 billion in those twoyears exceeded total approvals in its preceding 14-year history (Bt. 1.08billion) and marked IFCT's emergence as an institution of stature on theThai financial scene. As of December 31, 1975 IFCT had cumulatively made

301 loans for a total amount of Bt. 2.57 billion and had Bt. 1.34 billionin 146 loans outstanding to 120 borrowers. Since 1973 two distinct typesof business have emerged: "large business" in which loan sizes averagearound Bt. 36 million and "regular operations" with average loan sizes ofBt. 8 million. IFCT's loan portfolio is reasonably well diversified byindustry but reflects the general geographic concentration of industry inThailand. FY75 also saw an unprecedented increase in equity investments;four investments were approved amounting to Bt. 24.6 million. IFCT providesguarantees largely as a financial service to existing borrowers and does notconsider guarantee operations a separate and special facet of its business; asof end-FY75 guarantees outstanding amounted to Bt. 59.7 million. A detailedanalysis of IFCT's operations is provided in Annex 7.

viii. Reflecting its growth in business, IFCT's financial position andperformance improved significantly in FY75 with assets increasing by 37% andamounting to Bt. 1.48 billion (US$74 million) at year-end. Asset growth wasfinanced entirely by an increase in its long-term debt with available loansfrom the ADB, the Bank and the EXIM Bank of Japan being drawn down at afaster than expected rate. Long-term debt, which increased by 115% betweenFY73-75 stood at Bt. 1.15 billion at end-FY75; over the same period IFCT'sequity grew, entirely through reserves build-up, by only 23% resulting inan increase in IFCT's debt/equity ratio from 2.9 to 4.8 (well within thecontractual 6:1 limit). IFCT's liquidity position has also been main-tained at prudent levels throughout. In view of its increased leverageand growing asset base IFCT's profitability has increased at a respectablerate. Net income grew by 42% in FY75 to Bt. 38.3 million, triple the FY71level. However in relative terms it has stayed fairly stable at 3% of aver-age total assets. The increase in income raised returns to average equityfrom 12.5% to 16% and allowed IFCT to increase its dividend to 10%.

ix. In view of the limitations posed by its equity base on furtherborrowings to finance its expanded program, IFCT proposes to increase itsshare capital by Bt. 100 million in 1976. As of July 31, 1976, Bt. 55 mil-lion had been fully subscribed and paid-in. IFCT plans to issue the remain-ing Bt. 45 million to the general public to widen its ownership base andassist development of the securities market. Following the advice of itsunderwriters IFCT proposes to proceed with the public issue in December1976. It is expected that the issue will be fully taken up by January 1977.With the capital increase, the present debt/equity limit does not need to beraised. Additions to reserves have raised the book value of IFCT's shares

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to Bt. 1,689 (par Bt. 1,000); these shares are not yet traded publicly.In a recent private transaction IFC sold its entire shareholding of 8,000shares to the Mitsui Bank at a price of Bt. 1,600 per share. IFCT's cash flow

has been soundly managed in the past and the debt service cover has beenmaintained at a prudent level. The quality of IFCT's portfolio remains quite

sound; arrears amounted to 2% of the principal outstanding while principalaffected amounted to 11%. Although this represents a higher level of overdues

than in the previous year it reflects the temporary impact of the economicdownturn on Thai manufacturing industries and not a structural deteriorationin the quality of IFCT's portfolio. IFCT's accounts have been regularlyaudited by independent auditors acceptable to the Bank and have always been

certified without qualification. IFCT's projected operational and financialperformance between 1976-80 is analysed in Annex 11 and is expected to besatisfactory.

x. While IFCT's overall role in investment financing remains small,its influence is exercised over about 25% of manufacturing investment inThailand (paragraph 6.01). Paradoxically, IFCT's investment levels have beenrising in a declining investment climate. This suggests that IFCT has overthe past two years been playing a significant developmental role in maintain-

ing investment momentum when other financial institutions are adopting await-and-see attitude until the extant uncertainties in the Thai economicand political environment are resolved.

xi. The projects financed by IFCT during FY74-75 involve a total invest-ment of around Bt. 6.4 billion and, on completion, are expected to generate24,500 jobs resulting in an annual incremental payroll of about Bt. 430 mil-lion. Incremental annual value-added by these projects is expected to amountto nearly Bt. 1 billion. The ex-ante calculations of economic rates of re-

turn (ERR) for projects financed by IFCT in the past have varied from 13% to80%; the weighted average ERR for the sub-projects financed under the lastBank loan being around 46%. These projects are also expected to yield satis-

factory financial rates of return (between 12% and 42%, with the weightedaverage being around 19%). Sub-projects to be financed under the proposedloans are expected to yield similar returns. IFCT has played an active role

in promoting both capital market development (paragraph 6.06) and industrialinvestment (paragraph 6.07). It is continuing to step up its efforts inthese directions. IFCT's performance in pursuing the development strategyenunciated by it at the time of the last Bank loan has, on balance, beencreditable.

xii. In view of IFCT's performance over the last two years in efficientlyallocating resources and playing a significantly stepped-up developmental rolein encouraging sound industrial investment, the proposed loan is justified.It would allow IFCT to continue pursuing the successful course presently char-ted and would continue the process of internal institution-building to whichthe Bank has, so far, made a significant contribution.

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xiii. At negotiations with IFCT for the proposed loan, the following matterswere discussed and agreed upon:

(a) an increase in IFCT's lending rate to 12.5% before July 1, 1977(paragraph 3.12);

(b) appointment of the Deputy General Manager (paragraph 4.04);

(c) an individual sub-loan free limit of US$750,000 and anaggregate free limit of US$10 million (paragraph 4.12);

(d) maintaining the debt/equity limit at 6:1 (paragraph 5.05);and

(e) a sub-loan size limit of US$3.0 million (paragraph 8.07).

THAILAND

APPRAISAL OF THE INDUSTRIAL FINANCE CORPORATION OF THAILAND

I. INTRODUCTION

1.01 The Industrial Finance Corporation of Thailand (IFCT) has, withthe support of the Government, requested further Bank assistance for fi-nancing capital goods imports to expand the productive capacity of theThai industrial sector. This report recommends a Bank loan of US$25 mil-lion to IFCT with the guarantee of the Kingdom of Thailand. The loan wouldbe made on standard terms and conditions applicable to DFC loans and a flex-ible amortization schedule would be applied.

1.02 IFCT was established in 1959, under a special legislative act, toencourage private investment in indigenous productive enterprises. It wasre-organized in 1963 and its capital base restructured with the assistanceof the Bank and IFC. At that time the Bank made its first loan of US$2.5million and IFC bought 4,000 shares (at a cost of US$193,108) in IFCT. 1/Between 1963-70 IFCT was in the doldrums; it suffered from internal manage-ment problems, an uncompetitive posture vis-a-vis commercial banks and aclientele generally unwilling to accept the scrutiny of rigorous projectappraisal or to assume the foreign exchange risk on external lines of crediton-lent through IFCT. Consequently, less than US$1.05 million of the firstBank loan was utilized and the balance cancelled. The loan has now beenfully repaid.

1.03 Since 1970 there has been a noticeable and continuing improvementin IFCT's performance and its stature in the Thai financial community. Itsproject appraisal procedures are gradually being accepted and its increasedlevel of operations has widened the number of investment decisions beingsubjected to tests of financial and economic rationality. A second Bankloan to IFCT for US$12.0 million was made in June 1974; its rate of commit-ment and disbursement has exceeded earlier expectations. In addition toBank financing IFCT has received loans from other foreign sources includingthe Asian Development Bank (ADB), Kreditanstalt fur Wiederaufbau (KfW), theExport-Import Bank of Japan (EXIM) and the Japanese and Danish Governments.

II. THE THAI ECONOMY 21

2.01 Aided by rapidly rising commodity prices and booming internationaldemand the Thai economy achieved a real growth rate of over 10% in 1973. In

1/ In December 1970 IFC bought a further 4,000 shares under a one-for-onerights issue. All 8,000 shares were sold to the Mitsui Bank in February1976 for US$640,000.

2/ The latest Bank Economic Report on Thailand (No. 924-TH, dated Novem-ber 14, 1975) provides a recent review of developments in the economyand of its prospects. An updating Economic Mission visited Thailandin June 1976 and its report will be issued in the coming months.

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1974 poor weather and worsening terms of trade coupled with recession in itsmajor export markets caused the growth rate to dip to 3.2%. Since then theeconomy has begun to show signs o01 recovery and has responded well to stimu-lative government policies despite continued weakness in the external sector.Although an uncertain political climate co-Ln;, t: prevrai, a respectablereal growth rate of 6.4% was registered in 1975. With the abatement of in-flation (which dropped from 24% in 1974 to 4% in 1975), good weather, qui-escence on the labor front and the absorption of increased energy costs,agricultural and industrial production led recovery. Nevertheless world-wide recession and exaggerated perceptions of instability on the part ofthe business community dampened private investment and the inflow of foreigncapital. The latter, coupled with lower export prices and volumes, led toThailand's incurring its first balance of payment deficit since 1971 and aresultant decline in its international reserves of about US$100 million.

2.02 While prospects for continued recovery in 1976-77 appear reasonablybright it is expected that the balance-of-payments situation will be tightthrough the rest of this decade. At this stage, an insufficiency of neededforeign exchange resources could effectively brake medium and long-term eco-nomic growth. To avert this prospect the Thai government is (i) activelystepping up its efforts to attract the inflow of official assistance; and(ii) proceeding to restore stability, thus encouraging the resumption of pri-vate capital flows at previous levels. Annex 1 provides a more detailedaccount of relevant economic characteristics and recent developments.

III. THE INDUSTRIAL AND FINANCIAL SECTORS

A. The Industrial Sector

3.01 Economic Role and Growtlh: Industry (manuifacturing, mining andconstruction) constitutes the second largest sector of economic activity.In 1975 it accounted for: 26% of GDP (at 1962 constant prices); about 25%of total investment; and 7% of tot:al employment. Manufacturing alone ac-counted for over 20% of GDP in 1975 and for about 5% of the total laborforce. The characteristics of the sector are outlined in Annex 2. In 1960manufacturing output accounted for less than 12% of GDP and was orientedalmost entirely toward producing basic consumer goods. With substantialopportunities for import substitution and an environment which encouragedinvestment, manufacturing output grew at an-annual average rate of around 12%between 1960-69. A sharp shift in orientation towards exports led manufactur-ing output to grow at an even higher rate of 14% between 1970-73. At the endof 1969 manufactured exports amounted to barely US$34 million or about 4.8%of total merchandise exports and 3.5% of total value-added in manufacturing.By 1974 they amounted to US$367 million, accounting for 14.6% of total exportsand 15.6% of total value-added in rmanufacturing, having grown at a rate threetimes faster than that of the sector. By size, the most prominent industriesare food processing, beverages, tobacco, textiles, apparel, transport equipmentand petroleum refining; together they account for 70% of value-added in thesector. Manufacturing industries remain heavily concentrated around Bangkok

and the Government's measures to encourage plant location in other areas havenot met with much success (Annex 2, paragraphs 10-11).

3.02 Industrial Employment and Small Industry Development: At the endof 1974 the industrial sector employed about 1.4 million persons or 7.9% ofa total labor force estimated at 17.7 million. Of these about 0.9 million, 1/or about 5% of the labor force, were employed in the manufacturing sector(Annex 2, paragraphs 8-9). This represents a relatively low level of laborabsorption for a sector which accounts for over 17% of total investment and20% of GDP. Manufacturing employment is presently concentrated in very smallcottage type enterprises on the one hand and in large firms employing morethan 100 workers on the other. Investment costs per job in the very smallcottage units are low but most such units are generally inefficient and re-latively unproductive. Larger firms, on the other hand, absorb considerablequantities of capital in generating employment (an estimated average fixedcost of US$7,500 per job). 2/ Consequently there are distinct limitationson their role in significantly expanding productive job opportunities alonglines commensurate with Thailand's factor endowments.

3.03 At present, there are few small-medium industrial units (SMI) employ-ing between 10-100 workers to fill the gap between these two extremes; suchunits probably account for under 5% of the total number of enterprises, 10%of employment and 15% of value-added in the industrial sector. The Govern-ment generally recognizes that SMIs provide a promising vehicle for expand-ing and dispersing investment and employment opportunities at a reasonablecapital cost without necessarily sacrificing the objectives of productivity,efficiency and competitiveness. However, very little accurate information isavailable on the key economic ratios of SMI (i.e. their use of capital andlabor) or about their capacity utilization levels, age of their plant andequipment or their financing and technical assistance needs. Moreover, exist-ing programs aimed at assisting SMI have not been very effective. This situ-ation and the Government's commitment to SMI development over the Fourth Planperiod (1977-81) have led IFCT to take the initiative in launching a studywhich would explore the dimensions of the SMI assistance problem and evaluatealternative approaches to tackling it. The study will involve the participa-tion of various government agencies and academic institutions and is intendedto result in the development of a project package which would be suitable forfinancing by the Bank (Annex 2, paragraph 7).

3.04 Industrialization Strategy: Thai industrialization, so far, has notbeen based on the pursuit of a conscious, well articulated strategy. Its

1/ Of this about 0.6 million are employed in the Bangkok area withmanufacturing providing about a third of total urban employmentopportunities. Of this employment nearly a half is provided byfirms with more than 100 workers.

2/ Most of the investments promoted by the BOT had investment costsper worker of around US$12,500 comparable to costs of job crea-tion in similar projects in neighboring countries in S.E. Asia.

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absence has not impeded industrial growth but it has resulted in Government'snot anticipating the side effects of investment decisions on industrial con-centration, income distribution, labor absorption and patterns of foreignownership and control. Moreover, government agencies have not had a broadframe of reference in responding to pressures applied by various fractionatedlobbies resulting in frequent and uncoordinated adjustments of policy in-struments viz. taxes, tariffs and preferential access to credit. In severalinstances such adjustments have had effects contrary to those intended oninvestment, output, location and factor use. The radical political shiftbrought about in 1973 has compelled succeeding governments to take greatercognizance of the consequences of ad-hoc intervention in encouraging in-dustrial development. Recent measures (on foreign investment, industriallocation and employment generation), provide evidence of the pressures onGovernment to respond. Many of these measures have been conceived in hasteand some have been rendered ineffective by the inevitable need for the Gov-ernment to compromise. A kaleidoscopic political situation over the pasttwo years has also made it difficult for successive governments to focus onestablishing clear cut priorities and to formulate and pursue a strategyfor industrial development acceptable to all interests. There are, however,indications of slow but distinct progress in this direction. Flagging invest-ment levels and low investor confidence have already activated the seriousconsideration of various strategic options. The exhaustion of new settlementareas and the limits placed on the agricultural sector's capacity to continueabsorbing greater quantities of labor have caused attention to be focussed onemployment absorption potential in the industrial sector. In addition, thedistant possibility of regional economic co-operation in basic industry pro-jects (steel, fertilizer) has impressed upon Government the urgency ofdeveloping a sound strategic posture. Under the circumstances describedabove, the importance of having investment decisions subjected to tests offinancial and economic acceptability by institutions such as IFCT cannot beoverstated.

3.05 Industrial Protection and Promotion: As elsewhere, industrialinvestment in Thailand is influenced by: (i) tariff and protection poli-cies; 1/ and (ii) special fiscal incentives 2/ provided by the Governmentand applied on a case-by-case basis by the BOI. A recent analysis of theimpact of existing protection and incentive policies suggests that, in general,these policies have not resulted in inefficient high cost production acrossthe board. However, they have inadvertently resulted in favoring import sub-stitution with higher "effective protection" being provided to industriesproducing for the domestic market than to those producing for export markets.Success in increasing manufactured exports has thus been achieved in spiteof rather than because of tax and tariff policies. Moreover, with frequentadjustments having been made in the tariff structure, significant variationsin protection levels have resulted within and between various industry groupsfor which there is no underlying rationale. Also, in certain industries theGovernment has limited entry into the market to a few firms and intervened

1/ Annex 2, paragraphs 17-18.2/ Annex 2, paragraph 19.

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through direct price controls to prevent excessive profit-taking resultingin realized levels of protection being much lower than the protection poten-tially accorded.

3.06 The present uncoordinated application of tariffs, controls on im-ports, exports and prices, registration and licensing policies and the case-by-case provision of incentives has resulted in an unwieldy approach toencouraging efficient industrial growth with some incentives being offset bythe impact of others. It has also resulted in an immense administrative bur-den on BOI. Accordingly the Bank has, in the context of its continuingdialogue with the Government on economic matters and sector policies, recom-mended a complementary two-part incentive strategy based on: (i) a generalsystem of non-discretionary incentives based on tariffs and tax exemptionswhich would be applied to broad classes of industries; and (ii) a detaileddiscretionary review of only major projects in basic industries. Theserecommendations are expected to be taken up again with the newly electedGovernment once it has had the opportunity to review and react to them.

3.07 Given the BOI's very broad scope of discretion and the importanceof sound decision-making on its part the Bank has recommended that the in-ternal evaluation capabilities of BOI be strengthened and its focus shiftedfrom evaluating individual projects to establishing priorities for major sub-sectors. The Government and BOI readily accept the need for such measuresand, as a first step, have begun exploring avenues for grant assistance tofinance a program of broad studies which would focus on issues influencingco-ordinated industrial development and on improved BOI operations (Annex 2,paragraph 20). The Government's commitment to carrying out such studies hasbeen reaffirmed in an undertaking to the Bank included in the GuaranteeAgreement for the proposed loan.

3.08 Investment in Manufacturing: After an uninterrupted trend of in-creases in manufacturing investment, estimates for 1975 suggest that itdeclined for the first time since 1971. In current prices investment inmanufacturing has grown from Bt. 3.1 billion in 1967 to over Bt. 10 billion(US$500 million) in 1975 with roughly 90% of that investment going towardthe purchase of machinery and equipment by the private sector. Since 1967the share of manufacturing in gross fixed capital formation has risen from12.5% to over 20% in 1974 (dipping to around 18% in 1975); it has tradition-ally accounted for about one-third of total annual expenditures on machineryand equipment. As investment and application levels to the BOI have declinedsubstantially in 1975 it is unlikely that expenditures on manufacturing in-vestments will exceed Bt. 20 billion (US$1 billion) over the two-year period1976-77. Commitments, however, are expected to pick up in the latter half of1976 and may total about Bt. 25-28 billion over the two-year period 1977-78.The proposed loan would account for between 1.7% to 2% of this amount andwould contribute toward the provision of needed long-term official assistanceresources.

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B. The Financial Sector

3.09 Overview: The Thai financial system is still in the early stagesof development. Its institutional structure and characteristics are de-scribed in Annex 3. Total assets oi- the system stood at Bt. 156 billion(US$7.8 billion) as at October 31, :L975 of which the banking system accountedfor Bt. 110 billion. The organized financial sector has traditionally beendominated by sixteen Thai-owned commercial banks; between them they accountfor 94% of total deposits, 90% of all advances and 91% of the banking system'sassets. While foreign banks have been allowed to establish themselves theirrole has been sharply limited (by restrictions on the number of branches theyare allowed to establish) to dealing largely with multinational companiesand external sector transactions. ALs is characteristic of other sectorsin the Thai economy the financial system is largely privately owned. However,the Government owns the second largest commercial bank, the country' s onlysavings bank and most of the specialized financial institutions which havebeen created to channel resources into priority sectors. The Government alsoplays a prominent and direct role in influencing financial system behavior anddevelopment through the Bank of Thailand and the Ministry of Finance.

3.10 Financial Sector Development: The growth of Thai financial institu-tions and markets has not kept pace with: (a) the diverse demands of a domesticeconomy increasing in its sophistication; and (b) the pressing need for betterarticulation with an increasingly complex international financial system. Therecent emergence and rapid growth of finance companies in the short span offive years is one indicator of the extent to which intermediation needs exceedthe ability of the present financial system to meet them. The findings of arecent survey, which suggest that over 80% of the credit needs of the ruralsector are met by the "unorganized" system, is another. At present, thefinancial system does not provide sufficiently diverse opportunities forattracting financial savings in instruments with maturities of over a year.Excessively heavy reliance is placed on deposits with commercial banks andthe Government Savings Bank (GSB). The private sector, and particularly thesmall saver, has little direct access to investing in instruments which meetdifferent preferences for various cormbinations of risk, yield and liquidity.Thus a lack of options results in funds flowing almost exclusively into thecommercial banking system, the unorganized market and, to a much lesserextent, into Government securities through GSB. This pattern of mobiliza-tion also affects the manner in which funds are allocated. Most lendingfrom commercial banks is (with an unjjustifiably large spread) to estab-lished borrowers in the industrial and trade sectors on the basis of secu-rity and for a short term. With government pressure a very small proportionof these funds has been made available for long-term industrial lending(through the purchase of IFCT debentures) and agricultural lending (throughdeposits with BAAC). Although financE companies have introduced an element ofdiversity into the system they cater mainly to large savers but again througha quasi-deposit device and lend to generally the same clientele as commercialbanks. In fact, finance company behavior is influenced largely by commercialbanks who are their principal shareholders. As a result these companies haveconcentrated on short-term operations and largely ignored long-term financingand merchant banking operations.

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3.11 Policy Measures: The pace of future financial system developmentin a desirable direction depends on: (i) reduction of the extent to whichcommercial banks presently dominate all forms of intermediation; and (ii)emphasis on the growth of a capital market and of long-term financinginstitutions which would facilitate such growth. Policy measures whichwould achieve the first objective include: eliminating the exemption fromincome tax of interest income from commercial bank deposits; encouragingthe entry of new domestic commercial banks; discouraging cartelization ofthe banking sector; and removing ceilings on all interest rates 1/ and allow-ing them to be determined by the play of market forces. The second objec-tive is, to some extent, being achieved through support for the newly es-tablished Securities Exchange of Thailand (SET) and for the Mutual Fund Co.being established by IFCT. However, policy measures are also needed to induce:a greater number of corporations to publicly float their issues; establishmentof liquidity mechanisms to facilitate their underwriting and purchase; anddevelopment of the insurance and pension fund industries which, in turn,could spur development of the capital market. Moreover, government securitiesof varying kinds should be offered publicly and institutions such as IFCT andBAAC should be encouraged to raise funds directly from the public rather thanmobilize them secondarily. On the other side of the coin the possibility ofexpanding GSB's role in lending to the rural communities from which it col-lects savings should be carefully considered.

3.12 Interest Rates: The interest rate structure in Thailand is governedby the commercial banks' prime lending rate but its movement is constrainedby ceiling rates (15% for advances and 8% for deposits) set by the Bank ofThailand (Annex 3, paragraphs 30-34). The prime rate (which has fluctuatedaround 12% for the past ten years) was, until 1975, established by the inter-bank agreement of the Thai Bankers' Association. Since early 1975, individ-ual banks have been setting their own prime rates. The deposit rate, on theother hand, has been 5% for 3-6 month deposits, 6% for 6-12 month depositsand 7% for deposits of over 12 months until 1975 when all deposit rates wereincreased by 1%. Between 1966-72, with an inflation rate averaging about2-3%, real rates of lending were in the region of 9-10% while real yieldson savings were an average 3-4%. In 1973-74, the rate of inflation peaked at24% before climbing down to 4% in 1975. resulting in a short period duringwhich real yields on loans and deposits were highly negative. There was noevidence, however, of financial savings being significantly affected as aresult. With inflation expected to level off at around 6% through the remain-der of this decade real yields on savings will still be positive althoughsomewhat lower than pre-1973 unless rates are moved upwards marginally. IFCThad, between 1966-73, generally maintained its rate at around 9.5%. In 1974it moved its foreign currency rate up to 10.5% to cover the cost of providingfor the foreign exchange risk; in May 1976 it increased its standard lendingrate to 12.0%. Taking into account the rising cost of its funds IFCT has

1/ These measures were recommended by the IMF in 1973. Legislation isnow being proposed to tax interest income from Bank deposits at a flatrate of 10%. The National Assembly is considering the laws drafted andif passed such a tax would become effective by October 1, 1976.

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undertaken to revise its rates upward to 12.5% 1/ by July 1, 1977. Thiswould result in sub-borrowers paying a real rate of around 6% to 6.5% over thecommitment period of the loan and beyond.

IV. IFCT - INSTI:TUTIONAL CHARACTERISTICS

4.01 Charter and Ownership. IFCT was established under a speciallegislative Act 2/ as a privately owned corporation. Its ownership was di-vided between domestic and foreign shareholders with the latter (includingIFC) accounting for 47.4% of paid-in share capital as of December 31, 1975(Annex 4). Commercial banks accounted for nearly 69% of the total share-holdings 3/ with the government-owned Krung Thai Bank being the largestsingle shareholder (accounting for 16.4% of outstanding shares). Otherfinancial institutions accounted for a further 16.1% of the shareholdingleaving a balance of only 14.9% which was owned by non-financial companies(10.3%) and private individuals (4.6%). IFCT's initial share capital ofBt. 6.1 million has been increased four times and amounted to Bt. 150 mil-lion as at end-FY75. Share capital was last increased by Bt. 50 millionin September 1973; later this year, IFCT proposes to increase it again byBt. 100 million. Although privately-owned, IFCT enjoys a close relationshipwith the Government at policy-making levels; the Chairman of the Board isusually the government appointed director on IFCT's Board, its GeneralManagers have, in the past, been recruited from the Government/BOT hierar-chies, and an observer from the Ministry of Finance attends all Boardmeetings to provide the government point of view on IFCT's investments.

4.02 Board of Directors: IFCT has a 10-member Board which includesits General Manager (Annex 5). Three of its directors represent foreignshareholders, one represents the Government and the remaining six representdomestic shareholders. The present Board strongly reflects the predominanceof financial institutions in IFCT's ownership. The banking background of nineof its directors 4/ gives the Board a fairly conservative complexion althoughit has the advantage of the Board's being thoroughly conversant with thenature of IFCT's business and clientele. As opportunities arise in the

1/ IFCT's borrowers do not bear the foreign exchange risk; it is sharedby the Government and IFCT.

2/ The IFCT Act of 1959. It has since been amended in 1962, 1963,and 1967.

3/ With the recent sale of IFC's shareholding to the Mitsui Bank inFebruary 1976 the commercial banks' share of ownership rose to74.3%.

4/ One is an industrialist.

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future for diversifying IFCT ownership, a conscious effort should be madeto widen representation on the Board in terms of directors' professions,occupations, experience and educational backgrounds. The present Chairman,Khun Sommai Hoontrakool, plays an active role in guiding IFCT's affairsand emphasizing its developmental role. Previously General Manager ofIFCT for two years Khun Sommai was appointed Minister of Finance in thetransition government of Premier Sanya Dhamasakdi. His ability anddynamism are a distinct asset to IFCT.

4.03 The Board normally meets monthly to review policy matters and toapprove loans which exceed 5% of IFCT's net worth. 1/ Loans of a smalleramount are approved by an Executive Committee appointed by the Board whichcomprises four members: the Chairman, General Manager and two other directors,one of whom represents foreign shareholders. This Committee meets weekly bothto approve loans within its authority and to screen larger loans before theirsubmission to the full Board.

4.04 Management: IFCT's present management, headed by the GeneralManager, also includes two department managers and two deputy managers.One of the department managers, recently appointed to head the newly estab-lished Research and Planning Department (RPD), is a well qualified and ableindividual who is expected to lend strength to the management team. Thedeparture of IFCT's Assistant General Manager (concurrently manager of theProjects Department) in January 1976 has left a temporary void which IFCTis actively attempting to fill by recruiting a Deputy General Manager (DGM).This position is of considerable importance in adding depth to, and balanc-ing executive capabilities in, the present management. This matter was dis-cussed by the Bank and IFCT at negotiations and agreement was reached thatthe DGM position would be filled by September 30, 1976 at the latest.

4.05 At the department level, the manager of the Operations Department(OD) is, at present, also managing the Projects Department (DP). He is ablyassisted by two newly appointed deputy managers in each of these Departments.These positions have been created as a stop-gap measure until the deputieshave gained sufficient experience to be promoted to managerial rank. TheAdministration Department (AD) Manager's position has remained vacant forsome time and the workload has been handled directly by the General Manager.The appointment of a manager to this position has not been of urgent priorityespecially as excellent divisional support has been available. However, theworkload has now increased significantly and such an appointment is being givenactive consideration. At the divisional level three experienced divisionchiefs in key positions have recently been promoted or transferred. Theirreplacements are capable, but need to acquire further experience. Sufficientstrength exists within the management structure, however, to absorb the addi-tional load until they do.

1/ This loan limit was Bt. 12.7 million as of December 31, 1975. In viewof the impending increase in IFCT's share capital the Board has passeda resolution setting an absolute limit of Bt. 15 million for loans whichcould be approved by the Executive Committee.

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4.C6 Organization: Major organizational changes were made by IFCT inFebruary 1976 which, to a large extent, reflected the Bank's previous rec-ommendations. As depicted in Chart No. 15863 these included:

(a) the creation of RPD;

(b) the restructuring of divisional activity in PD;

(c) the (temporary) creation of two deputy manager positions(paragraph 4.05); and

(d) the establishment of branch offices (paragraph 4.09).

RPD's departmental functions cover: (i) long-range corporate planning;(ii) management support by way oi- policy and position papers on variousissues; (iii) economic and industry/financial sector and project analysis;(iv) project planning and promotiLon; and (v) dealing with the overall in-formation requirements of external creditor agencies and management. Thedepartment is not fully staffed a1S yet but recruitment is being activelyundertaken. Although RPD is a new addition to IFCT's organization it has,principally through its manager, begun playing an active and vital rolein formulating policy options for IFCT's management. Staff in PD's threefunctional divisions (engineering, financial analysis and market analysis)have been regrouped into complete appraisal teams divided between threedivisions which are specialized along sector/industry lines. This changewas brought about to effect closer coordination in appraisal work and todevelop greater appraisal team expertise in understanding the characteris-tics and problems of firms in particular industries. The internal struc-tures of OD (which is responsible for supervision) and AD have remainedessentially intact. IFCT's present organization is sound. It incorporatesfunctions which were previously not being carried out in IFCT and is expectedto result in both greater operational efficiency and increased job satisfac-tion for IFCT staff.

4.07 Staffing: At the end olf FY75 IFCT had a total staff complementof 163 representing a net increase of 13 staff during the year. Profes-sional staff accounted for 86 or just over half the total. The two opera-tional departments accounted for 66 staff members (or just over 40% of thetotal staff employed). IFCT staff, taken as a whole, had a good mix of di-verse professional backgrounds and were reasonably distributed by age; how-ever, over the last two years the age distribution has been skewed down-wards by the influx of recent grad'uates into IFCT between 1974-75. Staffare generally of good calibre although the proportion of experienced staff,particularly in the operating departments, has been reduced. Staff turnover,traditionally quite high in the past, was much lower in 1974-75 with turnoverin 1975 accounting for less than 4% of the average number of staff during theyear. This stability is, to a significant extent, attributable to the lessen-ing capacity of the urban economy to absorb highly trained graduates and aslowdown in the number of new companies entering the financial sector.Nonetheless, part of the credit in stabilizing turnover at low levels is

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due to IFCT's efforts to ensure the competitiveness of its overall compen-sation package, the element of relatively greater job security and manage-ment's concerted attempts at maintaining high levels of motivation and jobsatisfaction.

4.08 Advisors: For the first time in its history, IFCT has completelyshed its dependence on foreign advisors. Three foreign advisors completedtheir terms in 1975 and IFCT staff successfully absorbed their functions.One UNIDO-provided expert in chemical engineering completed his term in April1976. IFCT has generally found its experience with advisors to have beenbeneficial and feels that the advisors have played a key role in both advis-ing ;7.nagement and developing IFCT staff to a level of reasonable institu-tic - self-sufficiency.

4.09 Training and Staff Development: IFCT now has a much greater pro-portion of new staff in PD and OD. With proportionately fewer experiencedanalysts to provide guidance, IFCT realizes that its continued reliance on"on-the-job" training is likely to result in a much longer period beforenew staff members become fully effective. Furthermore the need to providetraining for older staff in newer project appraisal methods and techniques(particularly in market and economic analysis) is becoming more apparent.IFCT is, therefore, considering the possibility of providing formal trainingand planning staff development more systematically than it has done in thepast. Attention is now being given to developing: (i) a policy/operationsmanual for internal use as a reference guide and for training purposes;(ii) training courses in various aspects of project appraisal with stresson economic evaluation; and (iii) courses in corporate financing aimed atupgrading IFCT staff capability to provide corporate finance advice toclients on capitalization, public flotation of shares, bonds or debentures,etc., so as to promote and develop a merchant banking aspect to IFCT's role.Management and the Chairman have begun planning a suitable internal trainingprogram geared to meet IFCT's needs.

4.10 Branch Offices: Following approval by its Board early in 1975,IFCT opened its first branch office at Haat Yai (in the South) in December1975. In 1976, branch offices were opened in Khon Khaen (the. North East)and Lampang (the North). Launched as one-man offices, the branches' princi-pal function is to establish rapport with the local business community andacquaint it with IFCT's services. Building on that base IFCT plans to developnew business in regional centers. IFCT's approach to the establishment of itsthree branches has been cautious and sound; it has taken care in adequatelylaying the groundwork in each case by recruiting an experienced individualwho knows the locality well and providing him with intensive training at theHead Office. The Haat Yai branch has, in its first two months of operation,been remarkably successful in identifying 19 new projects in the region (vs.three new applications to the Head Office in the same period). The othertwo branches have just been established and have yet to commence operations.

4.11 Policies and Procedures: IFCT's basic operating guidelines areset forth in a Statement of Operating Policies (Annex 6) agreed with the

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Bank. There have been no recent amendments to the policy statement. Itwas changed at the time of the last Bank loan to incorporate the revision ofIFCT's debt/equity limit and its policies on sharing the foreign exchange riskwith the Government. The statement is similar to that adopted by most DFCsassociated with the World Bank Group. Its key features are: (i) a debt/equitylimit of 6:1; (ii) an exposure liimit of 25% of its own net worth 1/ in anysingle enterprise; (iii) an equity investment limit of 10% of its net worth 2/for any individual investment and an aggregate limit on all such investmentsequivalent to its own net worth; (iv) a lending "floor" of Bt. 1 million(US$50,000); (v) a limitation on IFCT's taking up more than 25% of the totaloutstanding shares issued by any single enterprise; (vi) a reserves policywhich requires setting aside at least 30% of annual profits (25% as a bad debtreserve and 5% as legal reserves) until bad debt reserves total at least 20%of its outstanding portfolio 3/ and legal reserves are at least 10% of paid-inshare capital.

4.12 Project Appraisal: The quality of IFCT's project appraisal workis satisfactory and has shown consistent improvement over the past two years.This is, in part, traceable to the influence of rigorous standards set byIFCT's previous advisors; the credit in responding to and maintaining suchstandards, however, belongs entirely to IFCT's staff. This achievementis especially notable in view of the rapidly increased workload 4/ in 1974 and1975 and the fact that IFCT's borrowers are not prone to providing information,especially on financial aspects, too readily. Appraisal time generallyvaries between 2-6 months, the average being around 5 months largely becauseof problems with access to reliable information. The present quality ofappraisal notwithstanding, there remains scope for continued improvement andfor a reduction in processing time. With the last Bank loan IFCT begancalculating economic rates of return for all projects for which sub-loansexceeded Bt. 10 million 5/ and/or the total project cost exceeded Bt. 30million regardless of sub-loan amounts. IFCT is now expected to include theeconomic rates of return in all appraisals (except very small projects) as a

1/ The exposure limit covers the sum total of loans, guarantees, equityinvestments or preferred share/debenture holdings in any enterprise.As of December 31, 1975 this limit amounted to Bt. 63.33 million.

2/ This limit was Bt. 25.3 million as at December 31, 1975.

3/ As at December 31, 1975, reserves and provisions amounted to 7.8% ofthe outstanding portfolio.

4/ The number of projects appraised increased from 16 in FY73 to 44 in FY74and 56 in FY75 while the number of staff increased from 20 to 29 in FY74and further to only 31 in FY75. Man-months per appraisal declined from15 in FY73 to 6.4 in FY75.

5/ This floor has now been lowered to Bt. 8 million.

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matter of course. With the entry of the Manager of RPD on the InvestmentCommittee it is expected that the quality of economic analysis will improvefurther. A comparison of actual project performance with appraisal expecta-tions suggests that, in the past, IFCT's appraisals have tended to use some-what optimistic assumptions especially on capacity utilization, prices andmarkets. Continuous feed-back between appraisal and supervision work shouldbe encouraged so that actual experience can influence judgements made duringappraisal; closer supervisory control may need to be exercised to ensure thatrelatively new staff acquire the benefit of available experience. In view ofthe quality of IFCT's appraisals it was agreed, during negotiations, that thefree limit would be increased to US$750,000 and the aggregate free limit toUS$10 million under the proposed loan.

4.13 Project Follow-Up: IFCT has an exceptionally sound project super-vision system, with close follow-up being carried out during implementationand after commencement of commercial operations. Client/project performanceis closely scrutinized with the frequency and intensity of scrutiny beingstepped up in problem cases. Regular and thorough progress reports are pre-pared based on extensive reporting requirements and frequent field visits.Collection performance is regularly reviewed on an account-by-account basisand, when necessary, loans are rescheduled in a timely manner. The highquality of IFCT's supervision has been largely responsible for its arrearsbeing kept under control (paragraph 5.08) and has earned IFCT the respectof many of its clients who have benefited from the advice received during thecourse of project follow-up.

4.14 Project Screening and Monitoring: Before appraisal, loan applica-tions are cursorily screened to establish prima facie viability and eligibi-lity for IFCT financing. With a much heavier project load than prior to1973, IFCT s screening mechanism needs to be improved to ensure that timeis not wasted unnecessarily at the appraisal stage. A review of the screen-ing report by a sub-Investment Committee, comprising the three managers ofPD, RPD and OD (and including the chief legal officer), prior to its sub-mission to the General Manager for authorization to proceed with appraisalwould be a useful introduction. After appraisal, project reports are re-viewed by the Investment Committee 1/ and often revised following such areview before going through the General Manager to the Executive Committeeand the Board.

4.15 IFCT was among the first in a sample set of institutions to tryout the Project Monitoring System being developed by the Bank on a limitednumber of its sub-projects. The results of that experiment were encouragingand IFCT is willing to adopt the system once it is refined. As a parallel

1/ The IC includes: the General Manager; the managers of OD, PD andRPD; the division chiefs in PD and OD; the Secretary and the Chiefof the Legal Division.

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effort IFCT should consider regular evaluations of operating projects anddetermine whether experience has borne out appraisal expectations.

4.16 Procurement and Disbursements: IFCT's procurement procedures aredesigned to ensure that items financed by it are procured with due regard;-r economy and efficiency. It generally requires borrowers to obtain atleast three competitive quotations from different suppliers. These arecarefully checked by PD whose technical scrutiny of the equipment procuredand the competitiveness of its price is comprehensive and thorough. Dis-bursement procedures are also prudently conceived. IFCT ensures that theborrowers' own funds are applied first to project costs. Disbursements fromsub-loan funds are generally staggered and are linked to the schedule ofproject implementation; they are only made against the submission of satis-factory documentation i.e. invoices, receipts or construction advances inthe case of domestic currency disbursements and letters of credit or billsof lading for foreign currency disbursement. The procurement and disburse-ment procedures applied by IFCT satisfactorily comply with the requirementsof the Bank.

V. IFCT, OPERATIONS, FINANCES AND PORTFOLIO QUALITY

5.01 Lending Operations: A detailed analysis of IFCT's operationsis presented in Annex 7. IFCT's level of loan approvals in FY74 and FY75has considerably exceeded previous expectations. From an average level ofaround Bt. 150 million between FY70-73, net loan approvals have jumped to anannual average level of around Bt. 750 million between FY74-75 with approvalsin those two years exceeding total approvals between FY60-73. Net approvalsof nearly Bt. 786 million for 54 loans in FY75 brought total loan approvalssince IFCT's inception to nearly Bt. 2.6 billion. As of December 31, 1975IFCT had Bt. 1.34 billion outstanding in 146 loans to 120 borrowers. Theratio of domestic to foreign currency lending is about 40:60 representinga shift toward an increasing proportion of foreign currency financing 1/from FY71 onwards. The average size of loan is around Bt. 13-14 million;however, this figure obscures the distinct differences between IFCT's hand-ful of large loan operations (which average Bt. 36 million in size) and itsregular business (averaging around Bt. 8 million).

5.02 IFCT's loans generally have maturities averaging around 6 years.Grace and maturity periods are inclined to be somewhat short, reflecting IFCT'ssomewhat rigid approach to basing rescovery periods too strongly on cash flowprojections without allowing sufficiently for margins of error. Lending

1/ As explained in Annex 7, paragraph 4, a sizeable portion of IFCT'sforeign currency lending is in tied funds. The proposed Bank loan willenable IFCT to increase its foreign currency lending from about 60% toaround 75% of total loan approvals in 1976-77.

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operations, reflecting the basic concentration of Thai industry, tend to be

heavily focussed on investments in the Central Region. For reasons explainedin Annex 2, paragraph 10 and Annex 7, paragraph 8, IFCT's concerted efforts atdispersing its lending operations have been thwarted by factors beyond itscontrol. Nonetheless, management intends to step up such efforts through the

establishment of branches and through the new project promotion section set upin RPD. The loan portfolio is reasonably well diversified by industry; fourbasic industries viz. food, textiles, chemicals and non-metallic minerals 1/account for about 66% of total commitments between FY73-75. IFCT's lendingoperations also reflect the thrust toward export orientation in manufacturingwhich began in FY70. There is a fairly even split between new and expansionprojects in IFCT's financing. One slightly disconcerting feature of IFCT'slending operations is the increasing number of applications being received forfinancing projects which are in a fairly late stage of development and inwhich IFCT's scope for exercising some influence over investment decisions istherefore restricted. 2/ This development has also concerned IFCT's Boardwhich, in a recent resolution, instructed management to limit IFCT's financingof such operations to exceptional cases where clear justification existed fordoing so. This action on the part of IFCT's Board is considered to be suffi-cient indication of the seriousness of IFCT's intent to curb such operations.

5.03 Equity Investments and Guarantees: After a four year period ofrelative inactivity IFCT approved 4 equity investments totalling Bt. 24.6million (Annex 7,paragraph 11) in FY75. As of December 31, 1975 IFCT's equityinvestment portfolio stood at Bt. 8.2 million in four companies and undis-bursed commitments for equity investments amounted to Bt. 31.8 million. Guar-antee operations have never been of much significance since IFCT restrictsthe issue of guarantees to its borrowers to cover letters of credit, deben-ture repayments and payment of import duties. As of December 31, 1975 IFCT'soutstanding guarantees stood at Bt. 59.7 million. Neither equity investmentsnor guarantee operations are likely to expand significantly in the near

future. 3/

5.04 Financial Position and Performance: Annex 8 provides full detailson IFCT's financial position and performance; summarized balance sheets andincome statements for the period FY71-75 are shown in Annex 8, Tables 1 and2 respectively. On December 31, 1975 IFCT's total assets stood at Bt. 1.48

1/ These industries are also the most prominent in the mnaufacturingsector (Annex 2, paragraph 3).

2/ Because of intensive sub-project review procedures there have been veryfew instances in which IBRD funds have been used to finance such opera-tions. In each such instance IFCT was requested to provide specialjustification.

3/ The reasons are provided in Annex 7, paragraphs 15 and 17.

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billion (US$74 million) having increased by over 37% during the year, aslight dip from the 40% growth recorded in 1974. Rapid asset growth overthe past two years reflects the stepped up level of long-term lending opera-tions, the proportion of outstanding long-term loans in the asset base risingfrom 78% to 91% between FY73 and FY75 1/. Although IFCT's equity portfolioalso grew dramatically in FY75 (from Bt. 0.4 million to Bt. 8.2 million) thesize of the portfolio is still too small to have any significant impact on thestructure of the asset base.

5.05 The growth of long-term Loan assets was financed almost entirelyby a concomitant growth in long-term debt, particularly foreign debt. Where-as IFCT's long-term debt grew by an average of 16% between FY70-73 the growthrate jumped to an average 47% in FY74-75 representing very rapid draw downson lines of credit provided by the Bank, ADB and EXIM. While the outstandinglong-term debt increased by 115% between FY73 and FY75 (from Bt. 0.53 billionto Bt. 1.15 billion), IFCT's equity grew by only 23% (from Bt. 205 million toBt. 253 million), the growth being accounted for by additions to reserves.As a result IFCT's debt/equity ratio rose from 2.9:1 in FY73 to 4.8:1 at endFY75, still well within the ceiling, of 6:1 established under the loan agreementfor the last Bank loan. IFCT's liquidity position also remains sound, thecurrent ratio being 1.7 in FY75. W'ith its large level of undisbursed com-mitments (Bt. 320.4 million at end FY75) and the inflow of funds from itsrecent Bt. 150 million debenture issue, IFCT would exceed the 6:1 debt/equitylimit by the third quarter of FY76. To avert this possibility IFCT is pro-ceeding with an equity issue of Bt. 100 million later this year, part of whichit expects to float publicly through underwriters. As of July 31, 1976 Bt. 55million (which had been allocated to existing shareholders, IFCT employeesand to the Mutual Fund Co.) had been subscribed and paid-in. On the adviceof its underwriters IFCT has decided to float the remaining BT. 45 million tothe general public in December 1976 and the issue is expected to be fully paid-in by January 1977. The arrangements being entered into by IFCT with its under-writers are satisfactory. IFCT's decision to float 45% of its capital issuepublicly has exceeded the Bank's earlier expectations. It should contributesignificantly to widening IFCT's ownership base and toward increasing the sup-ply of securities in an embryonic capital market. On the basis of IFCT's pro-jections an increase in the present debt/equity limit of 6:1 is not considerednecessary at this time; it was agreed at negotiations that this limit wouldbe maintained for the present.

5.06 The booming volume of operations has had a salutary impact onIFCT's financial performance. Net income for FY75 was Bt. 38.3 millionrepresenting a 42% increase over the previous year; it has tripled fromFY71 levels. Income growth is attributable entirely to an increase in theportfolio with increased interest charges being offset by increased financialexpenses resulting in a constant gross spread. Administrative expenses havebeen maintained at the historical level of 1.5% of average total assets.Although IFCT's profit levels have increased, as a percentage of averagetotal assets, net income has remained relatively constant at about 3% overthe last three years. Owing to higher leverage, however, returns to aver-age equity have risen from around 12.5% to 16.1% in FY75 allowing IFCT to

1/ The Baht value of long-term loans increased from Bt. 601.1 millionin FY73 to Bt. 1,342.6 million in FY75.

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raise its dividend from 9.5% in FY74 to 10.0% in FY75. In anticipation ofpublic trading of its shares over the medium term, IFCT hopes to graduallyincrease its dividends to around 12.0% by FY79. Judging by competing issuesin the capital market even a 12% dividend is likely to be too low to attractactive interest in IFCT's shares on the part of small non-institutional in-vestors in the immediate future. 1/

5.07 Foreign Exchange Risk: The relatively low level of IFCT's foreigncurrency lending operations prior to FY74 was attributable, in part, to bor-rowers being unwilling to accept a foreign exchange risk. The Baht is fullyconvertible and borrowers can normally borrow in Baht and swap for foreigncurrencies in spot transactions without incurring any risk. In March 1974, aForeign Exchange Risk Agreement was signed between the Ministry of Finance andIFCT whereby, without being totally relieved of possible losses as a result offoreign currency realignments, IFCT could cover such losses without suddenadverse effects on its finances. Details of the agreement and the mandatoryforeign exchange risk provisions which IFCT now has to make are provided inAnnex 8, paragraph 9.

5.08 Portfolio Quality: IFCT's loan, equity investment and guaranteeportfolios are of sound quality. Arrears (principal and interest) on theloan portfolio, at the end of FY75, amounted to Bt. 27.6 million (or 2% ofthe outstanding portfolio) for the accounts of 18 client companies. Theprincipal outstanding affected by overdue accounts amounted to Bt. 149.2million or 11% of the outstanding portfolio. In proportionate terms botharrears and principal affected have increased over FY74 levels when theywere 1.1% and 6% of the loan portfolio respectively. This reflects morethe temporary effects of an economic downturn, which has affected a largenumber of manufacturing companies (especially in export industries e.g.tapioca and textiles), rather than being indicative of a structural deter-ioration in portfolio quality. Roughly 55% of overdues are accounted forby two companies (both their accounts being more than one year overdue). 2/IFCT's equity portfolio is generally sound; two of its investments were incompanies which had not begun operating profitably until 1973. However, theyhave now turned the corner and their prospects for continued profitabilityare encouraging. Of its guarantees issued for eight companies, one (for a

1/ IFCT's shares are not publicly traded at present. Against a par valueof Bt. 1,000 the book value of an IFCT share was Bt. 1,689 at endFY75. IFC sold its shares to Mitsui Bank under a private arrangementin February 1976 at Bt. 1,600 per share.

2/ One of these companies faces temporary market acceptance difficultieswith a new product. The other (a deep sea fishing company) has hadunforeseen mishaps with its vessels but is now operating profitablyand gradually paying off its accounts. In both instances IFCT haswithheld account restructuring so as to pressure these companies totake necessary actions in improving their financial performance. OnApril 7, 1976 IFCT informed the Bank of actions taken to resolve theproblems faced by the first company. These actions are expected toresult in a significant improvement in IFCT's arrearages position.

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cmipany now in liquidation) was in default for a balance of Bt. 1.2 millionor 2% of the outstanding guarantee portfolio. IFCT has made sufficientlyprudent provisions for losses on doubtful accounts based on a thoroughL,view of each account. The arrears position is analysed in depth inAnnex 9.

5.09 Audit: IFCT's auditors - Na. Thalang & Co. - are associated withthe Sycip, Gorres & Velayo (SGV) Group and have audited its accounts since1972. Their reports are thorough and satisfactorily meet the Bank's require-ments. IFCT's accounts have always been certified without qualification.

VI. IFCT'S DEVELOPMENTAL IMPACT AND ROLE

6.01 Overall Impact: IFCT remains the only specialized long-term invest-ment financing institution in Thailand. Roughly 80% of its commitments arechannelled to the manufacturing sector and, since 1970, increasingly to medium-large plants oriented toward export production. Its annual lending volume(disbursements) which, prior to 1973, represented a very small proportion oftotal private sector investment in manufacturing (averaging 2.2% between1970-73) nearly doubled to an average 4.1% in FY74 and FY75. With disburse-ments likely to increase substantial:Ly in the future, as a result of muchhigher recent commitment levels, this share is expected to rise to around 6%in FY76-77. However, because IFCT's financing covered a relatively smallproportion of total project cost, its influence was exerted over a largerportion of total private investment in manufacturing (estimated at around 25%)especially between FY74-75. Somewhat: paradoxically, IFCT's lending operationshave been rising while overall investment levels have been falling. To alarge extent this reflects IFCT's willingness to take calculated risks in theinterests of medium and long-term development at a time when other financialinstitutions are retrenching and approaching investments with a cautiouswait-and-see attitude in a climate of general uncertainty over the future.

6.02 The 95 project loans approved by IFCT in FY74 and FY75 (whichaccount for over half its cumulative operations since 1960) involved a totalinvestment of Bt. 6.4 billion. On completion, these projects are expected togenerate about 24,500 additional jobs 1/ resulting in an incremental annualpayroll of Bt. 430 million. In terms of output these projects are expectedto result in additional annual sales of Bt. 13.7 billion and incrementalvalue-added of Bt. 2.54 billion; they are also expected to result in netannual foreign exchange earnings/savings of nearly Bt. 1 billion.

6.03 Efficiency of Investments: Economic rates of return were calculated(ex ante) for 45 of the 95 projects financed during FY74-75; they varied from13% to 80%. Financial rates of return generally ranged between 12-42%. Thedistribution of internal economic and financial rates of return for projectsfinanced by IFCT during FY74 and FY75 are shown in the table below:

1/ By comparison the annual rate of employment creation in the manufacturingsector is expected to be around 21,000 jobs per year. IFCT's projects onaverage take about 2 years to complete.

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Distribution of Rates of Return on IFCT's Projects

1974 1975Rates of Return ERR /1 FRR /2 ERR /1 FRR /2

Below 10% - -10%-19% 2 11 6 2720%-39% 9 28 21 2640% or over 2 2 5 1

Total No. of Projects 13 41 32 54

/1 I1CT calculates economic rates of return only for projects inwhich IFCT's sub-loan exceeds Bt. 8 million or the total projectcost exceeds Bt. 30 million.

/2 Financial rates of return are calculated for all projects and aregenerally understated.

The rates of return calculated for these projects were based on best possibleestimates at the time of sub-project appraisal by IFCT. These estimates aregenerally in line with ex post calculations carried out for a limited sampleof projects at the time of appraisal of the last Bank loan to IFCT.

6.04 Resource Allocation: In terms of ensuring, to the extent possi-ble, the allocation of resources to sound productive investments through itsappraisal process, the figures above suggest that IFCT is performing cre-ditably. Its financing in FY74-75 has resulted in some concentration(to varying degrees) of investment both geographically (in Bangkok andthe Central Region) and industrially (in food processing, textiles,chemicals and non-metallic minerals). By industry branch such concentra-tion, however, has been generally in accord with the investment priori-ties of the BOI. In some instances IFCT has played a significant role inthe planned restructuring of an industry (e.g. tapioca). IFCT has alsobeen venturesome in the financing of projects which result in the intro-duction of new product lines and technology. The continued concentrationof investment in the Central Region is indicative of IFCT's inability tosinglehandedly redress the regional investment imbalance. Moreover theconcentration of nearly all IFCT's large loans for projects in the Bangkokarea tends to distort the picture somewhat. Adjusting for such loans, adiscernible shift of investment to other regions becomes apparent; however,the process of achieving significant changes in this direction is likelyto remain a long and slow one.

6.05 Long-Term Resource Mobilization: Between FY74-75 IFCT was suc-cessful in mobilizing nearly US$73 million from various foreign bilateraland multilateral sources viz. the Bank, ADB, KfW and the Japanese EXIM Bank.To the extent that such resources represent incremental financial inflows,replace shorter-term and more expensive suppliers' credits and encouragesub-borrowers to procure equipment on an internationally competitive basis,

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IFCT's success at mobilizing such resources yields a substantial economicbenefit to the country. Under present circumstances it would be unrealisticto expect IFCT to diversify its sources of financing beyond the bilateraland multilateral sources it now taps. IFCT is not yet ready to approachforeign commercial markets for long-term funds. Nonetheless it should beginto prepare for such a possibility and consider a commercial foreign borrowing(a small consortium loan or a bond issue) for around FY78. IFCT's limitedefforts at raising domestic resources through its share capital and debentureissues have also been quite successful. Nonetheless, they have so far beenrestricted to "secondary mobilizati,on" (i.e. raising resources from otherfinancial institutions and not directly from private savers), borrowingsfrom the Government and the Bank of Thailand. Its ability to raise fundsdirectly from private savers has been constrained by: a policy regime whichfavors savings in commercial bank deposits; artificially depressed lendingrates; an undeveloped market for long-term bonds; and its inability to competewith other financial institutions in paying out the very high dividends whichthe local market has come to expect. With the recent and proposed increasesin its interest rate, one constrainlt to mobilizing resources directly will belowered. IFCT also hopes to tap the market directly for 45% of its nextequity issue. As the capital market: develops it should become increasinglypossible for IFCT to issue instruments with a medium-term maturity at ratesacceptable to the market.

6.06 Capital Market Development: In 1974 and 1975 IFCT has expendedconsiderable effort in assisting the Government with laumching the newSecurities Exchange of Thailand. IFCT's General Manager is also Chairmanof the Exchange. IFCT is also about to establish a mutual fund companywhich will provide the intermediate instrument to encourage participationby the small investor in the securities market. IFCT will be the singlelargest shareholder in the Mutual Fund Co. owning 29% of the paid-in capital(Bt. 20 million, authorized capital Bt. 40 million) with the Ministry ofFinance taking up a 25% share and the Government Savings Bank a further 20%.In establishing the mutual fund IFCT has been successful in persuading theGovernment to release to the new company shares held by the Government inprivate and public corporations valued at about Bt. 400 million and a furtherBt.100 million in the form of short-term notes and debentures. In additionIFCT has actively approached several well established private companies to gopublic and sell their shares to the Mutual Fund Co. The replies received sofar have been encouraging.

6.07 Promotional Efforts: Through FY74-76 IFCT has continued steppingup its promotional efforts with: (i) a continuation of its program of in-dustry studies; (ii) its efforts to encourage private entrepreneurs to estab-lish pioneer industries on a joint-venture basis with foreign partners; (iii)direct industrial promotion - IFCT has been playing a lead role both as a pro-vider of technical assistance and as a representative of domestic investorsin establishing joint ventures in the palm oil, sericulture, castor oil androck salt industries; (iv) the estabLishment of three branch offices; (v)regional seminars at which interested investors and traders are invited todiscuss specific investment opportunities to be taken up by IFCT; and (vi) theestablishment of a special project promotion unit at the head office. Theseactivities have yielded tangible results by way of actual investments made.

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As Annex 7, paragraph 13 indicates IFCT has financed a number of joint venturesbrought about through its intervention. The palm oil project on which IFCThas spent several man-years of effort is about to come to fruition. Further-more the Haat Yai branch has identified 19 project opportunities in two months,six of which were being actively screened in February 1976. IFCT's regionalseminars have also attracted wide interest and are likely to lead to specificprojects being financed in the next year or two. In addition to these activi-ties IFCT is playing the lead role in launching a study on small industries inThailand aimed at developing a "bankable" project package (paragraph 3.03).Moreover it has also actively begun strengthening its links with variousbusiness associations and chambers of commerce, with the commercial bankingsector and with other government agencies (in particular, BOI, NESDB and BOT)in order to play a more effective role in the planning and development ofprojects in their early stages.

6.08 IFCT's Development Strategy: At the time of the last Bank loan,IFCT proposed to pursue a five-point development strategy which would aimat: (i) financing smaller 1/ riskier projects in the Bangkok area which couldnot attract commercial bank interest; (ii) financing a few large and complexprojects which required substantial promotional inputs; (iii) promoting proj-ects, particularly agro-industrial projects, in lesser developed regions;(iv) increasing its level of equity investments; and (v) competing moreaggressively with commercial banks. Performance during FY74-75 in achiev-ing these various objectives has, on balance, been creditable. The follow-ing table indicates the extent to which IFCT was successful in achieving itsfirst objective.

1974 1975 Total

Projects approved in Greater Bangkok 18 28 46of which: total cost under Bt. 40 million 15 14 29of which: new projects under Bt. 40 million 9 6 15

expansion projects under Bt. 40 million 6 8 14Expansions of under Bt. 40 million by first time clients 5 7 12

As shown above 63% of the projects approved in the Bangkok area in FY74-75had a total cost of less than Bt. 40 million (the cut-off point for "small"as used for these purposes). Of these there was a roughly even split be-tween new and expansion projects, over 85% of the latter being undertakenby first-time clients of IFCT. It is difficult to judge the number ofthese cases which could have obtained long-term or roll-over finance fromother sources except to note that although commercial banks have been gen-erally liquid from late 1974 onwards their lending has become considerablymore conservative and even more collateral-based than in the past. Sincethe loan/collateral ratios of all these projects is fairly high it islikely that they would not have been able to secure finance from othersources.

1/ For the purposes of the strategy statement "smaller" projects weredefined as those with a total cost of Bt. 40 million or less.

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6.09 Between 1974-75 IFCT has financed 11 very large projects with atotal cost of over Bt. 200 million (US$10 million). However, all theseprojects have been undertaken by large "blue chip" firms (seven of whichhave extensive foreign participation) and had already been well plannedso that when IFCT stepped in no major promotional inputs were required.The only large project (pulp and paLper) to which IFCT has devoted a greatdeal of time and effort in promoting has not, as yet, materialized. Onthe third objective, regional dispersal, IFCT had in FY74-75 committedfunds totalling Bt. 130.5 million to 21 projects outside the Central Re-gion. Considering that it had financed only 28 projects for Bt. 156 mil-lion in the preceding fourteen year period (1960-73) outside the CentralRegion, the level of lending achieved in the past two years is noteworthy.In relative terms, however, the increase has not resulted in a discernibleshift in proportions lent to other regions largely because of the increas-ing predominance of large loans which IFCT has approved since 1973. Instepping up its level of equity investments IFCT was quite successfulin 1975 with four new investments totalling Bt. 24.6 million, therebydoubling the number of participations and increasing the amount of invest-ment by two and a half times. Finally, if its increased lending vol-ume in a declining investment environment is an indicator, IFCT can beassumed to have succeeded in competing more aggressively with commer-cial banks for its business especiaLly in 1975 when bank rates climbeddown and banks were generally liquid. However a strategy of aggressivecompetition with the banks is a questionable one. To the extent thatbanks can service established clients they should continue to do so,and if possible, on a long-term bas.is. IFCT's role, being essentiallya developmental one, should complement that of the banks rather thanseek to substitute for it. With thiis last exception IFCT should continueto pursue the strategic objectives enunciated previously. One strategicobjective not included in its statement is the development of the Thaicapital market toward which IFCT has made a significant contribution(paragraph 6.06).

VII. IFCT's RESOURCE POSITION AND PROSPECTS

7.01 Resource Position: Details of IFCT's resources are provided inAnnex 10 and its resources position as of December 31, 1975 shown in Annex10, Table 1. IFCT's approval, commitment and disbursement rates in FY74-75 have outpaced all previous expectations and its domestic resources fellshort of undisbursed commitments by about Bt. 63.5 million at the end ofFY75. The recent Bt. 150 million delbenture issue which was fully sub-scribed in January 1976 should cover such commitments and leave a balanceof about Bt. 40 million for further domestic currency approvals (beyonduncommitted loans already approved). During the year IFCT expects toraise a further Bt. 100 million through an increase in its share capital.These funds would suffice to meet IFCT's expected level of domestic cur-rency loan approvals through 1976. Hlowever, in the latter part of theyear IFCT will, almost certainly, have to make arrangements for further

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domestic borrowings. It plans to make a debenture issue of Bt. 150-200 mil-lion in 1977 which will need to be augmented by way of extended rediscountfacilities from the Bank of Thailand and/or loans from the Government SavingsBank to cover domestic lending operations through 1977. By 1978 IFCT shouldaim at being in a position to approach the public market directly for borrow-ings of between Bt. 100-150 million annually without relying exclusively onother financial institutions.

7.02 On the foreign resources side IFCT had resources totalling Bt. 569million available for further approvals of which tied funds represented nearly60%. Untied funds available for further approvals amounted to Bt. 216 million(US$10.8 million) and for commitments Bt. 394 million (or US$19.7 million).Against these available resources IFCT had an immediate pipeline of projectsrequiring untied funds amounting to around Bt. 200 million. On an approvalbasis IFCT had virtually exhausted its available untied funds by around June1976 (on a commitment basis by around September-October 1976). On the basisof its operational projections, the proposed Bank loan of US$25 million(Bt. 500 million) should last IFCT until around March 1978 on an approvalbasis (or three to six months beyond on a commitment basis). The Governmentand IFCT have requested a limitation on the size of the Bank loan to coverIFCT's approval requirements for a 15-18 month period. ADB has expressed itswillingness to augment IFCT's untied foreign resources when Bank funds areexhausted. The slightly contracted financing horizon also allows IFCT areasonable margin of error if projected levels of operations do not material-ize under the present uncertain circumstances. IFCT's tied resources, ofwhich it had over Bt. 352 million available for further approvals at end FY75should suffice until around the end of 1977.

7.03 Operational Projections and Prospects: IFCT's operational projec-tions and business prospects are analyzed in Annex 11. Although IFCT'soperations in FY74 and FY75 increased in the face of a declining investmenttrend, the sharp dip in investment decisions taken in FY74-75 is expectedto be reflected in IFCT's approvals for FY76-77. However, the abatementof exaggerated fears on the part of investors and the restoration of a stablegovernment with an enhanced ability to proceed with the pressing task ofdevelopment is expected to result in a pick-up in investment from late FY76onwards. Accordingly, IFCT has projected total approvals of Bt. 770 millionfor FY76 (including Bt. 40 million for equity investments) which represents anoverall decline of 6% (7% for loans) from FY75 levels. Approvals are thenexpected to pick up by 12% in FY77 to Bt. 865 million and, more rapidly, by20% in FY78 and beyond. Commitment levels are expected to parallel approvallevels with a lag of around three to six months. IFCT's operational projec-tions are generally in line with overall business expectations and, providingbroader assumptions about the environment hold good, they should be achievable.

7.04 Financial Projections and Prospects. On the basis of its opera-tional projections and assuming an increase in its interest rates to 12.5%IFCT's portfolio and income prospects appear to be bright. Spurred largelyby growth in its long-term loan assets, total assets are expected to in-crease by 54% in 1976 to Bt. 2.27 billion and at an average annual rateof nearly 15% thereafter to Bt. 4.48 billion in 1980. No major structural

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change in asset composition is expected over that time with the loan port-folio (net of provisions) accounting for the bulk of the asset base (around85%) except in those years when receipts from debentures or equity invest-ments toward the end of a financial year, placed on deposit, may temporarilyboost short-term assets. To finance this increase, long-term debt outstand-ing is expected to climb by 53% in 1976 to Bt. 1.76 billion and by 18% annuallythereafter to Bt. 3.42 billion in 1980. IFCT expects to increase its sharecapital by Bt. 100 million in 1976; over the remainder of the projectionperiod increases in net worth will be attributable entirely to a reservesbuild-up. Reserves are expected to grow by 31% in 1976 to Bt. 135.3 millionand by a much higher rate averaging 42% annually between 1977-80 to Bt. 544.1million. In 1980 reserves are expected to account for 68.5% of net worthvs. 40.1% in 1975. The projected rate of reserves build-up, attributableto income performance, appears to be somewhat high. As a result of theincrease in reserves the long-term debt/equity ratio is expected to declineto 4.4:1 in 1980 after rising to a peak of 5:1 in 1977. The liquidity posi-tion is expected to remain comfortable throughout with a high of 2.1:1 in1976 (caused by the increase in short-term holdings due to receipts fromthe equity increase) and a low of 1.4:1 in 1977.

7.05 The combination of an increased portfolio and an increased in-terest rate will have a pronounced impact on income growth in absolute(but not relative) terms. Net income is expected to grow by 27% toBt. 48.9 million in 1976 and by 57% to Bt. 77.5 million in 1977 whenthe impact of increased interest rates on a sizeable part of the portfo-lio is felt, thereafter its growtlh rate is expected to decline to 13.5%in 1980 when net income is expected to be Bt. 161.3 million. Net incomeas a percentage of average total assets however is expected to decline in1976 (from 3% to 2.6%) and then rise gradually to 3.8% in 1980. The mostnotable trend in the projections iis the expectation of a steady decline inadministrative expenses 1/ as a percentage of average total portfolio fromits historical average of 1.5% to 0.9% by 1980. Expected levels of profita-bility would result in an increase of the return to equity from 15.3% in1976 to 22.3% in 1980. IFCT is expected to raise its dividend rate by 0.5%annually from 10% in 1975 to 12% in 1979 in an effort to make its sharesattractive to the market. A reasonably sound cash flow position is ex-pected to be maintained throughout with the debt service coverage ratioexpected to remain at well above 1.6.

VIII. JUSTIFICATION FOIR THE LOAN AND ITS MAIN FEATURES

8.01 Justification: IFCT is rapidly developing into a sound institutionwhich applies rational project selection policies and procedures. Its manage-ment and staff are generally of good calibre. As a private institution with

1/ The present level of IFCT's administrative expenses is comparativelyhigh and, with the full disbursement of loans already committed, isexpected to decline by 1977.

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public connections it plays a unique role in encouraging private sectorinvestment in line with the overall industrial development priorities of thegovernment. It is pursuing a sound development strategy and has had more thanmoderate success in taking the first steps toward achieving fairly difficultobjectives. IFCT has excellent rapport with the government and is developingbetter relationships with the financial and industrial communities. In anenvironment not favorably inclined towards accepting the discipline of thoroughproject appraisal and supervision, IFCT continues to do an effective job ofgetting clients to accept such discipline although the task has proven to bestrenuous and progress has been gradual. Over the past two years, IFCT hasbegun to come into its own; it has played a leading role in the development ofthe securities market and its lending and equity investment operations haveincreased beyond reasonable expectations. These achievements notwithstanding,IFCT is looking toward continually upgrading the quality of its staff, itswork and toward the further diversification of its activities, particularlyin encouraging small industry development, with continued support and assis-tance from the World Bank Group. The availability of Bank resources andsupport for IFCT have, in the past, been materially significant to its increas-ing stature and its institutional growth. Its achievements notwithstanding,the continually developing Thai economy will make increasing demands on IFCT'scapabilities and resources and will render it dependent on multilateralsources of finance for some time to come. The proposed loan would enableIFCT to continue on the successful course now being followed.

8.02 Rates of Return on Projects Financed: As indicated in paragraph6.03, internal economic rates of return on IFCT financed projects have var-ied between 12% and 80% with the heaviest concentration around 30%. Internalfinancial rates of return have ranged between 12% to 42% with the bulk of theprojects having returns of around 25%. The last Bank loan to IFCT (Loan No.992-TH) for US$12 million has been utilized in a satisfactory manner, 1/ hav-ing gone toward financing 18 diverse projects with sub-loans varying in sizefrom US$49,000 to US$2.7 million. Economic rates of return, calculated for13 of these projects, have ranged between 15% to 80% with a weighted averageeconomic rate of return of 46%. Financial rates of return for all.18 proj-ects ranged from 14% to 41% with a weighted average rate of return of 19%.These rates of return are satisfactory. While the specific projects to befinanced under the proposed loan have not been identified it is expectedthat these projects will yield similar returns to those financed under theprevious loan.

1/ The manner in which Loan No. 992-TH was utilized is analyzed in detailin Annex 7, paragraph 12 and Annex 7, Table 4. Since February 29, 1976four additional sub-loans have been authorized for withdrawal under theloan account for a total of US$906,000 leaving an uncommitted balanceof US$527,000 in the account as of July 31, 1976. The financial andeconomic rates of return on these projects are similar to the othersub-projects financed under the loan and result in no change in theweighted average rates of return.

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Main Features of the Loan

8.03 Purposes: The loan would be used to finance direct capital goodsimport requirements of eligible industrial agro-industrial, mining, shipping,tourist and other enterprises, and 65% of the cost of imported goods pur-chased from domestic suppliers. The loan would also be used to finance thepermanent working capital requirements of eligible sub-projects.

8.04 Borrower: The loan would be made directly to IFCT and would beguaranteed by the Kingdom of Thailand.

8.05 Foreign Exchange Risk: The foreign exchange risk on currenciesdisbursed under the loan would be shared by IFCT and the Government inaccordance with the terms set forth in the "Foreign Exchange Risk Agree-ment" between IFCT and the Ministry of Finance dated April 26, 1974 (para-graph 5.07).

8.06 Amortization Schedule: As is normal for the Bank's DFC projectsthe loan would have a flexible amortization schedule which would correspondroughly with the expected aggregate amortization schedules of the sub-loansfinanced under the project. The maximum term of such sub-loans would be15 years including the grace period. The loan is expected to be committedover an 18-month period and disbursed over 3 years (Annex 12).

8.07 Free Limits and Sub-Loan Sizes: A free limit of US$750,000 withan aggregate free limit of US$10 million is recommended (paragraph 4.12).On the basis of experience with the previous loan it is expected that about50% of the number of loans and 752% of the amount committed will require theBank's prior approval under the proposed free limits. To ensure that IFCTcontinues to on-lend the proceeds of this loan to a reasonably large numberof industrial projects, it is recommended that a sub-loan ceiling of US$3.0million be established.

8.08 On-Lending Rates: IFCT would charge sub-borrowers an interest rateof 12.0% for all its domestic and foreign currency loans. This rate wouldbe increased to 12.5% before July 1, 1977. As indicated in paragraph 3.12,this would result in sub-borrowers paying a real rate of around 6% to 6.5%.Taking into account the mandatory 1.25% to be provided by IFCT against pro-visions for foreign exchange risk, the spread for IFCT on the proposed loanwill be 1.85%. During negotiations IFCT undertook to review its lendingrates on a regular basis and, in consultation with the Bank, to make per-iodic changes to reflect its borrowing costs and ensure an adequate levelof profitability.

IX. AGREEMENTS REACHED AT NEGOTIATIONS

9.01 At negotiations for the proposed loan agreement was reached withIFCT on the following matters:

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(a) an increase in IFCT's lending rate to 12.5% beforeJuly 1, 1977 (paragraph 3.12);

(b) appointment of the Deputy General Manager bySeptember 30, 1976 (paragraph 4.04);

(c) an individual sub-loan free limit of US$750,000and an aggregate free limit of US$10 million (para-graph 4.12);

(d) maintenance of the debt/equity limit at 6:1 (para-graph 5.05);

(e) a sub-loan size limit of US$3.0 million (paragraph8.07).

ANNEX 1Page 1

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

The Economy

1. An Economic Report on Thailand (No. 924-TH) was issued on November 14,1975. It covers major developments over the two-year preceding period and pro-vides a detailed analysis of Thailand's present economic position and prospectsfor the future. A synoptic view of relevant economic characteristics and devel-opments is provided below.

2. Growth Performance. According to the National Economic and SocialDevelopment Board's (NESDB's) preliminary estimates the economy registeredreal growth of 6.4% in 1975 1/ compared to 3.2% in 1974. While the growthrate was below that of 1973, when an export-led boom resulted in real GDPgrowth of 10%, it was a distinct improvement over the substantial economicslowdown in 1974 caused by poor weather, deterioration in the external sec-tor, and a weakening of domestic demand. Improved weather conditions, theabatement of inflation, quiescence on the labor front and the absorption ofincreased energy costs all contributed to aiding recovery in agricultural andindustrial production. Agricultural output rose by 6.6% and industrial outputby 6.1% in real terms during 1975 compared with growth rates of 3.2% and 2.5%respectively in 1974. There is little doubt, however, that industrial recoverymight have been more rapid were it not for heightened political uncertainty onthe domestic scene and by the impact on investment activity (foreign anddomestic) of developments in Indo-China. Increased government expendituresalso had a salutary impact on recovery although not to the extent expected.The services sector registered growth of 9.2% while the wholesale and retailtrade sector registered a decline of 1.7% in real terms. Per capita GNPincreased by 6.1% in current terms from Bt. 6,364 to Bt. 6,754 (or aboutUS$340) registering only a nominal increase in real terms.

3. Balance of Payments. Although Thailand's imports doubled between1972-74 as a result of escalating capital goods costs and a much higher energybill, increased export earnings and capital flows generated sufficient foreignexchange to cover imports and retain a sound reserves position (six months

1/ 9.5% at current market prices. GDP was estimated at about Bt. 296billion in current prices.

ANNEX 1Page 2

imports). In 1975, however, the BOP situation worsened; there was a substan-tial deterioration in the trade balance with the rapid decline in the prices 1/of agricultural commodities coupled with stagnation in the volume of theseexports as a result of poor weather conditions in 1974 and declining worlddemand (especially for rice) in 1975. Manufactured exports also performedpoorly owing to depressed international market conditions. Total exports forthe first nine months of 1975 amounted to Bt. 35.5 billion or 8% lower thanfor the same period in 1974. Although an uncertain investment climate damp-ened the demand for imports, 2/ prices kept rising albeit quite slowly (about6% over 1974 levels). The net result, for the first three quarters, was atrade deficit of Bt. 12.6 billion (US$0.63 billion) which was 34% higherthan for the same period in 1974. Since net receipts from services andtransfers also dropped the current- account deficit increased nearly fivefoldto Bt. 5.3 billion. With net capiLtal inflows (Bt. 4.1 billion, 18% lowerthan 1974) over the same period being insufficient to cover the currentaccount deficit Thailand will, in 1975, have its first overall BOP deficit(and a concommitant decline in reserves of over US$100 million) in fouryears.

4. Prices and Inflation. ALfter a decade of price stability (with in-flation averaging about 2% annually) Thailand experienced rapid inflationbetween 1972-74 with the increase in the consumer price index reaching a peakof 24% for 1974. However, the combined influence of export price declines,moderation of imported inflation, tightening of domestic credit, the appear-ance of excess capacity in several industries and a rapid rate of inventorybuild-up (now gradually being cleared) has resulted in a sharp decline in therate of inflation in 1975. The wholesale price index rose by less than 1%over the first half of 1975 and its rise is not expected to exceed 4% for thewhole year. The consumer price index rise is also expected to be limited tobetween 5-6% 3/. Long-term price inflation of about 4% annually over theFourth Plan Period has been forecast by the NESDB (the Bank's estimates,however, range between 6-7%).

5. Investment Activity. Th,e surge in investment activity, followingan 18-month boom from late 1972 to early 1974, now shows signs of peteringout. Business prospects which caused private investment to increase by 19%

1/ In mid-1975 Thailand's terms of trade index had dropped to below thelows recorded at the time of the last balance of payments crisis in1971-72.

2/ Total imports for the 9-months ending September 30, 1975 were Bt. 48.1billion i.e. 0.6% above the level recorded for the same period in theprevious year.

3/ Between 1965-70 the Consumer Price Index rose from 100.4 to 113.5 atan average rate of about 2% annually. Although at the end of 1972it stood at 119.6 it rose very rapidy on 1973 and 1974 reaching 171.7for the latter year. Its rate of increase moderated in 1975 averaging180.1 for the first 10 months of the year.

ANNEX 1Page 3

in real terms in 1973 and by a further 17% in 1974 are perceived by investorsto have dimmed. A fluid political situation has undermined government'sability to formulate and provide clear policy guidance especially in theindustrial sector. Apparent indecision on the part of the authorities hasserved to exacerbate the negative influences exerted on investment (espe-cially foreign investment) by recent events in Indo-China. Consequently,despite the general improvement in labor relations and the restoration ofrelative price stability private sector investment in 1975 actuallydeclined by about 2% in real terms. 1/ Public sector capital formation,however, increased by 42% as the Government pursued an expansionary budgetpolicy by increasing expenditures for construction and by its Bt. 2.5billion Tambon council financing scheme which involved a large number ofsmall local civil works projects. The increase in public sector investmentseems higher than it actually was, the explanation being that in 1974 theGovernment suspended several projects due to record increases in the pricesof construction materials. These contracts were renegotiated in 1975 andthe projects resumed.

6. The impressions conveyed by the gross fixed capital formationstatistics are reinforced by the sharp dip in the level of applications tothe Board of Investments (BOI) as the table below shows. Since there is alag between applications to the BOI and the actual expenditures on invest-ment (reflected in GFCF), the level of applications also provides a roughindicator of trends in the private portion of GFCF over the next two years,particularly in machinery and equipment.

(Amounts in Baht Billions)

1973 1974 1975

No. of applications 552 226 111No. of applications approved 325 176 83Registered capital of firms /1 5.52 2.75 0.59Total investment /1 26.23 9.22 1.95Thai Employment-generated (000's) 115.4 38.9 13.0

/1 For approved applications.

1/ Gross capital formation in machinery and equipment (over 90% of whichis accounted for by the private sector and is a good proxy indicator forindustrial investment) declined by 2.6% in real terms in 1975 comparedto a growth rate of 16.5% in 1974. This was the first time in four yearsthat capital formation in machinery and equipment had declined. Privateinvestment in machinery and equipment declined by over 5% while publicinvestment grew by 20%.

ANNEX 1Page 4

7. Fiscal and Monetary Developments. Following the turnaround in theeconomic climate government's fiscal and monetary policy was switched fromcombatting inflationary pressures in 1974 to stimulating economic recoveryin 1975. In FY74 the Government introduced a fairly tight budget of Bt. 48billion which represented a decrease, in real terms, over Government spend-ing in the preceding year. On the other hand the combined influence ofdomestic inflation, higher import prices (and, as a result, higher collec-tions from duties), increased export tax receipts (due to soaring interna-tional commodity prices), and higher tax rates introduced in 1973 resultedin a substantial increase in public revenues. The restraint on expenditurecoupled with an unexpectedly sharp increase in revenues swung the publicsector's budgetary position from a deficit of Bt. 5.7 billion in 1973 to asurplus of Bt. 2.0 billion in 1974 and allowed the public sector's cashbalances to rise by over Bt. 5 bilLion. In FY75 the situation was reversed;expenditures were raised by 20% to Bt. 50.5 billion while revenues droppeddue to a decline in the volume of imports, sharp drops in export prices andthe downward adjustments of import, excise and business tax rates which weremade in 1974 to mitigate cost push inflationary pressures. In FY75 theTreasury incurred a budgetary deficit of Bt. 5.4 billion.

8. Coupled with a tight budget, a restrictive credit policy was alsoadopted by the Bank of Thailand (BOT) in the fall of 1973 to combat inflation;these restrictions were strengthened in 1974 with increases of: 1% in commer-cial banks' required reserves (fronm 7% to 8%); 1% in the BOT-lending rate;and 1% in the deposit rate ceilings. These restrictions forced an upwardmovement in commercial bank lending rates. Nonetheless private credit demandremained strong through September 1974 with credit to the private sector grow-ing by 44% vs 34% in the preceding year. The resources for financing suchcredit came from increased commercial bank borrowings from BOT, from short-term borrowings abroad and from an increase in the growth of deposits. Thefiscal operations of the Treasury, however, offset the private sector'sincreased appetite for funds with the deflationary budget reducing the bank-ing system's net credit to the Government by Bt. 5 billion thus slowing therate of monetary expansion to 4% in mid-1974 from 23% in late 1973. With theBOP deficit emerging in late 1974 private credit suddenly became very tightas the ratio of commercial banks' liquid assets to deposits dropped from 33%to 23%, the lowest level ever reached. With the economy taking a recession-ary turn in late 1974 BOT began to relax credit policies in concert with thereflationary budget. The required reserve ratio for commercial banks wasreduced again to 7%, and generous rediscounting facilities were made avail-able to hard-hit industries (particularly textiles). In April 1975 BOTreduced its own basic loan rate and commercial banks followed suit. However,the deceleration in inflation and the deteriorating investment climate slowedprivate credit demand considerably; this coupled with a decline in externalreserves sharply curtailed monetary expansion. Between December 1974 andOctober 1975 there was a decline of 1.5% in total money supply.

9. Economic Prospects. Assuming that the political situation stabil-izes and that the government elected in April 1976 is in a better position

ANNEX 1Page 5

than its predecessor to pursue and implement sound policies, it is likely

that the recovery begun in 1975 will be sustained through 1976. This pros-

pect would be further supported by recovery of the industrialized econo-mies which comprise the principal markets for Thailand's exports. On the

basis of these assumptions NESDB has projected real GDP growth of 7.6% for

1976, which would bring the annual average growth for the Third Plan up

to 6.4% against a target of 7.0%. NESDB's projections, however, assume

a rather high growth rate for the manufacturing sector (16.7%) and a growth

rate of less than 1% for the agricultural sector. Given the level of inven-

tories piled up by several industries at the end of 1975 the projected growth

rate for manufacturing seems optimistic (the prevalence of slack capacity

notwithstanding). On the other hand, although currently depressed prices

of agricultural commodities may affect production in 1976, the Government's

price support programs for paddy and sugar are expected to offset to some

degree their negative impact and agricultural output may grow by more than 1%.

The net effect might be a slighty lower growth rate (of around 7%) than

projected. To achieve growth the Government has announced a highly expan-

sionary FY76 budget of Bt. 62.65 billion, along with measures to ensure the

more effective implementation of government's planned capital outlays. Al-

though this may revive inflationary pressures the Government aims to restrain

inflation at a level of 6% for 1976 while expanding employment opportunities

and achieving a better urban-rural distribution of income through its expendi-

ture program.

10. Although a more favorable investment climate is expected to emerge,

as the psychological fears caused by events in Indo-China gradually recede,

it is unlikely that there will be any revival in private capital formation

during 1976. There is a real possibility of a continued real decline in

private investment. Several investment decisions have been deferred until

after the April elections; it will be some time until any firm decisionstaken thereafter are implemented. The effects of a prolonged hiatus in

investment will not be felt until the medium term when it could significantly

restrain output growth. NESDB expects a sharp increase in fixed capital

formation in 1977 when domestic political uncertainties are reduced and

international economic conditions are favorable.

11. The Government's budget and its policy measures follow broadly

the directions mapped out in the Bank's recent economic report. The urgency

of dealing with the employment and distributional problems has now impressedthe Government as have the constraints on achieving desirable objectives

through better directed growth. A major constraint to growth could be the

balance-of-payments. With no prospect for price increases in Thailand's

major commodity exports and the higher demand for imports, which growth at

projected levels is certain to generate, the BOP deficit is expected to be

larger in 1976. The Bank's economic report expects this situation to pre-

vail for the remainder of the decade leading to a rising external resource

gap. As that report suggests, apart from private capital inflows and small

amounts of commercial borrowings, the government aims to attract increasedcommitments of official bilateral and multilateral loan assistance and is

taking steps to improve its project preparation capability to this end.

ANNEX 2Page 1

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Industry and Manufacturing in Thailand

1. Overall Performance. In 1975 the industrial sector (comprisingmining, manufacturing and construction) accounted for nearly 26% of GDP (at1962 constant prices) vs 24% in 1974. Industry constituted the secondlargest sector of economic activity after agriculture (which accounted for27.5% of GDP). Output in the industrial sector recovered slowly at a rateof 6.1% in 1975, still short of its average annual growth rate of over 10%prior to 1974; in real terms, mining output declined by 7% during the yearwhile in construction it rose by 17%. The manufacturing sector, whichaccounted for nearly 79% of industrial output, expanded at an average rateof 14% in 1970-73, a slightly higher rate than the 12% average between 1964-1969. The sector's role in the economy has grown increasingly prominent withits contribution to GDP having increased from 11.6% in 1960 to 20.2% in 1975.The onset of recessionary influences in 1974 reduced manufacturing outputgrowth to 2.5%. In 1975 the growth rate picked up to 6% with output perform-ance within the sector being mixed. Declines were registered in certain foodprocessing industries, and in the paper, rubber products, metal products andelectrical goods industries. These declines were more than offset by in-creased production in the sugar, beer, tobacco, textiles, cement, and petroleunindustries. However, a large part of the increased output, particularly insugar and textiles went toward the building up of inventories.

Characteristics of the Manufacturin; Sector

2. Establishments and Value-Added. Reliable data on establishmentsin the Thai manufacturing sector and their key characteristics are not avail-able. 1/ According to a 1968 industrial census, there were approximately45,000 manufacturing establishments. Government estimates suggest that by1973 these had increased to over 66,000 of which just about 35,000 were"registered." The following table indicates the rough distribution ofregistered establishments and value-added between three broad economic clas-sifications from data available for 1973.

1/ A limited census was undertaken in 1971 the results of which have justbecome available. The census which attempted to cover only establish-ments employing 10 or more workers covered 3,005 establishments (ofwhich 727 had fewer than 10 wor,kers) whose total value-added amountedto Bt. 7.8 billion, or less than 36% of the total value-added for thesector recorded in that year.

ANNEX 2Page 2

Table A: Establishments and Value-Added in Manufacturing - 1973 1/

Type of Industry Establishments Value-Added (Bt. Billion)No. % Amount _

Consumer Goods 27,582 78.7 19.2 52.4Intermediate Goods 4,974 14.2 13.2 36.1Capital Goods 2,495 7.1 4.2 11.5

Total 35,051 100.0 36.6 100.0

3. Since 1968, value-added in the manufacturing sector has grown fromBt. 17.9 billion to Bt. 36.6 billion in 1973 (current prices) 2/ with arelative shift in its composition. In 1973 consumer-goods industries contri-buted to 52.4% of value-added vs 62.3% in 1968, intermediate goods industriesto 36.1% vs 29.7%, capital-goods to 11.5% vs 8%. The increase in the share ofintermediate goods was due largely to the backward integration of the textileindustry during that period, the manufacturing of a wider range of chemicalsand chemical products and to the increased refining of petroleum and relatedproducts. The increase in the share of capital goods industries was duealmost entirely to vehicle assembly operations which were established inThailand during 1971-73. As shown in the table below, the most prominentindustries (by value-added) in Thailand at the end of 1973 were: food pro-cessing, beverages and tobacco; textiles and apparel; transport equipment;and petroleum refining and coal products. Together they accounted for nearly70% of total value-added in the manufacturing sector, over 74% of the numberof registered establishments and about 56.5% of total manufacturing employ-ment (paragraph 8 below).

1/ Based on 1973 data on registered establishments of which a specialanalysis was undertaken for a recent Bank industrial sector mission.Value-added data is based on the national income series recorded in thelast Bank economic report and includes value-added by unregisteredenterprises, the distribution of which is not known.

2/ In 1975 manufacturing value-added was estimated to be about Bt. 56billion in current market prices.

ANNEX 2Page 3

Table 3: Major Thai Industries at End-1973 1/

Value-Added(Bt. Billions) EstablishmentsAmount % No. %

1. Food, beverages and tobacco 12.6 34.4 23,927 68.262. Textiles and apparel 6.6 18.0 1,461 4.173. Transport equipment 3.4 9.3 625 1.784. Petroleum refining and coal 3.0 8.2 11 0.035. Other industries 11.0 30.1 9,027 25.75

Total 36.6 100.0 35,051 100.00

4. Ownership and Size of Establishments. The large majority of enter-prises in Thailand are small and f-amily-owned; nearly 95% employ less than 10workers and fall in the cottage/home industries category. Of the 3,005 enter-prises covered by the 1971 Industrial Census only 702, or fewer than 24%,were limited companies the remaindler being individual proprietorships orjuristic partnerships. However, these 702 limited companies accounted for68.5% of the total book value of fixed assets of all establishments covered.On average, in 1970, individual proprietorships had total fixed assets ofBt. 1.2 million (about US$60,000); partnerships and other associated ownership-type firms had fixed assets of Bt. 3.0 million (or US$150,000) and limitedcompanies had fixed assets of Bt. 13.5 million (or US$675,000). Of the totalnumber of establishments covered by the 1971 Census fewer than 640 (or about1% of the estimated total) employed more than 50 workers; yet these firmscontributed to over 32% of total value-added in the manufacturing sector.

5. The concentration of a fairly large share of the manufacturingsector in very small family-owned units, which do not differentiate betweenfamily and business finances, complicates the task of development financingin Thailand. These enterprises have generally proven averse to institutionalborrowing, particularly when such borrowing is accompanied by its usual con-comitants, e.g., the keeping of accurate business records, auditing ofaccounts, the analysis that accompanies project evaluation and reportingrequirements for sound project sup(ervision. They often forego expansionopportunities, borrow from commercial lenders either on the basis of securityor undertake unsecured borrowings at very high rates to avoid borrowing fromlenders "who ask questions." In view of their record of widespread taxevasion these establishments are also suspicious of any lending institutionswhich require the regular submission of detailed financial statements. When

1/ The same industrial ranking wEas retained in 1974 and 1975 with theseindustries contributing relatively the same proportions to manufactur-ing value-added.

ANNEX 2

Page 4

they do submit to such requirements their statements generally understatethe asset base and income generating capacity of the enterprise. Most smallThai businesses are resistant to the introduction of modern production andmanagement techniques and operate at a low level of efficiency. The stronginfluence of family ownership also prevents the possibility of rationaliza-tion and mergers of small inefficient firms into more viable production units.Nevertheless, the entry of a new generation of Thais into industry, manyeducated abroad, and the promotional emphasis placed on industrial invest-ment by the Government is beginning to result in a gradual transformation ofthe sector. Institutional efforts such as those of IFCT and the recentlyestablished investment companies are also having an impact on bringing aboutgradual change in traditional attitudes.

6. Small-Scale Industries. The paucity of accurate and comprehensivedata on the Thai manufacturing sector makes it difficult to develop a coherentpicture of the small industry-sub-sector, the problems that it confronts andthe opportunities that it promises. The limited statistical reports andsurveys carried out for the Bank's last industrial sector mission suggestthat the small-scale sector, 1/ including home/cottage type production units,accounted for about: 96.5% of the total number of establishments; 40% ofmanufacturing employment; and between 20-25% of total value-added in thesector. The modern small 2/ and medium 3/ industries (SMI) sector, however,probably accounts for about: 4-5% of the number of establishments (numberingroughly between 3,000 to 3,200 in 1975); 10% of manufacturing employment; andabout 15% of value-added. SMI are generally distributed over a very widerange of industrial activities and are suspected to be the most promisingvehicle for: (i) expanding and decentralizing investment and employmentopportunities at a reasonable capital cost without sacrificing the objec-tives of productivity, efficiency and competitiveness; and (ii) modernizing,diversifying and balancing the growth of the industrial and services sectorsin which production is presently concentrated at two extremes. However,little is known about SMI capital-output, labor-output and capital/laborratios, their capacity utilization levels and the age of their plant andequipment or the financing and assistance problems they confront. Existingprograms for providing financial (through the Small Industries Finance Office- SIFO) and technical assistance have proven to be ineffectual and are be-lieved to be geared to no more than scratching the surface of the problem.

1/ Defined in this instance as units employing 50 workers or less and withtotal assets of less than Bt. 2 million (US$100,000).

2/ Excluding estalishments with less than 10 workers and total assets ofless than Bt. 100,000 (US$5,000).

3/ Establishments with 51-99 workers and total assets not exceeding Bt. 10million (US$500,000).

ANNEX 2Page 5

7. In view of these factors and the Government's interest in the devel-opment of small industries IFCT is about to initiate a study at filling themain gaps in knowledge about the SMI sub-sector. The study will also explorethe pros and cons of various institutional alternatives for delivering finan-cial and technical assistance services to SMI in the most cost-effective man-ner. IFCT proposes to fund this eiffort with counterpart funds generated fromprevious loans from the Kreditanstalt fur Wiederaufbau (KfW) and to involverepresentatives from the Bank of Thailand, Ministries of Finance and Industry,the NESDB and from the Faculty of Economics at Thammsasat University. TheBank's Regional Mission in Bangkok is keeping track of developments in thisarea and is prepared to render any assistance it may be called upon to pro-vide. It is expected that the study will constitute the first step towardthe development of a project package suitable for Bank financing within thenext couple of years.

8. Manufacturing Employment. In 1973, the manufacturing sectoremployed about 852,000 persons, up from 682,000 in 1970 representing anannual average rate of job creation of 56,300 over the three-year period. 1/However, with the slowdown in 1974 carrying over into 1975 it was expectedthat the manufacturing sector would not provide more than 21,000 new jobsannually at projected rates of investment. At the end of 1973 the sectoremployed just about 4.9% of the total labor force. Large firms (with over100 workers) accounted for over 20% of total manufacturing employment in1970 2/ (over 50% in the Bangkok area) while enterprises with fewer than10 workers accounted for just under 70%. With the average number of newentrants into the labor market since then being estimated at about 450,000annually the share of manufacturing employment in total employment isexpected to be maintained at around this level. Although unemployment hasnot been a major problem in Thailand up to now, the rapid exhaustion ofnew settlement areas to cultivate will sharply curb the capacity of theagricultural sector to continue absorbing new entrants into the labor forceat the same rates as in the past. The expected increase in migration tothe urban areas (mainly Bangkok) coupled with existing unemployment therewill necessitate the active exploration of alternatives for employmentgeneration at a lower cost in the industrial, trade and services sectors. 3/

1/ This growth of almost 25% was generated largely by capacity expansionin the food, textiles and apparel, rubber products, chemicals, petroleumproducts, non-metallic mineral, basic metals and transport equipmentindustries.

2/ By 1975 this proportion has probably increased to around 30%.

3/ The Bank's recent economic report highlights employment generation asa major priority issue in the next few years.

ANNEX 2Page 6

9. Between 1968-72 the fixed cost per new job created in organizedindustry in Thailand appears to have been about Bt. 150,000 (US$7,500). 1/The average figure for industries "promoted" by the BOI was, however, muchhigher at about Bt. 250,000 (US$12,500) although in 1975 it fell toBt. 150,000 (the industry average) reflecting a shift away from capitalintensive investments during the year.

10. Regional Distribution of Manufacturing. Manufacturing industriesare heavily concentrated in and around Bangkok. The Central Region (includ-ing Bangkok) generates about 80% of total value-added in manufacturing, con-sumes 86% of the nation's electric power and provides 60% of total industrialemployment (in fact, manufacturing accounts for just under half the total em-ployed labor force in the Bangkok area). The Central Region also accountsfor about 40% of the total number of industrial enterprises and for nearly80% of the total number of medium and large-scale factories. The remainderof manufacturing sector investment and output is fairly evenly divided bet-ween the Southern, Northern and North-Eastern Regions. Between 1969-73 newindustrial investment 2/ grew at a much faster pace in the Central Regionthan elsewhere, as did manufacturing output thus exacerbating the concen-tration problem. This is because Bangkok is the principal market for in-dustrial products with 10% of the total population and an average level ofmoney-income per resident about 250% of that in rural areas. It is also thehub of Thailand's transportation system, the seat of government and the centerfor commerce and trade. The growth of inter-industry links, concentration oftrained manpower, and the ready availability of financial and commercial ser-vices, not to mention sub-contracting facilities, have all served to reinforcethe continued convergence of industrial investment in Bangkok.

11. Apart from its obvious locational advantage in terms of access toinfrastructure and supporting services, industrial investment in Bangkok has,at least until 1973, been inadvertently aided by the effects of severalgovernment policies e.g. lower rates for electricity and water supply, thestructure of railway tariffs, the insufficient attention given to the devel-opment of a second port, and the forced narrowing of wage differentialswhich has reduced the incentive for industries to locate in rural areas

1/ Based on written-down values of plant and equipment the value of totalassets (in 1970 prices) per job for the establishments covered by the1971 Census was nearly Bt. 70,000 (US$3,500). A breakdown betweensmall and large firms was, unfortunately, not available.

2/ The only industries established outside Bangkok are those based onnatural resources. Rice and saw-milling operations are spread through-out all regions. Tin smelting, rubber-processing, nonmetallic mineralsprocessing, sugar, tapioca, flour and wood-based industries are, on theother hand, located at the sites of resource availability.

ANNEX 2Page 7

(where the labor supply is cheap and plentiful). Confronted with seriouscongestion in Bangkok and concerned about future prospects the Government,in 1973, devised an incentives package to encourage location outside Bangkokin ten designated "development zones." These measures (and the developmentof a second major port in the south) notwithstanding, the Bank's last indus-trial sector mission was not sanguine about the prospects for significantlyredressing the present imbalance in the near term. It cautioned that "exces-sive" efforts to decentralize industry too quickly could lead only to slowerindustrial development at a higher cost because the requisite infrastructuralfacilities do not exist, the prospects of developing substantial "markets"outside Bangkok are bleak and the present real costs of forcing locationoutside Bangkok would further deter the presently none-too-confident investor.However, it is felt that over the :Longer term the ground being laid for thedevelopment of the port in the soulth coupled with appropriate incentiveswould attract export-oriented and "footloose" industries to locate in theSattahiep and Songkhla/Haat Yai areas.

12. Capacity Utilization. Available data on capacity utilization inThai manufacturing does not permit any quantitative assessment of performancein the sector as a whole. Information collected from firms often overstatesavailable capacity (to discourage Government from licensing or promotingnew investments) and, at the same time, understates actual production andsales to avoid any conflicts with respect to tax liabilities. Apart fromthe problem of initial overinvestment 1/ in relation to domestic marketneeds and temporary under-utilization due to spot input shortages, signif-icant under-utilization of capacity has not been suspected as a major problemin Thailand. In 1974, however, recession in major export markets causedsubstantial installed capacity to go unutilized, particularly in the textileand wood-based industries. Most factories in Thailand operate on a singleshift basis with multiple shift operations being confined to industrieswhere process requirements necessitate continuous operation e.g. sugar,chemicals, etc., or in export-oriented industries in which there is pressureto minimize costs e.g. textiles.

13. Manufactured Exports. In contrast to manufacturing growth in the1960's which was based largely on import-substitution, Thai industry in the1970's has become increasingly export oriented. Between 1970-73 manufacturedexports boomed, growing from US$39 million in 1970 to US$275 million in 1973.The share of manufactured products in merchandise exports rose from 4.1% in1970 to 15.1% in 1973 a significant increase considering that total exportsover the same period increased by 120%. The main contributing factors to

1/ With the Government's stop-go policies on investments in particularindustries, entrepreneurs often procure excess capacity in anticipationof future developments.

ANNEX 2Page 8

export success over this period, have been a record of relative domesticprice stability, low wages, and the effective devaluation of the Baht (whichis fixed to the US dollar). Much of the export growth between 1970-73 wasattributable to the textiles and apparel industries (which are highly labor-intensive), and to the precious stones and jewelry industries. Manufacturedexports have been nominally aided by Government incentives introduced in 1970although the tariff structure continues to introduce a negative bias (para-graph 18).

14. The growth in manufactured exports between 1970-73 was spurredlargely by external factors (e.g. strong demand, more rapid price inflationin importing countries, prodding by overseas buyers and foreign tradingpartners in joint ventures, etc.). With the worldwide downturn in 1974, therate of manufacturing export growth slowed down. In 1974 the value of manu-factured exports was US$367 million (representing a small real increase) withtheir share in merchandise exports dropping to 14.6%. In the first ninemonths of 1975 manufactured exports were running at the same levels as 1974with increased exports of canned fruits, molasses, jute products, gunny bagswood products, and miscellaneous manufactures but decreases in textilesand garments, cement, petroleum products, and precious stones. Textileexports have begun to pick up at the end of 1975 but are unlikely to recoverto 1973 levels very quickly. Considerable scope remains for further devel-oping sources of raw materials and intermediate products for export-orientedprocessing and manufacturing industries. A more aggressive exporting stanceon the part of Thai manufacturers coupled with support from the Governmentby way of improved information services and extension of the export taxcredit should result in better export performance in 1976.

Industrial Promotion Policies and Incentives

15. Backdrop to Policy Developments. Industrialization in Thailand hastraditionally been based on liberal support for free private enterprise.Government policies toward the development of the sector have been confinedto adjustments of such instruments as taxation, tariffs, and the supply ofcredit. During the first two plan periods (1962-66 and 1967-71) the Govern-ment created a number of state-owned enterprises in "nationally vital" indus-tries. This was done not to exclude the private sector from participation inthese areas but to ensure that necessary investments were not foregone becausethe private sector did not perceive adequate rewards for risk. Over the ThirdPlan period (1972-76), however, no new Government enterprises were established.With the present investment climate and growing national sensitivities aboutthe role of foreign investment it is likely that the Government may adopt amore direct and active role in the industrial sector especially in miningventures, off-shore oil and gas development, and the establishment of a fertil-izer industry. There are, at present, no licensing barriers to industrialinvestments and the Baht is freely convertible. The environment for indus-trialization is, in many respects, quite different from that of most countriesin the region.

ANNEX 2Page 9

16. Industrial Strategy. Thailand has, so far, lacked a reasonablywell-defined strategy to promote a desirable pattern of industrializationover the near, medium and long-term. Between 1970-74, frequent modifica-tions of available policy instruments have been made, in response to imme-diate pressures, to provide support or relief to particularly strong interestgroups. The absence of a strategic frame of reference in responding to thesefractionated and conflicting lobbies has often resulted in achieving effectson investment, output, location and structure of production contrary to thoseintended. Moreover the Government has been confronted with pressing problemsin redressing the imbalance between rural and urban areas and has tended togive industrialization problems lower priority and treat them with "benignneglect." 1/

17. Industrial Protection. With the domestic market for non-traditionalmanufactured import substitutes being fairly limited, manufacturing industrieshave, as elsewhere, been established under cover of tariff walls, restrictiveentry regulations and various fiscal incentives. The protective regime devel-oped under these circumstances has not, however, resulted in a generallyinefficient, high-cost industrial production structure. Several Thai indus-tries have thrived with initial protection and have now become quite efficientas their ability to compete in export markets indicates. The present struc-ture of tariffs is based on the Revenue Code of 1964 to which minor amendmentswere made between 1964-70 to promote the establishment of specific industries.In 1970 a large number of rates were raised to stem the balance of paymentsdeficit. This general increase was followed by another three-year periodof selective tariff adjustments. In mid-1974 tariff rates on some 306 itemswere lowered substantially to ease the pressure on domestic production costs.The resultant tariff structure is a product of several ad-hoc decisions madewith a short-term perspective almost on a product-by-product basis and doesnot represent an instrument shaped for rational industrialization over thelong-term.

18. To provide a basis for government tariff policy formulation a Banksponsored study of industrial protection in Thailand was undertaken. 2/ Itfound that the potential effective protection resulting from the tariffstructure and other forms of administrative intervention introduced a heavybias in favor of import substitution and against export orientation. Varia-tions in the rates of protection for some consumer goods, and several inter-mediate goods were found to be unsupportable by any underlying rationale. The

1/ Under these circumstances the role of institutions such as IFCT in ensur-ing the financial viability and economic soundness of industrial invest-ments assumes considerable significance.

2/ The report dated July 1975 is entitled "The Structure of EffectiveProtection in Thailand: A Study of Industrial and Trade Policies in theearly 1970's" and was carried out by Prof. Narongchai Akrasanee ofThammasat University.

ANNEX 2Page 10

study also found that in several industries (depending on the extent ofinternal competition, price controls, etc.) the protection realized wassubstantially lower than the potential protection accorded. The tariffstructure together with quantitative restrictions, licensing practices andprice control measures were found to be frequently used instruments, towhich adjustments were made in response to specific short-term pressures,without reference to a basic policy framework. As a result government'sactions have had unintended effects. The study has therefore recommendedthat a major revision of protection policies be considered with: (i) theintroduction of a general system of non-discretionary incentives based ona revision of tariffs and indirect taxes; and (ii) a detailed discretionaryreview only of major projects in nationally important industries. In viewof the uncertain political situation and other pressures on the previouscaretaker government, no action has yet been taken on these measures.

19. Industrial Promotion and the Board of Investments (BOI). In addi-tion to the tariff and protection policies pursued by the Government (para-graph 13), industrial investment in desired directions is also encouragedby the provision of fiscal incentives granted by the BOI. 1/ This agency isempowered to: (i) determine the list of industries to be promoted; (ii) ap-prove individual projects to which promotion benefits will be granted; and(iii) decide upon the extent of tax exemptions to be given in each individualcase. The incentives package also includes: guarantees against national-ization and freedom from competition by a new State enterprise. For foreigninvestors it includes permission to own land, repatriate profits freely andhire expatriate experts. Moreover, it allows full exemption from importduties and business taxes on imported machinery and equipment as well asexemption from business taxes on domestic machinery and equipment. 2/ BOIhas the discretion to grant exemption from corporate income taxes for between3-8 years and can, in any instance, recommend banning or raising tariffs oncompeting imports; in such instances BOI can also administer the sales pricesof firms so promoted. In addition, BOI grants special locational incentives(also based on tax exemptions) to encourage investment in ten designateddevelopment zones outside Bangkok.

1/ Such promotion was provided for by the "Act for the Promotion ofIndustries" passed in 1954. However, machinery for its implementationwas created only in 1960 when BOI was established. The Act was amendedin 1962 and major revisions were made again in 1972.

2/ In view of the general suspicion that such incentives also promotecapital intensity, an analysis was recently conducted to ascertainwhether this had occurred in Thailand. The study concluded that therewas, in fact, no significant relationship between the incentives providedand the capital intensity of investments undertaken.

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Page 11

20. In view of the degree of discretion that can be exercised by BOIand the consequences of poor decisions in terms of resource dissipation, itis clear that its efficient functioning is an imperative. In the view of theBank's industrial sector mission the BOI's capabilities needed considerablestrengthening in its staffing, operating systems and procedures and throughthe availability of specialized expertise to focus on specific tasks. Toassist BOI and relieve it of some unnecessary work in examining each casefrom the ground up a system of general criteria applicable to broad cate-gories of industries also needs to be developed.

21. BOI is now receiving limited technical assistance from USAID. Asa first step toward addressing some of the broader issues influencing invest-ment promotion and evaluating its costs and benefits the BOI had also pre-pared for submission to the UNDP three studies which would enable it to:(i) determine priorities for investment, project possibilities, and thedesired pattern of agro-industrial development; (ii) develop a policy posi-tion on foreign investment and the incentives and safeguards needed toattract it; and (iii) review alternative approaches to industrial investmentpromotion. However, with the recent retrenchment in UNDP commitments theBOI is actively seeking grant financing from other sources to finance thecosts of consultants to carry out those studies. Following recent discus-sions with the Bank, BOI and the Government are now considering expandingthe scope of these studies to incorporate a broader analysis of strategicand policy measures needed to assist more rational and co-ordinated indus-trial development. Together with such an analysis BOI proposes to launcha parallel study aimed at improving the co-ordination of investment regu-lation and at strengthening its own operational capabilities.

22. Foreign Investment. Direct foreign investment (DFI) has made asubstantial contribution to the development of Thai industry. Out of the883 firms promoted by BOI between ,L960-75, 415 (or 47%) were joint-venturesand 22 (2.5%) were wholly foreign-owned firms. The foreign contributed por-tion of the registered capital of these firms amounted to Bt. 3.94 billion(or 29%) out of total registered capital of Bt. 13.55 billion. Japan is byfar the single largest source of DFI accounting for 38.5% of the inflowingforeign capital. As of the end of 1975 there were over 115 manufacturingfirms in which Japanese enterprises had a direct financial interest. Thesefirms reported total paid-in capital of about Bt. 2.8 billion of which about48% was owned by Japanese investors. Next to the Japanese, the US andTaiwan accounted for the second and third largest share of DFI, accountingfor 14% and 11.5% respectively; as a bloc, European investment accounted forabout 12.6% of foreign investment. Most foreign participation has been innon-traditional sectors resulting in the inflow of new technology and in thetraining of Thai personnel in relatively new fields.

23. Government policy is generally to: (i) encourage DFI but to selec-tively direct it to sectors where foreign expertise and capital are mostneeded; and (ii) increase Thai participation in joint-ventures. The gradualreduction of the foreign share of ownership is often a major stipulationwhen promotional privileges are granted. An Aliens Business Act regulatingDFI was promulgated in November 1972 which identified the following activity

ANNEX 2Page 12

categories for participation: (i) industries in which existing foreignmajority participation was to be ended within two years; 1/ (ii) industriesin which no new foreign majority-owned companies could be established butexisting ones could continue but could not expand beyond a certain limit; 2/and (iii) industries in which new foreign majority owned companies could beestablished and existing ones allowed to expand indefinitely. 3/ At thesame time an Alien Occupation Law was also passed banning foreigners fromcertain specified occupations (e.g. accounting) and requiring all aliens toobtain work permits. Enactment of these somewhat unclear and ambiguous lawscoupled with unsettled political and labor conditions through 1974 createdconsiderable uncertainty in the minds of foreign investors and may havecontributed to declining levels of DFI since then.

24. Recent Policy Developments. In line with the last government'semphasis on export promotion and stimulation of investment to generateemployment the BOI, in April 1975, announced new and more detailed guide-lines on investment promotion. The explicit objectives behind the changeswere: (i) the creation of a favorable investment climate; (ii) the promo-tion of DFI with appropriate safeguards; (iii) greater decentralization ofinvestment to provincial areas through special incentives and through pro-vision of improved public infrastructure; (iv) acceleration of project iden-tification effort through special studies; (v) direct relation of promotionalprivileges to the benefits expected to be derived in each case; and (vi) for-mulation of an explicit industrialization strategy. Promotional benefitsgranted are now linked to employment creation, export generation, use oflocally produced raw materials and plant location in the designated develop-ment zones. Under the new rules, non-export oriented industries (less than20% of total sales exported) are now eligible for promotional privilegesonly if they locate outside Bangkok, have protection of less than 30%, value-added of at least 30% and Thai participation of at least 40%. Moreover, theycan receive tax exempt status (limited to a maximum of 5 years) only if theyemploy 200 or more workers and invest at least Bt. 50 million. Export-oriented firms, on the other hand, receive tax exempt status from a minimumof 5 years and are entitled to promotional privileges without having tomeet the above criteria.

1/ Mainly rice-farming, domestic agricultural trade, construction and pro-fessional services.

2/ Agricultural production (except rice), light industry, hand-crafts,retail trades and domestic transportation. Existing firms cannot in-crease their annual sales or production over 30% above 1972 levels.Businesses granted promotional privileges are exempt from this pro-vision.

3/ Other trade activities, heavy industry and mining.

ANNEX 2Page 13

25. In addition, in August 1975, the Prime Minister issued a policystatement further clarifying government's attitude toward DFI and announcedthe formation of a "Foreign Investment Advisory Council" to be comprised ofprominent foreign and Thai businessmen. An Executive Committee for Exportshas also been recently formed which has proposed a series of measures forpromoting exports. 1/ A new and more liberal Labor Relations Act has beenpassed. It legalizes unions in establishments with over 50 workers, permitsunions to federate on a nationwide basis and provides a formal arbitrationchannel through a Labor Relations Committee in the Ministry of the Interior.

26. Impact of Policy Measures. Government's fiscal incentives haveundoubtedly encouraged investment but it is difficult to assess preciselytheir impact. Clearly, as recent irnvestment performance has shown, theseincentives alone are not sufficient to encourage investment under unfa-vorable political conditions and uncertain prospects of stability. Whetherthe costs of providing these incentives in the form of taxes foregone havebeen commensurate with the benefits is also a matter on which no definitivejudgements can be made at this stage. It is, however, strongly suspected thatthe potential impact of these measures has not been fully realized because ofthe absence of any relation of these measures to desirable and clear strategicobjectives. In those instances where the objectives are clear, even in gen-eral terms (e.g. employment generation and decentralization), it is as yettoo early to judge whether the incentives package will have an impact althoughthe early signs are not too encouraging. In view of the growing importance ofthe industrial sector and its potential for addressing the problems of growthand employment, an effort to develop strategy, devise and refine appropriatepolicies and monitor their impact is of urgent priority.

27. Priorities for Future Action. The preceding paragraphs have alludedto several gaps in strategy, policy and information which need to be bridgedif effective policies are to be formulated. To recapitulate, these are:

(i) information: present data on several important featuresof the industrial sector are inadequate and a much betterinformation system needs to be developed;

(ii) coordination: new organizational arrangements need to bedeveloped for all policies affecting industrial developmentand the BOI needs to be strengthened;

(iii) review of promotional incentives: present ad hoc reviewsof individual applications by the BOI should be replacedby a framework of broader policies along the lines outlinedin paragraph 18, above;

1/ Please see the latest Bank economic report ("Thailand: Current EconomicProspects and Selected Development Issues"), No. 924-TH dated November 14,1975 (paragraph 2.33, p. 38, Volume I).

ANNEX 2Page 14

(iv) tariff reform: major reform of tariffs and indirect taxesis essential to establish a more uniform level of effectiveincentives; detailed recommendations are contained in aspecial report prepared under Bank sponsorship;

(v) reduced reliance on direct controls: import, export, priceand investment control should be administered within theframework of well designed investment incentives andreliance on direct control reduced;

(vi) export incentives: the export tax credit scheme I/ shouldbe expanded and its administration liberalized, the importduty exemption scheme should be phased out as recommendedby the Bank's industrial sector mission;

(vii) location strategy: a two-phase strategy should be adoptedwith initial emphasis being placed on location of new pro-jects near the ports being developed in the South and South-East. The second stage should emphasize location on devel-opment zones in other areas. Policies encouraging infra-structure and transport rate differentials in favor of theBangkok area should be reviewed, and the over-provision ofincentives to relocate should be avoided.

1/ Administered by the Fiscal Policy Office in the Ministry of Finance.

THiAILAND

INDUSTHIAL FINANCE CORPORATION OF THAILAND

Gross Domestic Product at Constant 1962 Market Prices by Industrial Origin

(Billions of Baht)

1969 1970 1971 197Ž ' 1973 1974 1975_

Agriculture 35.3 36.2 37.7 37.1 40.9 42.2 45.0

Mining, quarrying 1.8 1.8 1.9 1.8 1.8 2.1 1.9

Manufacturing 18.8 20.6 23.9 26.5 30.4 31.1 33.0

Construction 7.0 7.0 6.2 5.8 5.8 6.1 7.2

Electricity, water supply 1.6 1.9 2.9 3.6 4.2 4.5 5.o

Transportation, corimunication 7.3 8.? 8.6 9.3 9.7 10.1 10.6

Trade 18.8 21.0 21.6 22.7 25.6 25.1 24.7

Bankivig, insurance, real estate 4.1 4.8 5.3 5.6 6.2 6.8 8.1

Uwnership of dwellings 2.2 2.3 2.4 2.4 2.5 2.6 2.8

Public administration, defence 4.8 5.2 5.6 5.8 6.4 6.6 7.5

Other services 10.9 11.8 12.8 13.8 15.0 16.0 17.5

5ross domestic product 112.6 120.7 129.0 134.5 148.6 153.4 163.2

Source: NESDB.

Jote: Totals may not add because of rounding.

p/ Preliminary. rv

EAP Projects DepartmentMarch 22, 1976

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Growth of Gross Domestic Product at Constant 1962 Market Prices by Industrial Origin

(Percent)

1969 1970 1971 1972 1973 1974 1975E/

Agriculture 7.5 2.6 4.3 -1.6 10.2 3.2 6.6

Mining quarrying 4.4 -1.0 4.9 -2.4 -2.2 15.9 (6.9)

Manufacturing 13.4 9.5 16.2 10.7 14.6 2.5 6.1

Construction 1.5 -0.4 -11.5 -6.9 1.1 4.8 17.3

Electricity, water supply 8.o 19.9 57.3 21.3 17.9 8.4 9.8

Transportation, communications 6.9 13.1 4.6 8.3 4.1 4.1 5.1

Trade 5.8 11.9 3.0 5.2 12.7 (2.0) (1.7)

Banking, insurance, real estate 17.0 16.5 10.8 5.6 10.0 11.0 18.2

Ownership of dwelling 5.2 4.2 3.5 3.1 3.2 4.3 4.6

Public administration, defence 8.1 9.2 8.4 2.9 10.5 2.2 13.8

Other services 7.0 7.4 8.6 7.9 9.1 6.7 9.2

Gross domestic product 7.9 7.3 6.9 4.2 10.5 3.9 6.4

Source: NESDB.

p/ Preliminary.

EAP Projects DepartmentMarch 22, 1976

ANNEX 2THAILAND Table 3

INDUSTRIAL FINANCE CORFORATION OF THAILAND

Gross Domestic Product Originating From

Manufacturing At Current Market Prices

(Billions of Baht)

1970 1971 1972 1973 1974 1975

Food 4.8 5.3 4.8 6.6 9.5 n.a.Beverages 2.2 2.2 2.5 3.1 3.9 n.a.Tobacco and snuff 2.0 2.4 2.6 2.9 3.9 n.a.Textiles 1.7 2.3 3.3 4.1 4.7 n.a.Wearing apparel and made-up textilegoods and footwear 1.1 1.6 1.8 2.5 3.1 n.a.

Wood and cork o.6 o.6 0.7 0.9 1.3 n.a.Furniture and fixtures 0.3 0.3 0.3 o.4 0.5 n.a.Paper and paper products 0.2 0.2 0.2 0.2 0.2 n.a.Printing, publishing and alliedindustries 0.6 0.6 0.7 1.0 1.2 n.a.

Leather and leather products (excl.footwear) 0.1 0.2 0.2 0.3 0.2 n.a.

Rubber and rubber products 0.4 0.5 0.5 0.6 o.8 n.a.Chemicals and chemical products 1.5 1.6 1.8 2.0 2.4 n.a.Petroleum refining and coal 1.6 2.1 2.4 3.0 4.2 n.a.Non-metallic mineral products 1.4 1.5 1.6 2.0 2.4 n.a.Basic metal industries 0.3 0.3 0.4 o.6 0.7 n.a.Metal products (excl. machinery andtransport equipment) 0.5 o.6 0.7 1.1 1.4 n.a.

Repairing of non-electrical machinery 0.4 0.5 0.6 0.7 0.8 n.a.Electrical machinery and supplies 0.3 0.3 0.4 0.5 0.5 n.a.Transport equipment 1.3 1.5 1.8 3.4 4.5 n.a.Miscellaneous, n.e.s. 0.5 0.6 0.6 0.7 0.8 n.a.

Total value added 21.7 25.3 28.0 36.6 47.1 n.a.

Total gross domestic product 135.9 143.9 162.1 215.2 270.0 n.a.

Source: NESDB

p/ Preliminary.

EAP Projects DepartmentMarch 22, 1976

ANNEX 2

Table 4THAILAND

INDUSTRIAL FINANCE CORFORATION OF THAILAND

Gross Domestic Product Originating From Manufacturing at 1962 Prices

(Billions of Baht)

1970 1971 1972 1973R' 19742. 19752/

Food 5.1 5.2 5.2 5.4 6.o n.a.Beverages 2.0 2.0 2.3 2.8 3.1 n.a.Tobacco and snuff 1.6 1.7 1.8 2.0 2.1 n.a.Textiles 1.7 2.4 3.0 3.8 3.7 n.a.Wearing apparel and made-up

textile goods 0.1 1.5 1.6 1.8 1.9 n.a.Wood and cork 0.5 0.6 0.5 0.5 o.6 n.a.Furniture and fixtures 0.3 0.3 0.3 0.3 o.4 n.a.Paper and paper products 0.1 0.1 0.2 0.1 0.1 n.a.Printing, publishing and alliedindustries 0.5 0.5 o.6 0.7 0.7 n.a.

Leather and leather products (excl.footwear) 0.1 0.1 0.1 0.2 0.1 n.a.

Rubber and rubber products 0.5 0.7 o.8 0.8 0.9 n.a.Chemicals and chemical products 1.3 1.4 1.5 1.5 1.5 n.a.Petroleum refining and coal 1.6 2.7 3.1 3.9 3.2 n.a.Non-metallic mineral products 1.4 1.3 1.8 2.0 2.1 n.a.Basic metal industries 0.3 0.3 o.4 0.5 0.3 n.a.Metal products (excl. machinery andtransport equipment) 0.7 0.7 0.8 0.9 0.9 n.a.

Repairing of non-electrical machinery 0.4 o.4 o.4 0.5 0.5 n.a.Electrical machinery and supplies 0.3 0.3 0.3 0.3 0.4 n.a.Transport equipment 0.9 1.1 1.2 1.7 1.9 n.a.Miscellaneous, n.e.s. 0.4 0.4 0.5 0.5 o.6 n.a.

Total value added 20.6 23.9 26.5 30.4 31.1 33.0

Total gross domestic product 120.7 129.0 134.5 148.6 154.4 163.2

Source: NESDB

2/ Preliminary.

EAP Projects DepartmentMarch 22, 1976

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Registered Manufacturing Firms by Size and Location - 1972

Small Scale Medium Scale Large ScaleFactories2/ Factoriesb/ Factoriesa/ Total

Location No. No. __ No. % No. %_

Greater Bangkok Area 15,457 24.6 1,163 59.8 265 71.6 16,885 25.8

Central Region 8,374 13.3 319 16.4 70 18.9 8,763 13.4

Northeast Region 18,351 29.2 195 10.0 15 4.1 18,561 28.5

Northern Region 13,221 21.0 112 5.8 7 1.9 13,340 20.5

Southern Region 7,510 11.9 156 8.0 13 3.5 7,679 11.8

Total 62,913 100.0 12945 100.0 0 100.0 65,228 100.0

a/ Total assets less than Baht 1 million (US$50,000 equivalent).6/ Total assets over Baht 1 million but less than Baht 10 million (US$500,000 equivalent).c/ Total assets over Baht 10 million (US$500,000 equivalent).

Source: Factory Control Division, Industrial Works Department, Ministry of Industry.

CD P-4

EAP Projects Department n March 22, 1976

ANNEX 2

THAILAND Table 6

INDUSIRIAL FINANCE CORPORATION OF THAILAND

Number of Registered Establishments in the Manufacturing Sector - 1973

Metro. OtherIndustry Group Bangkok Provinces Total

Processed food 766 23,039 23,805

Tobacco and beverages 34 88 122

Textiles 379 266 645

Wearing apparel and made-up goods 117 8 125

Wood and cork products 667 824 1,491

Furniture and fixtures 154 82 236

Paper and paper products 120 25 145

Printing, publishing and allied industries 881 141 1,029Leather and leather goods, footwear* 80 83 163

Rubber and rubber goods 212 142 354

Chemicals and chemical products 844 182 1,026

Petroleum refining and coal 8 3 11

Non-metallic mineral products 31 84 115

Basic metal industries 995 244 1,239

Metal products 618 64 682

Machinery, non-electrical 950 787 1,737Electrical machinery 255 60 315

Transport equipment 796 520 1,316

Miscellaneous manufacturing 235 21 256

Total 8,223 26,828 35.051

* Discrepancy in data.

Source: Ministry of Industry.

EAP Projects DepartmentMarch 22, 1976

ANNEX 2Table 7

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAlJAND

Distribution of Establishments Among Groups of Industry as at End of 1973

(Perc entage)

Metro-politan Other

Industry Group Area Provinces Total

Processed food 9.32 85.88 67.92

Tobacco and beverage 0.41 0.33 0.35

Construction materials 0.90 0.62 0.68

Intermediate product - I 11.15 2.81 4.77

Intermediate products - II 24.57 3.55 8.48

Nondurable consumer goods 27.35 1.42 7.50

Consumer durable 8.66 1.50 3.18

Machinery 12.81 3.05 5.34

Transport equipment 4.84 o.85 1.75

Source: Annex 2, Table 6.

EAP Projects DepartmentMarch 22, 1976

ANEX 2THAILAND Table 8

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Exports and Manufacturing Exports

(in Baht million)

1969 1970 1971 1972 1973 1974

Principal Exports 11,295 10,949 11,892 14,778 19,458 33,916

Rice 2,945 2,517 2,909 4,437 3,594 9,778Rubber 2,664 2,232 1,905 1,862 4,573 5,035Maize 1,767 1,969 2,286 2,085 2,969 6,078Tin (metal) 1,631 1,618 1,569 1,664 2,035 3,096Tapioca 876 1,223 1,240 1,547 2,537 3,836Kenaf and jute 780 719 935 1,087 1,054 845Sugar 47 94 382 1,264 1,161 3,757Shrimp 270 224 247 340 804 642Teak 166 156 183 208 422 402Tobacco leaves 149 197 236 284 309 447

Other Merchandise Exports 3,427 3,823 5,389 7,713 12,768 16,329

Agricultural products 1,014 1,114 1,301 1,522 2,178 2,460Fishery products 57 143 249 430 779 786Forestry products 61 63 83 108 260 226Mineral products 334 440 795 673 737 1,129*Manufacturing Products 704 808 1,350 2,618 5,509 7,336

Temporary exports 371 366 625 916 989 753Re-exports 621 522 598 875 1,080 1,161Diplomatic shipments 26 63 82 92 165 135Personal effects 33 32 53 55 66 74Other items 206 272 253 424 1,005 2,269

Total Merchandise Exports 14,722 14,772 17,281 22,491 32,226 50,245

*Manufacturing Products 704 808 1,350 2,618 5,509 7,336

Pineapple, canned 37 55 44 51 75 272Garments 16 18 67 258 660 834Molasses 32 45 86 91 312 490Cemernts 38 83 90 218 314 652Petroleum products 38 36 132 248 379 305

Spinning 1 5 27 112 159 165Silk, fabrics 39 34 30 29 39 35Textiles 31 23 62 271 1,027 761Jute yarn & jute fabrics, twinecordage rope, cable of jute 2 16 63 81 198 485

Hemp yarn and thread 35 19 5 -- - __Gunny bags 74 63 178 170 312 329

Iron & steel products 29 41 46 118 174 335Household utensils of wood 10 18 33 72 135 167Precious stones and jewelry 150 137 232 383 641 769

Other manufacturing products 172 215 255 516 1,084 1,737

EAP Projects DepartmentMarch 22, 1976

ANNEX 2Table 9

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Manufacturing Employment

% Increase inEmployment Value Added at Estimated

1970 Constant Prices Employment % of 1973Thousands 1973/1970 1973 Employment

Food 110.5 8.6 120.0 14.1%Beverages 10.4 10.5 11.5 1.4%Tobacco and snuff 19.7 21.2 23.9 2.8%Textiles 62.3 53.6 95.7 11.2%Wearing apparel and made-uptextile goods 132.5 26.7 167.8 19.7%

Wood and cork (incl. saw mills) 75.3 -1.8 73.9 8.7%Furniture and fixtures L4.9 -22.2 11.6 1.4%Paper and paper products 8.1 18.2 9.6 1.1%Printing, publishing and alliedindustries L6.2 22.9 19.9 2.3%

Leather and leather productsexcept footwear 11.1 30.0 14.4 1.7%

Rubber and rubber products 8.8 83.3 16.1 1.9%Chemicals and chemical products ) 7.0 45.9 24.8 2.9%Petroleum refining and coal )Non-metallic mineral products 43.7 37.7 60.2 7.1%Basic metal industries 27.8 33.3 37.1 4.4%Metal products not machineryand transport equipments 18.4 23.5 22.7 2.7%

Repairing of non electricalmachinery 0.9 33.3 1.2 0.1%

Electrical machineries andsupplies 14.4 22.2 17.6 2.1%

Transport equipments 60.1 28.9 77.5 9.1%Miscellaneous n.e.c. 31.1 51.2 47.0 5.5%

Total employment 682.5 852.5 100.0%

EAP Projects DepartmentMarch 22, 1976

ANNEX 2Table 10

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Indicators of Regional Developmentl/

Regional

Total Center South North Northeast

Population (million) 39.9 13.9 4.9 8.5 13.6

GDP (billions of Baht) 187.7 108.0 22.3 27.2 30.2

GDP per capita (Baht) 4,540 8,230 4,340 3,020 2,140

GDP originating in manu-facturing (1972) (billionsof Baht) 26.7 20.7 1.7 2.0 2.3

Regional manufacturing as% of total national manu-facturing GDP 100% 79% 6% 7% 8%

Manufacturing % ofRegional GDP __ 18.8% 7.2% 7.0% 7.3%

Regional share of nationalelectricity consumption(1972) 100% 86% 4% 5% 5%

Manufacturing growthrate (1969-73) 8.5% 9.2% 4.2% 5.5% 8.0%

Manufacturing employment(1970) 682,000 447,000 56,ooo 101,000 78,000

Number of investment projects(promoted in 1960-73) inoperation 500 432 29 22 17

Source: NESDB, NSO, and BOI.

1/ Figures are for 1973 unless otherwise noted.

EAP Projects DepartmentMarch 22, 1976

ANNEX 3Page 1

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

The Financial Sector

1. Background. In terms of its structure, the diversity of institu-tions, financial services offered and the variety of financial instrumentsavailable for mobilizing savings, the financial system in Thailand is stillin the early stages of its development. Beginning in 1970 a number of newfinancial institutions have emerged and the pace of financial sector devel-opment and diversification has quickened. Nonetheless, much remains to bedone. The role of private pension and provident funds needs to be widened,as does that of life insurance companies, in the mobilization of savings.The market for government securities needs to be further developed 1/ asdoes that for corporate issues. In the latter regard, the establishmentof the Securities Exchange of Thailand (SET), the continued growth of fi-nance companies and the about-to-be established Mutual Fund Co. shouldprove to be salutary developments. However, in the Thai financial environ-ment and the prevailing climate of uncertainty it is unlikely that eitherthe supply of quality corporate securities or the demand for them willpick up at a rapid pace.

2. As of October 31, 1975 thie total assets of the monetary systemstood at Bt. 156.3 billion having grown by about 13% over a twelve monthperiod. This does not include the assets of the "unorganized" sector whichcovers the operations of private money-lenders, operations of the "pia huey"or rotating credit societies, private non-registered credit unions, privateborrowing and lending between individuals, and between farmers and traders.No data on financial transactions in the unorganized market are availablebut its assets are believed by Bank of Thailand (BOT) experts to be quitesizeable (estimates ranging from Bt. 30-50 billion). According to a ruralcredit survey carried out in 1971 by the Ministry of Agriculture and Coop-eratives it was estimated that around 80% of farm sector credit needs weremet by the unorganized market with interest rates ranging between 25-150%.The organized financial sector (described below) essentially comprises:

1/ At present the market for government securities is limited largely tobanking institutions. Of total Government Bonds outstanding of Bt. 40.8billion at October 31, 1975, the Bank of Thailand held 19.2%, commercialbanks held 42.5%, the Government Savings Bank held 30.2% and other insti-tutions held the balances of 8.1%. This last low percentage is anindicator of the relative stage of financial development.

ANNEX 3Page 2

(i) the commercial banking system; (ii) finance companies and investmenthouses; (iii) the Government Savings Bank; (iv) insurance companies; (v) spe-cialized financial institutions serving specific sectors; and (vi) pawnshopsand credit fonciers. It also includes the fledgling capital market.

Commercial Banks

3. The financial system is dominated by a central core of 29 commer-cial banks, of which 16 are Thai-owned I/ and 13 are branches of foreignbanks. The former had 846 branches at the end of 1974 of which 543 wereoutside the Bangkok-Thonburi metropolis. The total number of branches wasestimated to have risen to about 920 at the end of 1975. Thai banks clearlydominate the commercial banking scene accounting for 94% of deposits, nearly90% of advances and 91% of the total assets of commercial banks. Foreignbanks had only 19 branches at the end of 1974. Because of Thailand's bankinglaws and practices the role of foreign banks has been proscribed by limitingthe number of branches foreign banks can establish. This has effectivelyconfined them largely to doing business with foreign companies investing inThailand. Commercial banking activity, which mobilizes about 73% of totalsavings and extends 72% of total credit in the organized sector, is regulatedby the Bank of Thailand (the central bank).

4. On October 31, 1975 the total assets of the commercial bankingsystem stood at Bt. 110.4 billion of which Bt. 4.55 billion (or 4.1%) repre-sented inter-bank holdings within the domestic system, a further Bt. 2.2billion (2%) with banks abroad and Bt. 17.8 billion (or 16.1%) representedholdings of government securities. Loans and overdrafts accounted for Bt. 53billion or 48% of total assets while discount facilities extended (mainlyfor imports and exports) accounted for a further 17.3% (Bt. 19.1 billion).Of the loans and overdrafts outstanding, two sectors - manufacturing andwholesale/retail trade - accounted for the lion's share, about 32% (Bt. 16.6billion) and 30% (Bt. 15.9 billion) respectively, with agriculture accountingfor a relatively meager 4% (Bt. 2.1 billion). Commercial banks generallymake loans for up to 2 years although there have been instances where, underfloating rate frame agreements, they have lent for up to 6 years. Overdraftsare normally short-term accounts; however, since overdraft limits are renewedeach year if the relationship has been satisfactory to the bank, they effec-tively constitute a form of medium and long-term financing. A large propor-tion of loans and advances to the manufacturing sector goes toward the finan-cing of capital investments. 2/

1/ The second largest of these, the Krung Thai Bank, is almost whollygovernment owned.

2/ No firm data are available on either amounts or maturities of suchloans and overdrafts.

ANNEX 3Page 3

5. On the savings mobilization side, as at October 31, 1975 deposits 1/accounted for 76.5% of total commercial bank liabilities (Bt. 82.7 million).Demand, savings and time deposits were distributed roughly in a 16:9:75 pro-portion. The domestic household and corporate sectors accounted for over 93%of all commercial bank deposits. Borrowings by commercial banks amounted toBt. 11 billion, with the Bank of Thailand providing about 30% of the totaland foreign banks about 66%. Commercial bank capital accounts amounted toBt. 8.6 billion, of which nearly Bt. 3.0 billion represented paid-in sharecapital. While no data are available on the maturity structure of depositsthe figures available on rates of turnover suggest that the average lengthof time over which demand deposits stayed with banks was 37 days andsavings deposits about 17 months; the average length of time deposit wasgenerally one year.

6. Over the 10-month period December 1974 to October 1975, total de-posits with commercial banks rose by Bt. 9.65 billion or at an annual rateof 15.5% vs. 27% in 1974. Over the same period loans and overdrafts in-creased at an annual rate of 20% vs 33% in 1974 and discounting facilitiesincreased at an annual rate of 10% in 1975 vs. 35% in 1974. While loans andadvances to the manufacturing and trade sectors grew by 37% 2/ and 21% res-pectively, those to the agricultural sector rose by nearly 80% in responseto Government pressures to increase lending to rural areas. The continuedgrowth in deposits coupled with a disproportionate decline in lending pumpedsufficient liquidity into the commercial banks to: (i) reduce their out-standing balances with BOT and foreign banks; 3/ and (ii) increase their in-vestments in government securities.

7. The asset growth rate of commercial banks over the past decade hasbeen fairly spectacular in absolute terms with assets growing nearly sixtimes from Bt. 18.9 billion at end 1965 to Bt. 110.4 billion in October 1975.Over the same period the total assets of the financial system grew by justover four times. However the disparity between the two growth rates hasbeen reduced over the last three years with the recently established financecompanies beginning to make inroads into some part of the commercial bankmarket. Thai commercial banks operate very much as a cartel. The Thai Bank-ers Association constitutes a powerful lobby and no new banks have beenestablished since 1965. There is v-irtually no price competition between

1/ Excluding marginal deposits.

2/ This growth reflected mainly working capital provided for inventoryfinancing, a large share being accounted for by special facilities ex-tended to the textile sector.

3/ Heavy commercial bank borrowing, from abroad in late 1973-74 to circumventdomestic monetary controls led to the government's passing a law in 1975empowering BOT to register and regulate all bank and non-bank foreignborrowings.

ANNEX 3Page 4

banks. For the past few years they have operated with a comfortable 5-6%interest margin between their deposit and lending rates. Between 1970-75their published balance sheets showed profit rates averaging 18%. In early1976 four commercial banks declared dividends ranging from 21-65% on par valueof shares. Operating in a simple financial environment, more or less on theirown terms, Thai commercial banks (with 2 or 3 notable exceptions) have notfelt the pressures of competition and have shown little inclination to adoptventuresome loan policies, or to develop business with not so well establishedclients. In so far as lending for productive projects is concerned theirappraisals are generally superficial and disclosure requirements minimal astheir lending is based entirely on collateral coverage rather than projectmerit.

Finance and Security Companies

8. Finance companies (a term which encompasses any financial institu-tion which cannot accept deposits but borrows funds through the issuance ofpromissory notes or other similar instruments and lends virtually for anypurpose) arrived relatively recently on the Thai financial scene, the firstone being established in 1964. Since then they have so far enjoyed phenome-nal, uninterrupted growth largely because they could operate outside the in-terest rate and leverage regulations applying to commercial banks. Initiallyallowed to operate in a free-wheeling vein, finance companies 1/ have nowcome under increasing regulation by the Ministry of Finance and the Bank ofThailand. However, very little detailed information is as yet availableon the industry, as less than half the number of companies file any finan-cial statements with BOT.

9. While in 1964 there were only 3 finance companies, by 1969 theyhad grown to 33 and further to 114 at the end of 1975. Of these, however,only 12 are of any significant size with the five largest companies account-ing for about 30% of the assets of all financial companies (estimated atabout Bt. 22 billion in 1975) but only 17% of their total net worth. Thesecompanies are extremely profitable and, in the past, have been very highlygeared operating with risk assets to capital ratios in the range of 50:1 2/and charging effective interest rates ranging from 15%-36% (for the consumerfinance companies).

10. Engaging primarily in short-term operations finance companies gene-rally raise funds from commercial banks (most of whom are prominent share-holders), corporate depositors and wealthy private depositors, offering

1/ There are four basic types: finance companies; securities companies;consumer finance companies; and credit foncier.

2/ In July 1975 BOT announced that finance companies would have to reduce

these ratios to 28.5:1 by January 1, 1976 and to 20:1 by January 1, 1977.

ANNEX 3Page 5

yields on one-year promissory notes of between 10-13% (vs. the ceilingdeposit rate of 8%). A relatively large proportion (nearly 19%) of theirfinancing (especially for those companies with foreign participation) isobtained offshore; as a result their borrowing and lending rates fluctuateWi,il rate movements in the Euro-dollar market. As at November 1975 financecompanies had outstanding domestic borrowings of Bt. 16.9 million from thepublic of which 42% was from individuals and the balance from domestic banksand corporate clients. This level of borrowing represented about 20% ofcommercial bank deposits, having risen from 13% in 1974 and 7.5% in 1973,indicating that these institutions are making rapid inroads into the depositpreserve of commercial banks.

11. On the lending side roughly 80% of their total lending was in theform of call loans and other loans with a maturity of less than one year.Finance companies' share of total credits has increased steeply from 1.9% atend 1969 to 18% at end-1974. This increase has been largely at the expenseof commercial banks whose share has declined steadily from 84.3% to 72% overthe same period. Most finance companies engage mainly in installment creditand accounts receivable financing. A few of the larger investment houses(which concentrate on operations with the corporate sector) have begun tomake term loans of upto 6 years 1/ at floating rates (which in 1975 averagedbetween 14%-16%) as part of their increasing syndication operations. Somehave also underwritten corporate share issues. Two of the largest invest-ment houses possess high quality project appraisal capabilities.

12. Although their dynamism, competitiveness and growth rate has beenimpressive finance companies are now entering an era of stability, consoli-dation and regulation both externally and within the industry itself. 2/Compared to the entry of 79 companies between 1970-74 there were only twonew entrants in 1975. The general feeling within the financial communityis that there are now too many finance houses and there is a pressing needto merge them and strengthen their capital base. Accordingly BOT has re-quired finance companies to have registered capital of at least Bt. 40 mil-lion and paid-in of Bt. 20 million. They must also maintain liquid assetsamounting to not less than 7% of funds borrowed from individual depositsand 3% of funds borrowed from juristic entities. The minimum size of financecompany promissory notes has been set at Bt. 50,000 for Bangkok and the twoadjoining provinces and Bt. 10,000 elsewhere. These regulations will probablymean slower growth in future, especiially as the asset base is now much larger.

1/ The total portfolio of such loans made by finance companies was esti-mated to be about Bt. 600-800 mlillion as at end-1975.

2/ A Thai Securities Underwriting and Finance Association has been formedin which 35 finance companies including the major ones have obtainedmembership.

ANNEX 3Page 6

The Government Savings Bank (GSB)

13. GSB is the principal vehicle for mobilizing small savings in Thai-land. Set up under the GSB Act of 1946 it is a wholly government owned bankand operates under the general guidance of the Ministry of Finance. In therecent past GSB, with its extensive branch network, has been serving as littlemore than, a collection agency for small savings deposits which are convertedinto Government securities. As at August 31, 1975 its total assets were Bt.13.64 billion of which Bt. 12.41 billion or 91% were invested in governmentsecurities. Total asset growth declined from levels of 23% in 1972-73 to 4%in 1975. The loans made by GSB declined in both absolute and relative termsdropping from a share of 30.2% in 1962 to 2.4% in 1975. Between 1962-1968most of these loans were to Government enterprises; the share of loans toprivate individuals increasing from Bt. 137 million in 1965 to Bt. 291 mil-lion in 1971. Since then they have fluctuated between Bt. 230-270 million.The bulk (72.4%) of GSB's resources are provided by time and savings depositswhich collect an interest of 6% for 6-month deposits and 7% for 12-monthdeposits. A further 11.2% of its resources are derived from the sale ofpremium and savings bonds.

14. Given its large branch network, its contact with very small saversthroughout the country and its success at mobilizing rural savings the pos-sible expansion of GSB's role to include resource allocation, particularly inrural areas, should be given careful consideration.

Insurance Companies

15. The insurance business in Thailand is still in its infancy althoughlife insurance companies have been operating in Thailand since 1929 (insurancereserves accounted for barely 2.3% of total household savings in 1973). Theirslow growth has been attributed to the setbacks caused when the largest in-surance company in Thailand failed in 1962 followed by another in 1968. Theimpact of these failures, however, is being gradually overcome. In 1973 and1974 the insurance industry (comprising 11 life insurance companies, of which2 were foreign, and 56 general insurance companies) recorded growth rates of23% for general insurance and 34% for life insurance. The general insuranceindustry's growth is impeded by: (i) the lack of locally available rein-surance which causes resources to flow abroad; (ii) legal limitations on theinvestment of insurance company assets; and (iii) the propensity of Thaiimporters to insure their cargo shipments abroad.

16. As for life insurance, despite recent advances there were onlyabout 400,000 active policies in the market as of end 1974 of which about310,000 had been sold in the two preceding years. At the end of 1974 thetotal sum insured was Bt. 10.9 million. However, in Thailand about 50% ofthe policies signed in any given year are expected to be surrendered withinthe next two years and a further 20-25% in the two years after. Life insur-ance has therefore yet to come of age. With basic attitudinal factors inThailand militating against insuring for the future it is likely to be a slow

ANNEX 3Page 7

haul. Nevertheless the development of an established insurance industry isessential in securing a relatively stable stream of resources for long-terminvestment. Promotion of the insurance industry, with government support ifnecessary, therefore needs to be given active consideration.

Specialized Financial Institutions

17. In addition to the above, Thailand has a number of specialized finan-cial institutions which have been established under specific legislation tomeet the long-term credit needs of the agricultural, industrial and housingsectors. A brief account of each oif these institutions is given below.

18. The Bank for Agriculture and Agricultural Co-operatives (BAAC):Established under its own Act in 1966 BAAC took over the functions and opera-tions of the Bank for co-operatives (established in 1947). BAAC has a networkof 58 branches located throughout the country and lends to farmers both direct-ly and through agricultural co-operatives. Its primary function is resourceallocation and it plays virtually no role in savings mobilization. As atOctober 31, 1975 BAAC had total assets of Bt. 4.9 billion, of which Bt. 4.6billion represented loans to farmers, a rapid jump from Bt. 2.65 billion atthe end of 1974. Following a goverrnment directive in 1975 requiring commer-cial banks to channel at least Bt. *3.6 billion (5% of the total previous year'sloans) into agricultural portfolios, BAAC was suddenly flooded with offers ofdeposits from commercial banks. As at October 31, 1975 BAAC had utilizedabout Bt. 2.43 billion of available commercial bank funds which accounted for50% of its total resources vs. 6.6% at the end of 1974. BAAC has also linedup Japanese credits totalling X 8 billion from the OECF.

19. Around 70% of BAAC's lending consists of 1-year production loansto individual farmers (at a 12% rate); over 50% of these loans are for paddyproduction. Medium term (3-5 year) loans are also provided for purchase oflivestock and equipment as well as for animal raising and the redemption ofmortgaged land. Long-term (10 year) loans at 10% are provided by BAAC fordebt refinancing and, from 1975 onwards, for farm development. So far, how-ever, these loans account for less than 1% of all loans disbursed. Between70-75% of BAAC's loans are to "registered" farmers who now number about400,000. Despite extraordinarily bureaucratic procedures to prevent poorloans, arrears are about 30% of loans outstanding, (an improvement on 1973when they were 43%).

20. So far, however, it is apparent that the constraint on the expan-sion of BAAC's operations is not the availability of funds but its own in-ternal capability to utilize them. A new management has recently beeninstalled and is attempting to introduce necessary changes into a largeand seemingly intractable bureaucracy. It is likely that if BAAC is suffi-ciently strengthened it will, by 1977 or 1978, need additional resources tocarry out specific financing programs which it is now in the process ofdeveloping.

ANNEX 3Page 8

21. The Industrial Finance Corporation of Thailand (IFCT): Althoughestablished by special legislation (the IFCT Act of 1959) IFCT is a devel-opment finance company owned by private interests, set up to provide long-term credit to industry 1/ IFCT had between 1960-73 approved 234 loans valued

at Bt. 1.4 billion to assist industrial development and had outstanding loans

of Bt. 609 million at end 1973. Between 1974-75, however, IFCT's operationsincreased dramatically with approvals of Bt. 1.54 billion for 100 loans inthose two years alone thus exceeding its total lending in the previous 13

years; as of end 1975 its outstanding loans amounted to Bt. 1.34 billion.IFCT has also been instrumental in setting up the Mutual Fund Co. which will

provide the intermediary savings instrument to enable smaller savers to par-ticipate indirectly, but actively, in the corporate issues market. Whilebeing fairly effective in mobilizing funds from foreign official sourcesmost of IFCT's domestic funds have been obtained from Government, the Bankof Thailand (BOT), and from its equity and debentures (sold mostly to a

limited circle of financial institutions). As yet IFCT is not geared tomobilizing domestic savings directly from the public.

22. The Small Industries Finance Office. SIFO is not a juristic entitybut an office (set up in 1964) in the Department of Industrial Promotion,Ministry of Industry. Its principal objective is to provide financial and

technical assistance to small industrial enterprises 2/ including cottageand handicraft industries. SIFO cannot grant loans directly; it can onlyrecommend that loans be made by the Krung Thai Bank which provides 75% of

the loan amount while SIFO provides 25% from its budgetary allocation. In-dividual loans are limited to a maximum of Bt. 1 million. As a financial

1/ IFCT essentially makes loans above Bt. 1 million leaving smaller loansto be handled by SIFO. In financing industry IFCT competes with thecommercial banks, suppliers' credits and finance companies. Of thesesources in 1975 commercial banks were estimated to provide roughly45% of the debt funds required for financing fixed assets in industry,suppliers credits for about 30%, IFCT for about 10% and the financecompanies for about 15%. In 1975 suppliers' credits totalled Bt. 2.2billion (US$110.3 million) vs. Bt. 2.6 billion (US$129.3 million) in

1974. Of the 1975 total 52% financed textile machinery, 13.4% sugarrefining machinery and 14.6% other types of machinery. A further15.6% financed tractors and transport equipment. Roughly 52% of thecredits provided had terms of 5 years or more with interest ratesranging between 4%-14% (over 50% of the value of the credits bore

interest rates of over 8.5%). Japan was the main source of suppliers'credits accounting for 30.6% of the 1975 total with the U.K., Italy

and Germany accounting for a further 35.9%. The U.S. accountedfor less than 9% compared with 17% in 1974.

2/ Registered capital or total fixed assets not exceeding Bt. 2 million.

ANNEX 3Page 9

conduit SIFO has not proven to be particularly effective in addressing theneeds of the small industry sector. In the 10-year period 1964-74 1/ ithad approved only 809 loans for a total amount of Bt. 207 million (US$10.3million). Its annual approvals reached a peak of Bt. 31.6 million in 1969before dropping off to Bt. 14.9 million in 1974. Since then there has beena recovery in SIFO lending, although with its limited staff and its proce-dures there is a definite physical constraint on its project processing capa-city.

23. As of end-1974 SIFO's outstanding loans amounted to Bt. 58.2 mil-lion. SIFO's loans averaged around Bt. 240,000 until 1970 when the averagesize jumped to about Bt. 275,000 between 1972-73 and up to Bt. 350,000 in1974, reflecting the impact of cost inflation. Most of the loans (90%) hadmaturities ranging between 4-6 years and were made at an interest rate of10% (9% + 1% service fee); they were lent mostly to established entrepreneursjudging by the fact that the borrowers' own investments (in 1973-74) exceededtheir borrowings in the ratio of about 2.5:1. Most of the loans (about 35%)were for fixed asset financing in the manufacturing sector. Loan losseshave been remarkably low, about 1% of the outstanding value, largely becausethe loans are heavily overcollateralized (the security being reviewed andset by the Krung Thai Bank). Arrearages amount to about 25% of the portfolioand are accounted for by the large borrowers. Virtually no supervision iscarried out by SIFO and no assistance extended to borrowers in difficulty.

24. The Government Housing Bank. GHB was established in 1953 underits own Act to provide mortgage finarnce for low and middle-income groups.Its operations have been on a very small scale, providing finance to fewerthan 1,000 borrowers annually; its loans outstanding in June 1975 amountedto Bt. 121 million. 2/ Prior to 1973 GHB relied solely on government trans-fers for its resources; since then it has introduced deposit facilites, whichbecause they are limited to the same terms as commercial banks, 3/ have notbeen particularly successful in mobilizing savings. In view of the heavyfinancial requirements of the housing sector, better mobilization performanceby GHB is essential especially if the critical mortgage financing needs oflow-income borrowers are to be met. At present GHB is an almost insignificantmember of the financial sector; unless Government plans to revitalize it toserve a broader clientele, its existing functions could easily be absorbedby other institutions.

1/ Total approvals in FY75 were Bt. 29 million.

2/ In 1973 part of its assets were transferred to the National HousingAuthority. At end-1973 its outstanding loans amounted to Bt. 32.6million.

3/ Commercial bank also offer branch banking facilities and a wide rangeof other services.

ANNEX 3Page 10

Pawnshops and Credit Fonciers

25. Pawnshops, which lend funds to private individuals against pledgedpersonal possessions, are operated by private individuals, municipalities andby the Department of Public Welfare. They operate under the Pawnshop Actof 1962 and are supervised by the Ministry of the Interior. No recent andreliable information was available on their number or their role in thefinancial system. However, a study carried out on financial institutionsin Thailand suggests that between 1969-73 they accounted for 1.5% of thetotal credit provided by all financial institutions although their shareseemed to be gradually diminishing. As of the end of 1973 the total assetsof 202 registered pawnshops amounted to Bt. 790.5 million while their out-standing credit extended amounted to Bt. 635.7 million.

26. Credit foncier companies provide housing and real estate financein the form of mortgage lending, hire-purchase financing, or purchase withthe seller's right of redemption. As distinct from finance companies, creditfoncier companies cannot mobilize funds directly from the public and theiroperations are regulated by the Ministry of Finance. As relative newcomerson the financial scene most of these companies (of which there were 11 atthe end of 1973) are of modest size and at the end of 1973 accounted forBt. 229 million in credit extended (or less than 0.3% of the total). Withtheir mortgage financing bias credit foncier companies have the potentialfor developing into the counterpart of the savings and loan associations inthe U.S. if permitted to mobilize private savings directly.

The Capital Market

27. Thailand does not, as yet, have a well-developed capital marketfor either government or corporate securities; in this respect it lagsbehind the financial development of neighboring countries such as Malaysia,Singapore, the Philippines and Taiwan. The new Securities Exchange ofThailand (SET), established to fill this major void in the financial system,began operations on April 30, 1975. Unlike its predecessor, the BangkokStock Exchange 1/, SET has attracted strong Government support from theoutset and its legislation envisages substantial government involvement inits operations. SET is under the general supervision of the Ministry ofFinance; four of its nine directors are appointed by the Cabinet. At pre-sent its Chairman is the General Manager of IFCT. To encourage active in-terest in the stock market the revenue code was amended to allow fairlygenerous tax exemption and reduction privileges for income derived fromcorporate dividends. This was done to reduce the disparities between the

1/ Founded in 1962 as a private company BSE never really got off theground.

ANNEX 3Page 11

taxes previously levied on such income and interest income from commercialbank deposits which is tax exempt. 1/

28. It is as yet too early to assess definitively the performance ofthe new exchange in the first nine-months of its existence. The uncertainpolitical climate, dampened investment and a general preference for liquidityhave perhaps thwarted the realization of earlier expectations. It would,however, be premature to interpret the SET's slow start as a poor sign forthe future. On April 30, 1975 SET started off with 30 member firms and 15listed securities, of which 9 were common stock. 2/ By December 1975, thenumber of listed securities had increased to 27 while the number of commonshare issues increased to 21. Between May 1, - December 31, 1975 turnoveron the SET totalled 8.9 million shares with a market value of Bt. 1.52billion vs. Bt. 15 million for over-the-counter stock trading. Commonshares and government bonds were the most keenly traded securities.

29. During 1975 there were seven new common stock issues, three beingthose of commercial banks increasing their capital. Most of these weretaken up by existing stockholders with a small portion of each being reservedfor sale to the public. In addition there were three rights issues of commonstock and two debenture issues (totalling Bt. 200 million) of which IFCT'swas one. The public share capital (amounting to Bt. 280 million) and deben-ture issues were generally very successful with issues prior to August 1975being fully sold or oversubscribed., After August a lull settled and someissues floated after August had difficulties with acceptance, but theyachieved 90% rates of subscription nonetheless. Between November 1974-September 1975 Government bond sales totalled Bt. 3 billion with 10-15 yearmaturities and bearing interest rates of 8.5%.

1/ As the Bank's recent economic report points out: "Tax provisions forsavings in Thailand have distorted the financial structure by placingcommercial banks in a much too favorable position vis-a-vis alternatives.As a result, the growth of institutions engaged in medium and long-termborrowing and lending has been stifled and the importance of the equitymarket, life insurance and investment in provident funds has not beenpermitted to emerge. The exemption of interest income on commercial bankdeposits from income tax, coupled with the lack of adequate tax incen-tives for other types of savings, is principally responsible for thediversion of a disproportionate share of financial savings to commer-cial banks. The lop-sided growth of the banking system has alsoforced companies to rely more heavily on bank finance than would haveotherwise been desirable. If a more balanced growth of the financialsystem is to be fostered, major changes in the tax structure, and inparticular in the treatment of savings, need to be made."

2/ All the series of government bonds were also listed with SET.

ANNEX 3Page 12

The Structure of Interest Rates

30. The general interest rate structure in Thailand is governed bycommercial bank base deposit and prime lending rates which fluctuate in tunewith the banks' liquidity position and the Bank of Thailand's standard loanrate. The movement of the overall structure is constrained by ceiling ratesset by the Bank of Thailand on commercial bank deposits (8%) and on banklending (15%). The key rate in the structure is the commercial banks' primeoverdraft rate (to preferred customers) which until 1975 was set by the ThaiBankers' Association under the terms of the Inter Bank Agreement. The tablebelow gives an indicative comparison of interest rates which are relevant toIFCT's and their movement in the past two years.

Interest Rates: 1974-75

1974 1975High Low High Low 12/31

Commercial Banks

12 month deposits /a 8.0% 8.0% 8.0% 8.0% 8.0%"Prime" overdraft rate 12.5% 11.5% 12.5% 10.5% 11.5%General lending rate 15.0% 14.0% 15.0% 13.0% 14.5%

Bank of Thailand 11.0% 10.0% 11.0% 10.0% 10.0%

Government Savings Bank

Discount rate 10.0% 10.0% 10.0% 10.0% 10.0%Savings account 3.5% 3.5% 3.5% 3.5% 3.5%12 month deposit 7.0% 7.0% 8.0% 7.0% 8.0%Savings bond 4-6% 4-6% 4-6% 4-6% 4-6%

/a 3-6 months deposit rates were 6%; 6-12 month deposits were 7%.

ANNEX 3Page 13

1974 1975High Low High Low 12/31

Finance Companies

12 month deposits /a 11.5% 9.0% 12.0% 10.5% 12.0%12 month lending rate /b 16.0% 13.5% 16.8% 14.0% 16.0%

IFCT

Foreign currency loans /c 10.5% 9.5% 10.5% 10.5% 10.5%Domestic currency loans 9.5% 9.5% 11.5% 9.5% 11.5%Debenture rates -- _- 9.0% 9.0% 9.0%

Government Bonds 8.5% 8.5% 8.5% 8.5% 8.5%

/a It is very difficult to ascertain finance company lending rates becauseof rapid fluctuations in their cost of funds. Deposits are restrictedto Bt. 50,000 or more and deposits for more than 12 months have indivi-dually negotiated rates.

/b Rates charged to prime industrial borrowers with good security coverage.Effective rates range up to 22% for lower quality borrowers and up to36% for consumer finance.

/c Foreign exchange risk is shared by the Government and IFCT.

31. As can be seen from the above the average prime lending rate overthe past two years has been fluctuating around 12% with a dip in 1975 whencommercial banks were, for a short time, excessively liquid. This baserate has remained fairly stable since 1966 except between 1972-73 when itdipped to 11.5%. The average deposit rates on the other hand were all in-creased by 1% between 1974-75. Commiercial banks have traditionally operatedwith an average 5-6% spread between deposit and lending rates. However,their rates are managed and do not reflect the play of market forces. Therates of finance companies more closely approximate the market and reflectnarrower spreads.

32. From the viewpoint of savings mobilization it is difficult toconclude that deposit rates are too low to encourage a sufficient level ofsavings. Such savings have generally been high, increasing to a level of25-26% of GNP in 1973-74 from about 21-22% between 1970-72 but with theeconomic setbacks experienced from mid-1974 through 1975 savings fell toabout 23% of GNP. The proportion of financial savings could unquestionablybe higher and their channelization into longer term financial holdings con-siderably increased. In this connection, however, improvements in theefficiency of intermediation, the availability of a wider variety of instru-ments and the filling of major gaps iin the financial system's structure may

ANNEX 3Page 14

at this point, be more crucial than the level of deposit or yield rates. Itis true, however, that through the 1960's and early 1970's the average realyield on financial savings has been around 3-4%. If it is assumed that thisreal return is the minimum essential to sustain savings at their currentlevels then it may be that, with projected rates of inflation of around6-7%, deposit rates would need to be adjusted to around 10-11%. Nonethelessit is noteworthy that even through years of high inflation 1973-74, whenreal yields were highly negative, private savings remained constant andtheir holdings in the form of financial assets actually increased.

33. Using prime overdraft rates as an indicator, real lending rates havebeen between 8-10% between 1965-73; they were negative in 1973 and 1974 andwere a real 8-9% in 1975. For encouraging investments in priority sectorsthere is a strong implicit belief in government, financial and business circlesthat preferential institutional interest rates are a necessary and effectivedevice (lending rates in agriculture vary between 6-10%, small industries10%, agro-industries 9% etc.). Of course this ignores the fact that largeindustries (including agro-industrial firms) borrow from finance companiesat between 14-16% and that in agriculture about 80% of the credit needs aremet by the unorganized market at rates of between 25-150%.

34. One notable feature of the interest rate regime, however, is theextent to which it penalizes the small individual saver and borrower andfavors the large well established corporate and individual savers and bor-rowers. While in any market oriented system the latter would be favoredlargely because of lower intermediation costs in servicing them, in Thailandit would appear that the bias is excessive. A study conducted by the IMF in1973 pointed out that greater intermediation efficiency needed to be promotedand the distortions (of which the discrimination against small savers andborrowers was one), introduced by commercial bank domination of the financialsystem, reduced. To this end the DMF argued for abolition of the prescribedminimum lending rate and of the tax exemption of bank deposits and governmentbonds. It also pressed for market forces being allowed to play a larger rolein influencing interest rates. Discussions with the Thai authorities and theIMF at that time did not result in acceptance of the IMF's principal recom-mendations. Since then the successive governments which have emerged haveproved too short-lived to consider taking any sweeping action in this area.The present Governor of the Bank of Thailand is, however, anxious to press forneeded fundamental changes in the financial system and in the government'spolicies towards its continued development.

ANNEX 4Page 1

THAILAND

THE INDUSTRIAL FINANCE COUPuRATION UF THAILAND

List of Shareholders as of

December 31, 1975

Percentage ofForeign Shareholders No. of Shares Total

International Finance Corporation/ 8,000 5.33

U.S.A.

Manufacturers Hanover International Fin. Corp. 5,499Bank of America 3,127Chase Manhattan Bank 2,691Chase Manhattan Overseas Banking Corp. 2,040Wells Fargo Bank International Corp. 1,833United California Overseas Investment Corp. 1,833

17L023 11.35

Japan

The Mitsui Bank Ltd. 4,907The Bank of Tok,yo Ltd. 4,906The Fuji Bank, Limited 2 000

_1__ 7.88

United Kingdom

The Hongkong & Shanghai Banking Corp. 4,702The Chartered Bank 3 916

5.74

Germany

Deutsche Gesellschaft Fur Wirtschaftliche Zusammenarbeit 7,920Commerzbank A.G. 3,000 7.28

10,920

Malaysia

United Malayan Banking Corp. Ltd. 4,509 3.01

France

Banque de L'Indochine 2,671Banque Francaise du Commerce Sxterieur 1,000

3,671 2.45

India

Bharat Overseas Bank Ltd. 1,500 1.00

Taiwan

The International Commercial Bank of China 1,291China Underwriters Life & General Insurancie Co., Ltd. 1,000

2,291 1.53

uther small foreign shareholders 2,680 1.78

Total Foreign 71,025 47.35

Local Shareholders

Krung Thai Bank Ltd. 24,592Bangkok Bank 13,031The Bangkok Bank of Commerce Ltd. 3,768The Bank of Asia for Industry and Commerce Ltd. 2,550The Asia Trust Bank 2,500The Bank of Ayudhya Ltd. 2,024

1/ IFC sold in February 1975 its entire shareholding to Mitsui Bank of Japan.

ANNEX 4Page 2

Percentaee ofLocal Shareholders No. of Shares Total

The Thai Farmers Bank Ltd. 1,500The Thai Danu Bank Ltd. 1,488Bangkok Metropolitan Bank Ltd. 1,488The Siam City Bank Ltd. 1,436The Union Bank of Bangkok Ltd. 1,000The South East Insurance Co., Ltd. 2,000The Bangkok Insurance Co., Ltd. 1,500The Union Insurance Co., Ltd. 1,000Bangkok Nomura International Security Co. 1,000Bureau of Crown Property 2,000Mr. Chow Chowkwanyun 1,010Mr. Jootee Boonsong 1,000Shareholders holding less than 1,000 shares each 14,088

Total Domestic 78,975 52.65

Grand Total 150 000 100.00

Distribution of Shareholders

Banks 103.453 68.96

Domestic 58,028Foreign, with office in Thailand 35,552 93,580 62.38Foreign, without office in Thailand 9,873 6.58

Insurance Companies - 8A650 5-77Domestic 7,150 4.77Foreign, with office in Thailand 1,5C0 1.00

Investment Companies 7,479 4.99

Domestic 1,525Foreign, with office in Thailand 255 1,780 1.19Foreign, without office in Thailand 5,699 3.80

Other Companies 15,493 10.32

Domestic 5,612Foreign with office in Thailand 128 5,740 3.82Foreign without office in Thailand 9,753 6.50

1FC1/ 8,o0o 5.33

Individuals 6,945 4.63

Domestic 6,680Foreign 265

Total 150 000 100.00

Domestic 78,975 52.65(of which Government-owned Krung Thai Bank Ltd.) (24,592) (16.39)Foreign 71,025 47.35(of which located in Thailand) (37,435) (24.96)

1/ IFO sold, in February 1976, its entire shareholding to Mitsui Bank of Japan.

EAP Projects DepartmentMarch 2, 1976

ANNEX 5

THAILAND

THE INDUSTRIAL FINANCE CORPORATION OF THAILAND

Board of Directors

As of December 31, 1975

Name Date of Appointment or Election

1. Mr. Sommai Hoontrakool Appointed by Government as IFCT Director, December 1, 1973.

Elected as Board Chairman, December 3, 1973.

2. Mr. Waree Bhongsvej Appointed as Director and General Manager by Board, March 1, 1975.

3. Mr. Chamni Visvapolboon Elected by General Meeting, April 30, 1975. General Manager,G.S. Steel.

4. Mr. Banjurd Cholvijaran Elected by General Meeting, April 23, 1974. General Manager,Union Bank.

5.- Mr. Chai Sophonpanich Elected by General Meeting, April 23, 1974. General Manager,Bangkok Insurance Co.

6. Mr. Bancha Lamsam Elected by General Meeting, April 4, 1973. General Manager, ThaiFarmers Bank.

7. Mr. Thienchai Srivichit* Electel by General Meeting, April 4, 1973. Assistant to GM, KrungThai Bank.

8. Mr. W.D. Anderson Appointed by Board, November 26, 1975 to succeed Mr. J.L. Moulene,(Representative of Foreign electedi by General Meeting, April 30, 1975. Representative,Manu-Shareholders Group 1) factureres Hanover Trust Company.

9. Mr. J.R. Medley Appointed by Board, October 29, 1975 to succeed Mr. W.C.L. Brown,(Representative of Foreign appointed by Board, December 13, 1972 to succeed Mr. W.T. Watson,Shareholders Group 2) elected by.eneral Meeting, April 7, 1972. Manager, The Chartered

Bank.

10. Mr. P.M. Ryan* Appointed by Board, December 13, 1972 to succeed Mr. Toshio Asanuma(Representative of Foreign appointed by Board, September 1, 1972 to succeed Mr. John C. Ling,Shareholders Group 3) elected by General Meeting, April 7, 1972. Manager, The Hongkong &

Shanghai Banking Corporation.

Paragraph 3, Section 16 of IFCT Act governs the retirement by rotation of Directors as Follows:

"When all the Directors appointed under Sect:Lon 14 have retired, two Directors of the Corporationshall retire each year by rotation; the Directors to retire shall be those who have been longest inoffice".

* Member of the EXecutive Committee.

EAP Projects DepartmentFebruary 27, 1976

ANNEX 6Page 1

THAILAND

THE INDUSTRIAL FINANCE CORPORATION OF THAILAND

Policy Statement *

IFCT Board of Directors adopted the following policies to guideIFCT's operations:

1. IFCT is an investment institution designed to assist in the expan-sion of industry in Thailand. To this end, it will pursue an aggressivepolicy to promote, finance and otherwise assist private industry.

2. IFCT will invest in enterprises which are expected to make a con-tribution to the economic development of Thailand.

3. It will make its investment decisions only on the basis of soundinvestment criteria and standards.

4. Subject to such criteria, it will select projects on as broad ageographical basis as possible.

5. IFCT Articles empower it to provide finance in any form it con-siders appropriate to its clients and its own interest. IFCT will, as appro-priate, make use of the entire range of forms of investment. It will giveparticular attention to its clients' needs for equity financing and willprovide such equity to the extent consistent with sound financial practice.

6.** It will not incur debt in excess of six times its equity, (equityis defined as paid-in share capital plus reserves plus retained earnings)determined in accordance with sound accounting practices. For the purposeof calculating the debt/equity ratio, all debts in foreign currencies willbe valued in Baht using the par value at the time such calculation is made.

7.*** It will diversify its financing (except for temporary investmentof liquid funds in short-term securities) among different types of indus-tries and different types of financing.

(a) It will not normally commit to any single enterprise (inwhatever form) an amount greater than 25% of its equityas defined in paragraph 6.

* As adopted at the 65th IFCT Board Meeting on May 19, 1967.

** As amended at the 162nd IFCT Board Meeting on April 30, 1974.

*** As amended at the 148th IFCT Board Meeting on June 27, 1973.

ANNEX 6Page 2

(b) It will not commit to any single enterprise in the formof equity more than 10% of its equity as defined inparagraph 6.

(c) The total of its equity investments will not exceed itsequity.

(d) It will not normally make a loan of less than Baht 1,000,000.

8. It will not seek to take a controlling interest in an enterprise

or any other interest which would give it primary responsibility for manage-ment of an enterprise; and it will not take up more than 25% of the share ofany single enterprise. Notwithstanding the foregoing limitation, in anycase of jeopardy, it may take such action as it thinks fit to protect itsinvestment.

9. It will conduct its operations in such manner as to assist in thegrowth of a capital market in Thailand and to improve facilities for market-ing shares and securities, and will revolve its own portfolio whenever itcan do so on satisfactory terms. In selling an investment, it will pay dueregard not only to its own interests, but also to the interests of otherparticipants in such investment, and to the interests of the others who havedirectly invested in the enterprise in which it has invested.

10. It will finance undertakings which are soundly managed and whichappear, on careful economic, financial and engineering investigation, to be

economically viable; and it will carefully watch the operation of the enter-prises it finances and it will promptly make available to them constructiveand remedial advice wherever requisite.

11. To build and strengthen its own management and staff as well as toassist clients in the formulation and execution of their projects, it willrapidly build an effective organizaition and develop an adequate staff, inclu-ding financial and economic analysis, engineering, accountancy and legalservices.

12. In accordance with normal business practice, IFCT will endeavourto obtain adequate security for the loans it provides. However, its decisionsto invest will be based on its judgement regarding the prospective profit-ability of its clients' enterprises.

13. It will levy charges for iLts loans financing and services which,together with earnings on investments, will allow the accumulation of reserves

and the payment to its shareholders, in due course, of a satisfactory returnon their investment. It will build and maintain reserves consistent withsound financial practice; these will include reserves for bad debts and in-vestments and, in addition, legal reserve to strengthen its equity. To thisend, it will set aside at least 30% of its annual profits consisting of(a) 25% as reserves for bad debts and investments until such reserves have

ANNEX 6

Page 3

been built up to 20% of its loan and investment portfolio and (b) 5% as legalreserve until it has been built up to 10% of the paid-in capital.

14.* The foreign exchange risk on IFCT's external borrowings, which IFCTmust repay in foreign exchange, will be covered:

(a) for Government guaranteed and qualifying non-Governmentguaranteed loans, under the Foreign Exchange RiskAgreement between IFCT and the Ministry of Financedated April 26, 1974, or,

(b) in case the foreign exchange risk is not covered bythe said Agreement, IFCT will pass that risk to itsclients or will find other suitable means to cover it.

15. The Board of Directors will use its best efforts to prevent any oneperson or company, or group of affiliated persons or companies from gainingeffective control of IFCT.

EAP Projects DepartmentMarch 1, 1976

* As amended at the 162nd IFCT Board Meeting on April 30, 1974.

ANNEX 7Page 1

THAI]LAND

THE INDUSTRIAL FINANCE CORPORATION OF THAILAND

IFCT's Operations

A. Lending Operations

1. Operational Trends. As shown in Table 1, FY75 was a banner yearfor IFCT with its lending operations surpassing even the record level of

FY74. In FY75, 54 new loans for Bt. 785.9 million were approved 1/ raising

cumulative loan approvals since IFCT's inception in 1960 to Bt. 2,573.1 mil-lion (301 loans). IFCT's aggregate loan approvals in the last two years,(FY74 and FY75) amount to Bt. 1,489.7 million which account for about 58%

of total approvals since its inception, a clear indication of IFCT's emer-gence as an important institution on the Thai financial scene. Loan commit-ments and disbursements kept pace with the increased level of approvals and

amounted to Bt. 725.1 million and Bt. 540.9 million respectively in FY75.As compared to FY74, commitments in FY75 show a 36.5% increase and disburse-ments 37.6%. As of December 31, 1975 loans outstanding amounted to Bt. 1,340.8million representing 146 loans to 120 borrowers. Loans outstanding increasedby about 46% by amount over year-end FY74 and 34% by number.

2. Many diverse factors have contributed to the jump in IFCT's lendingoperations in FY74-75. The main ones are: (a) IFCT's competitive advantagein terms of its interest rate which is about 1.5% to 2% lower than the effec-

tive rate on alternative sources of fEinancing; (b) pressure on the liquidityof the commercial banks; (c) a 30-40%, rise in the capital cost of projectsdue to inflation; (d) IFCT's foreign exchange risk sharing arrangement withthe Treasury which absolved IFCT's sub-borrowers from the exchange risk onforeign currency loans; and (e) growing realization among Thai entrepreneursof the merits of borrowing from IFCT on a long-term basis as opposed to theshort-term roll-over financing providLed by commercial banks. Apart fromthe liquidity position of commercial banks and lower rates of cost infla-tion, these factors are of a permanernt nature and should enable IFCT tocontinue rapidly building up its loan portfolio.

Features of Lending Operations

3. Domestic vs. Foreign Currency Loans. Of the total loans approvedby IFCT between inception and December 31, 1975, about 40% were domesticcurrency loans and 60% were foreign currency (Annex 7, Table 1). Up to theend of FY71, the split was 50:50, but subsequently, the rate of approval offoreign currency loans has outpaced that of baht loans. In FY75, 39 domestic

1/ Net of cancellations.

ANNEX 7Page 2

currency loans 1/ were approved totalling Bt. 216.4 million, a 50% increase

in number over FY74 but a 27% decline in amount. In PY74 IFCT approved

five exceptionally large domestic currency loans totalling Bt. 212.7 million

(averaging Bt. 42.5 million) which accounted for about 72% of total domestic

currency loan approvals in the year; by contrast, the five largest domestic

currency loans approved in FY75 totalled only Bt. 87.3 million (averaging

Bt. 17.5 million) and accounted for only 40% of total approvals. 2/

4. Between FY71 and FY74, Special Yen and Japanese Exim Bank tied

credits accounted for a major share (64%) of foreign currency loan approvals.

In 1975, however, the trend was reversed and Special Yen and Japanese Exim

Bank credit approvals represented only 18% of total foreign currency loan

approvals. This reduction was due to the increased availability of untied

funds, mainly from the Bank and ADB, and the increased cost of Japanese pro-

curement. Nonetheless, because of sizeable approvals in the past, these

tied credits accounted for 22% of total loan approvals and 36% of foreign

currency loan approvals as of December 31, 1975. Although the baht is fully

convertible, IFCT follows a policy of matching loan and procurement currencies.

The use of domestic currency funds to finance imports has been permitted only

in exceptional cases and has, so far, involved negligible amounts.

5. Size of Loans. The average size of loans committed by IFCT in

FY75 declined to Bt. 13.4 million from Bt. 15.6 million in FY74 (Annex 7,

Table 2). As compared to FY74, there was an increase from 7 to 11 in the

number of large loans 3/ committed in FY75 but their average size was con-

siderably lower (Bt. 35.5 million) than in FY74 (Bt. 48.7 million). 4/ Prior

to FY71 IFCT did not finance any large loans; most of its loans were below

Bt. 10 million. Since then the number of such loans committed by IFCT has

steadily increased. This increase notwithstanding IFCT's regular loans 5/

1/ 12 loans (Bt. 62.2 million) were made exclusively in domestic currency

while 27 loans (Bt. 154.2 million) were made in combination with foreign

currency loans (Bt. 231.8 million).

2/ In FY74 these loans were made to: Thai Central Chemical Co. Ltd. (Bt. 91.1

million); Royal Mosaic Export Co. Ltd. (Bt. 40.0 million); Thai Kurabo Co.

Ltd. (Bt. 35.0 million); Phuket Island Co. Ltd. (Bt. 21.6 million); and

Bangkok Shipbuilding and Engineering Works (Bt. 25.0 million); and in

FY75 to Thai Soon Lee Co. Ltd. (Bt. 13.7 million); Sanyo Universal Elec-

tric Co. Ltd. (Bt. 22.3 million); Thai Glass Industries Co. Ltd. (Bt. 14.1

million); Thonburi Textile Mills Ltd. (Bt. 25.0 million), and Bangkok

Edible Oil Mills Ltd. (Bt. 12.2 million).

3/ Loans exceeding Bt. 20 million.

4/ Large loans committed in FY74 ranged between Bt. 23-91 million; in

FY 75 they ranged between Bt. 20-55 million.

5/ Loans up to Bt. 20 million.

ANNEX 7Page 3

still account for about 80% (in FY74 and FY75) of total loan commitmentsand represent the hard core of IFCT's financing. A more realistic indicatorof IFCT's regular business is the average loan size excluding large loanswhich has increased from Bt. 4.3 million as of the end of FY72 to Bt. 7.0million in FY74 and to Bt. 7.8 million in FY75, the increase being attri-butable to cost inflation. On a cumulative basis, as of December 31, 1975,the average size of all loans committed was Bt. 7.9 million and Bt. 5.2 mil-lion (large loans excluded). As of the same date, 40% of the total loanamount committed was for 24 loans (or 8% of the total). Loans exceedingBt. 10 million (there are 64) now account for 66% of the total amount com-mitted and for 22% of the total.

6. Duration of Loans. Loans committed in FY75 generally had shortermaturities than those in FY74. As Annex 7, Table 2 shows, the average maturityof loans in FY75 was 6.0 years by number vs 6.2 years in FY74 and 6.4 years byamount vs 6.6 years in FY74. In FY75 there was no loan with a maturity ofless than 2 years or more than 10 years. About 85% of the loans, both bynumber and amount, had maturities ranging from 4-8 years. Between FY73-75,the maturity of loans has fluctuated. The average maturity declined in FY73from a historical average of 5.6 years by number and 6.5 years by amount to5.2 years and 5.9 years respectively before falling again in 1975. Conse-quently, on a cumulative commitments basis there was almost no change in theaverage maturity of loans between December 31, 1972 and 1975; by number itchanged slightly from 5.6 to 5.7 years while by amount it remained unchangedat 6.5 years. Sub-loans under the previous IBRD loan have had terms repre-sentative of all IFCT loans. Under the proposed loan grace and maturity per-iods of sub-loans are expected to be stretched out by 1-2 years. IFCT's loanmaturities are, by and large, short and rigidly based on projected cash-flowswithout allowing sufficiently for a margin of error. This practice causesIFCT to run the unnecessary risk of default by its borrowers. IFCT's manage-ment accepts this view and is willing to set amortizaton schedules of sub-loans more realistically in future.

7. Geographic Distribution. IFCT's loans continue to remain concentra-ted in the Central Region 1/. In 1975 about 82% of the number of projects and90% of the amount committed (Annex 7, Table 2) were in the Central Region (ofwhich the Greater Bangkok area accounted for over 50%, both by number andamount). This distribution is much the same as in the past. Outside theCentral Region, IFCT's investment in the Eastern and Southern Regions has, inthe last four years, increased noticeably. In the four year period FY72-75,IFCT committed loans totalling Bt. 143.3 million for 18 projects in the Easternand Southern Regions. This represents over 50% of the total number and over

1/ Including the Greater Bangkok area.

ANNEX 7Page 4

75% of the total amount of loans committed in these regions on a cumulativebasis as of December 31, 1975. There have not been significant increases inloans for the North Eastern and Northern Regions where, during the same period,only 7 loans for Bt 22.8 million were committed. The heavy concentrationof IFCT's financing in the Central Region parallels the concentration of in-dustry in the area. 1/ As a matter of basic policy, IFCT's management hastried its best to persuade prospective entrepreneurs to locate their pro-jects in areas outside the Central Region but without much success.

8. The major inhibiting factors to location of industrial projectsin areas other than the Central Region are: (a) the absence of other majormarkets for linkage industries; (b) the availability of industrial infra-structure on relatively cheaper terms than in any other area; (c) theabsence of adequate facilities for transportation; (d) the proximity to theonly seaport in the country; (e) the government's policies which, in the past,have not provided a strong incentive for geographical dispersal of new indus-trial investments; and (f) the relatively late stage at which IFCT's owninvolvement in projects begins which prevents it from having much say inproject location (paragraph 14).

9. IFCT's management has recently taken three major steps in aneffort to alleviate the concentration of its financing. First, it has decidedto lend its domestic currency funds at a concessional interest rate for agro-based projects which are generally located outside the Central Region. Second-ly, a separate section in the Planning Department has been set-up for develop-ing projects with high economic priority in industrially less congested areas.Thirdly, in FY75 IFCT opened its first branch at Haat Yai in the South and twomore branches have been opened in FY76 in the North and Northeast. Thesebranches will primarily focus on introducing IFCT's services to local entre-preneurs and promoting new business in these areas. These steps are expectedto assist greater regionalization of IFCT financing but, in view of the othermajor factors beyond IFCT's control, no dramatic change in its geographicaldistribution can realistically be expected in the near future.

10. New vs Expansion Financing. Historically, IFCT's total loan appro-vals have been evenly split between their use for expansion of existing facil-ities and establishment of new plants. In FY75, out of 54 loans approved, 29loans (53.7% of total) amounting to Bt. 379.8 million (48.3% of total) werefor new plants. Total investment in these new projects was Bt. 1.46 billionof which about 50% (Bt. 746.6 million) was in four large projects (a sugarmill, a grain silo, a car assembly plant and a maritime project). In compari-son to their size IFCT's investment in these four large projects at Bt. 116.0million was relatively small, representing only 30.5% of total loans approvedfor new projects (by amount) and 15.5% of the total investment in these pro-jects. Of the 29 new projects approved, 23 (or 79%), including the three

1/ See Annex 2.

ANNEX 7Page 5

large projects, were located in the Central Region 1/ and accounted for 83.4%of total loans approved for new projects and 76.9% of their total investment.New projects in the Central Region 1/ were established in a wide range of in-dustries. Of the remaining projects, the Eastern and Southern Regions account-ed for two each and the Northern and North Eastern Regions for one each. InFY75, IFCT approved loans aggregating Bt. 24.7 million for three new hotelswhich accounted for IFCT's total nesw loan approvals in the Southern and NorthEastern Regions.

11. Industrial Distribution. IFCT's loan portfolio is well diversifiedwith no concentrated exposure in any industry. On a commitment basis thelargest recipients of IFCT's loans are the intermediate goods industrieswhich received 36% (by amount) of all loans committed, followed by consumergoods industries, 29%, capital goods industries, 18%, and miscellaneous in-dustries 17% (Annex 7, Table 3). There has been only a marginal change inthe industrial distribution of IFCG"s loan commitments over the past threeyears; the share of consumer goods industries increased from 22% as of Dec-ember 31, 1972 to 29% as at year-end FY75 and that of miscellaneous indus-tries declined from 23 to 17%. Four specific industries -- textiles, food,chemicals and non-metallic minerals -- absorbed about 66% of IFCT's totalloan commitments by amount during the FY73-75 period and 56% by number. Theirshare in FY75 commitments was 61% by amount and 49% by number. Most of theprojects in the food, textiles and non-metallic mineral industries are exportoriented while those in the chemical industries will produce mainly for thedomestic market. Loans committed by IFCT for textile industry in 1975 relatedto investments in specialized product lines, most of which were unaffected bythe international depression this industry experienced in FY74-75. Wood pro-ducts, paper and paper products, and rubber and rubber product industries,which are all based on local raw materials and appear to have strong poten-tial for further development, have been conspicuous by their declining sharein IFCT's total loan commitments (from 10% as of the end of FY72 to 6% as ofthe end of FY75). IFCT intends to attack this problem through intensiveproject development work to be carried out by the new project promotion sec-tion (paragraph 9).

Loans Financed Under IBRD Loan No. 992-TH

12. As of February 29, 1976, I]FCT had committed a total of $10.6 mil-lion under Loan No. 992-TH for 18 projects 2/ leaving an uncommitted balanceof $1.4 million (Annex 7, Table 4). Total investment in these 18 projectsamounted to Bt. 1.86 billion of which IFCT was expected to finance Bt 333.1million or 18%. IBRD funds accounted for 63% of IFCT's financing for theseprojects or 11% of total project investment. The two largest sub-projects 3/accounted for 42.6% of the total amount committed under the IBRD loan. Of

1/ Including the Greater Bangkok area.

2/ Excluding two sub-projects which were subsequently withdrawn by IFCT.

3/ These projects are: Bangkok Weaving Mills, Ltd. $2.44 million andMahaguna Sugar Refinery, $2.68 million.

ANNEX 7Page 6

these sub-projects, 12 (67%) were new, and an equal number were joint ventureswith foreign partners. Sugar refining ($3.7 million for two sub-projects),textiles ($3.4 million for five sub-projects), and chemical industries($1.8 million for three sub-projects) have, so far, been the main beneficiaries,sharing over 83% of the total IBRD loan amount committed so far. Other indus-tries which received IBRD funds were: (i) steel products; (ii) plastics;(iii) ceramics; (iv) marble tiles; and (v) electrical appliances. Of the 18sub-projects 13 are export oriented and are estimated to generate (at fullproduction), net incremental exports of Bt. 1.83 billion ($91.5 millionequivalent) per annum. The economic rate of return (ERR), was calculatedfor 13 sub-projects and ranged between 15% to 80% (sugar refining). Theinternal financial rate of return (FRR) calculated for all 18 sub-projects,ranged between 14 to 41% (nylon canvas project). Altogether these 18 sub-projects are expected to create 7,300 new jobs with an average capital in-vestment of Bt. 252,000 (US$12,600 equivalent) per new job.

Foreign Joint Ventures

13. Of the 54 loans approved by IFCT in FY75, 22 loans (41%) totallingBt. 346 million (44% of total amount approved) were made to companies withsome foreign equity investment. IFCT has extended 39 loans (41% of total)to joint ventures in the last two years (FY74-75) aggregating Bt. 780 million(52% of the total amount approved). The extent of foreign shareholding injoint ventures financed by IFCT in FY75 ranged from 3-75%, the predominantsource of foreign investment being Japan (in 10 out of the 22 cases). Outof 22 joint ventures financed by IFCT in FY75, 12 were for new projectsfalling under various industrial categories (of which all were in the CentralRegion). In 17 of these sub-projects the foreign partners had provided tech-nical know-how (11 out of the 12 new joint ventures were recipients of for-eign technical know-how). Moreover, 13 of the non-joint venture loans ap-proved by IFCT (amounting to Bt. 175.0 million) involved foreign technicalcollaboration.

"Late-Comer Operations" I/

14. The extent of IFCT's "late-comer operations" increased in FY75when IFCT approved 29 loans (53.7% of total loans) totalling Bt. 423.9 mil-lion (53.9% of total amount) for projects in which proponents had placedfirm orders for machinery and equipment prior to approaching IFCT. Theratio of such loans in FY74 was 30.9% by number and 48.1% by amount. Aliquidity squeeze on the commercial banks, forcing them to back out oftheir earlier commitments, coupled with the project proponents' anxietyto seek protection -dgainst rapid rises in machinery prices 2/ are the two

1/ Meaning cases where firm orders for machinery were placed and/or con-tracts for construction awarded before the project proponents appliedto IFCT for financing.

2/ The baht is freely convertible and project proponents often placeorders for imported machinery with overdraft financing by commercialbanks.

ANNEX 7Page 7

main reasons explaining this sharp rise. IFCT's preferential interest ratehas also provided an incentive (albeit a limited one), to entrepreneurs whohave already financed projects with overdrafts to approach IFCT at a latestage of project implementation. IFCT fully appreciates that in such casesit loses the advantage of influencing project design and its scope forplaying a meaningful developmental role is limited. Nonetheless, IFCThas, so far, followed an "open-door" policy for "late-comer" customers whichit justifies on the ground that its financing decision is taken purely onthe basis of project's viability and competitiveness of machinery pricesirrespective of the relatively advanced stage of implementation. In thecontext of Thailand's economic and financial environment and prevailingbusiness practices, IFCT's approach seems quite realistic but has the un-fortunate consequence of encouraging project proponents not to consult IFCTin the early stages of project formulation. In fact IFCT's Board of latehas been concerned with the growing number of IFCT's "late-comer operations"and in a meeting held in January 1976 has resolved not to extend its finan-cial assistance for such operations in other than exceptional cases withclear, valid, and special justification. The Board also decided that appli-cations for such operations should first be cleared with the Board prior totheir detailed appraisal. IFCT should not be compelled to go the extremeof completely closing its doors to "late-comers" as it might prove detrimentalto some sound projects worthy of IFCT's support on economic and financialgrounds. It is therefore recommended that IFCT's Board's decision should betreated as a supplement to IFCT's Policy Statement. The Bank should acceptthe resolution as a sufficient indication that, in future, IFCT will not,as a rule, finance such operations. At the time of negotiations for the pro-posed loan, the Bank reaffirmed that IFCT's Board's decision was beingimplemented in letter and in spirit.

B. Equity Investments

15. In comparison to earlier years, particularly FY74 when no new trans-action was approved, IFCT was quite active in the equity investment field inFY75. Four new equity investments totalling Bt. 24.6 million were approved,of which Bt. 7.8 million was disbursed for two projects -- Thai Feed Indus-try Co., Ltd. (Bt. 2.0 million) whicti is a Thai-Japanese Joint ventureand The Mutual Fund Co., Ltd. (Bt. 5.8 million). After these two new invest-ments, IFCT's total equity investment portfolio as of December 31, 1975 stoodat Bt. 8.2 million in four companies as detailed in (Annex 7, Table 5). Asof the same date, undisbursed approvals for equity investments amounted toBt. 31.8 million relating to four companies including two approvals made in1973 (Thai Pulp Co., Ltd., and Thai Castor Oil Co., Ltd.) which has so farfailed to materialize. IFCT is, however, hopeful that these projects willeventually reach the stage of implementation. The sudden spurt in IFCT'sequity investment operations in FY75 notwithstanding, the prospects of IFCTquickly building-up a strong equity portfolio are not too bright. In thoseprojects which meet with IFCT's fairly tough investment criteria, the projectproponents neither need nor welcome IFCT's equity participation. There are

ANNEX 7Page 8

no tangible fiscal incentives in Thailand to encourage wider public partici-pation in industrial ownership. On the other hand participation in very high-risk projects would not be in IFCT's interest. Project proponents also resistIFCT's participation in equity for fear of compulsion for full disclosure oftrue financial results. Under prevailing circumstaces IFCT's equity partici-pation is also unlikely to significantly influence or attract investment byforeign investors. IFCT's management fully recognizes its handicaps indeveloping a sound investment portfolio which satisfactorily maintains thedelicate balance between security and risk. It has adopted a policy of"friendly persuasion" for acquiring equity participation in companies, withgood prospects of success, that approach IFCT for loans. This policy is asound one.

C. Syndication

16. So far, IFCT has syndicated only three of its loans of which one(Thai Pulp Co., Ltd.) still remains uncomitted. No syndication was done inFY74 and FY75. IFCT's role in this field has been very limited principallybecause of: (a) the different basis of decision making employed by collateraloriented commercial banks and finance companies and by IFCT; and (b) the ab-sence of regular long-term lending institutions in Thailand. With the pros-pective increase in IFCT's involvement in the financing of large projects(paragraph 5) it should be able to play a more active role in syndicating itsloans than in the past. A breakthrough in this area would, however, be pos-sible only when commercial banks recognize the merits of IFCT's project ap-praisal approach and delegate this function to IFCT before making commitments.

D. Guarantees

17. As of December 31, 1975 IFCT's outstanding guarantees stood atBt. 59.7 million (Bt. 49.7 million in 1974). These guarantees covered:(i) letters of credit opened for the import of machinery and equipment tobe financed by IFCT; (ii) the repayment of principal and interest on deben-tures; and (iii) payment of import duties. IFCT issues its guarantees onlyto existing clients and restricts them to cover only IFCT financed projects.Guarantees are, therefore, not a very important feature of IFCT's operations;they represent an extension of a financial service to simplify matters forclients.

EAP Projects DepartmentMarch 18, 1976

ANNEXTable i

THAILAND

THE INDUS'TIAL FINANCE CORPORATION OF THAILAND

Sumuary of Loans Operations FY72-75

(Bt. Million)

Up to End Cumulative1971 1972 1973 1974 1975 to End 1975

Loan Approvals (Gross)

Domestic currency 485.98 79.30 38.77 307.93 219.94 1,131.92Special Yen and EBim 89.73 83.07 59.36 235.24 104.21 571.61Foreign currency1' 332.74 109.38 122.36 208.28 493.57 1,266.33

Total Amount 908.45 271.75 220.49 751.45 817.72 2,969.8No. of loans (193) r T5 1T6) W44) 56) 3347

Loan Approvals (Net)

Domestic currency 406.10 52.84 23.46 296.26 216.35 995.01Special Yen andlExim 89.73 83.07 59.36 235.24 104.21 571.61Foreign currency%y 312.58 27.34 28.88 172.35 465.34 1,006.49

Total Amount 80.41 163.25:/ 111.70 703.85 785.90 2,573.11

No. of loans (176) (18) (12) (41) (54) (301)

Loan Commitments

Domestic currency 389.72 67.70 18.10 217.41 256.62 949.55Special Yen and Exim 69.91 93.67 47.82 163.65 156.21 531.26Foreign currency 293.33 40.13 26.40 149.78 312.23 821.87

Total Amount 752.96 201.50 92.32 530.84 725.06 2,302.68No. of loans (172) (19) (11) (34) (54) (290)

Loan Disbursements

Domestic currency 365.09 48.00 32.65 197.52 153.77 797.03Special Yen and Exim 22.00 97.61 45.81 152.33 147.23 464.98Foreign currency 271.31 39.52 17.71 43.25 239.95 611.74

Total Amount 658.40 185.13 96.17 393.10 540.95 1,873.75

Loan Repayments

Domestic currency 148.43 35.79 32.56 24.74 44.59 286.11Special Yen and Exi. -- 8.91 14.38 43.57 66.86Foreign currency 37.76 26.91 40.03 31.97 180.01

Total Amount 186.19 62.70 81.50 82.46 120.13 532.98

Loan Outstandings

Domestic currency 216.66 228.87 228.96 401.74 510.92 510.92Special yen and Exim 22.00 119.61 156.51 294.46 398.12 398.12Foreign currency 233-5E 246.16 223.84 223.75 1431. 43Lt

Total Amount 472.21 594.64 609.31 1.9 1,340.77 1,340.77= =W = WCM=

No. of loans (98) (99) (95) (109) (146) (146)

1/ The par of selling rate of exchange at the time of disbursements has been used for the loanamounts disbursed, and the par rate of e2xchange quoted by the Bank of Tha3and on 12/31/75 hasbeen used for undisbursed amounts.

2/ Includes one loan of Bt. 3.0 million approved in 1972 which was cancelled in 1974 but againrevived in 1975.

EAP Projects DepatmentMarch 1, 1976

THE INDUS1'RIAL FINANCE CORCIATION OF THAILAND

Analysis of Loan Comnitments bv Sizc. Duration antd Geoaraphical Distribution FY73-75(Paoom,t in BIt. Million)

As of December 31, 1972 1973 1974 1975 Cumulative to Dec. 31. 1975

4 a Aount X No.-1

, /. I Amount % No./ Amount ', No. 7. Aount .No.- X Aount X

Size (Bt. in miltion)

llp to 2. 0 87 46 95.27 10 2 18 2.34 2 2 6 3.10 1 7 13 10.67 1 98 34 111.38 5

over 2.0 to 4.0 31 16 91.18 9 3 28 9.74 11 4 12 13.51 2 10 18 33.43 5 48 16 147.86 6Over 4.0 to 6.0 23 12 114.34 12 2 18 10.96 12 6 18 30.32 6 3 6 13.27 2 34 12 168.89 7

Over 6.0 to 1O.0 25 13 191.61 20 1 9 9.20 10 10 29 83.15 16 10 18 83.36 11 46 16 367.32 16

over 10.0 to 20.0 20 10 311.30 33 2 18 21.72 24 5 14 59.95 11 13 24 193.30 27 40 14 586.27 26

Over 10.0 5 3 150.76 16 1 9 38.36 41 7 21 340.81 _64 11 21 391.03 54 24 8 920.96 40

Total 191 100 954.46 100 11 100 92.32 100 34 100 530.84 100 54 100 725.06 100 290 100 2,302.68 100

Avore taie of loans 5.0 8.4 15.6 13.4 7.9Average sise of loans (below Bt. 20 millton) 4.3 5.4 7.0 7.8 5.2

Duration (Years)

Ulp to 2 1 1 2.00 - - - - - 2 6 72.56 14 1 2 1.64 - 4 1 76.20 3Over 2 to 4 33 17 43.66 5 1 9 5.64 6 1 3 2.00 - 2 4 2.66 1 37 13 53.96 2Over 4 to 6 84 44 338.44 35 8 73 37.29 40 10 29 95.61 18 26 48 299.57 41 128 44 770.91 33Over 6 to 8 57 30 394.51 41 2 18 49.39 54 17 50 174.11 13 20 37 315.88 44 96 33 934.15 41Over 8 to 10 14 7 141.13 15 - - - 3 9 154.01 29 5 9 105.31 14 22 8 400.45 18Over 10 2 1 34.66 4 - - - 1 3 _32.35 6 - - - - 3 1 67.01 3

Total 191 100 954.46 100 11 100 92.32 100 34 100 530.84 100 54 100 725.06 100 290 100 2.302.68 100wleighted sverage maturity - by project 6.0 2 __5.7

- bv amount 6.5 5.9 6.6 6.4 6.5

Gcographical Distribution

Greater Bangkok 2/ 103 54 489.76 51 3 27 13.23 15 16 47 311.15 59 28 52 370.07 51 150 52 1,184.21 51Central 43 22 324.20 34 4 37 63.56 69 8 24 158.29 30 16 30 285.86 39 71 24 831.91 36East 8 4 45.14 5 2 18 13.19 14 4 12 24.60 5 5 9 14.41 2 19 7 97.34 4North East 15 8 39.07 4 1 9 1.15 1 4 12 18.70 3 - - - - 20 7 58.92 3North 13 7 39.57 4 1 9 1,19 1 - - - - 1 2 1.76 1 15 5 42.52 2South 9 5 16.72 2 - _ - - 2 5 18.10 1 4 7 52.96 7 15 5 87.78 4

Total 191 100 954.46 100 11 100 92,32 100 34 100 530.84 100 54 100 725.06 100 290 100 2,302.68 100

I Number of loans.2' Greater BAngkok inclu.des Bangkok, Thonburi, Nontaburi, and Saautprakarn

EAP Projects DepartmentMarch 1, 1976

TRIAILAOID

THE INDUSTRIAL FINANCE, CORPORATION OE THAILAND

Loan Co-citmnts and Outstanding Loan by Industry as at December 31, 1975

(A.-suto in Naht Million)

I/ 2/loans Coeitted Loan utstanding_

Cossaltive Des. 31, 1972 1973 1974 1975 Csslative Den. 371. 1975 As at D.c. 31. D975

lyon of Industry lA~~~~~~N,. I Assent o. 7 Am-unt 1 No. 7. Amout % No. 7. Aeouet 7 No. 7. eAn-t 7. No. 7. o.unt 7.

.Consumer Geeds Iodustries

Food 15 8 122.64 13 3 27 14.34 16 10 30 151.18 28 7 13 43.62 6 35 12 331.78 14 25 17 247.27 18Tebaes 9 5 19.11 2 - - - - - - - - - - - -- 9 3 19.11 1 2 1 3.15 0Textiles 30 16 54.33 6 1 9 4.97 5 5 14 87.14 16 7 13 128.60 18 43 15 275.04 12 17 12 201.31 15Furniture and fietuces 1 0 4.25 0 -- -- -- -- -- -- -- -- 2 4 19.43 2 3 1 22.68 1 2 1 15.65 1Feinting and pebliahing 1 0 6.64 1L -- - -- _- _--. - _- _-_ 1 2 12.31 2 2 1 19.15 _1 2 1. 8.43 1

Sub-total 56 29 206.97 22 4 36 19.31 21 15 44 238.32 44 17 32 203.16 28 92 32 667.76 29 49 32 475.81 35

II. Intacadiate Geeds Indastrien

Weed and cork 51 6 49.40 5 1 9 3.76 4 1 3 10.53 2 3 6 0.70 1 16 6 71.91 3 10 7 38,16 3Paper and paper products 6 3 38.06 4 - - -- - -- - -- 1 2 8.22 1 7 2 46.28 2 3 2 18.23 1Rubber sod rsbber predeets 5 3 9.11 1 - - - - - - - -- 1 2 120 0 6 2 10.31 1 3 2 2.36 0Chasicals 22 12 68.651 7 1 9 38.36 41 2 6 96.08 18 7 12 120.45 17 32 11 323.54 14 13 9 170.56 13Roc-aetallin mineral 18 10 171.33 18 3 27 191.21 20 2 6 46.21 9 6 ii 142.14 20 29 I0~ 377.89 16 21 14 250.41 19Petroleum prodssts 1 8 0.80 0 -- -- - - 1 3 4.46 1 1 2 3.49 8 3 1 8.75 0 2 1 6.88 1

Sub-total 63 34 332.35 35 1 45 59.65 65 6 18 157.28 3D 19 35 284.20 39 93 32 638.68 36 52 33 486.62 37

Basic aet.ls 4 2 27.27 3 - -- - -- - - - - - - - -- 4 1 27.27 1 - -- -Metal predoete 12 6 97.54 10 2 19 13.16 14 3 9 59.14 11 6 11 43.24 6 23 8 213.08 9 12 8 126.22 10Machinery except eleotri-l 1 mahinery 2 1 4.24 0 - -- - -- - - - - - - - -- 2 1 4.24 0 ---- -

Electrical machiney 14 7 40.19 4 - -- - -- 2 6 22.12 4 3 6 60.71 8 19 7 123.02 5 6 5 59.51 4Transport eqsipne.nt 5 3 28.31 3 ---L- - 3 3.70 1 1 2 25.00 4 7 2_ 57.01 3 2 1 26.86 2

Sub-total 37 19 197.55 20 2 19 13.16 14 6 18 84.96 16 10 19 128.95 18 55 19 424.62 18 20 14 214.59 16

IV. His...llneeu. ledentriss

Ocean and cosalsatrfishing 1 0 13,66 1 - -- - -- 1 3 2.00 0 1 2 10.00 2 3 i 25.66 1 2 1 16.55 1Liveatecbhredi.g -- - -- - -- - - - 1 3 8.10 2 1 2 1.76 I 2 1 9.86 1 1 1 5.14 1lIntel 10 5 66.06 7 - -- - -- 1 3 4.70 1 3 5 45.55 6 14 5 116.31 5 9 6 60.06 4Transport etc. 12 7 91.53 Sf - - - - - - - - 1 2 34.75 5 13 5 126.29 5 7 5 43.67 3Co-strurtin 1 0 6.88 1 - -- - -- - -- - -- - - - -- 1 0 6.88 0 ------

Scene quarrying, clay & sand pit mining 2 1 9.75 1 - -- - -- 1 3 10.00 2 - --- -- 3 1 19.75 1 2 1 12.81 1MinZ n 6 3 9.55 1I - - - - - - - - - - - - 6 2 9.55 1 ------

Electicty, gas and stea - - - - - - - - 1 3 54.82 3 - --- -- 1 0 14.82 1 1 1 19.96 1Miscllanas -anfactaring 3 2 15.16 2 - -- - -- 2 5 10.66 2 2 3 16.69 2 7 2 4.0 2 4 4 14.56 1

Sub-total ~~~ ~~~ ~~35 18 212.59 23 - -- - -- 7 20 50.28 10 8 _14 108.75 15 50 17 371.62 17 26 19 163.75 12

Total 1 f_12LIt.g a _i. _ 100 92.32 100 34 00 530.84 100 4,,j 725.06 100 290-/ 108 2302.69 0 1641 8 -1407 -0

1/ Fsr foreign curree..y lon,par rates or se'lling exchange rates oLhe date of dihorsemeci have been used for co-v-sio into aht.2/ Par exchange rates en aveage buying rates qooted b y the Bank of Thailand en Dece.mber 31, 1975 for convrsion of foreige curreny

loI..an to Bsht.

3/ No. of te-as.

EAP Pro jctn Denarts..ntMarch 2, 1976

INDUSTRIAL PINANCE CORPORATION OF TOiALAND

SubP-rojects Approved Under TI.. con No. 992-T' as of Pebruary 29, 1976

Total INND Rates of jOsroOtOO Iers.oal1 CT1/ Foreign ProjecteCost OFOT's Financing Floancing Rgettrn Export Salo1-/ E' ploy not Total Cost-/ isancing

(Bt. 000'a) (Bt. 000's)

Ooh-Frolerto lodoatry Location Now/Eop. Oenornhir Bt. 000's Local roone Total US$ 000's Econe. Fin. Bt. 000's No. John m 3. OOO's (B.OOO's)

1, Thai Industrial Oases, Ltd. (A) Che=icals Gr. Boogkok Ep. AUS B5% 17,999 3,669 11,329 14,998 503.7 52% 20% - 36 500 417

2. Bangkok Weaving MiIU, Ltd. (A) Tentiles Gr. Bangkok Ep. PICA/JAP 40% 351,513 - 50,000 50,000 2,438.6 3 3% 26b 452,000 2,514 140 20

3 ahag.n. sugra gefinery (A) Sognr Central Region New - 621,054 - 55,000 55,000 2,677.9 56% 15% 528,000 438 1,418 126

4. Thai Visylos Canvas Idoatrien (B) Tootile- Or. Bangkok Hop. - 12,255 842 8,938 9,780 49.0 - 41% 20,500 85 144 115

5, Rajabhri Industry Co=pany, Ltd.(A) s0g0r Gr. Bangkok Nev - 289,059 - 25,188 25,188 980.0 807. 19% 310,000 803 360 31

6. Boos Chuoay' Fasctory,Ltd. (A) Teatilos Or. aBegkok Elp. - 16,255 - 20,S0O 11,080 550.0 50% 30% - ll 1,478 l,U07

7, Citric Acid Industry, Co Ltd. (A) Chetriols Gr. Bangkok Hew TwN 277 49,624 - 20,000 50.000 978.0 24% 19% 30,055 135 366 148

8. Thai Kor-bo Co=pany, Ltd. (B) Cextilos Ceotr-l Region Efp. JAP 49% 268,422 35,000 5,000 40,000 244.5 21% 14% 186,600 1,107 242 36

9. Shon Lee Plastics (B) plastic- Gr. Bangkok Now TWN 47% 12,200 1,900 3,100 5,000 157.1 - 33% 37,500 260 47 19

10, Hood Y1i Sskoro Hotel Co. (B) Hotel Souther geg. Now - 36,500 5,000 7,000 12,000 338.7 15% 15% - 108 338 11111. Haad Yai Invest..ent Co. (B) HoCel Sorther- Reg. New - 38,000 5,500 2,000 7,500 53.7 15% 15% - 103 369 73

12. Thai S00. Lee (B) Txtiles Gr. Boogkok Now - 28,670 13,689 1,881 15,570 89.8 27% 15% 51,300 411 70 38

13. A.7ia Pottery Co. (B) Cetraics Gr. Bangkok New TWN 46% 18,700 3,125 5,875 9,000 291.0 24% 197 18,600 145 129 62

14. Bangkok Marble Co. harble Tile Gr. Bangkok New CAM/HK 40% 9,493 - 3,982 3,982 198.5 - 21% 9,200 30 316 133

15. Pathana Casting Conpony, Ltd. (B) Steel Frodcrts Gr. Bangkok Now TWN 10% 7,225 1,025 2,475 3,500 116.0 - 35% - 66 109 53

16. Sooth Sion Chsnicsls Works, Chemicals Gr. Bangkok New 25,800 6,730 6,270 13,000 304.3 18% 14% 11,670 43 600 302Co. Ltd. (B)

17, Geererl Iron Copay, Ltd. (o) steel Frodoct Ceotral giSr New N %d170SING 51 17,830 5,140 2,360 7,500 220.4 _ 19% 41,600 188 95 4017. Ge-.1 Ir.- C-p.Oy, Ltd. (B) ~~~~HR 20%

1H, Hanyo Ontoersal Co. Ltd. (B) Electrlc G-. Bo1skok Eop. JAP 48.5% 36_648 22.338 7.677 30,015 376.0 35% 06% 132,90U 8772 42 34Appliac-ee US 0.5%_

Total 1.837.046 103.95 229.155 333,113 0562 1,B29.929355 2562 453

Unco-ittod Balance

1/ Two sobprojects, Thai Coe-teeria1 Lines Co. ($1.2 nillio-) aod Udo- Woodvork Prod-rtn. Ltd. (1337,0o) veto opprovp d bht s-hsbqoontly withdr-wn

2/ BaSed on constant prlnrot prices.

3/ In addition tn fixed cost of physical a-sets, project cost also inclodec net working capital elemsnt which on as average acco fnta for 10-15% of the total cost.

RAP P-ojacot DlparMe-tsarch 1, 1976

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Details of Equity Investments Approved as of December 31, 1975(Et in '000)

% of Equity -------- IFCT's Investment-----------------Year of Line of Paid-in Foreign Amount 7 of Paid- Actual Dist/ Book/Market 1/ 1

S. No. Name of Company Approval Business Capital Participation Approved in Capital bursement- Value FRR - ERR - Operational Status and Performance

3/1. The Metal Box Co., Ltd. 1969 Metal 28,000 _ 250 0.9°% 250 220 (Not calculated) Company's operations are profitable

containers and it paid a 97% dividend in 1975.4/

2. The Investment 1972 and Publishing 678 16% (Germany) 175 25.87. 175 200 (Not calculated) After suffering losses for many con-Publication Co., Ltd. 1973 secutive years, the company earned a

modest profit in 1975. Future prospectsare reasonably good.

51 6/3. Thai Pulp Co., Ltd. 1973 Pulp and 260,000 207. (USA) 10,000 3.8% - _ (Under revision) Project implementation has not yet begun.

Paper Project cost has considerably changedand therefore the project is being re-appraised by IFCT.

4. Thai Castor Oil Co., 1973 Castor oil 20,000- 30% (Japan) 5,000 25% - - 24=h - Start of project implementation awaiting

finalization of foreign joint venture

5. Thai Feed Industry Co., 1975 Animal 12,000 33% (Japan) 2,000 16.7% 2,000 2,00O 23% - agreement.Ltd. 5/ feed Project is expected to start regular

commercial production from March 1976.

7/ 7/ 7/ 4/6. The Mutual Fund Co., 1975 Investments 20,000 11,600 58%- 5,800 5,800- (Not calculated) The company is at present in the initial

Ltd. formation stage and expected to becomeoperative in the second half of 1976.

7. Siam Chemical S/ 1975 Textile 15,000 49% (Japan) 1,000 6.7% - - 22% 25% The project started cosamercial operationsIndustries Co., Ltd.- resins recently.

8. Thai Glass Industries 1975 Glass 100,000 45% (Australia) 10.000 10% - - 21% 39% The company's existing operations areCo., Ltd. containers profitable. IFCT's investment will finance

part of the expansion cost.Total 455.678 40_025 8.8%o 8,225 ~8220

1/ Calculated for IFCT financed projects at the time the investment decisions were made by IFCT.2/ Also present investment.3/ Market value.4/ Book value5/ Also IFCT borrowers.6/ Represents authorized capital. The paid-in capital has not yet been finally determined.7/ Paid-in capital is planned to be raised to Bt 40.0 million and in the additional capital IFC

is likely to participate to the extent of Bt 6.0 million or 15%. After total subscribed capitalis paid-in the percentage of IFCT's shareholding will decline from 58% to 29%.

EAP Projects DepartmentFebruary 26, 1976

ANNEX 8Page 1

THAILAND

INDUSTRIAL FINANCE CORPORTION OF THAILAND

Financial Position and Performance

Financial Position

1. Assets - IFCT's audited balance sheets as of December 31, 1971through 1974 and the unaudited balance sheet as of December 31, 1975, appear

in Annex 8, Table 1. Over this four-year period, total assets increased by

154% from Bt 582 million as of December 31, 1971 to Bt 1,478 million as

of December 31, 1975. The structure of IFCT's assets over the years 1973

through 1975 is detailed below:

IFCT's Assets Structure(Bt Million)

As of December 31

1973 1974 1975Amount % Amount % Amount %

Current Assets /a 143.8 19 135.2 13 90.3 6

Year to year growth +37% -6% -33%

(of which deposits) (118.5) (15) (85.9) (8) (14.7) (1)

(year to year growth) +59% -28% -83%

Long-term Loans 601.1 78 922.3 85 1,342.6 91

Year to year growth +3% +53% +46%

Equity Investments 0.3 - 0.4 - 8.2 1

Fixed Assets 25.0 3 18.4 2 37.1 2

Total Assets 770.2 100 1,076.3 100 1,478.2 100

Year to year growth +10% +40% +37%

/a Excluding current maturities of long-term loans.

ANNEX 8Page 2

While the highest growth rates in total assets were recorded in 1974 and

1975 with 40% and 37% respectively, current assets during these periodshave been decreasing both in relative terms (from 19% of total assets in

1973 to 6% in 1975) and in absolute terms (from Bt 144 million to Bt 90million). Two factors have contributed to such dramatic change in the

structure of IFCT's assets. First, there was an 88% reduction (from Bt119 million to Bt 15 million) in the size of bank deposits (representingtemporary deposits of proceeds from its equity issue in 1973) - the main

component of current assets till 1974 - which reflected their utilizationagainst IFCT's long term local currency disbursements. Secondly, IFCT'sloan portfolio grew very rapidly from 78% of total assets in 1973 to 91%

in 1975. Over the four year period ended December 31, 1975, IFCT's loanportfolio increased by 187% from Elt 464 million to Bt 1,333 million,with growth rates of 53% and 46% respectively in 1974 and 1975; foreigncurrency loans which accounted for 54% of the loan portfolio in 1971 had

risen to 62% as of December 31, 1975. 1/ The equity portfolio has in-creased from Bt 0.3 million in 1971 to ]Bt 8.2 million in 1975 (0.6% oftotal assets) following the higher rate of equity investment approvals in

this year and IFCT's subsequent disbursements.

2. Liabilities and Equity - The following table gives a breakdownof IFCT's liability structure for the years 1973 through 1975:

IFCT's Liability Structure(Bt million)

As of December 31 1973 1974 1975Amount % Amount % Amount %

Current Liabilities /a 31.2 4 52.9 5 73.1 5

Year to year growth 20% 70% 38%

Long-term Debt 533.8 69 800.6 74 1,151.8 78

Year to year growth 0% 50% 44%

Equity 205.2 97 222.8 21 253.3 17

Year to year growth 42% 9% 14%

Total Liabilities &Equity 770.2 100 1,076.4 100 1,478.2 100

Year to year growth 10% 40% 37%

/a Excluding current maturities of long-term debt.

1/ Including under foreign currency loans, Bt 48 million advanced from

local currency resources.

ANNEX 8Page 3

The rapid growth of IFCT's portfolio in the two-year period ended December1975 was essentially financed by an increase in debt as is reflected inthe total debt 1/ equity ratio which has risen from 2.7:1 in 1973 to 4.9:1in 1975. While IFCT's total debts grew by 2% only in 1973, the increasewas 51% in 1974 and 43% in 1975; over the four-year period December 1971to December 1975, total debts increased by 172% from Bt 461 million to Bt1,225 million. IFCT's long term debt increased by 171% over the sameperiod from Bt 425 million to Bt 1,152 million but the highest rates ofgrowth were recorded in 1974 and in 1975 with 50% and 44% respectively.IFCT's equity, on the other hand, increased by 93% from Bt 131 million asof December 31, 1971 to Bt 253 million as of December 31, 1975. Asidefrom a 1973 share capital increase of Bt 50 million such growth of equitywas achieved through ploughed back profits and reserves build up.

3. Financial Structure. The rapid increase in IFCT's long term debt,reflecting the recent growth in its loan portfolio has caused IFCT's long termdebt 2/ equity ratio to rise from 2.9:1 in 1973 to 4.8:1 by December 31, 1975;IFCT's financial structure, however, remains sound. The debt/equity ratio iswell within the limitations imposed by IFCT's various creditors (including theBank), as well as IFCT's own policy statement which fix the maximum ratio at6:1. Based on IFCT's projected requirements of funds for the period 1976-1980the debt/equity limit would be exceeded by the third quarter of 1976 if IFCT'sshare capital were to remain at the present level of Bt 150 million (unchangedsince 1973). Accordingly, a share capital increase of Bt 100 million in thecurrent year 1976 appears totally warranted; this increase would maintain thedebt/equity ratio within the presently authorized limit of 6:1 throughout theprojection period (until 1980).

4. As mentioned earlier, IFCT's current assets 3/ have decreased by33% in 1975 as compared to their 1974 level (despite a 37% increase intotal assets) owing to an 83% drop in the volume of bank deposits. Currentliabilities during the same period increased by 38% thus bringing thecurrent ratio down from 2.6:1 in 1974 to 1.3:1 in 1973. IFCT's currentratio for the years 1971 through 1973 had exceeded 4:1 and reached 4.6:1in 1973 principally because of a share capital increase (held in short-term deposits) in that year. Taking current maturities of long-term debtand long-term borrowings into account the current ratio decreased lessmarkedly from 2.0:1 in 1974 to 1.6:1 in 1975 but net current assets stoodat Bt 117 million against undisbursed local currency commitments of Bt 184

1/ Excluding contingent liabilities but including current liabilities..

2/ Including contingent liabilities but excluding current liabilities.

3/ Excluding current maturities of long-term loans.

ANNEX 8

Page 4

million. This tight liquidity position at the end of 1975, however, eased upat the beginning of 1976 with the influx of IFCT's Bt 150 million debentureissue.

5. Against a par value of Bt: 1,000 the book value of IFCT's shareswas Bt 1,689 as of December 31, 1975. IFCT's shares were last traded(privately) at Bt. 1,167 per share in December 1975 and at Bt 1,600 inJanuary 1976.

Financial Performance

6. Profitability - IFCT's income statements for the years 1971throub. 1975 1/ are summarized in Annex 8, Table 2. Principal highlightsare summarized below:

(Amount in Baht Millions)Years ended December 31 1971 1972 1973 1974 1975

Gross income 49.1 60.2 66.5 86.0 131.7

Financial expenses 22.0 28.4 33.6 38.6 66.5

Gross margin 27.1 31.8 32.9 47.4 65.2

Administrative expenses &provision for bad debts 14.0 10.1 11.6 20.5 26.9

Net Income 13.1 21.7 21.3 26.9 38.3

(year to year growth) 21% 66% -2% 26% 42%

Gross income as % of averagetotal assets 9.6 9.4 9.1 9.3 10.3

Net income as % of averagetotal assets 2.6 3.4 2.9 2.9 3.0

Net income as % of averageequity 12.7 15.8 12.2 12.5 16.1

IFCT's net income over the past five years almost tripled from Bt 13 millionto Bt 38 million and grew by 26% and 42% respectively in 1974 and 1975 againsta small decline in 1973. The rapid increase in net income is primarily due

1/ 1975 accounts are unaudited.

ANNEX 8Page 5

to the growth in IFCT's loan portfolio; in fact, net income expressedin percentage of average total assets has improved only marginally.Increased profits and improved leverage since 1973 have brought thereturn on average equity from 12.2% in 1973 to 16.1% in 1975. IFCThas progressively increased its dividends from a 9% dividend (on parvalue of share capital) to 9.5% in 1974 and 10% in 1975 but owingto the growing level of profits, the payout ratio decreased from anhistorical level of about 50% to 39% in 1975.

7. Income - IFCT's gross income grew by 168% from Bt 49 millionin 1971 to Bt 132 million in 1975. Growth rates of 29% and 53% wererecorded in the years 1974 and 1975 respectively. As a percentage ofaverage total assets a sizeable improvement was recorded from 9.1% in1973 to 10.3% in 1975. A more detailed breakdown of gross income forthe period 1971 through 1975 appears below:

1971 1972 1973 1974 1975

Income from loans: 38,192 52,651 58,434 69,760 126,130

(year to year growth) - +38% +11% +19% +81%

Interest earned (34,939) (49,766) (55,563) (64,600) (117,000)

(year to year growth) - +42% +12% +16% +81%

Penalties, fees, etc. (3,253) (2,885) (2,871) (5,160) (9,130)

(year to year growth) - (-11%) (-1%) +80% +77%

Interest on deposits 10,708 7,492 8,052 16,114 5,413

Others 260 69 40 157 142

Total gross income: 49,160 60,212 66,526 86,032 131,685

(year to year growth) 29% 22% 10% 29% 53%

As % of average loan portfolio

Gross income 11.6 11.3 11.1 11.3 11.6

Total income from loans 9.0 9.9 9.7 9.1 11.1

Interest income 8.2 9.4 9.2 8.4 10.3

Penalties 0.8 0.5 0.5 0.7 0.8

ANNEX 8Page 6

Income from an expanding loan portfolio, which represented as much as96% of IFCT's gross income in 1975, 1/ is the cause of the unprecedentedgrowth in IFCT's gross and net income. Between 1971 and 1975 incomefrom loans has multiplied by a factor of 3.3 from Bt 38 million to Bt126 million with an 81% growth in 1975. Such growth is due to two mainfactors: firstly the 53% and 46% increase in IFCT's outstanding loanportfolio in 1974 and 1975 respectively, secondly the impact in early1975 of the decision taken in 1974 to increase the lending rate on foreigncurrency loans from 9.5% to 10.5% p.a. following the agreement withGovernment on IFCT's foreign exchange risk coverage. From 1972 to 1974IFCT's interest income on its average loan portfolio had been decreasingowing to a relatively higher disbursement rate of foreign currency lend-ing at 9.5% vis-a-vis domestic currency lending at 10.5%. Income fromfees and penalities has increased by 218% in 1975 from its 1973 leveland from 0.5% of the average loan portfolio to 0.8% thus reflectinga slight deterioration in the quality of IFCT's portfolio. Overall, inspite of an increase in the average cost of term debt, the increase inthe average income from loans in 19375 has improved the interest spreadfrom 3.3% in 1974 to 4.7% in 1975.

8. Expenses - IFCT's total expenses have grown by 159% between1971 and 1975 from Bt 36 million to Bt 93 million, a lower growth ratethan that of gross income, hence the overall improvement in IFCT's pro-fitability. Administrative expenses have increased by 143% during thisperiod but remained at 1.6% of average total assets from 1972 through1974 and marginally decreased to 1.5% in 1975. Financial expenses (in-cluding the provisions made under the Foreign Exchange Risk Agreement)have increased to 5.2% of average total assets in 1975 against a level of4.6% in 1973 and a dip to 4.2% in 1974 following IFCT's drawdown of theentire Bt 116 million of the PL 48CI funds made available by Governmentat 2.25% p.a only. The 1975 rise to 5.2% was conversely due to theIFCT's drawdown on the Bank of Thailand, Japan Exim Bank and IBRD linesof credit which cost respectively 8%, 5.25% and 7.5% per annum. Pro-visions for doubtful loans are not made by IFCT as a percentage of itsloan portfolio but are determined on the basis of a case-by-case review,taking into account the discounted value of collaterals available. Theallocations made in 1974 and 1975 were negligible. Other provisionsmade in accordance with the terms of the Danish Loan and of the PL 480Government Loan represented a mere 0.6% of average total assets. Suchprovisions are effectively required under these agreements as a means tolimit IFCT's distribution of income to its shareholders and thereby in-crease its equity base. As such they represent an appropriation of incomerather than an expense. IFCT's auditors were requested to look into thematter and have made the necessary changes in the frame of the 1975 audit.

1/ Against 81% only in 1974 when 18% of IFCT's gross income originatedfrom deposits, owing to (a) a higher level of inter-bank depositsand (b) a sharp increase in the inter-bank rate.

ANNEX 8Page 7

9. Foreign Exchange Risk - Until 1974 IFCT's lending in foreigncurrency had been impeded by the borrowers' reluctance to carry theforeign exchange risk when Baht resources were freely convertible. InMarch 1974, a Foreign Exchange Risk Agreement was signed between theMinistry of Finance and IFCT whereby, without being totally relievedof possible losses as a result of foreign currency realignments, IFCTcould cover such losses without significant financial consequences. Underthe Agreement IFCT must build up a provision equivalent to 1.25% ofthat portion of its outstanding foreign debt incurred after the Agreement.This 1.25% provision consists of (i) a 0.25% fee to be paid by IFCT intoa "Claim Account" in the name of the Ministry of Finance which althoughbelonging to Government remains with IFCT and on which IFCT must payinterest at the rate of 6% per annum; and (ii) a 1% provision for build-ing up a Foreign Exchange Fund. Losses due to a realignment of currenciesare chargeable, first against the Foreign Exchange Fund (up to 75% of thebalance in the fund) and the balance, if any, against the Claim Account.The Ministry of Finance undertakes to cover all losses in excess of thecharges so made. Such advances are free of interest and are repayable byIFCT at the rate of only Bt 1 million per annum. The interest rate onforeign currency loans which was fixed at 9.5% p.a. with the borrowerassuming the foreign exchange risk was raised to 10.5% (the lending rateapplicable to local currency loans), following the effectiveness of theForeign Exchange Risk Agreement.

10. Audit - IFC has retained the services of SGV-Na Thalang & Co. toaudit its accounts since 1972. Their reports have satisfactorily met theBank's long-term audit report requirements. IFCT's accounts have alwaysbeen certified without qualification.

ANNEX hTable 1

IlWST1QL FDAC1E CORTIOIN OF TH&IIAIW

Svnaorized lance Set o Dp eer 31. 1971-1975

( Bt . thousand)

As of Daceabw 31 1971 12lk 2119( -4udit.d----- ------ ) (Unsudited)

ASST

Current AssetsCash 3,496 2,297 1,711 6,100 6,1l4Deposits 89,150 74,500 118,530 85,913 14,748Gorvnunt securitie 1,160 1,16o 1,160 1,120 1,120Notes receivable-rediccount - - 1,360 13,776 18,510Accrid inose 17,234 26,137 19,529 26,696 45,955Othe receivables 522 5. 1.480 1.580 1,838

111,562 104,68 143,770 135,185 90,275Lon-To LO DC

6Dome_tic cwrr wy 216,655 228,871 228,961 401,738 559,229-Fareign currmcy 2558L9 ,6.7Z 30 518.213 781.51a

Total portfolio 172,213 594,Z42 6,309 9i9,951 1,340,770Less: provii sm for doubtful loans ( (82) 0) 3 (13) (.709

Loanm not of provisions 4,13 586,4L2 1,0LO DC n t of protidon - ,013 58w2 60~~~1,109 912,758 1,3-33,061-

Hire-purchase contract and agreement to sell - - - 14,550 14,550Less: unrealized profit -- 9 57h

Eauitr invests-ts 250 250 350 425 8,225Property and equipment (net) 6,181 6,546 25,014 18,393 37,058

&Ltfi.AA&qt[ 2Qa_ 697.886 770.243 1.076.115 l.h78 193

LIAELITITS ANID QUITr

Currnt LiabilitiecAccrued charges on borrowings 14,349 14,103 15,691 19,709 26,006Sundry creditors 3,019 3,036 3,620 4,545 10,128HOF claim accant ;/ - - - 35 884Intert refundable to borrower V - 9 153 442 773Counterpart fund 1fN III J/ - - - - 267Proposed dividend 8,249 9,000 10,368 4J.,250 14,000Notes payable rediscount - - 1.360 13.776 16.13

Rser, for Foria ExbAe ik - - - 140 3,306ion=T-r DobtFordlgn aiirraw:

KfN 66,385 54,450 47,925 45,867 63,319IBIID 541 - - - 159,933ADB 160,258 178,291 153,356 4,549 10 ,Danish ivramont credit 1,631 5,261 1 ,15 3JapanKl Bank - -6 792 2477

subtotal 227,18 234,372 2 W;3 279,723 570,431

Local ourr_w:Special Tan 21,809 118,672 154,394 201,213 166,155Bank of Thailand long-twa credit - - - 32,440 130,711Government loans 81,051 79,600 77,880 192,306 189,457US-AID 15,000 15,000 15,000 15,000 15,000Debentures 80.000 so 8.0 W. so,Subtotal 7 NO 2 M 50II

42,C 521JUC B30 0.68 1,151754

Paid-in capital 100,000 100,000 150,000 150,000 150eCe6Retained earning skppropriated to reserves 31,040 43,741 54,541 67,111 90,412Unappropriated 305 338 408 441 477Reserves required by loan agrements i/ - 286 5.2o3 12.a3

Total not worth 131,345 I441I4 2-05235 2455 253,332Total Liabilities and Ecuitv 582.006 697.886 1.076.334 1.478.19

Contingent liabilities (guarantees) 74,105 59,137 67,444 49,681 59,723Curront ratio I/ 4.4 4.0 4.6 2.6(2.0) 1.3(1.6)L _-ta dabV7Pity 3. 4.1 2.9 3.8 4.Rlos-vms od provisdon as S ofPortfolio (including guaratee) 7.2% 8.0% 9.4% 8.2% 7J.%

As per the Foreign lEchange lisk tgremt IFCT must pW into a Claiz Account' in the name of the Ministry ofFinance 1/14 p.a. of its outstanding foreign debt./ Applicable to a fishery project financed from the proceeds of the Danish Loan.

J The proceeds of this fud can be used by IFCT for conducting feaibility studies.Under thb Foreign Echange Risk Agremnt OUT sets aside a provision for Ezchange Risk of 1S p.s. ofits outstanding foreign debt.A Is per agreement under the Danish Loan end the Govaroment Loan PL 480.Includ e Bt 48.3 millien loca 1urrency diebusrmnts for omitmesus in foreign ourrenoy, for whicheibwamestnt was pading.

/ Figures in brackets take into acocnt current maturities of I7CT's long-tam lons and borrowings.

2UP Projects DeparteontKarch 1, 1976

ANNEx 8Table 2

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Summarized Income Statements for 1971 Through 1975(Bt thousand)

1971 1972 1973 1974 1975(- ------- Audited ------------) (Unaudited)

Income

Interest on loans 38,192 52,651 58,434 69,761 126,130Interest on temporary investments and deposits 10,708 7,492 8,052 16,114 5,413Others 260 69 40 157 142

Total income 49,160 60,212 66,526 86,032 131,685

Expenses

Interest on indebtedness 22,004 28,392 33,622 38,453 62,483Administrative and general 7,509 9,607 10,922 14,475 18,218Depreciation 324 430 523 606 613Loss on foreign exchange - - 140 263 -Foreign exchange risk fund and fee - - - 175 4,015Provision for foreign currency revaluations - 36 59 - -Provision for doubtful loans 6,200 - - - 516Provision for refund to borrower 1/ - - - 289 331Provision required by loan agreements 2/ - - - 4.918 7,240

Total expenses 36,037 38,465 45,266 59,179 93,416

Net income 13.123 21,747 21,260 26,853 38,269

Profit (loss) on sale of assets 41 3 (21) - 69Retained earnings brought forward 250 305 338 408 441

Total 13,414 22,055 21,577 27,261 38,779

Profit Allocation

Dividend 8,249 9,017 10,369 14,250 15,000General reserve 900 6,100 4,400 4,470 11,800Legal reserve 660 1,100 1,100 1,350 1,917Reserve for possible loan losses 3,300 5,500 5,300 6,750 9)585Retained earnings carried forward 305 338 408 441 477

Total 13,414 22,055 21,577 27,261 38,779

Percentage of Average Total Assets

1. Gross income 9.6 9.4 9.1 9.3 10.32. Financial expenses 3/ 4.3 4.4 4.6 4.2 5.23. Gross spread (1-2) 5.3 5.0 4.5 5.1 5.14. Administrative expenses 1.5 1.6 1.6 1.6 1.55. Provisions 1.2 0 0 08.6 0.66. Net profit 2.6 3.4 2.9 2.9 3.0

Profit as % of:

Average equity 12.7 15.8 12.2 12.5 16.1Share capital 13.1 21.7 14.2 17.9 25.5

Other Ratios

Income from loans as % of average portfolio 9.0 9.9 9.7 9.1 11.1Cost of debt as % of average debt 3/ 5.7 6.0 6.3 5.8 6.4Interest spread 3.3 3.9 3.4 3.3 4.7

1/ As per agreement under Danish Loan2/ As per agreement under Danish Loan and Government Loan PL4803/ Inclusive of Foreign Exchange risk fund and fee

EAP Projeot. Dertmntw. eh 1. 1976

ANNEX 9Page 1

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Quality of Portfolio

A. Loan Portfolio

1. IFCT's loan portfolio has now matured and is quite sound. Ananalysis of loan portfolio status as of December 31, 1975 is provided inAnnex 9, Table 1. Of the 301 projects for which IFCT had approved loanstotalling Bt. 2.57 billion up to December 31, 1975, 249 (or 83%) with loanstotalling Bt. 1.77 billion (or 69% of the amount) were fully operational.124 loans (41%) amounting to Bt. 315.1 million (12% of the total approved)had been repaid. As of December 31, 1975, IFCT's outstanding loan port-folio of Bt. 1.34 billion embraced 120 client companies of which 38, with out-standing loans amounting to Bt. 386.0 million (28.8% of total portfolio),were operating profitably and servicing IFCT loans regularly. Thirty-nineprojects (32.5% of total) accounting for 44.2% of the total amount outstand-ing were either under construction or in the pre-operational stage. Thirty-six companies (30% of total), with outstanding IFCT loans totalling Bt. 319.4million (23.8% of total), were operating at a loss; they did not confront anyparticular technical and/or financial problems and were making regular pay-ments to IFCT. Altogether over 94% of the portfolio by number and 97% byamount was in a satisfactory condition.

2. As of December 31, 1975, 18 client companies (or 15.0% of total)were in arrears for a total amount of Bt. 27.6 million. The principal over-due totalled Bt. 12.6 million or only 0.9% of the total loan portfolio. Theoutstanding principal affected by arrears amounted to Bt. 149.2 million or11% of the total loan portfolio. A historical analysis of loans in arrearsis presented in Annex 9, Table 2. Compared to FY74, both loan arrears andloans affected by arrears have doubled but are still quite low. Totalamounts overdue increased from Bt. 10.0 million (1.1% of total portfolio)to Bt. 27.6 million (2.0% of total portfolio) while principal affected byarrears increased from Bt 47.3 miLlion (6% of total portfolio) to Bt. 149.2million (11% of total portfolio).

3. The increase in loan arrears is attributable to a generally down-ward economic trend rather than being a reflection of structural deteriora-tion in the quality of IFCT's portfolio. In the past two years IFCT's loanportfolio has expanded at a rate of over 120% (from Bt. 609.3 million as ofend of FY73 to Bt. 1.34 billion as of the end of FY75). At the same time,the part of the loan portfolio in the repayment stage increased at a rateof 128% (from Bt. 283.7 million to Bt. 647.8 million). An expansion inloan portfolio at this speed makes some increase in arrears almostinevitable.

ANNEX 9Page 2

4. Of the 18 defaulting clients 13 1/ were new entrants on the defaultlist in FY75. These 13 projects account for 30% of total arrears and about64% of loans affected by arrears. Accounts overdue for more than one yearrelate principally to two projects which are in default for Bt. 15.1 million,i.e. about 78% of accounts more than one year overdue and 55% of total arrears.One of them is a gypsum board project, a pioneering venture in Thailand,facing a classic problem of slow market acceptability. In IFCT's judgementthe project is essentially a viable one and the gestation period for marketdevelopment is likely to be long. 2/ The second project is a deep sea fishingproject which has had to face a series of unforeseen mishaps. It is nowrecovering from their effects. Profitability is expected to be restoredshortly and IFCT dues cleared. There are only three clients (with arrears ofBt. 1.8 million and total outstanding loans of Bt. 6.7 million) whose accountscould be classified as being in serious difficulty.

5. IFCT makes provisions for doubtful accounts on the basis of a tho-rough review of each account. In FY75, IFCT's review indicated a need forincreased provisions for only one account where the collateral was foundto be insufficient to cover IFCT's exposure, resulting in the provisionsfor doubtful accounts being increased by Bt. 0.5 million to Bt. 7.7 million(covering three loan accounts and one guarantee). One of the three loanaccounts covered by provisions is, in fact, no longer in default and isnow servicing IFCT's loan. IFCT's total exposure in the remaining threecompanies (two loans and one guarantee), all under liquidation, is Bt. 8.0million (including accrued interest). IFCT holds enough collateral tocover any eventual loss exceeding the provisions made for these loans (anunlikely prospect). The appraisal mission has reviewed IFCT's loan port-folio and was satisfied that IFCT's judgement with regard to the provisionsmade for doubtful accounts was realistic . This matter was also discussedwith IFCT's auditors.

Equity Investment Portfolio

6. As of December 31, 1975 IFCT had equity investments of Bt. 8.2million in four companies: (i) The Metal Box Co. (Thailand) Ltd. forBt. 250,000; (ii) The Investment Publication Co., Ltd. for Bt. 175,000;(iii) Thai Feed Industry Co., Ltd. for Bt. 2.0 million; and (iv) The MutualFund Co., Ltd. for Bt. 5.8 million. Investments in the last two companieswere made in FY75 and these companies are still in the pre-operationalstage; prospects for both projects are bright. The other two companies

1/ Four of which were in the tapioca industry.

2/ This project was visited by the appraisal mission which concurs withIFCT's judgement. IFCT has recently informed the Bank of its successfulefforts to restructure the capitalization of the company and to bring innew partners into the venture who will concentrate on solving the market-ing problem. These actions have resulted in a significant improvement inIFCT's portfolio.

ANNEX 9Page 3

were not doing well financially tntil FY73. However, both of them havesince turned the corner and are now making a profit. In fact one of them(Metal Box) declared a 9% cash diLvidend in FY75; the other company (Invest-ment Publications) is expected to follow suit once it has recovered itspast losses. The quality of IFCT's equity investment portfolio is sound.

Guarantee Portfolio

7. Outstanding guarantees amounted to Bt. 59.7 million as ofDecember 31, 1975 and were issued for eight companies. With one exceptionall IFCT's guarantees were being retired on time. The one guarantee indefault (for Bt. 1.2 million or 2% of total outstanding guarantees) wasissued to a company which is now under liquidation. IFCT has been recover-ing this guarantee in installments (the outstanding amount has actuallybeen reduced from Bt. 6.0 million in FY73 to Bt. 1.2 million in FY75) butit has prudently made a provision of Bt. 2.0 million against possible losses.As the provision exceeds the outstanding amount IFCT is more than fullycovered.

ANNEX 9Table 1

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Status of Loan PortfolioAs of December 31, 1975

(Bt in million)

No.of Amount ofloans % loans approved %

Implementation Progress of Loans Approved

Projects completed: 1/Under initial operations - 50 17 787,87 31Under regular operations 2/ 71 24 659.74 26Fully repaid 124 41 315.14 12Under liquidation/litigation 4 1 11.08 -

Sub-total 249 83 1,773.83 69

Approved but not committed 11 4 270.43 10Under disbursements and under construction 41 13 528.85 21

Total loans approved 301 100 2,573.11 100

3/ LoansOperational Status of Loan Portfolio No.- % Outstanding %

Companies operating profitably 38 31.6 386.00 28.8Companies under construction or inpre-operative stage 39 32.5 592.34 44.2

Companies operating at a loss but not inserious problems 36 30.0 319.40 23.8

Companies operating at a loss with technicaland/or financial problems 3 2.5 31.95 2.4

Companies under liquidation/litigation 4 3.4 11.08 0.8

Total portfolio 120 100.0 1,340.77 100.0

First repayment installment not yet due.Presently servicing debt.Number of borrowers.

Projects Department!h 3, 1976

at-Tal 2

THAILAND

INDUOSRIAL FIONC CORPOATION OF TAILAND

Antlesl. of Arrears. 1971-75lEt in ulllimo)

1971 1972 1973 1974 1973N.. X A-ount 7 No. 7 amount 7 N.. 7. ut No. 7. AMoont % No. 7 Mount 7

A. Ropsya nt Perfoon-nco ofPortfolio

O-rrwofs r-paying 55 57 184.80 39 49 53 242.27 41 36 43 216.43 36 49 52 391.27 42 52 43 498.62 37rogularly

Borr-o-rs in groco 26 27 212.84 45 33 36 326.81 55 31 37 325.62 53 39 41 481.39 52 50 42 693.00 52period

Borror. in default 15 16 74.57 16 10 11 25.56 4 16 20 67.26 11 7 7 47.29 6 18 15 149.15 11

Total loaoo ostantoding 96 100 472.21 100 92 100 594.64 100 63 100 609.31 100 95 100 919.95 100 120 100 1,340.77 100

B. Arrears

Principal _ - 14.71 3.1 .l - - 2.21 0.4 -_ 5.46 0.9 11 - - 2.50 0.3 - - - 15.04 1,1 1Iotorose t_ - 7.07 1.5 V1/ _ - 2.00 0.3 1, - - 7.23 1.217 - - 7.55 0.8 11 - _ 12.57 0.9 1/

Total 15 161 21.79 10 iL 1' 4.21 0.7 z1/ 191/ 12.69 2.1 7 7 I - j 9 ... 1J 27.61 2.0

C. AR. of Arrears

3 to 6 months 3 20 2.91 13.3 5 50 2.00 47.5 10 63 6.41 50.5 2 29 0.11 1.0 8 44 2.50 9.1Oo-r 6 to 12 months 2 13 5.68 26.1 2 20 1.00 23.8 1 6 2.84 22.4 1 13 0.08 0.8 3 28 5.82 21.1COot 12 to 24 months 3 20 8.86 40.7 1 10 0.57 13.5 3 19 2.44 19.2 2 29 5.43 54.1 3 17 6.94 25.1fOot 24 no.tb. 7 47 4.33 19.9 2 20 0.64 15.2 2 12 1.00 7.9 2 29 4.43 44.1 2 11 12.35 44.7

Total 13 100 21.76 100.0 10 100 4.21 100.0 16 100 12.69 100.0 7 100 10.03 100. 27.61 100.0

D. Starta of Botrowers it Default

By Outstanding Loan}Oporating profitably 3 20 5.77 7.7 3 30 9.72 38.0 4 25 15.97 23.7 2 29 5.48 11.6 2 11 16.37 11.0Undor cns truotion or in

pre.oporavtio stage - - - - 2 12 3.65 5.4 - - - - 3 17 24.78 16.6Operating atas a lor

facing fin"otial and/ortorhnical problems 11 73 68.15 91.4 5 50 10.33 40.4 B 50 41.13 61.2 3 42 35.01 74.0 10 55 101.30 67.9

Und-r liquidation/litigation 1 7 0.65 0.9 2 20 5.51 21.6 2 13 6.51 9.7 2 29 6.80 14.4 3 17 6.70 4.5

Total 13 100 74.57 100.0 10 100 25.36 100.0 16 100 67.26 100 0 7 100 47.29 100.0 18 100 149.13 160.0= . = _ _ = = 55__ O L_ _ =0 = _5 = 5 55 = =5

By ArrearsOporating profitably 2.53 11.6 1.35 32.1 1.94 15.3 0.12 1.2 0.91 3.3Uoder construction or in

pro-opera..ve stoge - - - - 0.08 0.6 - - 0.88 3.2Operating at a ios or

faring finantial and/arteobnioal problems 18.62 85.5 1.55 36.8 7.41 53.4 5.50 54.7 23.97 86.8

Lnder liquidation/litigatiao 0.63 2.9 1.31 31.1 3.26 25.7 4.43 44.1 1.85 6.7

Total 21.78 100.0 4.21 100.1 12.69 100.0 10.03 100.0 27.61 100.0

1/ As percentago af total outstanding 1oans.

EAP Projeots Depa-tm"ntMhuch 3, 1976

ANNEX 10Page 1

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Details of Long-Term Resources as of December 31, 1975

1. As of December 31, 1975, IFCT had secured cumulative long-term re-sources amounting to Bt. 2,888.71 million (US$144.44 million equivalent) ofwhich Bt. 748.60 million (US$37.43 million equivalent) or 26% were in domes-tic currency and Bt. 2,140.11 (US$107.01 million equivalent) or 74% in for-eign currency. Untied foreign currency resources represented 57.3% of thetotal foreign currency resources with the balance coming from resources tiedto Japanese procurement principally. The following table gives a breakdownby sources of IFCT long-term resources as of December 31, 1975.

Cumulative to December 31, 1975

in million EquivalentDomestic Currency Baht US$ million

Paid in capital 150.00 7.50Reserves and retained earnings 90.89 4.55Reserves as per loan agreements 12.44 0.62

Total equity and reserves 253.33 12.67

Borrowings from Government 215.27 10.76Debentures 80.00 4.00Bank of Thailand 200.00 10.00Revolving funds (27.08) /1 (1.35) /1

Total domestic currency resources 748.60 37.43

Foreign Currency

Untied Resources:KfW loans 317.56 15.88ADB loans 646.74 32.34IBRD loans 260.90 13.04

1,225.20 61.26

Tied Resources:Exim Bank of Japan 657.00 32.85Specian Yen Credit 236.52 11.83Danish Loan 21.39 1.07

914.91 45.75

Total foreign currency resources 2,140.11 107.01Grand total of all resources 2,888.71 144.44

/1 Not included in the total of domestic currency resources as it isincluded in the foreign currency resources.

ANNEX 10Page 2

2. Annex 10, Table 2 gives the main terms and conditions of the for-

eign and domestic long-term borrowings of IFCT as of December 31, 1975. Abrief review of IFCT's equity resources and long-term borrowings is givenbelow.

Domestic Currency Resources

3. Share Capital - IFCT's authorized and fully paid-in share capitalamounted to Bt. 150 million as of December 31, 1975. The initial share cap-ital of Bt. 6.1 million has been increased four times, the latest in Septem-ber 1973 by an amount of Bt. 50 million. A list of shareholders appears inAnnex 4. No significant changes in IFCT's ownership have taken place sincethe appraisal of the second Bank loan. Holdings of foreign shareholders(including IFC) have marginally decreased from 47.5% of the total to 47.35%;private domestic shareholders account for 36.26% and the Krung Thai Bank, aGovernment-owned commercial bank, for the remaining 16.39%. Excluding IFCwhich accounts for 5.3% of IFCT's share capital, the major foreign sharehold-ers are the US (11.4%), Japan (7.88%) and Germany (7.28%). Following the saleof IFC's shares to the Mitsui Bank in February 1976, Japanese interests nowaccount for 13.2% of IFCT's share capital. A breakdown of IFCT's share cap-ital by shareholders as of December 31, 1975 shows that banking institutions,local and foreign, accounted for 69%, insurance companies for 5.8%, invest-ment companies for 5%, and the balance was distributed between IFC, corporateshareholders (10.3%) and private individuals (4.6%). In order to enlarge itsborrowing base IFCT proposes to increase its share capital by Bt. 100 millionin 1976. Such a measure would enable IFCT to comply with the present debt/equity requirement of 6:1 contained in its policy statement.

4. Reserves and Retained Earnia v - In accordance with the terms ofits Policy Statement, IFCT maintains two types of reserves, a "Legal Reserve"and a "Reserve for Bad Debts and Investments". Thirty percent of annualprofits are set aside to build up these reserves consisting of: (a) 25% asreserves for bad debts and investment until such reserves represent 20% ofthe loan and investment portfolio; and (b) 5% as legal reserve for strength-ening of IFCT's equity, to be built up, to 10% of the paid in capital. Thebalance after such appropriation and allocation to distributable dividendsis set aside as General Reserve.

5. As of December 31, 1975, the General Reserve amounted to Bt. 39.8million and the statutory reserves to Bt. 50.5 million as follows:

in million Baht

Legal Reserve 7.833Reserve for possible loan losses 42.743General Reserve 39.836

Total 90.412

ANNEX 10Page 3

6. Reserves Required Under Loan Agreements - Under its agreementswith the Danish Government for the D.Kr. 6.5 million loan and with theMinistry of Finance under the PL 480 Plan IFCT can only treat three percent-age points of the interest received from borrowers as its income, thebalance (after deduction of interest charges in the case of PL 480) is to beset aside as an equity reserve. These clauses effectively limit the distri-bution of dividends and represent an appropriation of earnings. The mission,therefore, conveyed to IFCT's auditors that the provisions for such reservesshould not be considered as an expense but as an appropriation of income.The auditors agreed to review this question and its impact on the reservepolicy. As of December 31, 1975, IFCT's cumulative reserves set aside underthe loan agreements amounted to Baht 12.4 million.

7. Borrowings from the Government - As of end 1975, IFCT had obtainedsix Government loans totalling Bt. 215.27 million of which four loans amount-ing to Bt. 68.85 million are subordinated to share capital; the two otherloans (Bt. 146.42 million) were obtained from PL 480 counterpart funds.

8. The maturity of the Government subordinated loans ranges from 30to 50 years and the interest charge from nil to 6% with a current weightedaverage of 1.7%. The first repayments on these loans will mature in 1976 andas of December 31, 1975 the outstanding amount was still Bt. 68.85 million.

9. Two agreements have been signed between the Government and IFCTunder which IFCT receives baht proceeds from the imports of commodities underthe PL 480 Plan. Such proceeds can be utilized to finance agro-industriesincluding livestock, fishery and forestry. The first agreement signed in1965 for a term of 15 years amounted to Bt. 30 million with interest at 6%per annum; as of end December 1975, the outstanding amount was Bt. 19.19 mil-lion. The second agreement was signed in 1974 for Bt. 116.4 million with a40 year term including 10 years grace and 2.25% interest during the graceperiod and 3.25% p.a. thereafter. As of December 31, 1975, Bt. 116.4 mil-lion were outstanding. Special covenants under the second agreement pre-scribe that during the grace period interest earnings distributable to share-holders shall not exceed 3 percentage points. As mentioned in para 6,IFCT accordingly treats a 3% interest spread as operating income and setsaside the balance as a reserve.

10. Debentures - IFCT made two debenture issues in April and October1968 of Bt. 30 million and Bt. 50 million respectively. These debentureswere guaranteed by Government against payment by IFCT of a 0.5% fee. Theinterest payable is 7% per annum. The major subscribers of IFCT debentureswere the Government Savings Bank (38%) and the Bank of Thailand (37%), thebalance being subscribed by various commercial banks. In May 1975, thegeneral assembly of IFCT shareholders approved the issuance of debenturesfor Bt. 400 million over a period of five years. Accordingly, IFCT madea third debenture issue of Bt. 150 million in January 1976 which was fullysubscribed. With an interest rate of 9% p.a. against 8.5% p.a. tax freeon 12 months bank deposits and Government bonds and commercial rates on

ANNEX 10

Page 4

debentures of 11-12%, IFCT debentures are not aimed at attracting fundsfrom the public. Although IFCT's request for a full guarantee of itsdebentures issue was turned down by Government, special classificationprivileges were granted to IFCT's debentures which were particularly at-tractive to institutional subscribers such as commercial banks, insuranceand finance companies.

11. Bank of Thailand - In 1974, IFCT has secured a long-term redis-counting facility of up to Bt. 20( million from the Bank of Thailand. Theamortization schedule is linked to repayments by borrowers subject to amaximum of 10 years. The interest rate payable is 8% p.a. with a 0.5% feeon acceptance of the note by the Mtinistry of Finance. Under the agreement,the Bank of Thailand undertakes to buy IFCT's promissory note equal to amaximum of 70% of IFCT's loan to an eligible enterprise after endorsement bythe Ministry of Finance. Eligibleh enterprises must be (a) export oriented;or (b) import substituting; or (c) use agricultural raw materials represent-ing at least 20% of their total needs; in all cases domestic components ofthe total production costs must account for at least 50%. As of December31, 1975, the outstanding loan amount was Bt. 130.71 million and Bt. 63.04million were still available for commitments.

12. Revolving Funds - The Exim Bank of Japan and KfW loans have fixedamortization schedules. IFCT's collections over and above its own repaymentscan be used for the financing of domestic currency loans. As of December 31,1975, DM 638,000 and Y 344 million had so far been accumulated. Since suchfunds are lent in baht currency and represent a Deutsche Mark/Yen liabilityof IFCT, loans from these funds are made with a Deutsche Mark/Yen value main-tenance clause whereby the exchange risk is passed on to the sub-borrowers.

Foreign Currency - Untied Resources

13. KfW Loans - IFCT started borrowing from KfW in 1963 and has so farobtained four loans for a total of DM 40.98 million or Bt. 317.56 million(net of cancellations). Only in the case of the first loan are repaymentslinked to IFCT's collections. The interest rate payable is 5.5% p.a. forthe two first loans, 6.5% for the third and 7.5% for the fourth loan. Underboth the third and fourth loans, 2% only is payable to KfW, the balancebeing accumulated by IFCT in a "Counterpart Fund" to be utilized for financ-ing feasibility studies. These four lines of credit are for the financingof small and medium industrial enterprises (not otherwise defined). Thethird and fourth loans are limited to projects outside the greater Bangkokarea. As of December 31, 1975, the outstanding amount of KfW loans wasDM 8.05 million, or Bt. 63.32 million, inclusive of the revolving funds;available for commitments were DM 17.52 million, or Bt 135.78 million,consisting of DM 2.52 million from the third loan dated August 1973 andthe full DM 15 million of the fourth loan dated October 1975.

14. ADB Loans - The Asian Devielopment Bank has been so far the largestsource of IFCT's untied foreign currency resources with three loans totallingUS$32.34 million net of cancellations. The first line of credit of US$4.91million at 6-7/8% p.a. was obtained by IFCT in 1968, the second for US$7.43

ANNEX 10Page 5

million at 6-7/8% p.a. in 1970 and the third for US$20 million at 8-3/4% p.a.in August 1975. Outstanding from the two first lines of credit were US$5.1million as of December 31, 1975, or Bt. 103.86 million. No disbursementshad been made from the third loan but commitments reached US$8.48 millionleaving a balance of US$11.52 million available for commitments.

15. IBRD Loans - The World Bank Group made a loan of US$2.5 millionafter contributing to IFCT's reorganization in 1963. From 1963 to 1970,IFCT suffered from management problems and an uncompetitive posture vis-a-vis commercial banks, consequently only US$1.045 million was utilized andthe balance was cancelled. This loan has since been fully repaid. A secondloan of US$12 million was declared effective in September 1974. As ofDecember 31, 1975 US$7.91 million were outstanding and US$1.39 million, orBt. 27.82 million, still available for commitments.

Foreign Currency - Tied Resources

16. Export Import Bank of Japan - In 1974, IFCT obtained a p! 10,000million (US$38.85 million equivalent) line of credit at 5.25% p.a. consist-ing of five Loan Memoranda of i 2,000 million each. Each Loan Memorandumhas a 20 year term including seven years grace. The loan is tied to Japaneseprocurement, but can also be used to finance the local currency installationcosts of the Japanese procured machinery up to 30% of total project costs.Exim Bank funds can be rolled over during the 20 year term. The amount out-standing under the Exim Bank line of credit was M 3,218 million as of Decem-ber 31, 1975 or Bt. 224.78 million; available for commitments were M 5,841million or Bt. 383.76 million.

17. Special Yen Loan - Authorized by the Thai Government in 1971 theSpecial Yen Loan is disbursed in Yen, but repayable in Baht at the rate ofexchange prevailing at the date of commitment (hence its mention under localcurrency liabilities). The loan amounts to Y 3,600 million (US$11.83 mil-lion equivalent) with repayments linked to project's amortization schedulesand has a 7% interest rate. It is tied to Japanese procurement. As ofDecember 31, 1975, Bt. 166.15 million were outstanding under the specialYen Loan account and Bt. 5.69 million were available for future commitments.

18. Danish Government Loan - Contracted in 1972 for an amount ofDanish Kroner 6.5 million (US$1.07 million equivalent) the Danish Loan hasa 24 year repayment period including six years of grace. The loan isinterest free under the provision that of the total interest earningsonly 3% can be considered as income, the balance being set aside as areserve. The loan funds can be rolled over within the 24 year term andare tied to Danish procurement for the first generation only. D. Kr. 5.63million or Bt. 18.54 million were outstanding as of December 31, 1975 andthe near totality of the loan had been committed.

ANNE? 1 0Table 1

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Statement of Resource Position as of December 31, 19751(Bt in million)

A. Domestic Currency

Equity: Share capital 150.00Reserves and retained earnings 103.33Net equity 253.33

Long-term borrowings (net of repayments) 478.21Revolving funds 1/ 27.08

Total domestic currency resources 758.62Less: Domestic currency loans outstanding 2/ 592.52

Equity investments 8.22Fixed assets 37.06Resources available for disbursements 120.82

Less: Undisbursed commitments 3/ 184.32

Resource shortfall for commitments (63.50)L/Less: Uncommitted approvals 45.46

Resources available for approvals/(shortfall) (1 0c.96)4/

F. Foreign Currency Tied Funds Untied Funds Total

Lines of credits (less cancellations)Y5/ 914-91 1,233.30 2,148.19Less: Total loans disbursed 46o.79 583.57 1,044.34

Resources available for d:isbursements ZT58T 649.73 1,103.85Less: Undisbursed commitments 64.67 255.73 320.40

Resources available for commitments 389.45 3974.00 783.47

Less: Uncommitted approvals 36.70 177.66 214.36Resources available for approval 35__7_ 215.34 - 569.09

Consists of Revolving Fund so far accumulated under KfW (2nd) loan, Bt 5.21million, and Japan Export-Import Bank, Bt 21.87 million.

X/ Includes domestic currency loans (Bt 510.92 million), hire-purchase contract%Bt 9.57 million), and excess of foreign currency loans outstanding over thecorresponding foreign currency borrowings (Bt 72.03 million).

/ Includes Bt 31.8 million of undisbursed commitment for equity investments.X This shortfall is covered by a debenture issue of Bt 150 million made in

January 1976 which was fully subscribed.;/ uiis amount is expected to be utilized by August-September 1976 on the basis

firir. loan applications now being processed by IFCT.

EAP Projects Department?4irch 1, 1976

ANNEX 10Tsbl e2

INDUSTRIAL FDANCE CaRPAEXO8 OF THAILAD

Features of LonR-Term Borrowings as of December 31. 1975

1/ UncomittedYear of thaount Balance Interest Term of Use of Funds Restrictions, if any,

Source of Borrowing Aaremeent USS Bt. USS Bt. Rate the Loan Tied/Untied Free Limit on the use of funds

A. FOREIGN CURRENCY

Untied Sources

KfW - lst LJoan 1963 4.26 85.25 - - 5.5% 15 yrs.2/ Untied i/ DM400,000 For financing of small and($155,000) medium size handicraft and

manufacturing industries.

2nd Loan 1969 1.93 38.56 - - 5.57. 20 yrs. Untied 3 DMl.0 mil. -do-($387,500)

3rd Loan 1973 3.88 77.50 0.98 19.53 6.54 30 yrs, Untied / 1M1.0 mil. For financing of small and($387,500) medium size manufacturing

units outside GreaterBangkok area and the pro-jects to have a positiveemployment generation andbalance of payment impact.

4th Loan 1975 5.81 116.25 5.81 116.25 7.54/ 30 yrs. Untied 3/ D11.0 mil. Same as for the third loan($387,500) except that large projects

Total RfW Loans 15.88 317.56 6.79 135.78 are eligible.

ADB - 1st Loan 1968 4.91 98.20 - _ 6.8757. 12 yrs. Untied 5 $150,000 -

2nd Loan 1970 7.43 148.54 - 6.875% 12 yrs.-/ Untied 5/ $200,000 -

3rd Loan 1975 20.00 400.00 11.52 230.40 8.757 15 yrs.-/ Untied 5/ $400,000 -

Total ADB loane 32.34 646.74 11.52 230.40

IBRD - lst Loa 6 1963 1.04 20.90 - - 5.57 15 yrs.2/ ntied/ $50,000

2nd Loan 1974 12.00 240.00 1.39 27.82 7.57. 15 yrs.i/ Untied - $500,000 -

Total IBRD Loans 13.04 260.90 1.39 27.82

Total Untied Sources 61.26 1.225.20 19.70 394.00

Tied Sources

Japan Export-Daport 1974 32.85.1/ 657.00- 19.19 383.76 5.25% 20 yrs. Tied to _ Items ineligible for financingBank Japanese are: (a) machinery for leather

procure- manufacturing or tanning andment leather footwear, (b) silk reeling

machines, and (c) sea-going vessels.

Special Japanese 1971 11.83 236.52 0.29 5.69 7.07 10 yrs.i/ Tied toCredit Japanese

procure-ment

Danish Government 1972 1.07 21.39 _ - Interest 24 yrs. Tied tofree 8/ Danish

procure-ment

Total Tied Sources 45.75 914.91 19.48 389.45

Total Foreign Currency 107. 2.140.11 39.18 783.45

AM 10Thbl e 2Page 2

UncommittedYear of Amount Balance Interest Term of Use of Funds Restrictions, if any,

Source of Borrowing Agreement US$ Bt. USJ Bt. RaLte the Loan Tied/lTntied Free Limit on the use of funds

B. DGMESTIC CURRENCY

Government of Thailand

1st Loan 9/ 1963 0.75 15.00 - - Interest 28 yrs. - _ _free

2nd Loan - 1963 1.00 20.00 - - 0-5% 50 yrs. - - -

3rd Loan -/ 1963 0.70 13.85 - - Interest 50 yrs. - - -

free

4th Loan 9/ 1967 1.00 20.00 - - 6% 20 yrs. - - -

5th Loan (PL 480) 1965 1.50 30.00 - - 6% 15 yrs. - - -

6th Loan (PL 480) 1974 5.82 116.42 - - 2.25-3.257-1 40 yrs. - - -

Total Government Loans 10.77 215.2712/

IFCT Debentures -

st Series13/ 1968 1.50 30.00 - - 7.5714- 10 yrs.

2nd Series - 1968 2.50 50.00 - - 7.5%-- 10 yrs. - - -IS/~~~~~~~~~~~~~415/

Total Debentures - 4.00 80.0016/

Bank of Thailand - 1974 10.00 200.00 3.15 63.04 8.0% Linked with - - lrojects should be either export-subprojects oriented, Import substitution or

Total Domestic Currency Loans 24.77 495.27 3.15 63.04 based at least 20h on agriculturalrw material and with a minisu's50% value added.

1/ Net of cancellations.2/ Linked with aortization schedules of sub-loans.3/ Procureaent is allowed from any cousttry except the Sino-Soviet bloc and Yugoslavia.4/ Two percent is paid to the Government of Thaila2d and the balance (4.5% uner the 3rd loan and 5.5% under the 4th loan) is transferred

to a counterpart fund to be utilized for project developsent purposes sauch as financing costs of feasibility study.5/ Restricted to mmber countries and Switzerland (for MMRD loans) and Iswmberg (for ADB loans).6/ The original gross amount of the loan was $2.5 million. This loan has sgince been fully repaid.7/ Proceeds of the loan are allowed to be used for financing local currency installation cost of Japanese machinery imported under this

loan up to 30h of the project cost. IFCT has not so far made use of this facility.8/ Income margin in excess of 3% is required to be set aside as a reserve niot available for dividend distribution.9/ Subordinated to all other loans and share capital.10/ Interest free for the first 20 years, at 3% for the next 20 years and at 5% for the last 10 years.11/ First ten years 2.25%; last ten years 3.25%.12/ Subscribed by insurance companies and commercial banks.13/ Repayment of interest and principal is guaranteed by the Goverment of 7hailand.14/ Including 0.5% guarantee fee payable annually to the Ministry of Finance.15/ A third series of debentures of Bt.150 million was issued and fully subscribed in January 1976.16/ Against guarantee of the Goveroament of Thailand.

EAP Projects DepartmentMarch 24, 1976

ANNEX 11Page 1

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Projected Operations, Resources Requirements and Financial Situation

IFCT's Business Forecasts

1. General Outlook - In terms of production the Thai economy began torecover in 1975 from the 1974 slump. Real industrial output grew by 6.1% in1975 against 2.5% in 1974 still short of the performance achieved in the pastwith annual rates of over 10%. Gross fixed capital formation increased inreal terms by 6% only but the private sector capital formation actuallydeclined by nearly 2%. Private investment in machinery and equipment droppedby 5% and although public sector expenditures increased at a substantial 20%,this was insufficient to prevent an overall decline of 2.6% in real terms in1975 as against a growth rate of 16.5% in 1974. Although NESDB has projecteda real GDP growth rate of 7.5% in 1976 and an optimistic 16.7% growth for themanufacturing sector, it now appears likely that the slump in private invest-ment will continue until well after the April elections.

2. IFCT's Operations - In spite of this slump in private investmentdecisions, which is further confirmed by the sharp decline in the number andsize of applications presented to and approved by the Board of Investments,IFCT's operations have risen unabated and net loan approvals in currentamounts increased by 12% in 1975 over their unprecedented volume of Bt 704million in 1974. One factor accounting for this sustained growth in IFCT'sbusiness has been the availability of significant amounts of both foreign anddomestic resources at a time when the Thai commercial banks were sufferingfrom a severe liquidity shortage which prevented them from fully meeting thecapital requirements of their traditional clients. With such exogenous cir-cumstances now subsiding, it is expected that IFCT's business will dip in1976 as compared to 1975.

3. Business Forecast - Indicative of the downward trend for 1976IFCT's pipeline of projects as of end December 1975 amounted to about Bt.350million for 18 projects against 44 projects as of December 31, 1974, amount-ing to Bt. 700 million. Based on this project pipeline, IFCT forecasts itsnet approvals to be Bt. 770 million in 1976 (inclusive of Bt. 40 millionequity investments) a 6% decline in current terms over the 1975 level ofBt. 815.5 million. Commitments are projected at Bt. 731 million againstBt. 755 million in 1975. Disbursements, however, are forecast at Bt. 790million against Bt. 549 million only in 1975, a 44% increase. Such a suddenjump is attributable to the staggered effect on disbursements of the rapidincrease in IFCT's loan approvals and commitments in 1974 and 1975 (as ofend December 1975 undisbursed commitments amounted to Bt. 505 million).Projected approvals, commitments and disbursement for 1976 appear reasonable.

ANNEX 11Page 2

4. IFCT's operational forecasts through 1980 appear in Table 1attached to this annex. IFCT's projections for the period 1977-1980 arebased on the reasonable assumption that there is a direct relation betweenthe volume of IFCT's disbursements for both loans and equity investment inany single year and the level of Gross Fixed Capital Formation (GFCF) inthat year. IFCT's disbursements in percentage of GFCF 1/ in 1974 and 1975were respectively 0.66% and 0.83%. The projected disbursements of Bt. 790million in 1976 would represent 1.01% of the GFCF as estimated by NESDB in itsoutline for the Fourth 5-year Plan, or 2.15% of the assumed level of grossprivate sector fixed capital formation in machinery and equipment 2/. NESDBhad projected GFCF to increase from 24.3% of GDP in 1976 to 31.7% in 1980,compared with an average of 22% during the period 1970-1974. It is doubt-ful that such a high growth rate of GFCF can be achieved and new projectionshave been worked out by IFCT assuming an increase of GFCF in current pricesof 10% in 1977 and 15% yearly thereafter. It is assumed, indeed, that thecurrent slump in private investment decision will show the largest impacton GFCF in 1977 and the upturn in investment decisions expected in late1976 will effect GFCF from 1978 onwards. In projecting IFCT's disbursementsfor the period 1977 - 1980, it was assumed that the factors which will boostdisbursements in 1976 to 2.14% of the forecast private sector GFCF in mach-inery and equipment will eventually subside and IFCT has retained a constantratio of 2% thereafter (equivalent to 0.94% of the forecast GFCF). IFCT'sprojections appear reasonable and are summarized below:

1/ All estimates in current prices.

2/ Private sector GFCF in machinery and equipment can be projected at 47%of the total GFCF for the period 1976-1980, based on its average shareover the past three years.

ANNEX 11Page 3

IFCT's Projected Disbursements 1976-1980(in Baht Million)

--- Actual -- -------------- Projected --------------1974 1975 1976 1977 1978 1979 1980

GDP at currentmarket prices 270,017 295,607 322,608 357,876 398,674 444,123 494,753

Growth rate (%) 25.5 9.5 9.1 10.9 11.4 11.4 11.4

GFCF 59,839 66,540 78,400 86,235 99,174 114,051 131,160

Growth rate (%) 35.4 11.2 17.8 10 15 15 15

Private Sector GFCFin machinery andequipment 32,213 32,563 36,874 40,561 46,645 53,642 61,689

IFCT's loan andequity disburse-ments 393 549 790 810 930 1,070 1,230

As % of privatesector GFCF inmachinery andequiment 1.22 1.69 2.14 2 2 2 2

As % of GFCF 0.66 0.83 1.01 0.94 0.94 0.94 0.94

5. From the above estimates of IFCT's disbursements, forecasts of commit-ments and approvals were made, based on rates of commitments and disbursementsas experienced by IFCT in the last four years of operation. It was furtherassumed that equity investment approvals would represent approximately 5% oftotal approvals and that the domestic/foreign currency mix in loan approvalswill be 25:75 thus reflecting the downward trend observed in domestic currency

loan approvals over the last 4 years.

Resource Position and Requirements

6. Local Currency Resources - IFCT's resource position as of December

31, 1975, is shown in Annex 10 Table 1. As of that date, local currency re-sources were short of commitments by Bt. 63.5 million 1/ (including Bt. 31.8

million for equity investments). During the period January 1975 to December

1977, IFCT expects to commit about Bt. 451 million in local currency loans

1/ This shortfall in local currency resources was remedied in early 1976with the Bt. 150 million debenture issue.

ANNEX 11Page 4

and equity investments. Against resulting resource requirements ofBt. 514.5 million, IFCT plans to raise during this 2-year period atotal of Bt. 684.81 million in domestic currency as follows:

Sourc,es of Funds

(million Baht)

Increase in share capital 100.00

Internal cash generation 197.68

Net loan collections 187.13

Issuance of debentures 200.00

Total 684.81

These resources exceed the projected requirements for loan and equity com-mitments by about Bt. 170 million. Such a level of resource mobilization,however, appears necessary for IFCT to maintain adequate liquidity andworking capital.

7. Foreign Currency Resources - Tables 1 and 2 in Annex 10 show thatforeign currency resources available for commitments as of December 31, 1975amounted to Bt. 783.45 million (US$39.2 million) consisting of Bt. 389.45 mil-lion (US$19.5 million) of resources tied to Japanese procurement and Bt. 394million (US$19.7 million) of untied resources. IFCT expects to commit atotal Bt. 390 million (US$19.5 million) in foreign currency loans over thefirst three quarters of 1976 of which it feels that no more than 20% or Bt. 78million will be tied to Japanese procurement while Bt. 312 million (US$15.6million) would be from untied resources. Uncommitted resources would thusbe reduced to a total of Bt. 393.45 million (US$19.7 million equivalent)consisting of Bt. 311.45 million (US$15.6 million) of tied resources and Bt.82 million (US$4.1 million) untied. Projected commitments through September1976 are summarized below:

ANNEX 11

Page 5

Foreign Currency Commitments January - September1976

(All currency units in million)

Tied Untied TotalBt US$ Bt US$ Bt US$

Resources available forcommitment at endDecember 1975 389.45 19.5 394.00 19.7 783.45 39.2

Commitments for periodJanuary-September 1976 78.00 3.9 312.00 15.6 390.00 19.5

Net resources availablefor commitments at endSeptember 1976 311.45 15.6 82.00 4.1 393.45 19.7

8. Untied resources of US$19.7 million available for commitments as ofend December 1975 consisted of US$6.8 million from KfW, US$11.5 million fromADB and US$1.4 million from the second IBRD DFC Loan. These three sourceshave been considered equally mobilizable in the above projections; however,KfW places certain restrictions on the use of its funds which might compelIFCT to commit IBRD and ADB resources at a faster rate than KfW funds.

9. IFCT's foreign currency commitments for the period October 1976to December 1977 are projected at Bt. 730 million (US$36.5 million equiv-alent) of which Bt 146 million (US$7.3 million equivalent) would involveJapanese procurement, leaving a balance of Bt 584 million (US$29.2 millionequivalent) to be financed from untied resources. The table below showsIFCT's requirements of untied resources:

Foreign Currency Commitments October 76 - December 77(All currency units in millions)

Tied Untied TotalBt US$ Bt US$ Bt US$

Resources available for commit-ments at end September 1976 311.45 15.6 82.00 4.1 393.45 19.7

Commitments during periodOctober 76 to December 77 146.00 7.3 584.00 29.1 730.00 36.5

Net resources available (re-quired) for commitment atend Dec. 77 165.45 8.3 (502.00) (25.1) (336.55) 16.8

10. IFCT's projected net requirements of untied foreign currency re-sources over the period October 1976 to December 1977 amount to aboutBt. 500 million. A Bank loan of US$25 million would meet IFCT's needs of

ANNEX 11

Page 6

untied resources over that period. If the expected revival in privateindustrial investment is slower than projected the Bank loan may last IFCTuntil early 1978.

Projected Financial Results

11. Projected income statements for the years 1976 - 1980 are attachedto this annex in Table 2. IFCT's net income is expected to increase fromBt. 38.3 million in 1975 to Bt. 161.3 million in 1980 or approximately 33%annually. This high rate of increase is in line with the projected growthin IFCT's total assets and loan portfolio over the next five years as well asthe assumption that starting with the second quarter of 1976 all new loanapprc-' s will specify a lending rate of 12.5% p.a. for both local and for-eign currency loans. 1/ Local currency lending to agro-industries, however, wasprojected at a preferential rate of 11% p.a. and was assumed to represent 40%of local currency lending. The increase in IFCT's lending rates will pushnet income in percentage of average total assets from 2.6% in 1976 to 3.8%in 1980 and gross income from 10.1% of average assets to 11.1%. Financialexpenses are expected to grow from 5.1% of average total assets in 1976 to5.9% in 1980. Administrative expenses, on the other hand would decrease inpercentage of average assets from 1.3% in 1976 to 0.9% by 1980. Provisions,although projected on a conservative basis, would also decline as a percentageof average assets from 1.1% in 1976 to 0.5% in 1980. The forecast evolutionof IFCT's gross spread over the 1976 - 1980 period is summarized below:

1976 /a 1977 1978 1979 1980

Loan income as % of averageloan portfolio 10.5 11.2 11.6 12.0 12.2

Cost of debt as % of averageterm debt 6.6 6.3 6.8 7.0 7.6

Gross interest spread 3.9 4.9 4.8 5.0 4.6

/a Figures for 1976 are somewhat distorted by the projected increasesof 54% in total assets, 36% in outstanding term loans and 53% interm debt from 1975 to 1976 which directly affect calculations ofaverage assets, portfolio & debt.

Throughout the projection period, IFICT's interest spread will remain in the4% to 5% range, substantially higher than in the last four years 2/ in

1/ Agreement was reached at negotiations to defer the increase in interestrates to July 1, 1977, this has not been incorporated into the projectionsand financial results for 1977 maay therefore be slightly different fromthose projected here.

2/ The 1975 gross spread of 4.7% waZs partially due to the high level ofpenalty income which represented 0.8% of the average loan portfolioagainst 0.2% only in 1976.

ANNEX 11

Page 7

spite of an average cost of term debt rising from 6.6% in 1976 to 7.6% in1980. The return on average equity is expected to rise from 15.3% in 1976to 22.3% in 1980. IFCT proposes to increase the rate of its dividends from10% of the par value of its share capital in 1975 to 12% in 1980. Thiswould still leave IFCT far behind the level of dividends paid by commercialbanks in Thailand but is rightly viewed by IFCT as an inducement for theplanned broadening of its share capital ownership. The dividend pay-outratio would consequently rise to 53.7% in 1976 but would thereafter graduallydecline to 18.6% by 1980.

12. Projected balance sheets through 1980 are shown in Table 3.Based on IFCT's operational forecast total assets are projected to in-crease by 54% in 1976 to Bt. 2,271 million and thereafter at an annual growthrate of 14.6% to Bt. 4,484 million in 1980. The high growth rate in 1976 islargely due to the projected level of resource mobilization and a 44% increasein loan and equity disbursements. The loan portfolio net of provisions wouldgrow by an average 23% annually from Bt. 1,343 million in 1975 to Bt. 3,817million in 1980 and net equity investments would rise from Bt. 8 million in1975 to Bt. 299 million in 1980 as IFCT intends to place more emphasis on suchoperations. The loan and investment portfolio is expected to retain itsprominent role 1/ in IFCT's assets structure throughout the projection period.IFCT's term debt would increase by 53% in 1976 to Bt. 1,763 million andthereafter by 18% to Bt. 3,423 million in 1980. IFCT is planning to increaseits share capital by Bt. 100 million in the current year of 1976. Consequent-ly, the debt/equity ratio is expected to remain within IFCT's statutory limitof 6:1 throughout the projected period reaching a maximum of 5:1 in 1977 andslowly decreasing thereafter to 4.4:1 in 1980. Total debt/equity ratio wouldfollow a similar evolution from a 5.3:1 maximum in 1977 to 4.7:1 in 1980. Thecurrent ratio 2/ would jump from 1.6:1 in 1975 (in a tight liquidity situationfor IFCT) to 2.1:1 in 1976 following the inflow of funds mobilized by IFCT anda consequent increase in cash and deposits from Bt. 21 million to Bt. 203million. In 1977, on the other hand, the current ratio will drop to 1.4:1as a result of a 60% increase in current liabilities from their 1976 level 3/.Thereafter, the current ratio will regain a 1.7 to 1.8:1 level.

13. Projected cash flow statements through 1970 are attached inTable 4. Throughout the projection period, the debt service coverage isexpected to remain at a satisfactory level dropping to a minimum of 1.6:1in 1978 (again as a result of the redemption of the 1968 debenture issue)but rising thereafter to 1.9 in 1980.

1/ 91% of total assets in 1975.

2/ Taking current maturities of term loans and debts into account.

3/ Which in turn is essentially due to the maturing of the 1968debenture issue of Bt. 80 million.

TH{ILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

ProJections of ADDroVB1s Commitmonts and Disbursements 1976-1980(Bt Million)

= ~~~196 ,197 198 17190Tears ending December 31 (Actual) (-------

A&DrovalsLoanst Domestic currency 216.35 180 205 245 275 320

Foreign currency 569-5.5 5 820 960785'.--90 730 820 980 1,095 1,280

Equity Investments 29.60 0 1 50 60 70

Total ___. 0 77M 1.030 i

CommitmentsLoanst Doestic currency 256.62 171 195 230 265 310

Foreign currency .h68.h 5M 600 0 800 920725.06 69-1 795 ZO 1,06 1,230

Equity Investments -29.60 0 _45 50 60 70

Total 2.66 _ L4 821 1.300

DisbursementsLoans: Domestic currency 153.77 178 185 220 250 290

Foreign currency 387.18 i4T 580 66 760 8705095 75y !'MOB 101 1,160

Equity Investments 7.8 72 h5 50 60 70

Total 5 5 810 __ 1.0 2

PAP Projects DepartmentMarch 1, 1976

ANNEX 11Table 2

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Projected Statements of Income. 1976-1980

Years ending December, 31 Actual Projected1975 1976 1977 1978 1979 1980

Income: (Unaudited)

Interest on loans 117.00 165.35 232.08 298.48 366.36 432.35

Fines, commitment charges andguarantee fees 9.13 4.45 5.61 6.56 8.84 10.63

Dividend income 0.02 0.62 2.01 4.01 7.07 10.37Income from deposits 5.31 15.33 11.79 9.12 6.56 10.74Income from government bonds 0.08 0.08 0.08 0.08 0.08 0.08Other income 0.21 4.20 0.73 0.82 0.93 1.03

Total income 131.75 190.03 252.30 319.07 389.84 465.20

Expenses

Interest and commitment charge onborrowings 62.21 86.83 108.81 142.99 176.89 230.07Interest charges accruing to KfWCounterpart Fund 1/ 0.27 3.92 8.20 9.74 9.74 9.74Salaries and other personnel expenses 15.44 18.81 21.75 23.89 26.24 28.82Other administrative and generalexpenses 2.78 3.74 4.71 5.07 5.43 5.80

Depreciation of property and equipment 0.61 1.04 2.89 2.99 2.97 2.95ProV'isontfOr doubtful loans andinvestments 0.52 11.56 11.52 11.00 11.14 11.36Provision for refund of interest toborrower 2/ 0.33 0.62 0.64 0.49 0.28 0.17Provision for foreign exchange riskfund 3.16 4.16 4.95 4.88 4.87 5.10

Foreign exchange risk fee 3/ 4/ 0.85 1.10 1.32 1.29 1.29 1.36Provisions required by loan agreements7 7.24 9.39 10.00 9.39 8.86 8.55

Total expenses 93.41 141.17 174.79 211.73 247.71 303.92

Net profit 38.34 48.86 77.51 107.34 142.13 161.28

Appropriations

Dividend 15.00 26.25 27.50 28.75 30.00 30.00Reserves and unappropriated surplus 23.34 22.61 50.01 78.59 112.13 131.28

Total 38.34 48.86 77.51 107.34 142.13 161.28

Percentage of Average Total Assets

1. Gross income 10.3 10.1 10.0 10.6 10.9 11.12. Financial expenses 5.2 5.1 4.9 5.3 5.4 5.93. Gross spread (1-2) 5.1 5.0 5.1 5.3 5.5 5.24. Administrative expenses 1.5 1.3 1.2 1.1 1.0 0.95. Provisions 0.6 1.1 0.9 0.7 0.6 0.56. Net profit 3.0 2.6 3.0 3.5 3.9 3.8

Profit After Tax as % of

Average equity 16.1 15.3 18.7 21.9 23.9 22.3Share capital 25.5 19.5 31 42.9 56.9 64.5Rate of dividends (%) 10. 10.55% 11% 11.5% 127, 127.Dividend pay-out ratio (%) 39.1% 53.77. 35.5% 26.8% 21.17. 18.67

1/ Portion of interest income on loans under KfW 3rd and 4th lines of credit set aside for development studies.2/ Portion of interest income refundable under certain conditions to borrowers as per Danish Loan Agreemunt.3/ MOF claim account.4/ Under Danish Government Loan and PL 480.

ANNEX 11Table 3

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Prolected Balance Sheets, 1976-1980(Bt Million)

As of December 31 Actual Projected1975 1976 1977 1978 1979 1980

ASSETS (Unaudited)Current Assets:

Cash and short-term deposits 20.85 202.90 88.91 27.83 114.47 119.17Government securities 1.12 1.12 1.12 1.12 1.12 1.12Receivables, accrued income, etc. 68.30 93.67 120.42 145.61 170.64 195.72Current maturities of long-term loans 213.42 235.31 381.19 514.32 663.38 760.31

Total current assets 303.69 533.00 591.64 688.88 949.61 1,076.32

Long-Term Loans:Foreign currency loans 829.86 1 ,218.50 1,655.19 2,080.15 2,507.75 2,950.98Domestic currency loans 510.91 - 628.11 722.37 797.48 866.82 921.47Hire-purchase contract (net) 9.57 8.31 7.05 5.79 4.53 3.27

Total loan portfolio 1,350.34 1,854.92 2,384.61 2,883.42 3,379.10 3,875.72Less: Provisions for doubtful loans (7.71) (17.83) (28.45) (38.45) (48.39) (58.35)

1,342.63 1,837.09 2,356.16 2,844.97 3,330.71 3,817.37Less: Current maturities 213.42 235.31 381.19 514.32 663.38 760.31

1,129.21 1,601.78 1,974.97 2,330.65 2,667.33 3,057.06Equity Investments 8.23 80.23 125.23 175.23 235.23 305.23Less: Provisions for doubtful in-

vestments - (1.44) (2.34) (3.3) (4.54) (5.94)Net investments 8.23 78.79 122.89 171.89 230.69 299.29

Fixed assets (net) 37.06 57.37 56.38 54.69 52.82 50.97Total assets 1,478.19 2,270.94 2,745.88 3,246.11 3,900.45 4,483.64

LIABILITIES AND EQUITYCurrent liabilities:

Dividend payable 15.00 26.25 27.50 28.75 30.00 30.00counterpart fund (KfW 3rd & 4th) 0.27 4.19 12.39 22.13 31.87 41.61MOP claim account 0.88 1.98 3.30 4.59 5.88 7.24interest refundable 0.77 1.39 2.03 2.52 2.80 2.97Accounts payable & other accrued charges 52.88 80.94 98.43 115.75 138.39 157.13Current maturities of long-tenm debt 116.78 144.82 272.81 238.06 324.94 369.01

186.58 259.57 416.46 411.80 533.88 607.96Foreign exchange risk reserve 3.31 7.47 12.42 17.30 22.17 27.27

Long-Term Debt:Foreign currency borrowings 736.58 1,154.37 1,522.73 1,915.85 2,345.83 2,789.77Government loans (including AID) 204.46 199.81 194.96 189.93 184.70 180.27Bank of Thailand 130.71 179.21 146.78 115.97 84.50 53.24Debentures 80.00 230.00 280.00 300.00 400.00 400.00

Total long-term debt 1,151.75 1,763.39 2,144.47 2,521.75 3,015.03 3,423.28Less: Current maturities 116.78 144.82 272.81 238.06 324.9I 369.01

1,034.97 1,618.57 1,871.66 2,283.69 2,690.09 3,054.27

Equity:Paid-in capital 150.00 250.00 250.00 250.00 250.00 250.00Reserves and retained earnings 103.33 135.33 195.34 283.32 404.31 544.14

253.33 385.33 445.34 533.32 654.31 794.14Total liabilities & equity 1,478.19 2.270.94 2,745.88 3,246.11 3,900.45 4,483.64

Contingent liabilities 59.72 61.20 63.55 66.27 70.27 75.52

Current ratio 1.6:1 2.1:1 1.4:1 1.7:1 1.8:1 1.8:1Total debt/equity 5.1:1 5.0:1 5.3:1 5.2:1 5.0:1 4.7:1Long-term debt/equity 4.8:1 4.7:1 5.0:1 4.9:1 4.7:1 4.4:1Reserves and provisions as % of portfolio 7.8% 7.77. 8.8% 10.4% 12.4% 14.3%(loans, investments and guarantees)

I! Excludes domestic currency disbursements of Bt. 48.32 million advanced against foreign currency commitments.

ANNEX 1 1Table 4

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Projected Cash Flow Statements 1976-79(Bt Million)

1976 1977 1978 1979 1980

Sources:

Net profit 48.86 77.51 107.34 142.13 161.28Add back non-cash charges (depreciation, provisions) 31.79 39.52 39.78 39.15 39.23

Cash generation from operations 80.65 117.03 147.12 181.28 200.51

Increase in share capital 100.00 - - - -Issuance of debentures 150.00 50.00 100.00 100.00 -Draw down on foreign currency borrowings 515.38 475.90 550.09 631.34 733.19Draw down on BOT long-term credit 63.04 - - - -

Loan collections:Against domestic currency loans 60.80 90.74 144.89 180.66 235.35Against foreign currency loans 151.36 143.31 235.04 332.40 426.77Against hire-purchase agreement 1.26 1.26 1.26 1.26 1.26

Total sources of funds 1.122.49 878.24 1,178.40 1,426.94 1,597.08

Uses

Increase in fixed assets 21.35 1.90 1.30 1.10 1.10Disbursements:Domestic currency loans 178.00 185.00 220.00 250.00 290.00Foreign currency loans 540.00 580.00 660.00 760.00 870.00Equity investments 72.00 45.00 50.00 60.00 70.00Repayments against domestic currency borrowingsGovernment loans 4.65 4.85 5.03 5.23 4.43Bank of Thailand 14.54 32.43 30.81 31.47 31.26Debentures - - 80.00 - -Repayments against foreign currency borrowings 97.59 107.54 156.97 201.36 289.25Increase in receivables (decrease) 25.37 26.75 25.19 25.03 25.08Decrease in payables (increase) (28.06) (17.49) (17.32) (22.64) (18.74)Payment of dividend 15.00 26.25 27.50 28.75 30.00

Total uses of funds 940.44 992.23 1.239.48 1,340.30 1.59238

Opening balance of cash and deposits 20.85 202.90 88.91 27.83 114.47Cash surplus (deficit) 182.05 (113.99) (61.08) 86.64 4.70Closing balance of cash and deposits 202.90 88.91 27.83 114.47 119.17

Debt service coverage 1/ 1.8 1.8 1.6 2.1 1.9

1/ Defined as follows (IFCT is tax exempt):

Net profit + interest on borrowings + loan collections + non cash itemsInterest on borrowings + principal repayments

ANNEX 1 2

THAILAND

INDUSTRIAL FINANCE CORPORATION OF THAILAND

Estimated Commitments and Disbursements of IBRD $25 million Loan-'

Commitments Disbursements

Amount % Amount %

1976

4th quarter 0.25 0.25 1.0

1977

1st quarter 3.00 12.0 0.30 1.22nd quarter 5.00 20.0 0.50 2.03rd quarter 6.c5o 26.0 2.15 8.64th quarter 6.00 24.0 2.65 10.6

Sub-total 20.50 82.0 5.60 22.4

1978

1st quarter 2.00 8.0 4.00 16.02nd quarter 1.25 5.0 5.00 20.03rd quarter - - 5.25 21.04th quarter - - 3.10 12.4

Sub-total 3.25 13.0 17.35 69.4

1979

1st quarter - - 1.40 5.62nd quarter - - 0.40 1.63rd quarter - - - -

4th quarter - - -

Sub-total - - 1.80 7.2

Total 25.0( 100.0 25.00 100.0

1/ Assuming that the loan shall become effective in the last quarterof 1975.

EAP Projects DepartmentMarch 26, 1976

THE INDUSTRIAL FINANCE CORPORATION OF THAILANDORGANIZATION CHART AS OF FEBRUARY 29, 1976

B OARD OF DIRECTORS ChTanr gmasino d Sie trentv

S.-,a Ho.-trA-oo

I

Pomda HTnhtcgkoe1

l ~~~~~~~Legal Coun-I DIRECT0R & GENERAL ~Klttl S,h-Ioth J

MNAGEREnnern dsr

| DEPUTGE RAMANAGER

ProIcs DrisMi t Op2 PDerpDtcon Loas &nePrI,ent Loan App|t-ndnt-iio Researn & Plan-mg Seearal & Aconin ternlPT.e Pantumasen (ActPan) Tn DTos Pantums Dvoe A-erKnne Digniion Waorih Offc Le (AOfIigt

Llepw,t Depart-et M-ga9e Dep.ty[) DeatmentMagei Pdd-og Tech-saint ch l tpong PlR-tssi

Chalerme Nlymtha, Anrothal Techamreon. Peranee Wongtrakool DivISion(DvVl t i Vanvdai Rldey (Vacant) Div -,Wn Division Payau V(cant Writia Ki,dstrit ~ ~ ~ ~ ~ ~~~S C5 (V-t) (V- Dj-i.. ;., Pa; Lgl rekul Sanr Chnririr.s IVananti Vacan~~~~~~~~~~~~~~~~~~-t) Chat SorPeaj-e Vibhatbabgdy.

Prefessionais g Professionals 9 Professionals 7 Professionair 17 Prolnteioeals 3 Psotessianais 7 Pref-ssinnais 4 Professionalc 4 Prolessionals 6 Peefessionals 9 Professionals 1 Profett--nals 6Other- I Othe - O sOth-Der 2 Others 2 Others 4 Others 2 Others 4 Others 53 Othters 5 Othe-s _ | Others

10 10 8 19 5 l 14

PROFESSIONALS 87OTHERS 76TOTAL 163

1/ Enqaged on a pa-t time basis The Adviser has been provided oIder a UNDP program which neq,ires himtO dirda nit time equaily bntween IFCT. NESOB aId gO).

Wehd Ban-k 1563