Document ofThe World Bank

Report No: 17017-TH

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED LOAN

IN THE AMOUNT OF US$15 MILLION

TO THE

KINGDOM OF THAILAND

FOR A

FINANCIAL SECTOR

IMPLEMENTATION ASSISTANCE PROJECT

SEPTEMBER 8, 1997

Thailand Country Management UnitEast Asia and Pacific Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective 34 bahts/dollar)

Currency Unit = baht1 baht = US$0.0294

US$1 = 34baht

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS

AME Asset Management EntityBOI Board of InvestmentBOT Bank of ThailandDGA Deposit Guarantee AgencyFIDF Financial Institutions Development FundFPO Fiscal Policy OfficeIFCT International Finance Corporation of ThailandMOC Ministry of CommerceMOF Ministry of FinanceMOI Ministry of IndustryNESDB National Economic and Social Development BoardPLMO Property Loan Management OrganizationSEC Securities and Exchange CommissionSET Stock Exchange of ThailandSME Small/Medium Sized EnterpriseSOE Statement of ExpendituresSSO Social Security Office

Vice President: Mr. Jean-Michel SeverinoCountry Director: Mr. J. Shivakumar

Sector Director: Mr. Jonathan FiechterTask Team Leader: Mr. Jonathan Fiechter

ThailandFinancial Sector Implementation Assistance Project

CONTENTS

PageA. Project Development Objective

1. Project development objective and key performance indicators 2

B. Strategic Context

1. Sector-related CAS goal supported by the project 22. Main sector issues and Government strategy 23. Sector issues to be addressed by the project and strategic choices 3

C. Project Description Summary

1. Project components 42. Key policy and institutional reforms supported by the project 43. Benefits and target population 44. Institutional and implementation arrangements 5

D. Project Rationale

1. Project alternatives considered and reasons for rejection 52. Major related projects financed by the Bank and/or other development agencies 63. Lessons learned and reflected in proposed project design 64. Indications of borrower commitment and ownership 65. Value added of Bank support in this project 6

E. Summary Project Analyses

1. Economic 62. Financial 63. Technical 74. Institutional 75. Social 76. Environmental assessment 77. Participatory approach 7

F. Sustainability and Risks

1. Sustainability 72. Critical risks 83. Possible controversial aspects 8

G. Main Loan Conditions

1. Effectiveness conditions 82. Other 8

H. Readiness for Implementation 8

I. Compliance with Bank Policies 9

Annexes

Annex 1. Project Design Summary 10Annex 2. Detailed Project Description 12Annex 3. Estimated Project Costs 19Annex 4. Cost-Benefit Analysis Summary 20Annex 5. Financial Summary 21Annex 6. Procurement and Disbursement Arrangements 22

Table A. Project Costs by Procurement Arrangements 23Table B. Thresholds for Procurement Methods and Prior Review 24Table C. Allocation of Loan Proceeds 25

Annex 7. Project Processing Budget and Schedule 26Annex 8. Documents in Project File 27Annex 9. Statement of Loans and Credits 28Annex 10. Country at a Glance 29

ThailandFinancial Sector Implementation Assistance Project

Project Appraisal Document

East Asia and Pacific RegionThailand Country Management Unit

Date: September 8, 1997 Task Team Leader: Jonathan FiechterCountry Director: J. Shivakumar Sector Director: Jonathan FiechterProject ID: Sector: Financial Sector Program Objective Category: Financial Sector

Management ManagementLending Instrument: Technical Assistance Loan Program of Targeted Intervention: [] Yes [X] No

Project Financing Data [X] Loan [ Credit [] Guarantee [] Other [Specify]

For Loans/Credits/Others:

Amount (US$m/SDRm): 15Proposed terms: [] Multicurrency [x] Single currency

Grace period (years): 3 years [] Standard Variable [x] Fixed [] LIBOR-basedYears to maturity: 15Commitment fee: 0.75 %

Financing plan (US$rn):Source Local Foreign Total

Govemment 7.0 0.0 7.0IBRD 3.7 11.3 15.0

Total 10.7 11.3 22.0

Borrower: Royal Thai GovernmentResponsible agency: Ministry of Finance

Estimated disbursements (Bank FY/US$m): 1998 1999 2000Annual 9.0 4.0 2.0

Cumulative 9.0 13.0 15.0

Project implementation period: October 1, 1997, to March 31, 2000Expected effectiveness date: October 1, 1997 Expected closing date: September 30, 2000

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A: Project Development Objective

1. Project development objective (see Annex I for key performance indicators):

The objective of the proposed project is to provide implementation assistance to the Royal Thai Government inimproving the structure, resiliency and soundness of the financial sector, and to address the immediate need toresolve finance companies which have been suspended during the recent economic crisis.

The proposed project would be part of a broad effort supporting the stabilization and structural adjustrnent programthat Thailand has embarked upon to restore sustainable levels of economic growth. It would complement thestandby facility provided by the IMF and the emergency financing package from bilateral and multilateral sources.The project is the initial component of the World Bank's contribution to this effort which proposes an expandedlending program centered on two consecutive structural adjustment loans. The first structural adjustment loan(SAL) would focus on the financial sector, and the second SAL on broader structural measures designed to enhancethe competitiveness of the Thai economy.

B: Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1):

CAS document number: 13458-TH Date of latest CAS discussion: August 9, 1994

The last CAS prepared for Thailand was discussed by the Board in 1994 and, given the changed circumstances ofthe country, needs to be revised. A new CAS is under preparation and is expected to be presented to the Board in1998. Meanwhile, an outline CAS will be presented to the Board together with the documentation for a structuraladjustment lending operation. The centerpiece of the new CAS will be support for the development of a mediumterm macroeconomic framework, through reform of the financial sector, reform of the public sector, andstrengthening the enabling environment for private investment. The CAS will also encompass a series of real sectorinterventions focusing on energy, infrastructure, environment and human development, designed to enhanceThailand's intemational competitiveness. The present implementation assistance operation will help to build theanalytical and institutional foundation for measures directed toward this effort, with particular emphasis on thefinancial sector.

2. Main sector issues and Government strategy:

The main sector issue is the need to increase the efficiency of financial intermediaries to resume sustainableeconomic growth. This requires (i) strengthening the financial sector, especially through resolution of thesuspended fnance companies; and (ii) strengthening private investment and competitiveness; supported by (iii) asound macroeconomic and fiscal strategy.

The Thai financial sector has come under increasing stress due to several factors that include a weakening of thedemand for real estate, the recent depreciation of the baht by over 30 percent, high domestic interest rates, andrelated problems of asset quality in finance companies and commercial banks. The pressure on the financial sectorhas resulted in loss of confidence as demonstrated by the cutting of foreign credit lines and .depositor runs onweaker frnancial institutions. To restore confidence, the Royal Thai Government has agreed to a stabilizationprogram with the IMF, which is being supported by a US$17 billion emergency financing package. Addressing thefinancial system crisis is a key element in the program. A comprehensive approach will be taken for restructuringincluding changes in the regulatory, tax and governance policies.

Within the financial sector, it is critical that the Royal Thai Government immediately begin to address the issue ofthe suspended finance companies. This needs to be followed by actions to improve the structure, resiliency andsoundness of the financial sector to minimize the risks of the recurrence or deepening of the present crisis and torestore confidence.

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The Royal Thai Government's comprehensive strategy to restructure the financial sector includes the following:

* identifying and taking measures to strengthen all weak financial institutions;* extending, under emergency conditions, a comprehensive but temporary guarantee of liabilities in all remaining

financial institutions until it can be replaced by a self-financed limited deposit guarantee program;* adopting measures to minimize the moral hazard risks of the temporary guarantee through a combination of a

special guarantee fee, interest rate caps and intensive prudential monitoring of asset growth in individualinstitutions;

* conditioning future liquidity support for financial institutions on concurrent actions by the institutions torecapitalize; for those institutions unable to recapitalize, taking appropriate holding actions including non-payment of dividends and no asset growth to stem losses and to reduce the exposure of the FinancialInstitutions Development Fund (FIDF);

* requiring all remaining financial institutions to bring their capital bases to an adequate level in an expeditiousmanner;

* improving the procedures for supervision and examination, including asset classification, regulatoryaccounting, income recognition and provisioning; and

* implementing broad-based structural reforms to strengthen the framework for a sound financial sector.

Increasing the competitiveness of the private sector is the second key element of the Government's recoveryprogram. This medium term issue will be a focus of subsequent projects. Thailand's comprehensive reforms overthe past decade have allowed the private sector to become the main engine for growth. In the future, furtherstructural measures will be needed to facilitate the absorption of technology, upgrade the skills of the labor force,and address rising unit labor costs to improve export performance and create sufficient jobs. Thailand'scompetitiveness will also significantly depend on further improving the enabling environment for the private sector,especially for small and medium sized enterprises (SMEs).

Thirdly, in the medium term, the Government needs to ensure coherence of macroeconomic policy making andstrategy, especially for the fiscal sector. Given the need for fiscal retrenchment, the Government has to prioritizepublic expenditures, streamline budget implementation and develop focused interventions for state ownedenterprises and social security.

3. Sector issues to be addressed by the project and strategic choices:

Given the urgency of the present situation, this project would focus on the financial sector and on issues related tocorporate governance and finance that affect the investment climate. Other economic areas would be covered insubsequent adjustment lending. The proposed project would support short and medium term financial sector reformby (i) providing immediate assistance to address the resolution (e.g., through recapitalization, closures, sales andmergers) of troubled financial institutions and recovery of assets; (ii) improving the regulatory and supervisoryenvironment designed to enhance capacity to deal with banking institution problems and their underlying causes;(iii) implementing policies to improve the timeliness and quality of information and to develop institutions (such asthe Deposit Guarantee Agency) with the aim of creating much stronger incentives for market discipline of financialinstitutions; and (iv) undertaking several longer term studies to assess options for future financial sectordevelopment that affect the investment climate.

The regulatory and supervisory environment would be strengthened by (i) developing supervisory systems andregulations to more quickly identify future problems in financial institutions; (ii) restructuring and upgradingsupervision and examination functions; (iii) improving market discipline and transparency by enhancing accountingpractices, and the availability of accurate information; (iv) replacing the present comprehensive government depositguarantee with a permanent more limited deposit guarantee program; (v) strengthening incentives for corporategovernance; and (vi) upgrading the legal framework for bankruptcy and foreclosure.

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C: Project Description Summary

1. Project components (see Annex 2for a detailed description and Annex 3for a detailed costbreakdown):

Coponn Category Cost %of Bank- % ofTotal financing Bank-

___________________ (US$') _(US$m) financing1. Financial sector1.1 Strengthening financial institution Technical 14.5 66.0 9.2 63.6

resolution processes assistance1.2 Improving capacity to identify future Technical 3.1 14.3 2.3 73.5

problem financial institutions in an assistanceappropriate timeframe and raisingsupervisory standards

1.3 Rationalizing the supervisory regime Institution 0.2 0.9 0.2 100.0building

1.4 Strengthening market discipline Institution 2.2 10.0 1.6 72.3building

1.5 Improving the bankruptcy and Institution 0.5 2.3 0.4 80.0collateral foreclosure processes building

1.6 Implementing financial infrastructure Institution 1.0 4.6 0.9 91.0and institutional changes building

2. Project coordination andimplementation

2.1 Consulting services for studies Project 0.4 1.8 0.4 100.0management/

TA2.2 Equipment Physical 0.1 0.2 0.0 40.0

Total 22.0 100.0 15.0 68.2NOTE: Rounding affects totals

2. Key policy and institutional reforms supported by the project:

The project would support the Govermuent's capacity to address the present financial sector crisis, which threatensto undermine economic stability and growth. Important policy reforms embedded in the govermment financialrestructuring program will be supported including: (i) design of an overall resolution policy for addressing theproblems of troubled fmancial institutions; (ii) policies to create incentives for greater market discipline viaenhancement of accounting practices, public disclosures, and improved corporate governance by shareholders,Directors, CEOs and senior advisors; (iii) improved supervisory policies to limit discretion of authorities and tointroduce better processes of "prompt corrective action" in cases of problem fmancial institutions; and (iv) efforts tophase out the present comprehensive guarantee program via development of a self-financed deposit guaranteescheme.

Institution building will focus on: (i) development of the institutions needed to support immediate efforts to resolvethe suspended finance companies such as an asset management entity; (ii) intensive programs for buildinginstitutional capacity to undertake more effective supervision of financial institutions by the Fiscal Policy Office(FPO) of the Ministry of Finance (MOF) and the Bank of Thailand (BOT); and (iii) actions to develop a DepositGuarantee Agency (DGA) as part of government efforts to phase out the present emergency comprehensiveguarantee provided to depositors and creditors of financial institutions.

3. Benefits and target population:

The project is aimed at reducing the fiscal costs of the financial sector restructuring program through design ofpolicies and institutional arrangements to resolve the suspended fmance companies quickly and limit the extent ofcontagion to non-suspended financial institutions. Other benefits will include a much stronger institutionalframework for banking supervision; improved market discipline; and much more effective procedures for corporatebankruptcy and foreclosure on collateral. Finally, the project supports development of policies that will place the

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financial system on a sounder footing, increase confidence, and gradually reduce the credit crunch in the real sectorof the economy.

4. Institutional and implementation arrangements:

The implementation period of the loan would cover a period of approximately two and a half years to complementthe proposed structural adjustment lending to be provided by the World Bank. The executing agency under theproject would be the Ministry of Finance (MOF) with the Fiscal Policy Office (FPO) within the Ministry acting asthe lead project implementation unit. FPO would assign a task manager who would act as the Government's maintechnical counterpart for the project. This task manager would be allocated part of the implementation assistancebudget to achieve effective project management, procure equipment and engage local and international consultants.There would be several other implementation agencies under the project, including the Bank of Thailand (BOT). AProject Coordination Committee would convene regularly to monitor progress and project implementation,consisting of MOF, BOT, the Board of Investment (BOI), the National Economic and Social Development Board(NESDB), Ministry of Commerce (MOC), Securities and Exchange Commission (SEC) and other agencies involvedin the project. On the Bank's side, supervision would be carried out by the Country Management Unit based inBangkok in coordination with more specialized staff in units at headquarters.

Project records and accounts would be maintained by the FPO to reflect, in accordance with sound accountingpractices, the operations, resources and expenditures for each project activity. The accounts will be consolidatedannually into financial statements for the project as a whole. Supporting documentation will be made available tothe Bank's Country Management Unit and independent auditors as required. For expenditures incurred on the basisof Statements of Expenditures (SOEs), all records providing evidence for such expenditures will be retained by theFPO until at least one year after the Bank has received the audit report for the fiscal year in which the lastwithdrawal from the Loan Account or payment out of the Special Account is made, whichever is later. Projectrecords and accounts, including the Special Account and SOEs, will be audited annually in accordance withappropriate auditing principles that are consistently applied by auditors acceptable to the Bank, with terms ofreference for auditors and reports approved by the Bank. The Bank's Financial Accounting, Reporting, andAuditing Handbook (FARAH) published in January 1995 would be used by the auditors in accordance with Bank'sauditing guidelines. Audit reports will be furnished to the Bank within four months after the close of theGovernment's fiscal year.

Monitoring of project execution will be undertaken by FPO which will provide the Bank with an annual workingplan not later than December 31 of each year, starting 1997. Annual reviews of the project will be carried out notlater than March 31 of each year, starting in 1998. A mid-term review will be conducted by March 1999 to assessprogress in meeting agreed performance indicators and to identify additional implementation support as needed.Semi-annual progress reports will be presented to the Bank no later than 30 days after the conclusion of eachcalendar semester, starting 1998.

D: Project Rationale

1. Project alternatives considered and reasons for rejection:

The present state of Thailand's economy makes it imperative to provide focused implementation assistance to theGovernment for implementing its financial sector restructuring program. The groundwork also needs to be laid forimproving the efficiency with which investment is allocated. The Royal Thai Government has requested the Bank'ssupport for its macro-stabilization and structural adjustment programs through implementation assistance andstructural adjustment lending. The proposed implementation assistance loan is a critical element of the Bank'soperations in response to that request. It is heavily focused upon the financial sector in line with an agreementbetween the Bank and the Government to implement urgent financial sector reforms to build confidence andenhance credibility of the Government's economic policies. Finally, the operation has been designed in closecoordination with the IMF under the new collaborative agreement for financial sector work that has been endorsedby both Boards.

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2. Major relatedprojects financed by the Bank and/or other development agencies (completed, ongoingandplanned):

Financing Agency Sector issue ProjectIBRD Structural adjustment Structural Adjustment Loan(s)IFC Investments in private sector (see Annex 9)

fnancial intermediariesIMF Macroeconomic stabilization Stand-by FacilityADB Policy-based lending Capital Markets Development

LoanADB Policy-based lending Social Sector Program Loan

3. Lessons learned and reflected in the project design:

Projects need strong stakeholder commitment organized in an effective fashion to ensure that project objectives aremet. In urgent situations, project preparation, as well as subsequent implementation, has to be swift and projectdesign should allow for considerable flexibility to meet the complex changing requirements of a rapidly evolvingsituation. Moreover, in fnancial institution restructuring, it is essential to address the underlying causes of theproblems and the resulting capital inadequacy, illiquidity or insolvency.

4. Indications of borrower commitment and ownership:

The Royal Thai Government has urged the Bank at the highest levels to initiate the proposed project within a veryshort time frame. The Government has a strong, commitment to the existing IMF program which is supported by theobjectives of this loan. There is a clear recognition on the part of the Government that prompt action throughstructural adjustment is required to linit wider adverse repercussions of the fnancial crisis and return Thailand to asustainable growth path. Evidence of government commitment can be seen in recent efforts to establish a high levelResolution Steering Committee with public and private sector representation that will have overall responsibility forresolution of the suspended finance companies. In addition, the Government has agreed to immediately establish adedicated and small multidisciplinary, multi-agency unit (the Resolution Management Unit) with private sectorrepresentation to work with external consultants and Bank staff in order to define and implement the resolutionstrategy.

5. Value added of Bank support in this project:

The Bank can add value by (i) making a contribution to the restoration of international confidence in thegovernment's economic policies and in its program of support to financial sector restructuring; (ii) drawing on itswide international experience in design of financial sector reforms and in assisting in strategies for resolution oftroubled fnancial institutions; (iii) drawing on its experience in combining macrostabilization and structuraladjustment programs; and (iv) sourcing international consultants with specialized expertise in the appropriateproject component areas.

E: Summary Project Analysis

1. Economic:

Not Applicable

2. Financial:

The project is expected to augment the Royal Thai Government's efforts to begin to (i) achieve macrostabilizationof the economy; (ii) strengthen governance of the financial sector; (iii) resolve the problem of suspended financialcompanies; (iii) better protect shareholders, depositors and creditors of banking and financial institutions;(iv) promote financial transparency through an enhanced legal framework; and (v) improve the framework forallocation of investment resources.

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Fiscal impact:

The project is expected to assist in minimizing the fiscal impact and increasing the fiscal revenue base by providingsupport for (i) resolution of the suspended fnancial companies; (ii) shortening the adjustment period; (iii) reducing 7the risk that the crisis will spread to additional financial institutions; and (iv) enhancing the framework for corporatefinance.

3. Technical:

The project will ensure that the Royal Thai Government obtains access to high quality international expertiseavailable from external consultants.

4. Institutional:

a. Executing agencies:

The project is expected to help Thailand build its institutional capacity through implementation assistance, training,studies and institution building. In particular, the project is targeted at improving the Ministry of Finance's and theBank of Thailand's capability to formulate and implement policies to deal with the financial crisis, strengthen theregulatory and supervisory environment and to face the challenges posed by the exposure of Thailand to increasingglobalization.

b. Project management:

The project will be coordinated by forming an inter-agency Project Coordination Committee. Projectimplementation, procurement and disbursement will be managed by FPO, which would act as the government'smain counterpart for the project.

5. Social:

Not Applicable

6. Environmental assessment: Environmental Category [] A [] B [x] C

7. Participatory approach:

a. Primary beneficiaries and other affected groups:

Due to the short time for project preparation, extensive consultation could not be held with a wide range ofstakeholders. However, discussions were held on a selective basis with representatives from financial institutions,corporations, government agencies, industrialists and bankers. In addition, the project has been designed to buildconsensus with other stakeholders (e.g. private market participants) in the process of implementing thecontemplated tasks.

b. Other key stakeholders:

See above.

F: Sustainability and Risks

1. Sustainability:

Sustainability is an intrinsic element of the project development objective, in that the implementation assistance loanaims to improve macroeconomic management leading to sustainable long-term growth of the Thai economy. Whilethe immediate focus of the assistance is to deal with the financial work-out of troubled financial institutions, theprogram includes a more fundamental set of measures designed to improve the supervisory, legal and enablingenvironment to improve the long-term soundness and resiliency of the financial system. Moreover, it is anticipatedthat subsequent structural adjustment operations will provide considerable follow-up in areas addressed by thisproject.

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2. Critical Risks (reflecting assumptions in the fourth column of Annex 1):

Risk Risk Rating Risk Minimization Measure

From Outputs to ObjectivePolitical instability H Ensuring broad ownership of the

operation by different levels in variousinstitutions

Wavering political commitment H Dialogue on the operation with highestlevels of government

Adverse social impact of adjustment M Measures to shorten adjustment periodLack of interagency coordination S Establishment of interagency

Resolution Steering CommitteeIncreased fiscal impact of financial work-outs S Strong counterpart team led by FPO forbecause of delays in this operation implementing the operation

From Components to OutputsInappropriate choice of counterparts N Strong leadership for operation

provided by FPO within the MOFInadequate allocation of government funds for M Establishment of strong projectoperation management capacity in FPO

Overall Risk Rating H Intense project supervision in the field

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

3. Possible Controversial Aspects:

Controversial aspects of the project comprise:(i) perception that financial resolution may be neither open nor fair;(ii) possible conflicts of interest in resolution of troubled financial institutions;(iii) public resentment against economic stabilization package in general and further loss of public confidence in

Government's capacity for economic management; and(iv) lack of coherence in articulation of government policy, which may lead to conflicting interpretations.

G: Main Loan Conditions

1. Effectiveness Conditions:

None.

2. Other:

Covenants in the Loan Agreement are: (i) to maintain the Resolution Steering Committee; (ii) to establish andmaintain a Resolution Management Unit; and (iii) to furnish to the Bank for its review and comments, proposedpolicies, guidelines and procedures for the resolution of troubled fnancial institutions, and proposed measures toenhance early detection and corrective actions for troubled financial institutions.

H. Readiness for Implementation

The project has been prepared in close consultation with a project team consisting of the different governmentagencies concerned. The Government is ready to implement the project, with the FPO taking leadership. While thecosts involved in delaying implementation are unacceptable, the risks in proceeding with the immediateimplementation are high because of political instability and wavering political commitment.

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I. Compliance with Bank Policies

[X] This project complies with all applicable Bank policies.

Task T Leader: J. Fiechter

Sector Director: J. Fiechter

Country Director: J. Shivakumar

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Annex 1

Project Design Summary

Thailand: Financial Sector Implementation Assistance Project

Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical AssumptionsSector-related CAS Goal: (Goal to Bank Mission)

Development of a medium termmacroeconomic framework,through reform of the financialsector, reform of the public sector,and strengthening of the enablingenvironment for privateinvestment.Project Development (Objective to Goal)Objective:

Support for the Royal Thai * Political stabilityGovernment in implementing a * Unwavering politicalstabilization and structural commitmentadjustment program to restore * Minimal social impact ofsustainable levels of economic adjustmentgrowth.

Outputs: Key Performance Indicators Monitoring and Evaluation Critical Assumptions(Outputs to Objective)

I. I strengthened financial - overall structure of resolution Quarterly reviews and progress * Strong interagencyinstitution resolution process defined reports coordinationprocesses - operating guidelines for * No unforeseen fiscal impacts

suspended finance companies of financial work-outsestablished

- established procedures andoperational guidelines forcreditors

- enabling legal and regulatoryframework in place

- guidelines and criteria forresolutions in place

- communications strategy onresolutions operational

- due diligence process in placeand initiated for relevantcompanies

- Asset Management Entity(AME) established andoperating

- processes for selection ofinvestment advisors in place

- investment advisors selected1.2 improved capacity to identify - early warning procedures and Quarterly reviews and progress

future problem financial systems in place reportsinstitutions in an appropriate - accounting and reportingtimeframe and raised treatment of nonperformingsupervisory standards loans agreed and announced

- process for diagnosing high riskinstitutions in operation

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Outputs: Key Performance Indicators Monitoring and Evaluation Critical Assumptions(Outputs to Objective)

1.2 (continued.) - training program forsupervisory capacity completed

- new techniques for assetclassification, provisioning andliquidity management in place

- prompt corrective action againstproblem banks established inlaw, supervisory policy andprocedures

- FPO training program forexaminers of specialized bankscomplete

1.3 rationalized supervisory - review of supervisory structure Quarterly reviews and progressregime completed reports

1.4 strengthened market - Deposit Guarantee Agency Quarterly reviews and progressdiscipline (DGA) implementation plan reports

finalized- newv corporate govemance rules

established- newv auditing, accounting and

public disclosure guidelinesestablished

- newv standards for self-regulatory associationsestablished (e.g., credit bureaus,appraisers/valuers, auditors,accountants)

1.5 improved bankruptcy and - new bankruptcy, collateral Semi-annual progress reportcollateral foreclosure foreclosures and disputeprocesses resolution procedures proposed

1.6 financial infrastructure and - modemization of financial Quarterly reviews and progressinstitutional changes structure completed reportsimplemented - development of government

debt market completed- debt management and

monitoring of capital flowscompleted

Project Components/Sub- Inputs: (budget for each Monitoring and Evaluation Critical Assumptionscomponents: (see Annex 2 component) (Components to Outputs)for project description) (US$ million)

1. Financial sector1.1 Financial institution 14.49 Project Coordination Committee . Appropriate choice of

resolution and consultant reports, draft counterparts1.2 Future problem financial 3.13 legislation and regulations, audit * Adequate allocation of

institutions and supervisory reports, training reports and govemment funds forstandards evaluations, procedural guideline, operation

1.3 Supervisory regime 0.20 and procurement records1.4 Market discipline 2.201.5 Bankruptcy and collateral 0.50

foreclosure processes1.6 Financial infrastructure and 1.00

institutional changes2. Project coordination and 0.45 Employment, procurement and

implementation training records

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Annex 2

Financial Sector Implementation Assistance ProjectProject Description

Project Component 1. Financial Sector - US$21.5 million

The financial sector component of the implementation assistance loan is designed to meet two overriding objectives. First,the assistance program is intended to support Royal Thai Government actions to resolve (i.e., recapitalize, merge, sell orliquidate) troubled financial institutions. Second, the program is intended to support a package of actions to improve thestructure, resiliency and soundness of the financial sector. To meet these two objectives, six distinct components forimplementation assistance have been identified. The areas of assistance to the Government include:

1.1 expert advice to assist in refining the process to address the resolution of troubled financial institutions. Given thescope and complexity of the overall resolution process, a government unit specifically dedicated to this task is essential;

1.2 strengthening the supervisory process by upgrading the supervision and examination bodies through training andenhancement of supervisory systems (e.g., supervision, examination, reporting, and off-site monitoring systems) andregulatory policies, with an initial concentration on enhancing supervisory capacity to identify problems in financialinstitutions on a timely basis and on instruments and rules that will result in prompt corrective actions;

1.3 rationalizing the supervisory and examination structure of financial institutions through an analysis of alternativesto the present structure and allocation of responsibilities among the various authorities;

1.4 developing recommendations for MOF consideration to improve market discipline by enhancing accounting practicesand the timelines and quality of information that market participants receive, and by creating better- incentives for propercorporate governance by shareholders, directors, and advisors to Boards and to CEOs;

1.5 recommending improvements in the legal framework for bankruptcy and foreclosure in credit contracts by improvingthe scope for loan recovery and to ensure that voluntary debt restructurings can be more easily facilitated.

1.6 undertaking several high priority studies related to the financial infrastructure and institutional changes to supportthe safe and orderly development of the structure of the financial system; improving external debt management andexchange rate management; and improving government monitoring and management of capital flows in the future--inclusive of privately contracted external debt.

The Bank intends to coordinate its assistance program closely with other multilateral lenders including the InternationalMonetary Fund and the Asian Development Bank.

1.1 Strengthening Financial Institution Resolution Processes

The Government of Thailand has established a high level Resolution Steering Committee to develop the restructuring andresolution policies of the Government for the suspended finance companies. The Committee is responsible for decisions onspecific restructuring and resolution proposals and for coordinating the activities of the related government entities. Morebroadly, the authorities have recognized the need to define more clearly the precise parameters to be adopted for theresolution process applied to all financial institutions.

This component is designed to assist the Committee, and authorities more generally, by providing expert advice in thefollowing specific areas:

(i) developing procedures to supervise, manage, conduct due diligence of the troubled institutions, and prepare resolutionstrategies;

(ii) establishing explicit criteria and procedures as well as institutional arrangements among the relevant agencies (e.g.,FIDF, BOT, PLMO, and AME, etc.) to plan and implement resolutions;

(iii) establishing the legal and regulatory framework to enable the Government to resolve the suspended institutions;(iv) establishing the institutional capacity for asset disposition and sales through development of an asset management entity;

and(v) proving the Government's communications strategy for explaining the resolution process for troubled financial

institutions, including suspended fnance companies.

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Interim Financial Supervision and Institutional Due Diligence: The status of the suspended finance companies requiresimmediate evaluation. Action is required to develop basic guidelines governmg the operations of the suspended companiesprior to their resolution. Guidance will be provided to the Government on necessary supervisory actions to be takenincluding establishing rules governing any extensions of credit by troubled institutions prior to resolution, replacement ofweak management and ongoing supervisory monitoring.

Immediate steps also need to be taken to initiate due diligence to determine the value of the assets, liabilities, net worth ofeach institution, and some assessment of viability and saleability. The sequencing of institutions chosen for due diligenceand resolution should be prioritized to begin resolving the stronger institutions first as this can be important in building"confidence" among market participants. The results of each due diligence will be necessary prior to the time when acompany is put up for sale, merged, restructured or liquidated.

Structure of the Resolution Process: The objective of this sub-component is to assist the Resolution Steering Committee andrelated government agencies in establishing explicit criteria, procedures, and policies as well as the institutional arrangementsto conduct resolutions of the suspended companies. Specifically, assistance will be provided through retention of specializedadvisors and consultants to assist the Resolution Steering Committee in:(i) organizational arrangements for establishing proper coordination and staffing of a centralized multi-disciplinary unit

employed by the Committee to assist in implementing and overseeing the resolution process';(ii) development of practical criteria to assess rehabilitation or other restructuring/resolution plans presented to the

Committee;(iii) criteria, trigger points, and processes for liquidation of finance companies or asset disposition; and(iv) choice of sale-side, financial, and other advisors to assist in evaluating resolution proposals and in undertaking asset or

financial institution sales.

Supporting Lea. Regulatory and Accounting Framework for Resolutions: The process of resolving troubled financialinstitutions will require a review and, in some cases, amendments to the existing legal and regulatory framework. Thiscomponent will support retention of consultants and legal advisors to assist the authorities in ensuring that the legal andregulatory framework provides sufficient flexibility to permit the Government to resolve troubled financial institutions usinga variety of options. The areas to be reviewed will include: processes for intervention of the suspended institutions; thesupervisory steps needed to bring them to resolution including receivership and conservator actions; transfer of legal claimsto collateral, asset disposal, litigation management, and pursuit of those individuals responsible for losses. Finally, theaccounting and tax treatment will be reviewed to ensure the existing framework is consistent with the timely and efficientresolution of insolvent institutions at minimum cost to the Government.

Establish an Asset Management Entity (AMEL: As part of strengthening the process of resolution for troubled financialinstitutions, the Government may need to remove nonperforming assets and other hard-to-sell-assets from individualfnancial institutions before they are resolved. These assets will need to be managed in an organized manner until they aresold or liquidated. The concept of an AME will be evaluated and a template developed describing its possible organization,management, and staffing. Expert advice will also be provided to the Resolution Steering Committee on various methods forasset disposition, risk management, internal controls, and accounting and tax issues. Finally, assistance will be provided atvarious points in the process of establishing and running the entity.

Communications Strategy: Establishing an effective communications strategy that enhances Government credibility will be akey element within an overall approach to resolution of troubled financial institutions and management of the various classesof depositors and creditors. Advice would be provided in designing a communications strategy for the appropriate body andofficial spokesman that includes a program of regular briefings to explain the Government's approach to addressingproblems in the financial sector and the status of the resolution process. The target audience would be the general public,legislators and both domestic and foreign investors and creditors.

This will include assistance in establishing the skill mix of the working group, defining the functions of its members and defining how the group cancoordinate roles of different government agencies involved as well as defining the exact lines of decision-making.

14

1.2 Improving Capacity to Identify Future Problem Financial Institutions in an Appropriate Timeframe and RaisingSupervisory Standards

Improving the supervisory function, particularly in BOT and FPO is an essential aspect of the Government program to placethe financial system on a sounder footing. These two entities together have responsibility for the supervision of close to 95percent of total financial system assets. If the economic downturn intensifies as a consequence of weakness in the real estatemarket, high domestic interest rates, and the recent drop in the exchange rate, it will become increasingly important that Thaiauthorities, the BOT, and other financial institution supervisory officials improve their capacity to identify risky and troubledinstitutions. Early detection will also limit the risk of weak institutions engaging in rapid growth or acquiring other problemcompanies.

This component will assist the Government to: (i) better assess the condition of all financial institutions includingcommercial banks; (ii) strengthen financial institution supervision; and (iii) enhance the supervisory regime governing thespecialized financial institutions and provident funds.

Expert advice would be available to the Government to assist in establishing procedures for more effective and timelyhandling of any future problem financial institutions. Assistance will take the form of secondments of bank supervisors andother experts, and training. Specific areas addressed below include: (i) strengthening the capability for early detection ofproblem institutions; (ii) establishment of prompt corrective action rules; (iii) diagnostic reviews to augment regularexaminations; (iv) improved methodologies for off-site assessments of financial institutions; and (v) strengthening financialinstitution supervision through a medium term program of implementation assistance and training.

Strengthening the Capability for Early Detection of Problem Institutions: Strengthening early detection capability and earlywarning systems will require development and enforcement of a uniform set of strict rules for all financial institutions toimprove the basic information used by the supervisory officials to assess financial operating condition. These rules (e.g.,asset classification, income recognition, provisioning guidelines, loan concentrations, liquidity management and interest raterisk management), will allow supervisors to better assess the true quality of loan portfolios and liquidity positions. Inaddition, enhanced income recognition and provisioning guidelines will provide a more realistic picture of capital and itsadequacy relative to risk-adjusted assets.

Establishment of Procedures and Capacity for Prompt Corrective Actions: Implementation assistance will be provided todesign procedures and to enhance the capacity of the Government to take prompt corrective actions when banks, financecompanies, and other financial institutions are not in compliance with certain rules. Assistance will be provided to develop aset of rigorous enforcement rules with supervisory sanctions commensurate with the degree of legal or regulatory violations.These rules would be aimed at restricting supervisory discretion in order to minimize supervisory forbearance. Over themedium term, these rules could be introduced as legislation and include trigger points that would require supervisory and/orgovernmental action. In addition, assistance will be provided to review, and if required, modify a series of administrativeactions (such as management letters, Memorandum of Understanding (MOU), formal agreements, and cease and desistorders) that would escalate in severity according to the nature and risk of the financial institution. Finally, expert advice andtraining will be provided to strengthen supervisors' capacity to develop remedial programs for weak financial institutions.

Diagnostic Reviews to Augment Regular Examinations: Expert advice will be provided to design and finance specialdiagnostic reviews of commercial banks and non-suspended finance companies to improve the underlying quality ofinformation available to supervisory agencies in their assessment of banks, finance companies, and other financialinstitutions. These reviews could be conducted by special examination teams comprised of on-site examiners as well asconsultants and auditors. Focused training would be provided to a special group of examiners for this specific purpose.Consultants and participation of auditing firms would be financed under the loan.

Improve Methodologies for Off-Site Assessments of Financial Institutions: Assistance will be provided to improve the off-site examination and monitoring processes used to assess the condition of financial institutions. A process of more rigorouspre-identification of problem institutions will be developed through use of existing information such as financial statements,examination reports and any required regulatory reports. This will allow supervisory authorities to prioritize fimancialinstitutions according to the severity of their risks and problems. Staff training will be provided to assist them in makingthese assessments and recommendations will be made for enhancing the infonnation reported by financial institutions tosupervisory authorities.

15

Strengthen the Financial Institution Supervision Function: Assistance to the Government in this area will be designed toimprove the overall functioning and efficiency of the supervision areas within the BOT, the FIDF, and the FPO.' Thisassistance will be provided over a three year period and will place strong initial emphasis on improving enforcement of loanclassification, provisioning rules, liquidity management and monitoring, and licensing. The initial program will also focusupon criteria for change of control and licensing and on development of a plan to upgrade on-site and off-site supervisionprocesses. This will also include an evaluation of changes in certain reports and information processes.

Assistance will be provided to the FPO within the Ministry of Finance to: (i) design prudential regulations for thespecialized financial institutions and strengthen regulations that apply to private and public provident funds particularly withrespect to investments, (ii) to strengthen the examination function, and (iii) to strengthen capacity to enforce the newregulations via an intensive training program. Expert advice to be provided in these areas will be supported via financing ofa seconded high level advisor(s) and consultants to assist the Goverrnent develop and implement an institutionaldevelopment plan.

1.3 Rationalizing the Supervisory Regime

The focus of this component is the supervisory framework, regulatory jurisdiction, independence and possible integration ofthe supervisory functions. The areas of focus will be the separate supervisory bodies and regimes in the BOT for financecompanies and commercial banks, and the supervision of specialized financial institutions by FPO.'

Supervisorv Framework. Regulatory Jurisdiction, Independence. and Integration of Supervisory Functions: Two specificforms of implementation assistance will be provided to the MOF in sequence. First, an in-depth review of the Thai legal andregulatory framework for supervision will be conducted including the roles of the Ministry of Finance, the BOT, SEC,Ministry of Commerce, and the Agriculture Ministry. An analysis will also be conducted of alternatives for locating andorganizing the two supervision functions within the BOT for banks and finance companies. As part of this effort, areas suchas consolidated supervision and streamlining of regulatory reports will be addressed. This will be carefully coordinated withthe IMF and ADB. The output of this report will be a blueprint for defining regulatory jurisdiction and evaluating theprospects for an integrated independent supervisory function. In addition, this work will assist the authorities by exploringoptions for creating better incentives for action by regulatory authorities by examining how to more effectively matchresponsibilities and powers, changing governance arrangements, minimizing conflicting areas ofjurisdiction, harmonizingprudential regulations for similar transactions, and by altering required disclosures by the agencies themselves.Subsequently, assistance will be provided to implement the recommendations coming out of the blueprint.

1.4 Strengthening Market Discipline

Five characteristics of the Thai financial system hinder the effectiveness of market discipline as a deterrent to unsafe andunsound banking practices and have created incentives for excessive risk taking. First, as recognized by the Government, themoral hazard introduced by the comprehensive guarantee program for all depositors and creditors of financial institutions(other than those recently suspended) can weaken market discipline. Second, existing corporate governance rules are weakand reduce the discipline placed on management by the Board of Directors. Third, unsatisfactory financial information interms of accuracy and timeliness available to market participants due to lax accounting practices and prudential classificationguidelines that are more lenient than international standards, has likely increased market volatility. It has hindered incentivesfor the proper monitoring of financial institutions by market participants and other providers of financial services (e.g. ratingagencies). Fourth, public disclosures are inadequate in several critical areas (e.g., non-performing loans, ownershipinformation. risk concentrations, etc.), thereby impeding the ability of the markets to discipline financial institutions. Fifth,key ancillary information services such as accounting. appraisers/valuers, credit bureaus, and credit rating agencies, need tobe strengthened so that the market can exercise more discipline on management of weak financial institutions.

The ADB will provide support to the SEC and to the Ministry of Commerce and Agriculture that currently have jurisdiction over securities firms andSROs, insurance companies, and commodities exchanges respectively.

This institutional development plan would address issues such as training to introduce specialized skills, and advice on composition of personnel, skillmix and overall organization of the supervisory function.3 These are the Govemment Savings Bank (GSB), the Govemment Housing Bank (GHB), the IFCT, the BAAC, SICGC, SIECT, Secondary MortgageCorporation. Export-Import Bank, PLMO, and Security Finance Corporation.

16

This component will provide support via training and financing of specialized consultants to assist the MOF in designing andimplementing a package of actions to improve incentives for the markets to discipline financial institutions. This mayinclude support to: (i) design and establish a Deposit Guarantee Agency; (ii) improve corporate governance within financialinstitutions; (iii) upgrade auditing and accounting standards; (iv) strengthen standards for public disclosures; and (v) developother key ancillary private information services (credit bureaus for small debtors, credit ratings, etc.)

Design and Establishment of a Deposit Guarantee Agency (DGA): A key element within the Government financial sectorrestructuring strategy is to phase out the comprehensive guarantee that was provided to all non-suspended financialinstitutions as an emergency measure to restore confidence and forestall a major banking crisis. Expert advice will beprovided to design a Deposit Guarantee Agency that will be put in operation once confidence is restored and interest ratecaps and asset growth restrictions within individual institutions are lifted. The DGA is expected to be self-fnancing.Assistance will be provided to develop an initial blueprint for the form of coverage to be granted, the level and structure ofthe deposit guarantee fee, the functions and organization of the new agency, draft charter, governance arrangements, andoptions for the phase-in of a limited explicit deposit guarantee regime. Expert advice will also be provided to assist the MOFin setting up the new agency and making it operational in coordination with the FIDF, BOT and other related governmentagencies.

Improve Corporate Governance in Financial Institutions: This component would focus on improving the incentives forDirectors to exercise their responsibilities to shareholders by increasing the legal liability of members of Boards of Directors,Board advisors, and advisors to CEOs vis-a-vis shareholders, creditors, depositors and supervisors. Advice would also beprovided on delineating the responsibilities and roles of Boards of Directors and advisors to Boards and CEOs vis-a-vissenior managers and external auditors. In addition, possible requirements related to the appointment of independentDirectors without links to main shareholders would be explored, public company discipline imposed on these directors, andimposing limits on insider lending to Directors and Officers of the financial institution.

Up2grading Accounting and Auditing Standards: A review and evaluation of the current accounting standards and auditingstandards for external and internal auditors will be undertaken with a view to recommending improvements.' Areas to bereviewed will include accounting for nonperforming loans, capitalized interest treatment, troubled debt restructuring,consolidation of subsidiaries, institutional acquisition provisions, loss booking, reserve accounting, and mark-to-marketconventions in the case of the trading and investment portfolios of banks and securities or finance companies. Finally, thiswork would explore how supervisory authorities can establish certain minimum standards for certification of accountants andauditors. Such assistance would also aim to clarify as clearly as possible the responsibilities of auditors, accountants,financial analysts etc., vis-a-vis bank supervisors or other management and Directors of commercial banks or financecompanies. The guidelines would also establish procedures whereby examination processes would be triggered by suchevents as a qualified opinion by a bank auditor. Finally, a review will be undertaken of the accounting and auditingstandards for firms in the non-financial sector.

Streng.hening Public Disclosures: The transparency and quality of financial information in Thailand needs to be upgradedand strengthened to meet international standards. Assistance will be provided to the Government to bring accountingrequirements for financial institutions up to international standards and to strengthen public disclosure. Financial institutiondisclosures will be assessed with a focus on the timeliness, and quality and level of detail of profit and loss statements, cashflow statements, risk concentrations, off balance sheet and other contingencies, ownership structure, affiliate relationships,insider transactions, and material events disclosure via a review of law and BOT as well as SEC disclosure regulations.Public disclosure standards for firms in the non-financial sector will also be reviewed.

Improving Other Key Ancillarv Financial Services: Many types of key ancillary services that are critical to improving thequality of financial information could be enhanced such as accounting and auditing (noted above) or appraisal and valuation,credit bureaus, and credit ratings agencies. Expert advice will be provided to identify areas where this infrastructure shouldbe strengthened. Specific recommendations will be made for amendments to regulation and law, etc. to improve the qualityof these important fmancial information services. Support will be provided to establish new regulations and/or guidelines inclose coordination with relevant self-regulatory organizations (the credit bureau, credit rating agencies) or associations in thecase of specific professional areas (e.g. auditors, accountants, financial analysts). The objective of this work will be todevelop standards and regulations (e.g., procedures for certification or code of ethics) as well as better incentives forcollection and disclosure of higher quality and more timely information.

IThis work would be coordinated with ICAAT that is already developing new auditing standards.

17

1.5 Improving the Bankruptcy and Collateral Foreclosure Processes

The overall legal framework and processes for dispute resolution under bankruptcy remain underdeveloped and arecumbersome with delays averaging several years. Similarly, collateral foreclosure can take between 3-4 years on average.The existing framework is thus not conducive to efficient restructuring of troubled non-financial enterprises or to timelyforeclosure. This can harm loan recovery rates and increase the overall costs of the Government's financial sectorrestructuring program.

This component will finance assistance to recommend: (i) streamlined bankruptcy processes and (ii) improved collateralforeclosure processes.

Streamline Bankruptcy Processes: Well functioning bankruptcy proceedings are essential to ensure that resources can bereallocated rapidly and efficiently when enterprises fail. With the macroeconomic downturn, the number of enterprises thatare unable to service their loans may increase significantly. Any measures that can ease processes for voluntary debtrestructuring of loans to failing enterprises will help to improve the liquidity of financial intermediaries. A revisedbankruptcy act is currently being presented to the Thai legislature. The project would support a review of the proposedbankruptcy act and would suggest any changes to the legislation that might help facilitate voluntary debt restructuring andspeed asset liquidation. This would include an assessment of alternative frameworks for out-of-courtl workouts andarbitration awards.

Improve Collateral Foreclosure Processes: Difficulties with foreclosure on collateral pledged against enterprise credits canarise not only in the legal and regulatory framework governing foreclosures, but also in the institutional mechanisms fordispute resolution. The result is to raise the cost of credit and the risks associated with lending. The project would finance areview of legal, regulatory and institutional mechanisms for foreclosure proceedings (particularly related to real estate) andpropose ways of facilitating more rapid foreclosure and dispute resolution. The immediate focus of the implementationassistance would be on speeding the process of foreclosure proceedings and related barriers.

1.6 Implementing Financial Infrastructure and Institutional Changes

The current Thai financial crisis has interrupted the previously rapid development of the financial system and highlighted thesusceptibility of the financial sector to certain types of sudden shocks (e.g., real estate price increases, exchange rate shocks,sudden capital flow reversals). In part this susceptibility is due to the structure of the financial sector itself where there hasbeen a lack of incentives for risk diversification. In addition, the very rapid build-up in private sector debt that was not wellmonitored also played a role in increasing the vulnerability of the Thai economy to capital flow reversals. Lack of a welldeveloped government debt market has complicated the ability of the Central Bank to develop indirect monetary policyinstruments (e.g., open market operations and use of repurchase agreements) and hindered overall development of the Thaiprivate debt market given the lack of a benchmark yield curve. Finally the process for establishing exchange rate policy andexchange rate management in Thailand may need to be better coordinated with export, inflation control, and overseasinvestment policies of the country.

This component will finance several studies and related institutional capacity improvements to reform and developmechanisms and systems to permit the Thai economy to reduce its vulnerability to macroeconomic shocks. These activitieswill include: (i) an analysis and review of the existing structure of the financial system and actions that might be taken toimprove both financial sector efficiency and resiliency to macroeconomics risks; (ii) a study and related blueprint of how todevelop the domestic debt markets, especially the Government debt markets; and (iii) an examination of how to improvegovernment external debt management and better monitor capital flows, particularly privately contracted external debt.

Modernization of Financial Sector Structure and Services: This study would examine the role, competitiveness, andefficiency of financial services provided within the Thai financial system. This would include banking and non-bankingservices provided by banks, finance companies, securities firms, specialized banks, etc. The study would examine theefficiency of the provision of financial services and impediments to the development of a broader range of financial services(e.g. , payment services, leasing, factoring, money brokerage, foreign exchange brokerage, etc.). It would also examine thevarious sectors of the financial system and the forms of institutions to be permitted and degree of specialization to foster (e.g.Islamic banking, locally incorporated foreign bank subsidiaries) to mobilize savings in both domestic and offshore bankingcenters (IBFs). The study would make recommendations for specific actions and suggest follow-up legislation (e.g., theissuance of an offshore banking act or leasing law). A related study would make recommendations on removing bottlenecksin accessing bank finance by firms in the real sector to increase the efficiency of investment.

18

Development of Government and Private Debt Markets: A nascent government debt market currently exists, but the privatecorporate and municipal debt markets are not well developed. The financing needs of the Thai Government under thepresent crisis present an opportunity to systematically develop the domestic debt markets as the need to issue governmentdebt is becoming increasingly important. Development of the Government debt market and a benchmark yield curve wouldin turn create a more conducive environment for developing the private corporate debt market. An analysis would beconducted of the major impediments to development of a broader debt market including establishment of a private long-termfixed-rate market. This will include: examination of market structure including the regulations applied to broker/dealers inthe bond dealers club, tax treatment, nonexistence of instruments to promote liquidity (i.e., repurchase agreements), lack ofcompetition in the primary or secondary market, and inadequate infrastructure in the area of clearing, custody and settlementarrangements, quality of information.

The Government of Thailand's efforts to develop the primary issue- underwriting system will be supported via assistance toevaluate the processes being proposed. This will include: an evaluation of alternative mechanisms for auctioning/pricing thesecurities, the preferred structure of the market (e.g., who will be eligible to act as a primary dealer), and what entities can befinal purchasers. Of particular importance will be establishment of guidelines relating to the purchase of securities by theCentral Bank given the implications for monetary policy.

External Debt Management and Monitoring of Capital Flows: To help enhance the management of economic policy throughimproved information about aggregate private and public sector external indebtedness, this study would assist in developinga process through which to measure and manage the country's aggregate external debt position. This would require specificrecommendations for reporting and measuring the outstanding external debt in both sectors and provisions for the monitoringof debt levels. Recommendations would be provided for enhanced monitoring mechanisms to provide the informationnecessary for assessing the economic impact of the composition and structure of capital flows as well as related policyactions.

Project Component 2. Project Coordination and Implementation - US$0.5 million

This component would provide sufficient resources for project coordination and implementation, and include provision forproject management, implementation assistance and studies from consultants. From the borrower's side, the project wouldbe managed by the Fiscal Policy Office (FPO) of the Ministry of Finance. FPO would assign a task manager who would actas the Government's main counterpart for the project. This task manager would be allocated part of the implementationassistance budget to achieve effective project management, procure equipment, and engage local and internationalconsultants. A Project Coordination Committee would convene regularly, comprising the Bank of Thailand, Ministry ofFinance, BOI, NESDB, Ministry of Commerce, SEC and other agencies involved in the project. On the Bank's side,supervision would be carried out by the Country Management Unit based in Bangkok.

19

Annex 3

Financial Sector Implementation Assistance ProjectEstimated Project Costs

Project Component Local Foreign Total-------------------- US $ million--------------------

1. Financial Sector1.1 Strengthening fnancial institution resolution processes 7.55 6.94 14.491.2 Improving capacity to identify future problem fnancial 1.47 1.66 3.13

institutions in an appropriate timeframe and raisingsupervisory standards

1.3 Rationalizing the supervisory regime 0.00 0.20 0.201.4 Strengthening market discipline 1.00 1.20 2.201.5 Improving the bankruptcy and collateral foreclosure 0.20 0.30 0.50

processes1.6 Implementing financial infrastructure and institutional 0.30 0.70 1.00

changes2. Project Coordination and Implementation2.1 Consulting services for studies 0.10 0.30 0.402.2 Equipment 0.05 0.00 0.05Total Project Cost 10.67 11.30 21.97

20

Annex 4

Financial Sector Implementation Assistance ProjectCost Benefit Analysis Summary

Not Applicable

21

Annex 5

Financial Sector Implementation Assistance Project

Financial Summary

(US$ millions)

Foreign % Local % Total %

IBRD 11.30 51.4 3.70 16.8 15.00 68.3

Royal Thai 0.00 0 6.97 31.7 6.97 31.7Govenment

11.30 51.4 10.67 48.6 21.97 100.0

22

Annex 6

Financial Sector Implementation Assistance ProjectProcurement and Disbursement Arrangements

Procurement

Procurement of consultants would be done according to the provisions of the "Selection and Employment of Consultants byWorld Bank Borrowers" (January 1997) and of equipment according to the provisions of the "Guidelines for Procurementunder IBRD Loans" (January 1995, revised in January and August 1996). For complex time-based assignments and forcontracts based on lump-sum price, such contracts will be based upon the standard form of contract for consultants' servicesissued by the Bank, with such modifications thereto as shall have been agreed by the Bank. Where no relevant standardcontract documents have been issued by the Bank, other standard forms acceptable to the Bank shall be used.

Table A of this Section shows the project costs by procurement arrangements. Since the total expenditure on equipment islimited to US$150,000, there will be no international competitive bidding (ICB) in the project. Equipment estimated to costUS$25,000 equivalent or more but less than US$150,000 equivalent per contract may be procured using national competitivebidding (NCB), up to an aggregate amount of US$150,000. Goods estimated to cost less than US$25,000 equivalent percontract may be procured through national or international shopping up to an aggregate amount of US$150,000.

Requirements of prior review of other contracts for consulting services and equipment are summarized in Table B.

Disbursement

Expenditures for individual contracts of equipment and services, for which prior review by the Bank is not required, will bedisbursed against Statement of Expenditures (SOEs). For expenditures incurred on the basis of SOEs all records evidencingsuch information must be retained by the project entity until at least one year after the Bank has received the audit report forthe fiscal year in which the last withdrawal from the loan account is made. Full documentation for all contracts requiring theBank's prior review will be submitted. Disbursements, representing mainly expenditures under short term implementationassistance, will be made over a period of three years. Since the Government wishes to advance rapidly, with respect to theresolution of suspended finance companies, retroactive financing, not to exceed US$1.50 million (10% of the loan amount),would be applied to finance eligible expenditure made after September 11, 1997, but no more than three months before loansigning.

A special account in US dollars might be established at a bank acceptable to the World Bank with an authorized allocation of2.0 million. The amount of this initial deposit, however, would be limited to US$1.0 million, until the aggregate amount ofwithdrawals from the loan plus outstanding special commitments will equal to or exceed the equivalent of US$4.0 million tocorrespond to anticipated expenditures in the first months of project execution. The special account will be replenishedmonthly to assure liquidity of funds, and all replenishment applications would be accompanied by reconciled bankstatements from the depository bank showing all transactions in the special account.

The allocation of loan proceeds is provided in Table C of this Section.

23

Annex 6, Table A: Project Costs by Procurement Arrangements'

(in US$ million equivalent)

Expenditure Category Procurement Method Total CostICB NCB Other N.B.F

1. Consultants' Services and 18.6 18.6Related Expenses (11.9) (11.9)

2. Training 2.2 2.2(1.9) (1.9)

3. Equipment 0.1 0.1(0.1) (0.1)

4. Unallocated 1.1 1.1

(1.1) (1.1)

Total 0.1 21.9 22.0(0.1) (14.9) (15.0)

Note: N.B.F. = Not Bank-financed (includes elements procured under parallel cofinancing procedures,consultancies under trust funds, any reserved procurement, and any other miscellaneous items).The procurement arrangement for the items listed under "Other" and details of the items listed as"N.B.F." need to be explained in footnotes to the table or in the text.

Figures in parenthesis are the amounts to be financed by the Bank loan, and figures affected byrounding

'For details on presentation of Procurement Methods refer to OD1 1.02, "Procurement Arrangements for Investment Operations.

24

Annex 6, Table B: Thresholds for Procurement Methods and Prior Review

Expenditure Contract Value Procurement Contracts Subject toCategory (Threshold) Method Prior Review

US $ thousands US $ millions1. Equipment 25 - 150 NCB First two contracts

<25 Shopping None

2. ServicesFirms > 200 QCBS, QBS All. Additional review of

Borrower's evaluation ofproposals.

100 - 200 QCBS, QBS All.<100 CQ TORs only.

Individuals > 50 Consultant guidelines All.Section V

<50 Consultant guidelines TORsSection V

25

Annex 6, Table C: Allocation of Loan Proceeds

Expenditure Category Amount in US$ Financingmillion Percentage

Consultants' services and related expenditures 11.9 100% of allexpenditures

Training 1.9 100% of foreignexpenditures and80% of localexpenditures

Equipment 0.1 80% of localexpenditures

Unallocated 1.1Total 15.0

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Annex 7

Financial Sector Implementation Assistance ProjectProject Processing Budget and Schedule

A. Project Budget (US$000) Planned Actual(At final PCD stage)

Not Applicable 40 (estimate)

B. Project Schedule Planned Actual(At final PCD stage)

Not ApplicableTime taken to prepare the project (weeks) 2First Bank mission (identification) 8/28/1997Appraisal mission date 9/1/1997Negotiations 9/4/1997Planned Date of Effectiveness 10/1/1997

Prepared by: Fiscal Policy Office, Ministry of Finance with other agencies

Preparation assistance: None

Bank staff who worked on the project included:

J. Shivakumar Country ManagementJonathan Fiechter Financial Sector SpecialistIjaz Nabi EconomistThomas Glaessner Financial Sector SpecialistStefan Koeberle EconomistLaura Ard Banking SpecialistHoi-Chan Nguyen Legal SpecialistPaul Murgatroyd Financial Sector SpecialistCalum Gunn Project Management

27

Annex 8

Financial Sector Implementation Assistance ProjectDocuments in the Project File*

A. Project Implementation PlanA project implementation plan containing detailed cost breakdowns for each sub-component.

B. Bank Staff AssessmentsNone

C. OtherNone

*Including electronic files.

28

Annex 9Statement of Loans and Credits

A. ThailandStatement of Bank Loans and Credits(As of 7/31/97, in US Dollar Millions)

Loan/Cr Fiscal Borrower Purpose Bank IDA Undis-Number Year bursedL41990 1997 Royal Thai Government Metropolitan Dist Reinforcement 145.00 0.00 145.00L41600 1997 Royal Thai Govermnent Univer Sci & Eng Education 143.40 0.00 143.40L40670 1997 Royal Thai Government Distribution Autom & Reliability 100.00 0.00 100.00L40520 1996 Royal Thai Government Secondary Education Quality Improvement 81.90 0.00 81.90L39680 1996 Royal Thai Government Highways V 150.00 0.00 150.00L40530 1996 Royal Thai Government Technical Education 31.60 0.00 31.60L37990 1995 Royal Thai Government Second Gas Transmission 115.00 0.00 4.58L38890 1995 Royal Thai Government Clean Fuels & EA Quality 90.00 0.00 90.00L38840 1995 Royal Thai Government Lam Takhong Pump Storage 100.00 0.00 71.79L37980 1995 Royal Thai Government Distribution System Reinforcement 50.00 0.00 9.85L37970 1995 Royal Thai Government Land Titling III 118.10 0.00 79.86L35980 1993 Royal Thai Government Distribution Systems and Energy Efficiency 109.00 0.00 33.75L34460 1992 Royal Thai Govemment Highway IV 177.50 0.00 25.15L34040 1992 Royal Thai Government Distribution System Upgrade 40.00 0.00 12.70

TOTAL 1,451.50 0.00 979.59

B. ThailandStatement of IFC Investments (since 1992)

(As of 6/30/97, in US Dollar Millions)

FY Committed DisbursedApproval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1997 PhatraThanakit 26.29 0.00 0.00 0.00 13.15 0.00 0.00 0.001996 Thai Petrochem 80.00 0.00 20.00 400.00 76.67 0.00 20.00 383.331996 NFS 30.00 0.00 0.00 250.00 30.00 0.00 0.00 190.001995/96 BTSC 50.00 9.83 9.83 0.00 0.00 9.83 9.83 0.001995 UPOIC 0.00 1.08 0.00 0.00 0.00 1.08 0.00 0.001995 Saha Farms 25.00 9.90 10.00 25.00 25.00 9.90 10.00 25.001995 Finance One 30.00 0.00 0.00 150.00 30.00 0.00 0.00 150.001994 Vinythai 39.65 0.00 0.00 54.33 39.65 0.00 0.00 54.331994 Dhana Siam 26.00 0.00 0.00 4.00 26.00 0.00 0.00 4.001993 TUNTEX 12.00 4.92 0.00 134.50 12.00 4.92 0.00 134.501993 Sukhontha 2.00 0.00 0.00 5.00 2.00 0.00 0.00 5.001993 Star Petroleum 100.00 0.00 0.00 350.00 100.00 0.00 0.00 350.001993 Samui Beach 3.00 0.00 0.00 5.00 3.00 0.00 0.00 5.001993 Central Hotel 0.00 13.95 0.00 0.00 0.00 13.95 0.00 0.001993 Bumrungrad 25.00 2.24 0.00 35.00 25.00 2.24 0.00 35.001993 Advance Agro 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.001992 KrungThai IBJ 0.00 0.35 0.00 0.00 0.00 0.35 0.00 0.00

TOTAL 458.94 42.47 39.83 1,412.83 392.47 42.27 39.83 1,336.16

I

I

Thailand at a glance 918197

Lower-POVERTY and SOCIAL East middle-

Thailand Asia income Developmentdiamond

Population mid-1996 (millions) 58.7 1,726 1,125GNP per capita 1996 (US$) 3,020 890 1,750 Life expectancyGNP 1996 (billions US$) 177.3 1,542 1,967

Average annual growth, 1990-96

Population (%) 0.9 1.3 1.4 GNP GrossLabor force (X) 1.3 1.3 1.8 per primary

Most recent estimate (latest year available since 1989) capita enrollment

Poverty: headcount index (% of populaton) 13Urban population (% of total population) 20 31 56Life expectancy at birth (years) 69 68 67Infant mortality (per 1,000 live births) 35 40 41 Access to safe waterChild malnutrition (% of children under 5) 13Access to safe water (% of population) 81 49Illiteracy (% of population age 15+) 6 17Gross primary enrollment (% ofschoolage population) 87 117 104 - Thailand

Male 120 105 Lower-middle-income groupFemale .. 116 101

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1975 1985 1996 1996 , _

Economic ratiosGDP (billions USS) 14.9 38.9 167.5 184.1Gross domestic investment/GDP 26.7 28.2 43.3 42.5 Openness of economyExports of goods and services/GDP 18.4 23.2 41.1 38.0 eGross domestic savings/GDP 22.1 25.5 36.2 36.0Gross national savings/GDP 22.7 24.2 34.9 34.3 T

Current account balance/GDP -4.1 -4.0 -8.1 -8.0Interest payments/GDP 0.7 2.3 1.2 *- Savings InvestmentTotal debtVGDP 12.5 45.1 34.0Total debt service/exports 12.0 31.9 11.3 .Present value of debUGDP .. .. 34.4Present value of debt/exports .. .. 86.0 Indebtedness

1975-85 1986-96 1996 1996 1997406(average annual growth) ThailandGDP 6.5 9.6 8.7 6.7GNP per capita 4.1 8.3 7.7 5.1 Lower-middle-income groupExports of goods and services 9.5 15.9 14.8 2.4

STRUCTURE of the ECONOMY

(%ofGDP) 1986 1995 1996 Growth rates of output and investment(%)Agriculture 26.9 15.8 10.6 10.4 40-

Industry 25.8 31.8 39.5 40.0 30-Manufactunng 18.7 21.9 29.0 29.3 20-

Services 47.3 52.3 49.8 49.6 10 .- z =:

0Private consumption 67.6 61.0 54.4 54.8 91 92 93 94 95 96

General government consumption 10.3 13.5 9.4 9.3Imports of goods and services 23.0 25.9 48.2 44.5 GDI GOP

1975-86 1986-96 1996 1996(average annual growth) Growth rates of exports and Imports (%)Agriculture 4.1 3.7 3.1 3.1 25

Industry 7.9 13.2 11.4 8.2 20Manufacturing 7.0 13.6 12.4 8.0 15_

Services 6.7 9.1 7.6 6.110

Private consumption 5.2 8.2 8.3 6.2 sGeneral government consumption 9.1 5.1 0.8 4.5 a i -- _ , Gross domestic investment 6.1 15.1 13.3 8.2 91 92 93 94 95 96

Imports of goods and services 6.2 17.8 16.9 2.8Gross national product 6.3 9.4 8.3 6.4 Exports imports

Note: 1996 data are preliminary estimates. Figures in italics are for years other than those specified.

* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

Thailand

PRICES and GOVERNMENT FINANCE1976 1985 1995 1996

Domestic prices Inflation

(% change) 8 -Consumer prices 5.3 2.5 5.8 5.9 6Implicit GDP deflator 3.5 2.2 6.5 4.8 4.

Govemment finance 2 -

(% of GDP) ° ----Current revenue 15.2 18.9 19.2 91 92 93 94 95 96

Current budget balance ., -0.6 8.0 8.6 - GDP def. -C--CPIOverall surplus/deficit .. . 2.6 2.3

TRADE1976 1985 1995 1996 . Epr and ipr l l

(millions US$) Export and import levels (mill. US$)Total exports (fob) .. 7,120 56,729 55,992 80,000

Rice 829 1,928 2,012 70,000Otherfood .. .. 4,312 4,239 60,000

Manufactures .. 2,920 46,445 45,653 j 509000

Total imports (cif) *- 9,248 71,493 72,768 40000

Food .. 38.. . DIGIFuel and energy .. 2,696 4,620 6,203 200 IJiIii

10,000 1I101Capital goads .. 2,598 31,950 3349 0 llLJlr

Export price index (1987=100) .. 73 139 138 90 91 92 93 94 95 96

Import price index (1987=100) .. 72 154 153 ;Exports ag ImportsTernms of trade (1987=100) .. 101 90 90

BALANCE of PAYMENTS1975 1985 1995 1996

(millions US$) | Current account balance to GDP ratio (%)Exports of goods and services 2,780 9,100 70,590 71,725 _ _, __

Imports of goods and services 3,478 10,160 82,169 83,617 , 90 91 92 93 94 9 a 96

Resource balance -698 -1,060 -11,579 -11,892 -

Netincome 11 -643 -2,114 -3,257 -3 1,Net current transfers 80 165 487 780 4 ITCurrent account balance, ,6

before official capital transfers -607 -1,537 -13,206 -14,369 ,

Financing items (net) 555 1,620 19,954 16,066 -5Changes in net reserves 52 -82 -6,748 -1,697 -9-

Memo: |

Reserves including gold (mill. US$) 2,008 3,003 37,027 38,725Conversion rate (localUUS$) 20.4 27.2 24.9 25.3

EXTERNAL DEBT and RESOURCE FLOWS1975 1985 1995 1996

(millions US$) E Composition of total debt, 1996 (mill. US$)Total debt outstanding and disbursed 1,865 17,552 56,789

IBRD 270 2,202 1,805 1,607 B

IDA 4 105 102 100 100

Total debt service 357 3,263 7,533IBRD 32 232 336 318IDA 0 1 3 3

Composition of net resource flowsOfficial grants 11 120 99Official creditors 93 556 511 .. \Private creditors 107 956 4,921Foreign direct investment 22 163 2,068Portfolio equity 0 44 2,154 .. A

1607World Bank program

Commitments 95 113 190 250 i A-IBRD E-BilateralDisbursements 44 285 146 138 1 B-IDA D-Other multilateral F -PrivatePrincipal repayments 13 75 203 198 C-IMF G-Short-termNetflows 31 210 -57 -60 i

Interest payments 20 158 136 122Net transfers 12 51 -193 -183

Development Economics 9/8/97