Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-4622 TH

MEMORANDUM AND RECOMMENDATION',

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO USt13.0 MILLION

TO THE

STATE RAILWAY OF THAILAND

WITH THE GUARANTEE

OF THE KINGDOM OF THAILAND FOR A

RAILWAY EFFICIENCY IMPROVEMENT PROJECT

August 20, 1987

This document has a restricted dtbtion and may be used by eipdnts only in the pereance oftheir offidl duties. Its content may ot othervise be disclosed without Wodd Bank authoration.

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CURRENCY EQUIVALENTS

Currency Unit = Baht (B)(As of June 1987)

US$ - B 25B 1 - US$ 0.04

FISCAL YEAR

October I - September 30

UNITS AND MEASURES

1 meter (m) - 3.2 feet (ft)1 kilometer (kcm) = 0.62 miles (mi)

ABBREVIATIONS AND ACRONYMS

SRT - State Railway of Thailand

FOR OFFICIAL USE ONLY

THAILAND

RAILWAY EFFICIENCY IMPROVEMENT PROJECT

Loan and Project Summary

;

Borrower: State Railway of Thailand (SRT)

Guarantors Kingdom of Thailand

Amount: US$13.0 million equivalent

Terms: Seventeen years, including a four-year grace period, at theBank's standard variable interest rate.

Financing Plan: SRT $ 1.8 millionIBRD $13.0 million

Total $14.8 million

Economic Rateof Return: n/a

Staff ApvraisalReport: n/a

Map: IBED-20155

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

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED LOAN

TO THE KINGDOM OF THAILANDFOR A RAILWAY EFFICIENCY IMPROVEMENT PROJECT

1. The fellowing memorandum and recowmendation on a proposed loan to theState Railway of Thailand (SRT) for US$ 13.0 million equivalent is submittedfor approval. The loan would halp finance a railway efficiency improvementpro4ect and would be for seventeen years including a four-year grace period,at the Bank's standard variable interest rate.

2. Background. The Bank has been involved with railway development inThailand through five loans, the last of which closed on July 2, 1984. Theprocessing of a sixth railway project was shelved in 1983, primarily becausethe Royal Thai Government (Government) was unwilling to agree to thesubstantial tariff increase which the Bank considered necessary to imprcveSRT's finances. Transport sector work wvs initiated in 1983 and completed in1985 under the Bank's country economic and sector work program; ThailandTransport Sector Review (Report No. 4950-TH) was circulated in grey cover inJune 1985. Railway was an important subsector component of this review. As afollow-up on our sector work, a Bank mission was sent, in February 1985, toassist the Government/SRT in preparing a plan of action aimed at improvingSRT's operations and finances and developing a railway investment strategy forthe Sixth Plan period (1987-1991). During that mission, the Governmentexpressed interest in Bank assistance in support of the Railway's investmentprogram.

3. Proiect Obiectives. The proposed project is designed to help SRTachieve some immediate improvement in its operations and financo. The ulti-mate objective is to develop SRT into not only an operaticnally efficientrailroad, but also a financially viable one. In order for this long-termprogram to be possible, the railroad must first clearly identify the marksetsthat it can effectively and profitably serve. The primary objective of thisproject is thus to identify those market segments and begin to strengthenSRT's ability to compete with the other transport modes for traffic that itcan serve more efficiently and economically. The project will supportmeasures aimed at (i) realigning railway services to match changing demand;(ii) increasing marketing and sales efforts; and (iii) reducing costs per

4 traffic unit through cost reduction and efficiency improvements.

4. Project Description. The proposed project is part of a comprehensiveprogram of technical, economic and finaucial improvements in the railway sub-sector. The core activity would be a major technical assistance and trainingprogram concentrating on reducing the operating cost per traffic unit throughmore efficient operations and increasing revenue by focusing the marketing andsales organization toward intermodal (container freight traffic), medium andlong distance passenger traffic and those other market segments where SRTpossesses a comparative advantage over other modes of transportation. Thebenefits of this project should become apparent in about two years, and willbecome the foundation for a major reorientation of SRT's operating and mainte-nance procedures. The project components are:

- 2 -

(a) technical assistance to SRT in the following areas: managementinformation system, freight and passenger marketing, equipmentrationalization, and procedures to impro-ve the planning and opera-tions of the mechanical and civil engineering departments;

(b) training of railway staff in the areas of the technical assistancepresented above; and

(c) acquisition of computer hardware and software for the managementinformation system, passenger car bogies, turbo chargers, radiocommunications equipment to improve utilization of motive power androlling stock, simulator for training of locomotive drivers andmiscellaneous maintenance equipment related to the objectives of thetechnical assistance activities.

5. The total cost of the project is estimated at US$14.8 million equiva-lent, with a foreign exchange component of US$13.0 million. A breakdown ofcosts and the financing plan are shown in Schedule A. Amounts and methods ofprocurement and disbursements, and the disbursement schedule are given inSchedule B. A timetable of key project processing events and the status ofBank Group operations in Thailand are given in Schedules C and D, respec-tively. A map is also attached. Given the history of preparation and thenature of the project, the project was processed on the basis of an expandedPresident's Report, which is available in the Project File.

6. Rationale for Bank Involvement. Given the experience of the discon-tinued Sixth Railway Project, the Bank decided to follow a two-stage approachto develop a medium and long-term strategy for the railways. During the firststage, this small project, would demonstrate the impact of operational effi-ciency improvements on SRT's finances and test Government/SRT commitment topolicy changes. Our expectations for this operation are limited; the objec-tive is to ascertain the willingness and ability of SRT to institute difficultbut needed changes and the seriousness of the Government's commitment to helpimprove the railway's efficiency. At the second stage, a larger loan for SRTto finance railway investments during the Sixth Plan may be considered depend-ing on the outcome of the first stage project and the Government/SRT's commit-ment to further cost cutting measures and tariff reforms as may be necessary.

7. Our macro-economic dialogue and sector discussions have assisted theGovernment and SRT in initiating measures to improve SRT 's finances. In linewith the Government policy of reducing budgetary subsidies to state enter- gprises, SRT is drawing up a program to improve efficiency in train operations,maintenance, and fuel consumption and to increase revenue through enhancedmarketing efforts. Given its past long association with the subsector and itsrecent detailed review of the transport sector, the Bank is weli placed toprovide the needed assistance to the Government and SRT in accomplishing thesesubsector goals which are primarily efficiency-improvement oriented in scope.The rationale for Bank involvement with the proposed project, to be completedwithin two years, should be seen in this contest. We expect the Governmentand SRT to be even more receptive to further policy reforms after someimprovements are already visible.

-3-

8. AgrEed Actigon. The Government and SUT have agreed on the followingactions: (a) consultation with the Bank before finalizing SRT's annualinvestment programs: (b) annual tariff increases at least to keep pace withinflation; (c) detailed review of SRT's capital structure and a plan by June30, 1988, which will enable SRT to finance future capital investments and toservice residual debt liabilities; (d) action plan to revw.ew SRT's entiretariff structure by December 31, 1988; (e) annual budget provisions and timelypayments to SRT to compensate for losses incurred in maintaining uneconomiclines and services at the Government's request; and (f) payments, according toan agreed program, by the Government to cover SRT's 1985 and 1986 losses bySeptember 30, 1989.

9. Justification and Risks. Economic benefits under the proposedproject are expected from: (a) improved efficiencies in railway operations;and (b) reduction in SRT's losses, initiating the process of making SRT into aviable state enterprise. Possible risks include delay in appointment ofconsultants, thereby delaying the efficiency improvement program. To minimizethis risk, selection of consultants in key areas have already been made.

10. Recommendation. I am satisfied that the proposed loan would complywith the Articles of Agreement of the Bank and recommend that the ExecutiveDirectors approve the proposed loan.

Barber B. ConablePresident

Attachments

August 20, 1987Washington D.C.

- 4 - Schedule A

THAILAND

RAILWAY EFFICIENCY IMPROVEMENT PROJECT

Estimated Costs and Financing Plan(US $ million)

Local Foreign Total

Estimated Cost: /a

Computer hardware andsoftware 0.4 4.6 5.0

Equipment 1.2 6.1 7.3Technical Assistance 0.2 1.9 2.1

Base Cost (June 1987) 1.8 12.6 14.4Contingencies 0.0 0.4 0.4

Total Proiect Cost 1.8 13.0 14.8

Financing Plan:

IBRD - 13.0 13.0SRT 1.8 - 1.8

Total 1.8 13.0 14.8

La As of June 30, 1987, including taxes and duties of $1.6 millionequivalent.

5 - Schedule B

THAILAND

RAILWAY EFFICIENCY IMPROVEMENT PROJECT

Procurement Method and Disbursements(US$ million)

Procurement method TotalProject Element ICB Other Costs

Goods 7.5 5.0 12.5(6.1) (4.6) (10.7)

Services - 2.3 2.3(2.3) (2.3)

Total 7.5 7.3 14.8(6.1) (6.9) (13.0'

Note: Figures in parenthesis represent amounts to be financed by the proposedloan. All amounts include contingencies.

t'isbursements

Categoro Percenta&e

Goods 1002 of foreign expenditures1002 of local expenditures

(ex-factory cost)701 of local expenditures

(other items procuredlocally)

Consultants Services andTraining 100? of total expenditures

Estimated Disbursements

Bank Fiscal Year1988 1989 1990 1991

--- US$ million -----------

Annual 1.5 7.0 4.0 0.5Cumulative 1.5 8.5 12.5 13.0

- 6- Schedule C

TLAILAND

RAILWAY EFSICIENCY RMPROVEMENT PROJECT

Timetable for Key Project Processina Events

Section I TMnqetable of Key Events

(a) Time from project identification to appraisals 16 months

(b) Project preparation by: State Railway ofThailand assistedby Bank missions

(c) First Bank mission to consider the projects February 1985

(d) Appraisals June 1986

(e) Negotiationst April 1987

(f) Planned date of effactiveness: December 1987

(g) List of relevant PCrs and PPARs: Fourth RailwayProject(PPAR No. 2611)Fifth RailwayProject(PPAR No. 6163)

7 Schedule D

P&ge I of 2

THE STATUS OF BANK GROUP OPERATIONS IN THAILAND

A. STATEMENT OF BANK LOANS AND IDA CREDITS /a(AS or MarcM 31, i'gi)

Amour $ million)Loan or less cancellationscredit no. Year Bo:rower Purpose sank IDA Undisbursed

Sixty-one loans and five credits fully disbursed 2,164.13 93.50

929 1979 Kingdom of Thailand Agriculture - 25.00 5.291752 1979 Kingdom of Thailand Agriculture extension 35.50 - 2.611787 1980 Kingdom of Thailand Irrigation 80.00 - 35.601852 1980 Electricity Generating P'nwer 72.00 - 0.27

Authority of Thailand1863 1980 Provincial Waterworks Water Supoly 40.00 - 14.15

Authority1871 1980 Provincial Electricity Rural electrification 75.00 - 0.23

Authority1889 1980 Kingdom of Thailand Inland waterways 53.00 - 25.961918 1980 Kingdom of Thailand Ports 8.47 - 2.811922 )980 Kingc&om of Thailand Agriculture research 30.00 - 17.412000 1981 Electricity Generating Power 100.00 - 21.45

Authority of Thailand2022 1981 Kingdom of Thailand Irrigation 57.00 - 34.402035 1981 Kingdom of Thailand Provircial roads 29.50 - 1.642143 1982 Telephone Organization Telecommunications 121.40 - 10.25

of Thailand2178 1982 Kingdom of Thailand Education 45.20 - 13.792198 1982 Kingdom of Thailand Agriculture 17.00 - 13.982311 1983 Kingdom of Thailand Provincial roads 100.00 - 44.582312 1983 Provincial Electricity Rural electrification 30.60 - 14.57

Authority2402 1984 Kingdom of Thailand Rural development 41.50 - 19.912407 1984 Electricity Generating Mining 15.00 - 14.68

Authority of Thailand2440 1984 Kingdom of Thailand Agriculture 35.00 - 29.542520 1985 Kingdom of Thailand Urban development 27.50 - 27.342548 1985 Bangchak Petroleum Co. Refinery 85.00 - 81.952639 1986 Petroleum Authority Energy 20.00 - 20.00

Thailand2691 1986 Kingdom of Thailand Agriculture 60.00 - 54.06

Total 3,342.80 118.50 506.47

of which has been repaid 569.21 1.20

Total Now Outstanding 2,773.59 117.30

Less: Amount sold /b 127.61 3.10

* Total Now Held by Bank and IDA 2,645.98 114.20

Total Undisburbed 501.18 5.29 506.47

/a The status of the projects listed in Part A is described in a separate report cn allBank/IDA financed projects in execution, which is updated twice yearly and circulatedto the Executive Directors on April 30 and October 31.

/b Of which $43.3 million sold to the Ban&- of Thailand.

-8- Schedule D

Page 2 of 2

B. STATEMENT OF IFC INVESTMENT(As of March 31, 1987)

Investment Loan Equity Totalnumber Year Company Type of business -- (USs million) --

19TH 1959 Concrete Products and Cement & constrtction 0.3 - 0.3Aggregate Co., Ltd. materials

71/185TH 1964/1971 Industrial Finance CoI. Development finance co. - 0.4 0.4of Thailand (IFCT)

147/321/ 1969/1976/ Siam Cement Group Cement & construction 28.3 4.4 32.7419/475/ 1978/1980/ materials477TH 1985368TH 1977 Mutual Fund Company Ltd. Money & c&pital market - 0.3 0.3373TH 1977 United Sugar Terminal Food & food processing 2.5 0.2 2.7

Ltd.401TH 1978 Siam Commercial Bank Small- & medium-scale 2.0 - 2.0

industries425/504/ 1979/1980/ Bangkok Glass Industrial Glass containers 9.9 0.4 10.3661TH 1983 Co., Ltd.

426/562/ 1979/1981/ Siam City Cement Co. Cement & constructiLn 118.3 6.1 124.4736TH 1985 Ltd. materials433TH 1979 Thai Orient Leasing Co. Capital market - 0.1 0.1

Ltd.634TH 1983 Sea Minerals Limited Mining - 0.6 0.6702TH 1983 National Petrochemical Chemicals & petrochem. - 0.5 0.5

Cornoration703TH 1983 Thailand Tantalum Mining 53.5 3.4 56.9708TH 1984 World Aquaculture Food & food processing 3.0 0.7 3.7731TH 1984 Southeast Asia Venture Money & capital market - 1.0 1.0

Investment (Seavi)820TH 1986 Masbhumi Limited Mining - /a /a

860TH 1986 Phya Thai II Health care 4.2 0.8 5.01986 NACO Tomato paste 1.5 0.5 2.o1987 The Thailand Fund Money & capital market 9.7 9.7

Total Gross Commitments 223.5 29.1 252.6

Less cancellations, terminations,repayments and sales 171.1 14.1 185.2

Total Commitments Now Held by IFC 52.4 15.0 67.4

Total UTndisbursed (includingparticipant's portion) 58.7 4.1 62.8

/a $45,969.

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