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Regions and Countries Country Assistance Plans Document
Country Assistance Plans - Thailand : III. Sector Strategies
F. Private Sector Operations115. Recent Developments. While the outlook for the private sector has improved since last year, business is still relatively flat, and few new private projects are being launched. Although liquidity has returned to the financial system, commercial banks are not increasing their lending to the private sector. Larger, established corporates are able to access the bond market, which is growing in terms of size and liquidity, but there is still a credit squeeze for smaller companies. Serious structural problems remain, including over-capacity in some sectors, and poorly conceived projects in terms of location, size and cost. The steel industry provides some of the more extreme examples. Key challenges to promote private sector growth include attracting more long-term foreign investment, channeling foreign and domestic capital into infrastructure projects, and assisting SMEs in potential growth sectors, for example light manufacturing and assembly operations such as automotive parts and integrated circuit boards, agribusiness and textiles.116. Government Strategy. As discussed in Section I.A, the Government has implemented significant measures since 1997 to mitigate the impact of the economic crisis, stabilize the economy, and return Thailand to its recovery path. These measures have yielded clear results. To further promote economic recovery, support the economic restructuring process, and enhance the long-run competitiveness of the private sector, the Government has adopted a series of measures in 1998 and 1999 to encourage private investment, including:
The establishment of SIRF, with ADB support; an Equity Fund which will invest in large-scale Thai enterprises which are competitive but require expansion capital or require additional financing to support debt restructuring efforts, with IFC support; a Fund for Venture Capital Investment in SMEs, with Government support; restructuring and recapitalization of the Small Industry Credit Guarantee Corporation and the Small Industry Finance Corporation; and establishment of an Institute for SME Development and the SME Financial Advisory Center, are key components of the measures recently undertaken by the Government to improve SME financing and promote private sector development. 117. ADB Support. The ADB has played a key role in promoting private sector development in Thailand, especially in improving the environment for private sector participation in the energy and telecommunications sectors. The PSG has provided $58.3 million in direct financial support to seven private sector projects in Thailand. Of this amount, $26.8 million was provided in equity and $31.5 million was in the form of loans without Government guarantee. In addition, ADB's regional investment funds have invested $37.9 million in Thailand projects. PSG is currently exploring possibilities for expanded operations in Thailand. In March, the ADB approved a $25 million equity investment in the SIRF as part of its PSG operations. The SIRF has a target size of $100 million and will invest in viable small- and medium sized Thai enterprises in need of expansion capital. The SIRF is a part of the ADB's strategy to assist crisis-affected economies in the region with investment in the private sector. The SIRF will assist in restoration of investor confidence in Thailand. It will also aim to reduce high debt-to-equity ratios of SMEs to a lower and more prudent levels, thereby enabling the banking system to extend credit or provide new loans to these enterprises. The JBIC has played an active role in the development of the SIRF, and is expected to approve an equity investment of $25 million in the SIRF soon. The remaining balance of the SIRF will be raised from the institutional investors, including $10 million from the TFMC, held by SSgA and ADB, which will manage the SIRF. 118. In addition, PSG expects further activity in both its focus areas of infrastructure and capital markets. For example, PSG is considering support for the West Bangkok Water Project in 2000. If this $250 million project goes ahead, it could improve growth prospects for industry in two provinces west of Bangkok, and potentially benefit the environment significantly by reducing the usage of ground water from bore holes. The sponsors of the project have requested PSG's assistance in providing baht-denominated debt. This would not only benefit the project, but could also contribute to domestic capital market development. PSG will consider capital markets projects, especially if they have a synergy with SIRF. This could include exploring concepts such as a project development facility for SME or "business incubators" for SMEs. Such projects would probably have a significant TA component. PSG could also play a role in the banking sector through a regional investment fund. PSG might also work with Industrial Finance Corporation of Thailand (IFCT) in support of IFCT's SME program. 119. The private sector is clearly in need of more long-term debt denominated in the domestic currency. The West Bangkok Water project has purely domestic revenue sources and a high local content in terms of civil works. It is therefore a prime example of a project that needs long-term, baht-denominated debt, for a prudent financial structure. Water tariffs should not be subject to the volatility of exchange rate fluctuations. The sponsors of this project have asked PSG to assist in raising local currency debt, optimally with a tenor of 15 years. The most likely structure would be for PSG to use its partial credit guarantee instrument to enhance the credit of a baht-denominated project bond, thereby stimulating a sufficient volume of interest, mainly from local institutional investors. Unassisted, domestic corporates could not possibly issue bonds with a sufficiently long tenor. Accordingly, PSG, in conjunction with ADB’s Treasurer's Department and the Office of Cofinancing Operations, held preliminary discussions during the CPM with the MOF, the BOT, the SEC and the Thai Bond Dealing Center to explore options for credit enhancement of project bonds. Further discussions will be held in the coming months. 120. Policy Dialogue. The Interim COS for Thailand espouses greater private sector participation in the provision of public sector services in Thailand. Accordingly, in its policy dialogue and loan and TA operations with the Government, the ADB supports privatization and commercialization initiatives, including contracting out public sector functions to the private sector, the use of private intermediaries to channel public sector assistance, the preparation of strategies for privatizing state enterprise, and the identification of suitable opportunities for private sector participation in infrastructure projects. The ADB also provides direct financial support, with credit or equity funds or both, to private enterprise and acts as a catalyst to mobilize resources. The emphasis in Thailand has been on private sector involvement in physical infrastructure investments, environment and natural resources management, and human resource development. Further, the ADB advocates the strengthening of Thailand’s financial and capital markets.
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