Regions and Countries

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p. 13 of 23 BACK | NEXT I. Country Performance Assessment II. Country Operational Strategy III. Sector Strategies A. Agriculture B. Infrastructure C. Social Infrastructure and Environment D. Governance Dimensions of ADB Operations E. Gender Dimensions of ADB Operations F. Private Sector Operations IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Thailand : III. Sector Strategies

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B. Infrastructure

1. Transport

51. Recent Developments. Thailand's road system compares favorably with that of other countries in the region. The first phase of the $1.7 billion, “Skytrain” mass transit system was opened in December 1999 to assist people movement along several of Bangkok’s major transport corridors. Eight years in the making, the 23-kilometer railway offers hope to commuters tired of some of Asia's worst traffic congestion. The State Railway of Thailand operates 3,800 km of railway tracks with 632 destinations; improved links between Bangkok and the Eastern Seaboard Development Project are facilitating transport of cargo and alleviating congestion at Bangkok’s main port of Klong Toey. Currently, Thailand has 27 domestic airports, five of which meet international requirements for port of entry. In response to predicted growth in air passenger and cargo demand, the Government is constructing a second international airport at Nong Ngu Hao, Samut Prakarn Province, to be opened in 2004. Aviation analysts predict that Bangkok will soon rival Singapore as a regional aviation hub.

52. Substantial Government investments in road infrastructure facilitated the country’s economic boom. It follows that Thailand’s rapid economic growth has resulted in significant changes in the transport sector, mainly in road transport. The Government focussed its road subsector activities on the construction of a nation-wide network of major highways resulting in the growth of the paved network from 5,500 km in 1965 to about 43,000 km in 1992. The public road network now comprises about 53,000 km of national highways, 140,800 km of rural roads and 14,700 km of municipal roads. Now, with some 18.0 million vehicles on the road, road transport represents 88 percent of freight and 92 percent of passenger transport. Public expenditures in the road transport sector continue to increase and reached B65.9 billion (about $2.5 billion equivalent) in 1997 but decreased to B52.5 billion (about $1.4 billion) in 1998. In 1998 alone, the maintenance budget for DOH was cut by about 30 percent.

53. While the country’s road system is basically adequate to serve both population centers and centers of economic activity, the efficiency of road transport is constrained by a number of factors related to the pace of recent economic development and the ensuing rise in road traffic. Now, the traffic load and density on many roads exceeds their original design strength or capacity while many roads have yet to be improved to a paved standard.

54. Government Strategy. The Government’s strategy in the rural road sector is to:

• sustain economic growth and stability at an appropriate level;
• distribute income and prosperity to the regions; and
• develop human and natural resources, improve the environment and quality of life.

With a view to achieving these overall objectives, targets for the road subsector include:

• maintenance and improvement of the existing network;
• efficient network usage; and
• emphasis on safety aspects.

More specifically, the Government program involves:

• widening of congested roads;
• rehabilitation of paved roads;
• upgrading of unpaved road to a bitumen standard;
• construction of new links and interchanges where warranted, including links to neighboring countries;
• traffic safety measures; and
• construction of the new motorway network.

55. ADB Support. The ADB has financed ten road projects in Thailand with loans totaling $784.6 million. The first six projects have been completed. The respective project/program performance audit reports for the first four give a generally favorable overall assessment, although some shortcomings mainly related to implementation delays were noted. A Regional Rural Roads (Sector) Project ($53.4 million) is being processed for consideration in 2001. The project would improve national roads partly along the East-West Transport Corridor and the North-South Economic Corridor. ADB would assist in improvement of vital infrastructure to sustain an appropriate level of economic growth in several of Thailand’s poorest provinces. In addition, the project would include components involving the continued development of the transport sector.

56. Policy Dialogue. The substantial economic growth of Thailand in the past 20 years has strained the capacity of the transport system to provide efficient service, particularly road transport, which has consistently experienced the most rapid growth. Although the era of high growth economy has ended due to the financial crisis, road transport demands are still high. The Government through DOH is implementing a road improvement program to develop an efficient transport network, particularly in the rural areas, where transport efficiency is critical for economic recovery affected by the financial crisis. As the sector develops and matures, a number of corollary issues and policies have emerged and are being actively addressed through dialogue with and assistance from the ADB and coordination with other aid agencies. For example, reorganizing and restructuring the Ministry of Transport and Communications (MOTC) and its departments will be a major task, and the ADB is well positioned to provide assistance under the proposed loan. Similarly, human resource development is an important component of restructuring the Department of Highways, an area where ADB is already active and could continue to be so. ADB is in a good position through the proposed Regional Rural Roads (Sector) Project to expand its participation in developing and implementing action plans to address issues such as road safety, road transport efficiency, and road facility financing. Finally, DOH’s budget particularly for capacity expansion and maintenance has been sharply reduced due to the economic crisis. The proposed project would help DOH get its program back on track within the framework of rural road development and would focus on the poorer parts of the country.

2. Finance and Industry

a. Financial Sector Reform

57. Recent Developments. NPLs have declined from their peak level of about 48 percent in May 1999 to an estimated 37 percent in May 2000. Nonetheless, the accumulation of new nonperforming loans and the deterioration of restructured loans have prevented a substantial reduction in NPLs. Banking institutions have been pursuing recapitalization programs to meet more stringent capital adequacy standards, including seeking alliances with foreign banks. In August 1998, the Government instituted a recapitalization scheme that encourages private sector recapitalization of banks and provides public funds for banks that are unable to raise capital. Banks have tended to view this scheme as a last resort due to concerns that participation will lead to government interference in management and dilute family ownership. To date, only 15 percent of the $8.3 billion available under this scheme had been drawn down. Nonetheless, between January 1998 and October 1999, banks and finance companies raised over $22 billion in new capital. Debt restructuring has accelerated during the past year resulting in about $1.5 billion of corporate restructuring in 1999 compared to approximately $154 million in 1998. Completed debt restructuring cases and debt restructuring cases in process total 245,263 cases with credit outstanding of Baht 2.2 trillion (about $57 billion), as of March 2000. Business sectors reporting the largest amounts of completed debt restructuring cases by credits outstanding include the manufacturing, the real estate sectors, wholesale and retail and services, comprising about 77 percent from Bangkok, and the remaining 23% from provincial areas.

58. In the domestic capital market, a variety of strengthening measures have been undertaken including the restructuring of the Securities and Exchange Commission (SEC) to make it more autonomous. In addition, steps were taken to improve corporate governance, strengthen prudential regulations, improve market access, particularly for SMEs, and liberalize ownership of securities firms to help reinforce their capital base, improve access to technology and markets, and strengthen their competitiveness in the face of a globalizing environment. A Government securities market is being initiated to improve the conduct of monetary policy.

59. Sustaining steady growth will require continued efforts from the authorities in accelerating structural reforms, especially the resolution of NPLs and further progress in corporate and bank restructuring. A pickup in loan demand, once capacity utilization returns to pre-crisis levels, may be constrained by the banking sector if their NPL burden and capital constraints remain unresolved. Unless rectified soon, therefore, problems in the financial sector could hold back recovery once demand picks up. This underscores the importance of advancing financial sector reform, and maintaining progress in corporate debt restructuring.

• no bailout of private shareholders or holders of subordinated debt,
• intervention in those institutions that were unable to raise sufficient capital and meet prudential norms, and
• a strong bias toward private-market based recapitalization and restructuring the financial sector.

Initial changes to the regulatory framework included revamping the prudential framework focused on bringing capital adequacy and loan classification and provisioning rules in line with international best practices. To avoid a credit squeeze and substantial nationalization of the banking system, banks were allowed to phase in these new rules. Foreign investors were allowed to take control of existing Thai commercial banks; from zero before the crisis (excluding foreign branches), foreign-owned commercial banks have increased to four today, and may increase to as many as six in the next few months.

A comprehensive financial sector restructuring package was announced in August 1998 to support bank recapitalization. The scheme encourages private sector recapitalization of banks and provides public funds as a last resort for banks that are unable to raise capital. This package also introduced rules governing the establishment of privately-owned Asset Management Companies (AMCs). The authorities are preparing and revising laws related to establishment of a new regulatory framework for financial institutions, including the Financial Institutions Law, Deposit Insurance Law, and Central Bank Law.

The restructuring of the financial sector has led to consolidation of the system and a sizable increase in the role of the Government in the financial sector. According to IMF estimates, the share of financial system assets held by the Government has increased from 10 percent in mid-1997 to 23 percent in 1999. It is anticipated that the expanded role of the state will be temporary, however, with the core of the banking system to remain in private hands. Nonetheless, the recapitalization plans of the private banks remain subject to a number of risks. Additional risks arise from the possibility that a slowdown in the recovery may further raise the level of NPLs, depress collateral values, and prolong corporate debt restructuring.

61. Given continued progress and reform, together with favorable external conditions, further improvements in macroeconomic stability and financial and corporate sector adjustments are to be expected. Sustained economic recovery will hinge on success in restructuring corporate debt and in recapitalizing banks. Although considerable progress has been made in these areas, only limited headway had been made so far in reducing nonperforming loans. To accelerate corporate restructuring, the Government is encouraging the wider use of asset management companies and improving the capacity of the Corporate Debt Restructuring Advisory Committee (CDRAC) to undertake arbitration and promote debt restructuring. In addition, with new strategic partners, banks are acquiring better technology, management and professional skills – leading to increased strength, transparency and competitiveness. These positive developments will be supported by a number of tax and legal changes, including firm implementation of new bankruptcy and foreclosure laws. In addition, Government policy is to institute a number of other initiatives to improve financial sector efficiency over the medium-term. The Securities and Exchange Commission (SEC) and the Stock Exchange of Thailand (SET), in parallel, have supported active delisting and suspension of firms in debt restructuring and facilitated the listing of firms affected by the crisis undergoing rehabilitation. Moreover, the MOF is initiating the restructuring of specialized financial institutions in line with overall restructuring of the financial system. The MOF is also enhancing the regulatory and supervisory regime by supporting the development of a comprehensive supervisory framework, strengthening supervision and regulation, and developing a deposit insurance scheme.

62. ADB Support. Through the Financial Markets Reform Program Loan (FMRPL), the medium-term framework for structural reform of the domestic capital market has been set. Briefly, the FMRPL covers:

• the restructuring of the SEC to increase its autonomy and scope of powers, and
• delineation of the scopes of authority of the MOF, BOT, Ministry of Commerce, and SEC.

The Government should carry this process forward to strengthen regulation and supervision, particularly with respect to the oversight of public companies. Three TAs were piggybacked to the FMRPL:

• Strengthening Information Disclosure and Compliance to improve corporate governance;
• Asset Securitization to develop the securities market; and
• Pension and Provident Funds Reform to determine appropriate options for reforming the present social security system.

Consistent with the Government’s strategy, in 1999 ADB also approved the Small- and Medium- Enterprises Investment and Restructuring Fund (SIRF) for SME financing.

63. The development of a long-term debt market in Thailand, principally of contractual savings, is crucial for achieving long-term market stability. To continue efforts already started under the earlier Pension and Provident Funds Reform TA, additional TA will be provided for Development of Long-Term Institutional Sources of Funds (ADTA in 2001), including insurance reforms and formulation of a trust law.

64. An Export Financing Facility (EFF) was approved on March 26, 1998. The Facility was set up to fund pre- and post-shipment financing of exports, the import of raw materials needs of exporters, and export-related plant and machinery requirements. The EFF consisted of:

• a $50 million loan to the Export-Import Bank of Thailand (EXIM); and
• $950 million equivalent in cofinancing from 68 international banks to EXIM in the form of a syndicated 5?year term loan.

The ADB provided a partial credit guarantee to the commercial cofinanciers, with a counter guarantee from the Kingdom to the ADB. The EFF was effective in launching Thailand’s return to the international capital market, following the financial crisis. However, the terms of the facility, which reflected the prevailing market sentiment of March 1998, became unattractive as interest rates declined sharply with the restoration of stability. Of the $1 billion available under the EFF, $200 million was accessed by EXIM. The availability period for this facility lapsed without further drawdowns and loans from the ADB and the syndication of international banks were prepaid by EXIM in September 1999.

65. On December 21, 1999, ADB approved a $7.5 million technical assistance package for Restructuring Specialized Financial Institutions (SFIs) in Thailand. The assistance is helping the Government devise restructuring plans for four state-owned SFIs, namely, the Bank for Agriculture and Agricultural Cooperatives, Industrial Finance Corporation of Thailand, Small Industry Finance Corporation, and Small Industry Credit Guarantee Corporation. The various forms of Government support for SFIs and their effect on SFI operations are also being reviewed. A clear corporate governance framework for the SFIs to ensure autonomy, accountability and transparency is also being established. The assistance is exploring possible roles for the SFIs in SME financing. The ADB assistance comprises a technical assistance loan of $4.5 million, which comes from its ordinary capital resources, and a technical assistance grant of $3 million, financed by the Asian Currency Crisis Support Facility, funded by the Government of Japan. Activities commenced in September 2000.

66. Finally, ADB will provide support for three ADTAs during 2001-2002 in the area of microfinance (i.e., Establishing Legislation for Operation of Microfinance Institutions in 2001, Linking Micro- and Small-Enterprises to Commercial Finance (2002), and Regulation and Supervision of Microfinance Institutions (2002). Please refer to para. 46 for additional details on this assistance.

67. Policy Dialogue. The ADB has worked very closely with the IMF and World Bank on financial sector reforms in Thailand since 1997. The IMF has undertaken principal responsibility for reforming and strengthening the Bank of Thailand, while the World Bank has led efforts to reform and rationalize the non-bank financial institutions subsector. The IMF and the World Bank are also assisting the Government in reforming the regulatory framework for banks and other private financial companies. ADB has focused on assisting the Government in reforming and developing the capital market (e.g., SEC, SET, Bond Dealers’ Club, pension and provident funds) as an alternative channel of resource mobilization through a Financial Markets Reform Program Loan of $300 million provided in December 1997. Technical assistance support was provided under the loan on:

• strengthening information disclosure and compliance;
• pension and provident funds reform; and
• asset securitization.

In addition, the ongoing, $7.5 million technical assistance package for Restructuring of SFIs in Thailand will help the Government devise restructuring plans for four state-owned SFIs, rationalize Government support for this sector, develop an appropriate corporate governance framework on SFIs, and explore possible roles for SFIs in SME financing.

b. Insolvency and Related Processes

68. Recent Developments. Thailand's approach to restructuring corporate debt has been private sector led, market based, and voluntary. For this approach to succeed, the authorities introduced a wide range of reforms in the institutional environment, including reforms to strengthen debtor-creditor negotiations, removal of tax barriers and other impediments to corporate debt restructuring, and institutional reforms to encourage out-of-court debt workouts. One of the key elements of Thailand’s approach involved the reform of its legal framework for insolvency. First, an amendment to the Bankruptcy Act introduced a new corporate insolvency process known as “Business Reorganization” (April 1998). Second, a “structured,” out-of-court, informal corporate reorganization process administered by CDRAC was developed by the BOT (August 1998). Third, a Central Bankruptcy Court with exclusive jurisdiction over insolvency, particularly corporate reorganization, was established (June 1999).

69. While the number of formal insolvency cases have been very low so far, there is reason to believe that both CDRAC as well as the Central Bankruptcy Court will soon come under considerable pressure. It is anticipated that at least 850 corporate debtors will commence the CDRAC process in the very near future. And, as the Bank of Thailand has recently insisted that financial institutions prepare debt restructuring targets each month, it may be expected that more debtors will be hauled into informal restructurings under CDRAC.

70. Additionally, the CDRAC process will shortly target 300,000 SMEs with Baht 200 billion (about $5.1 billion) of NPLs. In order to assist these and other SMEs experiencing financial difficulties, the MOF has established the SME Financial Advisory Center (SFAC). The Center’s mandate is to:

• provide free advice to individuals and companies experiencing financial distress;
• act as intermediaries between financial institutions and debtors; and
• collect relevant data.

71. Government Strategy. Thailand’s strategy has been to strengthen the legal framework for formal and informal insolvency processes, and to provide incentives by way of tax relief to encourage the use such processes. The commercial and legal community generally acknowledges that Thailand has made considerable progress in this area. The recent decision of the Central Bankruptcy Court in the Thai Petrochemical Industry (TPI) case will solidify this view and contribute significantly to improving investor and creditor confidence in the formal insolvency processes.

72. ADB Support. Since the insolvency system was hardly used prior to the Asian financial crisis, there is little modern and up to date expertise, or knowledge of international good practices in this area. Stakeholders generally recognize that the administration and operation of the formal and informal insolvency processes would be considerably strengthened and improved by training and education. In particular, the newly appointed officials and judges to the Central Bankruptcy Court and the attached Business Reorganization Office would benefit greatly from short term training programs.

73. Recognizing this need, the Government has requested the ADB to provide a small-scale technical assistance grant to finance the training of officials from the key agencies involved in informal and formal insolvency processes. The ADB will provide a small-scale TA grant in the third quarter of 2000 to finance the provision of targeted short-term training for officials from key agencies involved in the administration and operation of the formal and informal insolvency processes, namely, the Central Bankruptcy Court, Business Reorganization Office and Legal Execution Department, Ministry of Justice. This will be followed up with the provision of further technical assistance as part of the Accountability Cluster I TA in early 2001 for further short- and medium-term training and capacity building for these agencies, as well as CDRAC and SFAC.

74. Policy Dialogue. The reform of insolvency, restructuring and debt collection laws and processes is a part of Government's efforts to improve corporate governance. It is critical that the progress made in these areas are further maintained and cemented. The Mission has been advised that there is a committee currently undertaking a comprehensive review of bankruptcy and related laws. It is proposed that the Government consider accelerating the work of this committee. It is also proposed that the Government consider accelerating the ongoing reform of secured lending laws governing moveable property. The Mission suggested that reform to any insolvency law system must be carried out with due consideration of the secured lending system, as both are part of the same system of legal and commercial regulation. Any weakness in one area poses an unhealthy burden on the other. Therefore, the Mission suggested that an integrated approach should be adopted for the reform of insolvency and secured transactions laws.

c. Small- and Medium-Enterprise (SME) Development

75. Recent Developments. The contributions of SMEs in Thailand are significant. According to existing estimations and available statistics, SMEs account for 98 percent of existing businesses, 74 percent of the industrial labor force, 60 percent manufacturing output, 47 percent of value added, and 55 percent of exports. In addition, SMEs are expected to absorb future labor surpluses from agriculture, and contribute to both manufacturing specialization and more capital-intensive production. In social terms, SMEs have proven to be a major source of employment (formal and informal) in Thailand, especially during the 1997-99 crisis, and of affordable basic consumer products. Moreover, SMEs are effective in reducing the widening social gaps and deepening regional disparities in income distribution which have emerged in Thailand over the past few decades.

76. As a result of the financial crisis, many intrinsically sound companies in Thailand, especially SMEs, face severe financial difficulties, including a shortage of working capital and unsustainable debt burdens. Those companies have limited or no access to alternative sources of capital, generally cannot afford the services of international investment banks, and are facing insolvency despite the fact that their underlying businesses remain viable and enjoy good potential for expansion. Financial institutions, saddled with high levels of NPLs, are unwilling to extend credit and are calling existing loans even before maturity. Although there is adequate liquidity in the banking system, many banks are reluctant to increase their exposure to SMEs as perceived credit risks have increased sharply. This vicious cycle has led to additional numbers of illiquid SMEs, prompting an increase in NPLs and unemployment. Apart from these financing constraints, SMEs also require technical support and business advisory services for:

• upgrading management capabilities;
• improved access to information (e.g., marketing, advance production, and new investments); and
• personnel administration, techniques and skills including how to attract skilled labor on a continuing basis.

• Baht 35 billion (about $900 million) financing package for SMEs through specialized financial institutions (SFIs);
• Baht 4 billion (about $100 million) recapitalization of the Small Industry Finance Corporation and Small Industry Credit Guarantee Corporation;and
• Baht 2.1 billion (about $54 million) for establishment of an Institute for SME Development and SFACs.

78. ADB Support. Although the Export Financing Facility, discussed earlier in this section, was not specifically focused on SME development, it is considered as support for SMEs in Thailand, given the high percentage of SMEs which are exporters and which benefited under the facility.

79. In addition, the TA for Restructuring Specialized Financial Institutions (SFIs) in Thailand (see para. 65) includes support for assistance to the Government on development of a framework for financing SME development, including recommendations on appropriate institutional mechanisms and a financing strategy. This component is linked to two other TA components, namely:

• SFI Restructuring, to assist selected SFIs in NPL resolution and capacity building; and
• Corporate Governance of SFIs, which will assist the Government to establish an appropriate governance framework for SFIs.

80. ADB approved a $25 million equity investment in the SIRF in March 2000, to be set up shortly. The fund - which has a target size of $100 million - will invest in SMEs with promising businesses in need of expansion capital. The SIRF will (i) generate reasonable risk-adjusted returns by investing in financially strapped but fundamentally viable SMEs, (ii) provide momentum for SME sector restructuring and restore investors' confidence, and (iii) develop a generic model for SME investments. It will seek a diversified portfolio that contributes to improving governance and recovery of the SME sector in Thailand. The SIRF aims to reduce high debt-to-equity ratios of SMEs to a lower and more prudent level, enabling the banking system to extend credit or provide new loans. The SIRF will have a seven-year term with an option to extend for two more years. Japan Bank for International Cooperation (JBIC) has played an active role in the development of the SIRF, and is expected to provide equity investment of $25 million in the SIRF. The balance will be raised internationally from institutional investors, led by State Street Global Advisors (SSgA), the investment arm of State Street Bank and Trust Company. In addition to the fund investment, ADB will make an equity investment in the Thailand Fund Management Company (TFMC), which will manage the Fund. SSgA and ADB will be the shareholders of the TFMC.

• recommending necessary policy and institutional reforms to improve the business environment facing SMEs (e.g., regarding the regulatory and legal framework governing competition, investment, commercial transactions, labor regulations, taxes, property rights, and procurement procedures;
• designing and implementing methods of gathering information on SMEs that can be used to determine SME opportunities and constraints, identify target groups for assistance, monitor the impact of policy reforms on enterprise performance, and evaluate the impact of interventions;
• developing strategies to reduce the risks and transactions costs associated with lending to SMEs, and to strengthen the capacity of the formal financial system to serve this segment of the market; (iv) encouraging the development of markets for the private provision of a diverse set of non-financial services by building upon existing private initiatives, and by involving the private sector in the delivery of services supported by the public sector; and
• improving the performance of publicly-provided services, with the objective of achieving high impact as well as financial sustainability over an established period of time.

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