Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 48331-TH

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED

PUBLIC SECTOR REFORM DEVELOPMENT POLICY LOAN (PSRDPL)

IN THE AMOUNT OF US$1BILLION

TO THE

KINGDOM OF THAILAND

OCTOBER 21, 2010

Poverty Reduction and Economic Management Unit East Asia and Pacific Region

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

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GOVERNMENT FISCAL YEAR October 1 – September 30

CURRENCY EQUIVALENTS (Exchange Rate Effective as at October 2010)

Currency Unit Thai Baht (THB)

US$1.00 29.89

ABBREVIATIONS

ADB Asian Development Bank NESDB National Economic and Social Development Board

BOB Bureau of the Budget OAG Office of the Auditor General’s BOP Balance of Payments OCSC Office of the Civil Service Commission BOT Bank of Thailand OPDC Office of the Public Sector Development

Commission CDP Country Development Partnership PAD People’s Alliance for Democracy CDP-G Country Development Partnership with

Thailand on Governance and Public Sector Reform

PAMP Public Administration Management Plan

CGD Comptroller General’s Department PART Performance Assessment Rating Tool COA Chart of Accounts PDMO Public Debt Management Office DPL Development Policy Loan PEFA Public Expenditure and Financial Accountability DSA Debt Sustainability Analysis PFM Public Financial Management FDI Foreign Direct Investment PFMR Public Financial Management Report FPO Fiscal Policy Office PICS Productivity and Investment Climate Survey GFMIS Government Fiscal Management

Information System PPP People’s Power Party

GoT Government of Thailand PSRDPL Public Sector Reform Development Policy Loan ISN ICA

Interim Strategy Note Investment Climate Assessment

RBM Results Based Management

JICA Japan International Cooperation Agency RD Revenue Department KPI Key Performance Indicators ROSC Report on Observance of Standards and Codes LIBOR London Inter-Bank Offered Rate RTG Royal Thai Government LTO Large Taxpayer Office SDDS Special Data Dissemination Standards MOF Ministry of Finance SME Small and Medium Enterprises MoNRE Ministry of Natural Resources and the

Environment TKK “Thai Kem Kaeng” (Strong Thailand)

MTEF Medium Term Expenditure Framework TRA Treasury Reserve Account NACC National Anti-Corruption Commission TRT Thai Rak Thai Party NEER Nominal Effective Exchange Rate UDD United Front for Democracy against Dictatorship

Vice President: Country Director:

Sector Director and Chief Economist: Lead Economist and Task Team Leader:

James Adams Annette Dixon Vikram Nehru Mathew Verghis

The Thailand Public Sector Reform Development Policy Loan was prepared by a team consisting of Shabih Ali Mohib, Kirida Bhaopichitr, Frederico Gil Sander, Vatcharin Sirimaneetham, Nattaporn Triratanasirikul, Ruangrong Thongampai, Ton-Thang Long, Angkanee Luangpenthong, Ratchada Anantavrasilpa, Lynn Gross (EASPR), Zhi Liu, Chanin Manopiniwes (EASTE), Clive Harris (EASOP), Jitendra Shah, James Monday (EASRE), Blanca Moreno-Dodson (PRMVP), Ahsan Ali, Chinnakorn Chantra, Ronald Points (EAPCO), Vikram Raghavan, Roche Levesque (LEGES), Malcolm Holmes, Michael Engelschalk, John Wiggins, David Shand (Consultants), and led by Mathew Verghis (EASPR).

The peer reviewers were Stephan Koeberle (LSCOS), Dana Weist (PRMED) and Ijaz Nabi (SARVP). Useful comments were received from Ed Mountfield (OPCCE) and Wolfgang Fengler (EASPR). The team worked under the guidance of Vikram Nehru (Sector Director, EASPR) and Annette Dixon (Country Director), and earlier from Ian Porter (former Country Director).

KINGDOM OF THAILAND

PROPOSED PUBLIC SECTOR REFORM DEVELOPMENT POLICY LOAN (PSRDPL)

TABLE OF CONTENTS

LOAN AND PROGRAM SUMMARY

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

II. COUNTRY CONTEXT AND DEVELOPMENT CHALLENGES .......................................... 4

A. Recent Economic Developments and Outlook ....................................................................... 4

B. Fiscal Response to the Financial Crisis and Debt Sustainability ......................................... 12

C. Political Context ................................................................................................................... 19

III. THE GOVERNMENT’S PROGRAM AND PRIORITIES ..................................................... 21

A. Public Financial Management and Service Delivery ........................................................... 22

B. Improving National Competitiveness .................................................................................. 22

C. Increasing social protection and health policy reforms ........................................................ 24

IV. BANK’S SUPPORT TO THE GOVERNMENT’S PROGRAM ............................................. 24

A. Thailand’s Interim Strategy Note ......................................................................................... 24

B. Analytical Underpinnings .................................................................................................... 25

C. Collaboration with the IMF and Other Donors .................................................................... 27

V. THE GOVERNMENT’S REFORM PROGRAM .................................................................... 27

A. The Fiscal Stimulus Package ............................................................................................... 28

B. Budget Formulation ............................................................................................................. 32

C. Reforming Budget Execution, Accounting and Reporting .................................................. 34

D. External Audit ...................................................................................................................... 36

E. Internal Controls and Internal Audit .................................................................................... 37

F. Public Procurement .............................................................................................................. 38

G. Debt Management ................................................................................................................ 39

H. Anti-Corruption .................................................................................................................... 40

I. Revenue Management .......................................................................................................... 41

J. Results-Based Management ................................................................................................. 42

K. Civil Service Management ................................................................................................... 43

L. Areas of Focus for Future Reforms ...................................................................................... 44

VI. THE PROPOSED OPERATION ............................................................................................... 45

VII. OPERATIONAL AND IMPLEMENTATION ISSUES .......................................................... 49

A. Poverty and Social Aspects .................................................................................................. 49

B. Implementation, Monitoring and Evaluation ....................................................................... 52

C. Fiduciary Aspects, Disbursement and Auditing ................................................................... 53

D. Risks and Risk Mitigation .................................................................................................... 54

E. Environmental and Social Aspects ....................................................................................... 56

FIGURES

Figure 1. The Thai economy is driven by sectors linked the production of tradable goods and services. .... 6 Figure 2. Core Inflation Remains Below its (already low) Historical Average. ........................................... 6 Figure 3. Bank of Thailand Balance Sheet ................................................................................................... 9 Figure 4. Financial Sector Strength Indicators .............................................................................................. 9 Figure 5. Thailand: Public Debt Sustainability Analysis ............................................................................ 17 Figure 6. Thailand 5-year Credit Default Swaps ........................................................................................ 19 Figure 7. Thailand Yield Curve .................................................................................................................. 19 Figure 8. Thailand Poverty Headcount Ratio and Economic Growth: 1988-2007 ..................................... 49 Figure 9. Proportion of Poor Households Classified by Economic Activities, 2007 .................................. 49 Figure 10. The decline in agricultural prices was the main channel through which the crisis affected vulnerable households. ................................................................................................................................ 51 Figure 11. Labor initially shifted to agriculture during the crisis, but as the recovery took hold manufacturing employment gained. ............................................................................................................ 51 

TABLES

Table 1. Real GDP Growth, 2009-2011 (Percent, year-on-year) ................................................................. 5 Table 2: Key Economic Indicators .............................................................................................................. 10 Table 3. Central Government Expenditure, FY2006-2009 ......................................................................... 12 Table 4. Central Government’s Financing Plan for FY2009 – FY2013 (percent of GDP) ....................... 14 Table 5. Debt Sustainability Analysis – Sensitivity Analysis ..................................................................... 18 Table 6. Thailand’s Fiscal Stimulus Package ............................................................................................. 31 Table 7. Beneficiaries of Cash Transfer Measures under Fiscal Stimulus in 2009 .................................... 32 Table 8. Status of Prior Actions negotiated in May 2009 ........................................................................... 46 Table 9. Thailand Poverty Headcount and Number of Poor, 2000-2007 .................................................... 50 

ANNEXES

Annex 1. Letter of Development Policy ..................................................................................................... 58 Annex 2. Application of Good Practice Principles on Conditionality ........................................................ 62 Annex 3. Development Policy Matrix ........................................................................................................ 63 Annex 4. Governments Public Sector Reform Program –Key Reforms and Plans .................................... 71 Annex 5. World Bank Support to Thailand’s Public Sector Reform Program (1998-2008): Inputs (TAs and ESWs) .................................................................................................................................................. 80 Annex 6. IMF Public Information Notice ................................................................................................... 84 Annex 7. Thailand at a Glance .................................................................................................................... 88 

MAP IBRD 33495

LOAN AND PROGRAM SUMMARY

KINGDOM OF THAILAND

PROPOSED PUBLIC SECTOR REFORM DEVELOPMENT POLICY LOAN

Borrower Kingdom of Thailand Implementing Agency

Ministry of Finance

Financing Data

Loan Amount: US$1,000,000,000 Instrument: IBRD Flexible Loan (IFL); Interest rate: variable spread to US dollar LIBOR, re-set every six months; Maturity: 20 years with an 8-year grace period; Principal Repayment Profile: Equal semi-annual installments; Front-end fee: 0.25 percent of the Loan Amount, payable out of loan proceeds; Disbursement type: Commitment-linked.

Operation Type Stand-alone single-tranche Development Policy Loan. Main Policy Areas Public Financial Management, Public Administration, and Public Service Delivery Program Development Objectives and Contribution to CAS

The objectives of the PSRDPL are to assist the Royal Thai Government (RTG) in its response to the financial crisis and to support institutional development in the public sector by: (i) improving the effectiveness of the public financial management framework through better governance and accountability; (ii) enhancing the skills and performance of the civil service; and (iii) improving quality and timeliness of service delivery.

The Interim Strategy Note (ISN) prepared concurrently with this operation has two pillars: (i) assisting the country to recover from the financial crisis; and (ii) helping improve Thailand's competitiveness and sustainable development. This operation is at the center of the Bank’s support in responding to the crisis, while the public sector reforms are an important component of the second pillar.

Related operations of the World Bank Group and other donors. The reforms supported by this DPL were catalyzed by the Public Sector Reform Loan (1999-2001) and Economic Management Assistance Loan (1998-2003) and steadily implemented by the Government ever since. After the loans closed in 2003, World Bank assistance was continued through technical support from the Country Development Partnership for Governance and Public Sector Reforms. A parallel budget support operation to support capital market development was approved by the board of the Asian Development Bank (ADB) on September 21, 2010.

Key Outcome Indicators

1. Economic recovery underway supported by fiscal stimulus that helps mitigate the impact of the financial crisis, including progress with implementation of public investment programs to foster long-term economic growth. 2. A more accountable and efficient public financial management system through improved fiduciary controls, better monitoring and reporting of public finances, increased policy focus on budget formulation, increased transparency and disclosure of the use of public resources, and enhanced external audit capability.. 3. A better performing public administration with reduced rigidities in the civil service structure, improved incentives for civil servants, and establishment of a performance monitoring framework for the civil service. 4. Improved service delivery through increased public monitoring and oversight over quality and timeliness of services delivered by public agencies, and enhanced internal performance measurement and monitoring by aligning budget monitoring tools with service delivery indicators.

Risks and Risk Mitigation

Political uncertainty. The political outlook is subject to significant risk, but there are also important mitigating factors. A coalition of opposition groups, the United Front for Democracy against Dictatorship (UDD), staged large protests in Bangkok in April and May that culminated in violence. The ruling coalition is working on a national reconciliation agenda, which may involve an early dissolution of Parliament. While relative calm has followed the end of the protests, the underlying political divisions remain and are likely to have been exacerbated by the violence. The Government’s parliamentary majority was unaffected, and Parliament has approved the FY2011 budget and financing plan in August 2010. The financing plan includes borrowing from ADB and the Japan International Cooperation Agency (JICA) in addition to borrowing from the World Bank. Although plans to borrow from international financial institutions (IFIs) were approved in Parliament by a wide margin, the vote was largely along party lines and there is a risk that borrowing from IFIs may be politicized, and that these institutions are seen as supporting the ruling coalition. Several factors mitigate this risk: (i) the loan was originally requested by a finance minister currently in the opposition; (ii) the Ministry of Finance (MOF) has carried out public consultations on the operation and solicited comments on its website; (iii) the loan is being submitted to the World Bank Board only after parliamentary approval has been received; and (iv) designing the operation as a standalone operation rather than a programmatic one helps the Government manage the political risk.

Implementation risks. Notwithstanding the political instability, the public sector reform agenda has been maintained under different political administrations. This has been the case over the past twelve months as the reform program has been sustained despite the political turmoil. This is because the underlying reform program has broad support across the political spectrum and is owned by senior civil servants in respective agencies. Therefore the risk to reform program implementation is modest. Inevitably, continued political turmoil will have some impact on the implementation of the program, and especially through delays in passage of needed legislation.

Macroeconomic risks. Thailand is recovering strongly from the global financial crisis with year-on-year GDP growth at 10.6 percent in the first half of 2010 and projected to reach over 7 percent for the year as a whole. However, growth remains largely dependent on external demand conditions, and a new slowdown in world trade would have a substantive negative impact on Thailand’s economy. A track record of prudent macroeconomic management and conservative banking practice means that the likelihood of a balance of payments or banking crises is relatively low, and that the authorities will continue to manage debt prudently. Given the strong macroeconomic fundamentals, markets have reacted calmly to political events in Thailand, although a renewed escalation in violence may lead to a market reappraisal.

Operation ID P114154

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED PUBLIC SECTOR REFORM DEVELOPMENT POLICY LOAN

TO THE KINGDOM OF THAILAND

I. INTRODUCTION 1. The Royal Thai Government (RTG) is requesting this US$1 billion Public Sector Reform Development Policy Loan (PSRDPL) to sustain economic recovery from the global financial crisis. Discussions on a possible loan that would supplement Government funds to implement a larger development budget began in mid-2008 and a formal request was made before the 2008 Annual Meetings. During loan preparation in late 2008 and early 2009, Thailand became one of the countries in Asia most affected by the global financial crisis making more urgent the need for resources. Around this time, the political climate also deteriorated significantly. The loan was negotiated in May 2009, but the government did not submit it to Parliament as the political situation did not allow parliamentary discussion as required by the Constitution. The economy began to recover in late 2009, and there has been a period of relative political calm since June 2010. As a result, the government initiated the process for parliamentary discussion of the loan, Parliament approved the loan in August, and the Government has now requested the Bank for final approval. The reforms supported by the loan are summarized in paragraph 4 and in Table 8. The delay in Parliamentary approval meant a relatively long gap between negotiations and final Board consideration. During this period, the government continued to make significant progress in implementation of the forward-looking reform program discussed during negotiations, in addition to the standard consideration of implementation of the prior actions (see Table 8 and Annex 3). 2. The Thai government’s renewed interest in borrowing reflects widespread consensus across the political spectrum on the need to increase spending on public investment. Public investment had never fully recovered from the 1997 Asian financial crisis, raising concerns about the sustainability of growth over the long term. Increasing public investment was viewed by the authorities as important to both sustain Thailand’s recovery from the global financial crisis as well as to support structural change and medium term growth. As a result, the stimulus packages emphasized public investment in critically needed infrastructure, health, and education. In addition to the World Bank, the Asian Development Bank (ADB) and the Japan International Cooperation Agency (JICA) have also been asked for support. The ADB Board approved a program loan focusing on capital market development on September 21, 2010, while JICA is preparing a number of investment loans for infrastructure, supporting among others the construction of mass transit in Bangkok. 3. Accessing World Bank funds supports prudent debt management and policy reforms. Thailand’s financing needs are largely met through the domestic debt market (Table 4). However, foreign financing from the World Bank, ADB and JICA is viewed as an important component of the financing plan to (i) prevent crowding out of the private sector in the debt market and to diversify funding sources to manage risk; (ii) allow the Government to access long term finance to match long gestation investment projects that are planned (as in many countries, the global financial crisis led to reliance on debt of shorter maturities - the amount of government debt with maturities of less than three years increased from 31 percent of the portfolio in June 2008 to 38 percent in December 2009);

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and (iii) benefit from the policy components of IFI financing that will help maximize the development impacts of the planned investments. 4. The Government’s reform program supported by this loan seeks to strengthen public sector institutions that foster efficiency, good governance, accountability, and results – a focus that fits well with the government’s accelerated public investment program. The public financial management reforms supported by the loan promote improved fiduciary controls, better monitoring and reporting of public finances, increased policy focus on budget formulation, increased transparency and disclosure in the use of public resources, and an improved external audit system. Parallel reforms in public administration aim to reduce rigidities in the civil service structure and improve incentives and performance monitoring for civil servants. Accountability for service delivery is being promoted by increased public monitoring and oversight over the quality and timeliness of services delivered by public agencies and enhanced internal performance measurement by aligning budget monitoring tools with service delivery indicators. 5. The public sector reform program has been implemented over a number of years despite long-standing political instability. Public sector reforms were launched in the aftermath of the Asian financial crisis, and were initially supported by World Bank policy-based lending and technical assistance (TA). The last policy-based loan closed in 2001 and the corresponding TA loan closed in 2003. Although the Bank has remained substantively involved in key policy discussions over the entire period since these loans closed (see paragraph 10), Thailand’s reform program evolved without conditionality from the international financial community. This reflects the fact that while Government policy actions have benefitted from Bank analytical work and advice, these reforms are clearly owned by senior civil servants in the key agencies. While the focus of the diagnostic work described in Section V is on the areas of the program needing improvement, it is important to note that in some areas such as civil service reform the Thailand program is already serving as a model for regional peers and in some areas, such as the program and performance budgeting, Thailand compares well with OECD countries. Inevitably, the political instability has led to some slowdown in the program – typically through a delay in the passage of needed legislation. Notwithstanding such slowdown, reforms have continued during 2009 and 2010 with reasonable progress. The level of ownership by Government and its demonstration of steady implementation, in spite of a political change in leadership, clearly support a judgment that the public sector reform program will continue, regardless of the status of subsequent operations and political instability. 6. The Bank will be able to continue to support the medium-term reform program. In parallel with the PSRDPL, World Bank support to the Government’s public sector reform program will continue. Ongoing work includes an important study on central-local fiscal relations, technical assistance to implement the results-based management, and strategic performance-based budgeting reforms. In addition, the Government has also indicated that it intends to continue borrowing at modest levels for investments in specific bottleneck areas over the next three years as described in the Interim Strategy Note. 7. The political situation in Thailand remains challenging and adds uncertainty to the prospects for the Thai economy. In end-2008 a new coalition Government led by the Democrat Party took office after the previous ruling party was dissolved by the Constitutional Court on violations of electoral law. The opposition has been staging protests since, which in 2009 led to the cancellation of an ASEAN+6 summit in Pattaya and riots in Bangkok, and in April/May 2010 an outbreak of violence that led to nearly 100 deaths and over one thousand injured. However, since

3

early-June a level of stability has returned and Parliament has met and supported the borrowing under PSRDPL. Nevertheless, it seems likely that it will take some time before full political stability is restored. 8. The economy is recovering strongly from the financial crisis, although political strife highlights that the recovery is still fragile. The Government’s fiscal stimulus prevented a more significant decline in domestic demand in the face of a substantial external shock as well as ongoing political tensions. In addition, the Government is using the crisis response as an opportunity to also increase social sector spending and to alleviate infrastructure bottlenecks through a medium-term scaling up of public investments. The political crisis has severely affected tourism and both domestic and foreign investment, and the continued dependence on exports adds urgency to implementing policies to support growth in both the short- and medium-terms. Nevertheless, even with such policies in place, the combination of crises has lowered growth prospects. 9. Request for Bank support has come from Thai governments led by parties on either side of the political spectrum and has been confirmed twice by Parliament. The request for this proposed PSRDPL was initially made by the People’s Power Party (PPP) Government led by the late Mr. Samak Sundaravej, was reconfirmed by the following PPP Government of Mr. Somchai Wongsawat, and has again been reconfirmed by the Democratic led Government of Mr. Abhisit Vejjajiva. The main drivers of the underlying reform program and the request for World Bank support have come from senior civil servants. On March 24 2009, Parliament authorized the Government to negotiate with the World Bank, ADB and JICA, and on August 17, 2010, Parliament authorized the Government to conclude the borrowings that had been negotiated under the previous authorization. 10. There have been public consultations on the PSRDPL. Government has solicited feedback on the PSRDPL as well as the ADB and JICA loans through the websites of the Ministry of Finance, Prime Minister, Parliament and Senate in March 2009. The Ministry of Finance also conducted a series of public consultative forums in May 2009 in Bangkok, Khonkkean (Northeastern), Surrathani (South), and Pitsanulok (North) to solicit views from the public. Participants included academics, community leaders and representatives of professional groups. Surveys were conducted at the end of each session. There have also been consultations in the context of the preparation of the Interim Strategy Note.

11. The Ministry of Finance has summarized the main messages received from the public consultations. These were grouped into four main areas:

(i) Rationale for borrowing from abroad: Given the current economic situation in Thailand,

most participants agreed on the importance of borrowing to restore the economy and develop infrastructure in Thailand.

(ii) Use of the funds: There should be a focus on value for money; since domestic borrowing is larger than foreign borrowing, domestically financed spending should also be monitored closely and local infrastructure projects should have high priority.

(iii) Debt management: Debt should be managed efficiently so as not to cause a fiscal burden in the future

4

(iv) Monitoring: There should be close monitoring of the expenditures from loan proceeds to ensure efficiency, transparency and accountability; expenditures financed by domestic debt should also be monitored closely.

II. COUNTRY CONTEXT AND DEVELOPMENT CHALLENGES

A. Recent Economic Developments and Outlook

12. Thailand’s open and globally integrated economy experienced a V-shape contraction and recovery from late 2008 through the first quarter of 2010. Driven by the manufacturing-for-exports sector, Thailand’s real GDP fell 6.3 percent between the third quarter of 2008 and the first quarter of 2009, as global demand slumped, before rebounding by 12 percent over the following four quarters. The rebound was primarily due to the recovery in global demand (exports were up 16.2 percent), while private consumption grew at a more modest 4 percent during the period. Real GDP returned to pre-crisis levels by the end of 2009 (as measured in seasonally adjusted terms); although for 2009 as a whole real GDP fell by 2.2 percent. 13. The recent political turmoil of April/May 2010 had a limited effect on the economy, although the social impact was larger. The critical manufacturing-for-exports sector was little affected by the turmoil and performed extremely well given buoyant export demand in the second quarter of 2010 and a surge in domestic demand for cars, which jumped as much as 50 percent over the period. The tourism sector, on the other hand, suffered substantial losses, and service receipts contracted by over 18 percent from the previous quarter (seasonally-adjusted). The retail sector also contracted in the quarter, suggesting it was also affected by the turmoil. Since the retail and tourism-related sectors employ about 25 percent of the workforce compared to 15 percent in manufacturing, the social impact of the crisis was likely greater than its impact on GDP. 14. Despite a pick-up in household consumption in the second quarter of 2010, exports will remain the main driver of growth in the near term. Sectors linked to the production of tradable goods and services (namely, manufacturing, hotels and transport) have been the main contributors to growth since the Thai economy recovered from the 1997 financial crisis and also accounted for most of the economic dynamism since the onset of the global financial crisis (Figure 1). A change to this pattern is unlikely in the near term, implying that the outlook for exports will continue to be the key determinant of GDP performance. 15. The economy will slowdown in the second half of 2010 as the inventory cycle fades and the recovery of advanced economies proceeds at a modest pace. The Thai economy grew by 10.6 percent in the first half of 2010 from the previous year, but quarterly growth already slowed down substantially in the second quarter and is expected to contract modestly in the second half. The outlook for external demand is subdued: global trade has rebounded, but growth was likely concentrated in the first half of the year as activity indicators in the US, Japan and China point to slowdown in global demand. This moderation is due to the waning of the global inventory cycle and fiscal policy stimulus, as well as the continued slow pace of growth in advanced economies. Because of the low base of GDP in 2009 and robust performance in the first half of 2010, the year-on-year growth rate is expected to come at 7.5 percent in 2010 before slowing to 3.2 percent in 2011.

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Table 1. Real GDP Growth, 2009-2011 (Percent, year-on-year)

Source: NESDB and WB staff calculations. Note: p = World Bank projection.

Share in 2009 2010 2010 2011 2012 2013

2009 GDP Year Q1 Q2 Year(p) Year (p) Year (p) Year (p)

Consumption 63.2 -0.1 4.5 6.5 4.2 4.5 4.1 4.3

Private 53.1 -1.1 4.0 6.5 4.4 4.6 4.1 4.4

Public 10.1 5.8 7.3 6.3 3.0 4.0 4.0 3.5Gross Fixed Capital Formation 20.7 -9.0 12.9 12.2 9.9 5.1 6.1 6.4

Public 5.7 2.7 3.8 -3.4 3.2 5.0 6.5 5.5

Private 15.0 -12.8 15.8 18.5 12.5 5.1 6.0 6.7

Change in Inventories -2.3 -268.2 141.3 -34.4 -139.7 -46.3 -25.0 -25.0

Total Domestic Demand 81.5 -6.6 19.1 7.5 9.8 4.2 4.5 4.7

Exports 65.1 -12.7 16.2 22.3 12.4 5.5 6.8 7.3

Goods 52.4 -14.0 16.5 28.3 14.0 5.5 7.2 7.7

Services 12.8 -6.9 15.0 -5.5 5.9 6.0 5.0 5.5

Imports 46.6 -21.8 31.5 23.6 18.2 7.9 7.9 8.4

Goods 36.8 -23.7 43.2 30.2 22.1 7.5 8.6 9.0

Services 9.8 -13.5 -3.9 0.5 3.4 9.5 5.0 5.5

Net Foreign Demand 18.5 23.4 -10.6 18.5 -2.2 -1.5 3.0 3.6

By Sectors:

Agriculture 8.9 -0.5 -0.8 -1.1 0.0 2.1 2.5 2.5

Industry 44.1 -4.2 20.9 16.5 12.2 3.5 5.4 5.5

Services 47.0 -0.4 5.9 2.9 4.0 3.1 3.2 3.7

GDP 100.0 -2.2 12.0 9.1 7.5 3.2 4.2 4.5

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Figure 1. The Thai economy is driven by sectors linked the production of tradable goods and services.

Source: NESDB and World Bank staff calculations. 16. Inflation risks are generally low, but food prices need to be monitored. Thailand’s headline CPI increased 3.3 per cent year-on-year in August whereas core prices rose 1.2 percent in the same period. Prices of food, especially raw food, were the key drivers, explaining the difference between core and headline numbers. Year-on-year increases in energy prices have moderated to 0.3 percent from a peak of 36 percent in December/January, whereas fruits and vegetables registered a 40 percent year-on-year increase. Year-on-year readings will remain relatively high due to base effects, but core prices are likely to remain below their long-term trend in part due to continuing government subsidies to transportation and utilities. The current readings, as well as the last-twelve-month average (annualized) are still below Thailand’s 2006-2007 average (an approximation for ‘normal times’) and well within the Bank of Thailand’s (BOT) target of between 0.5 and 3 percent (see Figure 2 below).

Figure 2. Core Inflation Remains Below its (already low) Historical Average.

Source: Ministry of Commerce and World Bank staff calculations.

960

980

1,000

1,020

1,040

1,060

1,080

1,100

1,120

1,140

1,160

1,180

400

450

500

550

600

650

Real, Seasonally‐Adjusted THB Billions (GDP)

Real, Seasonally‐Adjusted THB Billions (components)

3 sectors producing tradable goods & services

13 sectors producing primarily non‐tradable goods & servicesGDP

‐2

‐1

0

1

2

3

4

2006Jan

2006Apr

2006Jul

2006Oct

2007Jan

2007Apr

2007Jul

2007Oct

2008Jan

2008Apr

2008Jul

2008Oct

2009Jan

2009Apr

2009Jul

2009Oct

2010Jan

2010Apr

2010Jul

Core CPI (m/m, 12‐mo MA, annualized)

Average core CPI in 2006 and 2007

(1.4 percent per year)

7

17. A slowdown in export growth from the breakneck pace of the first half is likely. Merchandise exports grew by 42 percent year-on-year in nominal terms in the second quarter of 2010, acceleration from the 32 percent pace registered in the first quarter. Growth was driven almost entirely (92 percent) by exports of manufactured goods, and it is likely that much of this growth was linked the global restocking cycle, which is expected to have been largely completed. This is likely to lead to a stabilization of demand for Thai exports at a lower level, consistent with slow growth in advanced economies. Although emerging markets have been a growing source of demand for Thai exports, they have yet to fully compensate for the shortfall in the demand from developed countries, especially as their economies are also sensitive to developments in OECD countries. The outlook for services exports, notably tourism, is more favorable in large part due to the low base set in the second quarter. Indeed, tourist arrivals have already rebounded strongly and as of July were already at 84 percent of the (seasonally-adjusted) pre-crisis peak Thailand remains a competitive destination and the recovery in consumer spending in advanced economies -- while slow -- will continue to drive growth. Key risks include a new deterioration of sentiment in Europe, as European tourists comprise the largest percentage of visitors from high-income countries, as well as renewed politics-related violence. 18. The outlook for private investment is positive in the near term, but uncertainty due to Thailand’s political situation and the speed of global recovery could dampen investment beyond 2010. The rebound in manufacturing production has implied an increase in capacity utilization from its low level in February 2009 and a resumption of capital expenditures that had been all but frozen during the trough of the crisis. Private investment grew by 18.5 percent year-on-year in the second quarter, mostly imported equipment (capital goods imports grew by 32 percent in real terms over the same period) for machine maintenance and upgrades by existing firms. The prospect for ‘greenfield’ investments in new plants or by new investors is more limited, although recent announcements by auto makers bode well for the sector, which is of increasing important to exports and the economy overall. Remaining excess capacity on a global scale, a related highly competitive environment for foreign direct investment, and the weight of the ongoing political turmoil and regulatory uncertainty from the Map Ta Phut and 3G auction court cases will limit the potential growth rate of investment in the medium term. Construction investment, long subdued, has picked up modestly thanks to the low interest rate environment and economic recovery. The rebound in private investment is seen in the first quarter of 2010, when private investment grew by nearly 16 percent. 19. Public investment grew by 2.7 percent in 2009 and growth is expected to accelerate to 3.2 percent in 2010. Investment projects under two government stimulus packages helped raise public investment slightly in 2009 – around 2.7 percent of total public investment or 0.3 percent of GDP, but this contribution is expected to pick up in 2010, making up for a reduction of on-budget investments. The investment budget from the first stimulus package that was carried forward to 2010 is expected to add about THB 11 billion in new public investments, and approximately two-thirds of the “Thai Kem Kaeng” (TKK) budget is allocated to construction and equipment investments. Although on-budget capital expenditures of the central government are expected to decrease by 50 percent from the previous year, investment projects under the off-budget stimulus package more than compensate for this reduction. Slow disbursements in the initial months of 2010 and lower investment by state-owned enterprises caused public investment to contract in the second quarter. Nevertheless, an acceleration of public investment growth is expected in the second half of 2010 thanks to the availability of financing for, and advanced stage of, most projects under the TKK program, as well as a recovery of investments from state-owned enterprises and an increase in the capital budget.

8

20. A recovery in agricultural prices and improved consumer sentiment will support growth in household consumption in 2010. Household consumption contracted by 1.1 percent in 2009, the first contraction since the 1997 crisis. The global economic crisis affected household consumption in at least three ways: first, incomes in agriculture, which employs nearly 40 percent of the workforce, declined in 2009 along with the prices of agricultural commodities; second, agriculture served as a safety net to workers displaced from the manufacturing and trade-related sectors, which placed downward pressure on wages and incomes; finally, the crisis affected consumer confidence. In response to these shocks, the Government implemented a consumption-focused fiscal stimulus package, which was implemented quickly, and likely prevented a further decline in consumption. Moreover, as consumer confidence returned in early 2010, accommodative monetary policy started to have a greater impact as households took advantage of low interest rates to purchase durable goods, especially autos. As a consequence, household consumption grew a robust 6.5 percent in the second quarter of 2010. Although this was driven by car sales made prior to the political turmoil, consumer confidence and value-added tax (VAT) receipts have picked up in June and July from a dip during the crisis. Given base effects and firm agricultural prices, household consumption should post modest growth in 2010. The Government’s farm support schemes have expanded their reach to more farmers, providing sizeable transfers to a larger number of agricultural households and further supporting consumption growth in 2010. 21. A strong rebound in imports is expected to lead to a sharp narrowing of the current account surplus from 7.7 percent of GDP in 2009 to 2.3 percent in 2010. Imports plummeted 25 percent in US dollar terms in 2009, and are expected to jump by 29 percent in 2010 as exports and equipment investment pick up. Importantly, given that a large portion of manufacturing firms’ inventories are comprised of imported inputs for production, a rebuilding of inventories depleted in 2009 is also likely to drive up imports. The result will be a substantial narrowing of the current account from 2009, although a surplus is still expected given the sizeable value added of exports (approximately 50 percent of gross exports) and import prices (especially of energy products) that are still below the 2008 levels. 22. As interest rates head higher and the current account surplus persists, the BoT announced two rounds of measures to promote outflows and help manage pressures on the exchange rate. Until recently, the BOT managed pressures for exchange rate appreciation by accumulating reserves and mopping up the resulting liquidity through sterilization. The cost of this policy has been limited because rates have been at historical lows and credit demand sufficiently subdued to raise concerns about inflation or asset price bubbles; moreover, foreign inflows were limited by the heightened political risk. Given the beginning of interest rate normalization (which leads to an increase of the interest differential with OECD economies) and stabilization of the political situation, sterilization costs are likely to increase while inflows of foreign capital (and repatriation of Thai investments) may increase. This has led the Bank of Thailand to announce two sets of measures to facilitate capital outflows facilitating the operations of regional operating headquarters and supporting direct investments overseas by Thais. As a result, the financial account is expected to post outflows in 2010, even as foreign direct investment (FDI) grows at a higher pace than private investment. Reserves currently cover over about 10 months of imports and are expected to decline marginally in nominal terms. 23. The Thai financial and corporate sectors remain sound, and bank balance sheets continued to strengthen through the crisis. Banks exceed statutory capital adequacy ratios, with the average capital adequacy ratio standing at 15.8 percent at end-2009, compared to the BIS

9

requirement of 8.5 (see Figure 4). Although at the onset of the financial crisis there was a concern that asset quality was bound to deteriorate, non-performing loans (NPLs) actually declined – gross and net NPL to total assets ratios stood at 4.9 and 2.7 percent at year-end, respectively. Large firms went into the crisis with strong balance sheets (debt-to-equity ratios had been declining and stood at about 3 times at end-2009), which allowed them to withstand the shock to their profits during the trough of the crisis. This minimized disruptions during the recovery and allowed firms to post solid financial results for 2009 as a whole. 24. Despite adequate liquidity in the financial sector, small and medium enterprises (SMEs) suffered not only to the shock to sales but also from a lack of credit. Business dissolutions peaked in the second quarter of 2009 even as large corporates were returning to profitability, reflecting the difficulties encountered by many SMEs that had neither the strong balance sheets of large corporates nor access to credit despite plentiful liquidity in the financial system. With the improved economic environment and ample room in their balance sheets, banks have increased lending in 2010.

Figure 3. Bank of Thailand Balance Sheet Figure 4. Financial Sector Strength Indicators

Source: Bank of Thailand.

Source: Bank of Thailand.

25. As the economic recovery has consolidated, the BOT has started to raise interest rates towards levels compatible with precrisis levels. Monetary policy has sought to be countercyclical during the financial crisis, with the policy rate cut to 1.25 percent in early 2009 from 3.75 percent in October 2008. The impact of monetary policy on the real economy had been limited, however, given the demand-side nature of the economic slowdown. However, as consumers (and banks) became more confident of the recovery, credit growth accelerated as a response to low interest rates. The consolidation of the economic recovery and recent growth in domestic credit has prompted the BOT to start normalizing interest rates, rising to 1.75 percent following two 25 basis points hikes in July and August.

‐60

‐40

‐20

0

20

40

60

‐5

‐4

‐3

‐2

‐1

0

1

2

3

4

5

Jan‐07

Mar‐07

May‐07

Jul‐07

Sep‐07

Nov‐07

Jan‐08

Mar‐08

May‐08

Jul‐08

Sep‐08

Nov‐08

Jan‐09

Mar‐09

May‐09

Jul‐09

Sep‐09

Year‐on‐year Growth (percent)

THB Trillion

Net domestic assets (L) Monetary base (L)Net foreign assets (L) Net foreign assets (R)Monetary base (R) Net domestic assets (R)

Year‐on‐Yeargrowth rates 

Balance sheet of the Bank of Thailand

0

10

20

30

40

50

60

0.00

0.50

1.00

1.50

2.00

2.50

Percen

t

Trillion TH

B

Capital Funds‐LHS Gross NPL ‐ LHS

% CAR ‐ RHS % NPL to total  loan ‐ RHS

10

Table 2: Key Economic Indicators

Historical Projected 2007 2008 2009 2010 2011 2012

Output, Employment and Prices Real GDP (% change year to year) 4.9 2.5 -2.2 7.5 3.2 4.2 Industrial production index (2000=100) 180.7 190.2 180.4 .. .. .. (% change year to year) 8.2 5.3 -5.1 .. .. .. Unemployment (%) 1.4 1.4 1.5 1.3 1.3 1.3 Real wages (% change year to year)1/ 0.7 4.8 -1.6 .. .. .. Consumer price index (% change year to year) 2.2 5.5 -0.8 3.5 3.0 3.0 Public Sector Government balance (% GDP)2/ -2.5 -1.9 -3.8 -2.7 -3.0 -2.1 Public sector debt (% GDP) 37.5 38.2 43.8 43.0 44.9 45.1 Foreign Trade, BOP and External Debt Trade balance (Billions US$) 12.8 -0.4 19.4 5.2 0.3 -2.6 Exports of goods (Billions US$) 151.3 175.2 150.7 175.3 192.2 216.1 (% change year to year) 18.2 15.9 -14.0 16.3 9.7 12.5 Key Export (% change year to year)3/ 16.4 7.6 -15.2 .. .. .. Imports of goods (Billion US$) 138.5 175.6 131.4 170.0 191.9 218.8 (% change year to year) 9.1 26.8 -25.2 29.4 12.9 14.0 Current account balance (Billion US$) 15.7 1.2 20.3 7.0 1.4 -0.8 (% GDP) 6.3 0.4 7.7 2.3 0.4 -0.2 Foreign direct investment (Billion US$)4/ 10.3 7.6 5.3 7.6 9.3 11.3 (% GDP) 4.1 2.8 2.0 2.5 2.6 3.0 External debt (Billion US$)5/ 61.9 65.2 69.5 .. .. .. (% GDP) 24.8 24.0 26.4 .. .. .. Short term external debt (Billion US$)5/ 21.6 24.2 27.4 .. .. .. Debt service ratio (% exports of goods/services) 11.8 7.1 6.7 .. .. .. Foreign exchange reserves, gross (Billion US$) 87.5 111.0 138.4 143.1 .. .. (months of imports of goods/services) 7.9 7.9 13.2 10.1 Financial Markets Domestic credit (% change year to year)6/ 4.9 9.3 3.1 .. .. .. Short term interest rate (% p.a.)7/ 3.69 3.40 1.35 .. .. .. Exchange rate (Baht/US$, average) 34.2 33.4 34.3 32.5 30.0 30.0 Real effective exchange rate (2000=100)8/ 112.2 112.8 108.8 .. .. .. Stock market index (December 1996=100) 858 450 735 .. .. .. Memo Items Nominal GDP (Billion US$) 249.0 272.0 263.7 309.8 356.9 383.1 Nominal GDP (Billion Baht) 8,529.8 9,075.5 9,050.7 10,070.0 10,705.7 11,492.6 Real per capita GNI (2000 US$) 2,876.3 3,055.0 2,950.1 3,391.0 3,772.9 3,912.7

Source: BOT, NESDB, MOF, NSO, MOC, Stock Exchange of Thailand, and staff calculations. 1/ Average wage of employed person (Labor Force Survey; NSO) deflated by CPI inflation. 2/ Cash balance of central Government for the calendar year. 3/ Machinery and mechanical appliances 4/ Non-bank foreign direct investment. 5/ Source: Bank of Thailand (BOT) 6/ IFS definition (net credit to the non-financial public sector, credit to the private sector and other accounts). 7/ BOT Policy Rate (end of day liquidity adjustment window; average of borrowing and lending facilities). 8/ Source: Bank for International Settlements

11

26. Fiscal policy has been expansionary as the Government responded to the global financial crisis with two rounds of stimulus measures, but the deficit as a share of GDP is expected to decline in FY2010. The fiscal deficit spiked in 2009, coming in at THB 376 billion or 4.4 percent of GDP for the fiscal year ended in September. The deficit was driven by the sharp decline in revenues due to the global financial crisis (accounting for about 2.6 percentage points of the deficit), the first round of stimulus (1.1 percentage points) and the lower GDP denominator (0.4 percentage points). The exit from fiscal stimulus is comprised of the expiration of a number of stimulus measures, a gradual move of other expenditures (especially public investments) into the budget (and therefore within the government’s fiscal rules), and revenue measures that are currently under study. Implementing a fiscally sustainable stimulus package is a prior action for the operation, and the stimulus package is evaluated in more detail in Section V. Because of the robust GDP growth, temporary nature of most consumption measures under the first round of stimulus, tight on-budget expenditures, and moderate disbursements under the Government’s public investment programs, a lower deficit of 1.9 percent of GDP is expected in FY2010.

27. Most of the central Government spending in the past few years has been for current expenditures, notably in the education sector. Central government expenditures averaged 17.8 percent of GDP from 2006-2009 and have been increasing by around 10 percent per year from 2007-2009. Around 75 percent of the total expenditures are for current expenditures. Wages and salaries account for around a third of the current expenditures or a quarter of total central government budget. Spending patterns are expected to be similar in FY2010. The largest share of expenditures each year goes to the education sector (almost one-fourth of total expenditures).

28. In FY2009, expenditure as a share of GDP for priority areas such as education and health has increased in line with a higher total spending as a share of GDP. After being stagnant in FY2008, spending on education and health increased by 0.8 percent in FY2009 (0.2 percent in health and 0.6 percent in education). This is in line with the increase in the Government’s total expenditures of 3.5 percent of GDP from FY2008 to FY2009 (see Table 3). Expenditures in the community and social services category posted the highest growth, up by 1.6 percent of GDP, while economic services rose by 0.2 percent. In FY2009, around THB72.0 billion (or 0.8 percent of GDP) out of the THB97.55 billion Stimulus Package 1 was spent on social projects. This significantly helped raise the share of expenditures on the social services in GDP in FY2009 from its FY2008 level. The Stimulus Package 2 which is focused on public infrastructure investments will help offset the reduction in the Government’s capital expenditure in FY2010. A more in-depth analysis through a Public Financial Management Review (PFMR) is currently being undertaken to review the expenditures and their effectiveness in greater detail.

29. Tax collection reforms have helped increase revenues collection modestly since 2002. Taxes on income and profits, in particular, have been increasing as a share of GDP. This has helped increase tax revenues from 14.2 percent of GDP in 2002 to over 16 percent in recent years. In FY2009 (ended September), total revenues stood at 16.2 percent of GDP due to the impact of the crisis. FY2010 revenues were initially projected to decline further, but thanks to the recovery revenues have also grown substantially. In the first 8 months of FY2010 (October 2009 – May 2010), revenue collection was up 27 percent compared to the previous year. As the economy continues to grow over the next few years, tax revenues are likely to return to around 17 percent of GDP as personal and corporate income tax collection efforts continue to improve, helping to offset lower tax receipts as a result of possible future tax cuts and further rationalization of tariffs.

12

Table 3. Central Government Expenditure, FY2006-2009 (Percent of FY GDP)

FY 2006 2007 2008 2009

General Government Services 2.9 2.9 3.1 3.5

1.1 General public services 0.9 0.8 0.9 0.9

1.2 Defense affairs and services 1.1 1.1 1.2 1.4

1.3 Public order and safety affairs 1.0 1.0 1.0 1.2

Community and social services 6.9 7.5 7.2 8.8

2.1 Education affairs and services 3.6 4.0 3.7 4.3

2.2 Health affairs and services 1.3 1.8 1.7 1.9

2.3 Social security and welfare affairs and services 1.4 1.4 1.3 1.9

2.4 Housing and community amenity affairs and services 0.5 0.2 0.3 0.6

2.5 Religious, cultural and recreational affairs, and services 0.1 0.1 0.1 0.1

Economic services 3.6 3.8 3.3 3.5

3.1 Fuel and energy affairs and services 0.0 0.0 0.0 0.1

3.2 Agricultural, forestry and fishery affairs and services 0.8 1.2 0.9 1.0

3.3 Services, manufacturing affairs, and services, and construction affairs and services

0.1 0.1 0.1 0.1

3.4 Transportation and communication affairs and services 0.7 0.8 0.7 0.7

3.5 Other economic affairs and services 2.0 1.7 1.6 1.6

Miscellaneous and unclassified items 3.1 3.5 3.2 4.4

Total Expenditure 16.5 17.8 16.7 20.2

Memo: Total spending (billion baht) 1,270 1,472 1,532 1,791

Source: Comptroller General’s Department.

B. Fiscal Response to the Financial Crisis and Debt Sustainability

30. In response to the impact of the global financial crisis, in early-2009 the Government announced a two-pronged fiscal stimulus strategy. In February 2009, Parliament approved a supplementary budget of THB116.7 billion, of which THB97.6 billion (US$2.8 billion or 1.1 percent of 2009 GDP) was used to finance stimulus measures, as well as tax reductions costing around 0.45 percent of GDP. The emphasis of the first round of stimulus was on consumption measures for quick implementation. In April 2009 the government announced a second round of stimulus known as the “TKK” (Strong Thailand) program in an amount of THB1.3 trillion over the 2010-2012 period (averaging 4.5 percent of GDP annually).1 The headline figure includes new and already planned

1 As discussed elsewhere, the TKK program aims both at maintaining and raising levels of public investment; therefore, the headline amount was intended as an upper bound on additional deficits that assumed a protracted crisis and high disbursement rates. Please see Table 5 for an analysis of the additionality of the second round of fiscal stimulus.

13

items from the central government’s public investment plan as well as investments by state owned enterprises. The TKK program emphasizes public investments, especially in small-scale infrastructure, favoring projects that could be implemented in the three-year timeframe. 31. The first round of stimulus measures had been largely implemented by September 2009, while execution of the second round is currently underway. Progress on the stimulus is a prior action for this operation and is described in paragraphs 72-83. This section assesses the financing of the fiscal stimulus and its compatibility with fiscal sustainability. 32. The first round of stimulus was financed through domestic borrowing under the Public Debt Management Law. Thailand’s Public Debt Management Act of 2005 authorizes the Government to borrow domestically in any fiscal year up to 20 percent of approved expenditures (including the supplementary budget) plus 80 percent of budgeted principal repayments.2 For 2009, this ceiling limited borrowing to THB440 billion. Although initially there were concerns that the Government’s financing needs would exceed this ceiling, thanks to a recovery of revenues towards the end of the fiscal year the deficit came in at THB420 billion, below the borrowing ceiling. 33. The TKK program was originally intended to be financed outside the budgetary framework due to the limits imposed by the PDM Act, but projects have been increasingly moved on-budget as revenues recovered. Because expenditures cannot exceed expected revenues plus financing, the borrowing ceiling imposed by the Public Debt Management Act effectively limits expenditures to 125 percent of expected revenues. Since the budget for FY2010 was prepared at the height of the financial crisis, revenue estimates were low and greatly constrained expenditures. In light of these severe constraints to the budget envelope and wishing not only to maintain the level of public investments but also to provide a boost that would stimulate the economy, the Government decided to finance the TKK program outside the budgetary framework. Thus the borrowing authority for initial TKK expenditures comes from an Emergency Decree passed in May 2009. An amount of THB 400 billion was originally authorized, of which THB 50 billion were used to replenish the Treasury account and THB 15 billion were used to recapitalize certain state-owned financial institutions. Although the Government originally anticipated the need to borrow an additional THB 400 billion through another exceptional borrowing authorization, the recovery in revenues has led many TKK expenditures to be moved back on budget. 34. The Government’s total financing requirements for TKK expenditures in FY2011 may be as high as THB 470 billion, depending on the pace of implementation of the underlying projects. Financing requirements after taking into account expected disbursement rates as well as those projects moved on-budget are estimated to be approximately THB 150 billion. The Government plans to meet these financing requirements through the remaining funds from the Emergency Decree, as well as borrowing from official creditors (ADB, JICA and World Bank), to which a separate borrowing ceiling applies.3 In addition, actual revenues are likely to exceed the revenue target, which would allow the government to finance additional expenditures through a supplementary budget. Table 4 below summarizes the Government’s financing needs and sources for

2 Each year, approximately 3 percent of the overall budget is earmarked for principal repayments, with any additional principal payments coming due that year being rolled over “off budget”. The 80 percent ceiling applies to the on-budget principal repayments. 3 In addition to the borrowing ceiling of 20 percent of overall expenditures, the government may borrow up to 10 percent of expenditures from foreign sources.

14

FY2010-FY2013.

Table 4. Central Government’s Financing Plan for FY2009 – FY2013 (percent of GDP)4

Source: FPO, PDMO and World Bank calculations and projections. 35. Foreign borrowing, including from the World Bank is needed to finance the planned expenditures in FY2011. The FY2011 budget recently approved by Parliament anticipates THB 2.07 trillion (19.8 percent of GDP) in expenditures, including THB 345 billion (about 16.5 percent of the total budget) in public investments. The budget contains a number of large “headline” increases – the announced level of spending represents a 22 percent increase over the FY2010 budget, whereas the investment budget was announced as an increase of about THB 100 billion (over 60 percent) from FY2010. However, most of this increase represents TKK investments that have now been moved on-budget. Without additional financing from multilateral sources such as the World Bank, the Government would only be able to finance about THB 165 billion out of approximately THB 250 billion in expected TKK expenditures. 36. A debt sustainability analysis and indicators of market perceptions suggest that the Government has sufficient fiscal space to implement the stimulus. Under conservative assumptions (permanent expenditure increases but no new revenue-raising measures with growth below potential through 2014), Thailand’s debt ratios are projected to decline from a peak of 46.6 percent in 2014 to 45.0 percent of GDP by 2020. Reflecting the market’s view of the strength of Thailand’s public balance sheets, credit default swap (CDS) spreads and bond yields have remained at relatively low levels notwithstanding higher deficits and the political turmoil. 37. Thailand’s long track record of fiscal prudence underpins the assumption that deficits will enter a declining path in FY2012. In FY2010, the budget deficit will decline to about 1.9 percent of GDP from 4.4 percent in FY2009 even after taking into account the fiscal stimulus.5

4 Figures are on a cash basis. Differences between cash and GFS bases are small for budgetary balances, but relatively large (around 1 percent of GDP) for the off-budget balance. This explains most of the differences in projected fiscal balances in this document compared to fiscal forecasts in the IMF’s most recent Article IV report. 5 The government may indeed run a surplus when the off-budget TKK is excluded. As noted elsewhere, pessimistic GDP and revenue projections at the time of budget formulation greatly constrained expenditures in FY2010.

(Fiscal Years) 2004 - 2008 av 2009 2010 2011 2012 2013 2020

Financing Needs1. Revenues 17.6 15.9 16.6 16.8 16.9 17.0 17.32. Expenditures 18.2 21.8 18.4 19.8 19.3 19.1 19.1

On-budget 18.2 21.7 16.1 18.4 18.3 19.1 19.1TKK, off-budget … 0.2 2.3 1.4 1.0 … …

3. Off-budget Balance, excl. TKK -0.1 1.5 -0.2 -0.2 -0.2 -0.2 -0.24. Net Financing Needs (1–2+3) -0.8 -4.4 -1.9 -3.2 -2.6 -2.3 -2.0

Financing Sources

1. Net Domestic Borrowing, PDM Act … 4.3 -0.1 1.8 1.6 1.9 1.72. Domestic Borrowing, Emergency Decree … 0.2 2.1 0.6 0.7 … …3. Foreign Borrowing (WB, ADB, JICA) … 0.0 0.0 0.5 … … …4. Other 1/ … … … 0.3 0.3 0.4 0.35. Total Sources (1+2+3+4) 4.4 1.9 3.2 2.6 2.3 2.0

1/ For 2011, assumes a supplementary budget as actual revenues are expected to exceed budgeted revenues. For 2012 and beyond,assumes other foreign financing.

15

This is in sharp contrast to the 5.5 percent deficit expected in early 2009. While the deficit is expected to increase in FY2011, the analysis suggests that Government can afford the stimulus package without jeopardizing debt sustainability as deficits are expected to decline starting in FY2012.This assumption is supported by the Thai Government’s consistent pursuit of a conservative fiscal stance of low budget deficits or surpluses. Since 2002, budget deficits were no more than 2 percent of GDP and the primary balance was in surplus twice between 2005 and 2008. In addition, the Ministry of Finance has recently signed a memorandum of understanding with the bureau of the budget committing to balancing the budget within five years. 38. As a result of Thailand’s prudent fiscal stance, public debt stocks had been declining until the onset of the financial crisis and the debt composition had been managed to minimize the impact of external shocks. Public and publicly-guaranteed debt, including non-guaranteed debt of state-owned enterprises, has been falling as a share of GDP from a peak of 58 percent in 2000 to 38 percent at end-2008. Due to the financial crisis, debt levels rose to 44 percent at end-2009, but remain below the 60-percent indicative ceiling under Thailand’s fiscal sustainability framework and earlier forecasts. The composition of the debt stock has also shifted. Foreign-currency debt, which accounted for about 39 percent of public debt in 1999, was reduced to about 10 percent of the portfolio by end-2009. In addition, 40 percent of the government’s external debt has been swapped back into local currency, so that risks from exchange rate fluctuations are minimal. There has also been a move towards issuing fixed-rate government bonds, therefore minimizing risks from interest rate volatility. The average time to maturity had been increasing, but due to the financial crisis the Government was forced to borrow primarily in shorter tenors in 2009. The maturity profile started to be extended again in 2010. 39. The baseline scenario is relatively conservative, assuming a return to pre-crisis levels of growth only by 2014, permanently higher expenditures and no new revenue-raising measures. In addition to the projections described in Table 4 above, the baseline scenario assumes that real GDP growth converges to its potential of 5.0 percent by 2014 and the primary public sector balance moderates to a deficit of two percent of GDP – above historical averages of about 0.8 percent of GDP. This permanent increase in the deficit is driven by the government’s adoption of new social policies (some initiated as part of the stimulus package) while as a conservative assumption revenues as a share of GDP are only expected to (slowly) return to pre-crisis levels. The baseline scenario incorporates the impact of the stimulus packages, which can be seen in the high budget deficit of 2009-2012 averaging 3.0 percent of GDP, well above the post-98 crisis average of 0.9 percent of GDP. Levels of new foreign and domestic borrowing are consistent with the Government’s proposed funding sources. 40. Thailand’s external debt is owed primarily to official creditors and is therefore at below-market terms. Even considering the projected shift in financing towards a greater share of external debt and ignoring the fact that much of the external debt has been hedged, Thailand’s public external debt-to-GDP ratio does not exceed 17 percent under the most severe standard shock (an unlikely 30 percent depreciation). This is in contrast to foreign reserves amounting to 48 percent of GDP. Given Thailand’s high levels of exports, debt-to-export ratios are very low. 41. Overall external debt (both public and private) is also low at 26 percent of GDP (US$74 billion). About 40 percent of the external debt is short-term, but trade credits represent almost two-thirds of private short-term debt, while another 18 percent are inter-company loans. Public external debt (primarily owed by state-owned enterprises) comprises 19 percent of total external debt and

16

only 1.9 percent is short-term. External debt service ratios are manageable at 5.2 percent of exports overall and total external debt was 51 percent of international reserves as of end-March 2010. 42. Under the baseline scenario, Thailand’s public debt-to-GDP ratio does not exceed 46 percent of GDP and ratios start to decline (albeit slowly) in 2015. After an initial spike due to the substantial financing needs that arise from the fiscal stimulus, debt ratios resume their downward trend. The debt-to-GDP ratio is expected to be approximately 45 percent of GDP by 2020 following a peak of 46.6 percent in 2014. The slow decline under the baseline arises from conservative assumptions on fiscal balances, which remain lower than their post-financial crisis average throughout the projection period. Debt projections are substantially lower compared to April 2009, indicating the magnitude of the recovery. 43. Public debt sustainability is resilient to worse-than-expected outcomes in 2011-2012, but a permanent shock to growth could lead to an upward path of public debt. The Debt Sustainability Analysis (DSA) considered the effect on debt ratios of (i) a real GDP contraction of 0.9 percent in FY2011; (ii) a 30 percent nominal depreciation of the Thai baht; (iii) the realization of contingent liabilities adding up to ten percent of GDP; and (iv) a combination of the growth and exchange rate shocks (Table 5). The contingent liability shock is the most severe, leading the debt-to-GDP ratio to peak at 55 percent, but favorable debt dynamics lead to a declining debt path. The greatest risks to debt sustainability come from protracted growth slowdown and lack of fiscal consolidation following the resumption of growth. If primary deficits remain at 1.5 percent of GDP – high for historical standards but almost 1 percentage point of GDP below FY2009 levels – the debt-to-GDP ratio would remain on a rising trend in the longer term and would exceed 50 percent by the end of the projection period. The scenario with permanently low growth also leads to rapidly increasing debt ratios. This emphasizes the importance of taking advantage of the crisis to enhance competitiveness and ensure a return to sustainable growth.

17

Figure 5. Thailand: Public Debt Sustainability Analysis (As percent of GDP, unless otherwise noted)

1/ Assumes that real GDP growth is at the baseline level minus one standard deviation divided by the square root of the length of the projection period. 2/ Assumes that real GDP is at the baseline level minus one standard deviation in 2011. 3/ Assumes the primary balance is kept at a deficit of 1.5 percent of GDP throughout the projection period. Source: World Bank calculations based on data from PDMO.

39

45

35

40

45

50

55

602005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Real GDP growth and primary balance at historical averages

Baseline 55

48

45

35

40

45

50

55

60

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Permanently lower GDP growth 1/

Real GDP growth shock in 2011 2/

Baseline

51

45

35

40

45

50

55

60

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Primary balance shock 3/ Baseline

50

4645

35

40

45

50

55

602005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

10 percent of GDP increase in other debt‐creating flows  in 2011

Combination of growth and real depreciation shocks

Baseline

18

Table 5. Debt Sustainability Analysis – Sensitivity Analysis (Fiscal Years)

44. Market indicators confirm Thailand’s strong financial position. When the global financial crisis struck, Thailand was clearly perceived as less risky than some of its regional peers (reflected in Figure 6 as the sharp decline in Q3 2008). As the recovery took hold and financial conditions in Korea and Indonesia normalized, Thailand’s credit default swap (CDS) spreads declined less rapidly than in those countries, before rising slightly in April and May 2010 on account of the political turmoil. CDS spreads have declined since May and remained stable at levels well below their peaks during the crisis; spreads are comparable to Korea, 20 – 30 bps higher than China and Malaysia, and about 40 bps lower than the Philippines and Indonesia. Similarly, Thailand’s government bond yield curve has been generally stable (especially in the more liquid intermediate segment of the curve between 3 and 7 years) and driven primarily by the overall interest rate environment, suggesting that markets have not placed a risk premium on the Government’s debt as a result of expansionary fiscal policies (Figure 7). 45. In conclusion, risks to fiscal sustainability are low, and the macroeconomic policy framework is adequate. The financial crisis and resulting policy response put considerable stress on the macroeconomic balances and the political turmoil in 2009-10 made the macro challenge more difficult. However, Thailand’s history of prudent macroeconomic management, conservative public debt management and liquid financial sector provided ample space to respond. The financing plan is prudent in accessing reasonably priced debt. As will be discussed in Section V, the stimulus has been mostly temporary with most tax and transfer provisions having a sunset clause and the remainder comprised of social and infrastructure expenditures that may be accommodated even without revenue measures.

2010 2011 2012 2013 2014 2015 2020

Baseline 44 46 46 46 46 46 45

A. Alternative scenarios

A1. Real GDP growth and primary balance are at historical averages 44 43 42 42 41 41 39A2. Primary balance shock 44 45 46 47 47 48 51A3. Permanently lower GDP growth 1/ 44 46 47 48 48 49 55

B. Bound tests

B1. Real GDP growth grows by 0.8 percent in 2012 44 48 48 49 49 49 48B2. One-time 30 percent real depreciation in 2011 44 47 48 47 47 46 44B3. 10 percent of GDP increase in other debt-creating flows in 2011 44 55 55 55 54 53 50

Debt-to-GDP Ratio

Projections

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Figure 6. Thailand 5-year Credit Default Swaps Figure 7. Thailand Yield Curve

Source: Datastream, World Bank staff calculations Note: Regional currency basket includes China, Malaysia, Indonesia, Philippines, Hong Kong SAR, China, Singapore and Korea.

Source: Thai Bond Market Association.

C. Political Context

46. The roots of the recent political crisis go back to at least 2001. The Thai Rak Thai (TRT) Party, headed by Thaksin Shinawatra, was elected by a landslide that January, a first for Thailand’s democracy which has been characterized by short-lived coalition governments. Thaksin’s Government was the first to serve a full four-year term and was re-elected by another overwhelming majority in 2005. Opponents gathered under the People’s Alliance for Democracy (PAD) and began a series of public protests, accusing Thaksin’s Government of favoritism, corruption and conflict of interest. In September 2006, a bloodless coup overthrew the TRT Party and appointed an interim Government, which oversaw the drafting of the 2007 Constitution. An interim Constitutional Tribunal was also installed. In May 2007, the Tribunal dissolved the TRT and three other political parties found guilty of violations of electoral laws. Former TRT members then regrouped under a new name, the People’s Power Party (PPP), contested in the December 2007 election, and emerged as the head of a Coalition Government. 47. The political crisis escalated in August 2008 and the situation remained tense through December that year. The Coalition Government was led by PPP leader Samak Sundaravej. In May, 2008, the PAD, which had set the stage for the 2006 coup, returned to the streets to protest an attempt to amend the Constitution and grant amnesty to banned politicians, including Mr. Thaksin. In August, they stormed the National Broadcasting Corp. headquarters, which they accused of being the mouthpiece of the pro-Thaksin Government, and successfully seized Government House. In September, Mr. Samak was forced out on a conflict of interest charge and Mr. Thaksin’s brother-in-law, Somchai Wongsawat, took over as Prime Minister. In October, a clash between the police and the PAD near Parliament left two persons dead and about three hundred injured. Then in November, the PAD seized the public areas of Bangkok’s airports leading to their closure and paralyzing Thailand’s air traffic for almost two weeks, causing substantial losses for Thailand’s tourism and export industries.

0

100

200

300

400

500

600

-250

-200

-150

-100

-50

0

50

basis

poi

nts

Thailand 5-year Credit Default Swaps

Thailand minus regional peers (left axis)

Thailand 5-year CDS Spreads (right axis)

Regional peers: China, Indonesia, Malaysia, Philippines and Korea. Lower values denote improvements.

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Yield (percent)

Time to maturity  (years)

2007 av. ('pre‐crisis')

12/15/2008 ‐Prior to Announcement of Stimulus

3/31/2009 ‐ Fiscal stimulus under implementation

9/28/2010

20

48. In December 2008, the Constitutional Court ruled to dissolve the PPP and two other coalition parties, leading to the end of the airport occupation and the formation of a new, Democrat-led government. The three parties were dissolved for electoral fraud and their executives were banned from politics for 5 years. With the expectation that PPP would be dissolved, a new political party called Puea Thai (For Thai) had been set up and PPP members unaffected by the Court ruling quickly joined. Puea Thai became the main opposition party in parliament after the House of Representatives voted to elect Abhisit Vejjajiva, leader of the Democrat Party, as the new Prime Minister. Mr. Vejjajiva then formed a coalition government with five smaller parties. 49. The new Government was met with sustained protests. The United Front for Democracy against Dictatorship (UDD) emerged in 2006 as an anti-coup movement which supported Mr. Thaksin Shinawatra. The UDD now backed Puea Thai and launched its protests against the Government in early 2009 on the argument that the Government did not have an electoral mandate. UDD protests disrupted the East Asian Summit in the coastal city of Pattaya, followed by three days of violence in Bangkok. Smaller protests in the provinces continued through the year. 50. In 2010, the UDD occupied two areas of Bangkok with symbolic and commercial value, culminating in two military operations in April and May. After the Supreme Court ordered the seizure of US$1.4 billion of Mr. Thaksin’s assets in February 2010, the UDD launched another round of protests against the Government. In March, thousands of protesters began occupying an area in an old part of Bangkok near Democracy Monument, and two weeks later they occupied Rajprasong intersection, the city’s upmarket shopping district. They also briefly invaded Parliament. These actions prompted the Government to declare a state of emergency in Bangkok on April 7th. Three days later, an attempt to disperse the protesters from the area near Democracy Monument resulted several fatalities, including military officers and a Japanese journalist. UDD then consolidated its presence at Rajprasong, effectively shutting down much of Bangkok’s central business district. The following month of UDD protests was marked by occasional episodes of violence. After negotiations failed, the Government launched a military operation to clear protesters off the site on May 19th. Following a week of street battles as well as concerted arson attacks at a number of commercial buildings in Bangkok, the military was able to restore order. Subsequently, Bangkok has remained relatively calm, however, there are occasional security incidents. 51. The Government is currently working on a national reconciliation plan, which may involve early elections. The Government has formed several committees to establish what happened during the recent crackdown and to chart a path for national reconciliation. It has also gradually lifted the state of emergency across the country although it is still in effect for Bangkok and UDD leaders remain under arrest. The Prime Minister has spoken of the possibility of holding elections earlier than the end of 2011, but only if conditions are appropriate. Both the UDD and Puea Thai Party, however, questioned the impartiality of the committees and accused the Government of trying to buy time. Another complicating factor is that the Democrat Party is presently on trial for alleged misuse of campaign finance funds and, if found guilty, may face dissolution. The Democrat Party is also being charged separately of allegedly accepting illegal donations, which may lead to penalties for party executives but would not lead to dissolution. The possibility of further tension and violence remains. 52. At the same time, a violent separatist movement insurgency continues in the three southernmost provinces (Pattani, Yala and Narathivas). Since January 2004, insurgency movements have killed more than 3,000 people and affected thousands of women and children

21

from the ethnic Malay minority group in these three provinces. Even though violence has concentrated largely in the three provinces, it has occasionally slipped into other areas of the country. In 2009, the Government approved the "Five Southern Border Provinces Special Areas Development Plan" with a budget of THB 73.5 billion (US$2.3 billion). The plan has six components: (i) plan to upgrade people’s income and quality of life; (ii) plan to restore justice and security; (iii) plan to standardize social services; (iv) plan to boost the economy and investment; (v) plan to develop economic links with Malaysia; and (vi) plan to improve local administrative effectiveness. 53. On the international front, resolving the long-standing border dispute between Thailand and Cambodia remains a challenging task. However, the danger of this dispute escalating into an armed conflict has receded. The dispute is over the 900-year old Preah Vihear temple and a patch of neighboring territory. Littered with landmines left over from decades of war in Cambodia, the Thai-Cambodia border has never been fully demarcated and occasional disputes have caused border shutdowns in the past two decades. In October 2009, the dispute turned deadly after a clash between Thai and Cambodian troops along the border killed two people. Cambodia has sought to bring the situation to ASEAN and to the UN for mediation while Thailand has insisted that the issue is bilateral. As of August 2010, however, tensions have eased markedly after Mr. Shinawatra resigned as an economic advisor to Prime Minister Hun Sen. The two countries’ Ambassadors have resumed their duties. 54. Notwithstanding political differences, there is greater consensus on economic policy issues among the political parties, which has enabled the economic reforms to continue. The political instability and uncertainty in Thailand is driven primarily by a competition for power among differing factions and stakeholder groups rather than by a clash of ideologies. In fact, all the major groupings subscribe to private sector-led development, almost all parties have now endorsed most of the programs introduced by the first Thaksin government (in particular universal health care) and most parties agree, at least nominally, on the importance of improving governance. Thailand also has a strong bureaucracy which has not been significantly impacted by the political uncertainties and recognizes the importance of continued reforms to enhance Thailand’s competitiveness, and reduce poverty and inequality. As a result—and even over the past several years of political instability and frequent changes in government—Thailand has continued to move ahead with the design and implementation of a steady stream of reforms across a broad range of issues and areas, including poverty reduction, the financial and corporate sectors, improving the business and investment environments, trade, public sector, governance and social protection. The longevity of the reform movement speaks to the extent to which the changes have been owned by senior members of the bureaucracy and the professionalism of the top tier of the Thai civil service, as well as to a broad level of consensus about these reforms among all political parties. III. THE GOVERNMENT’S PROGRAM AND PRIORITIES 55. The RTG has implemented a sustained program of reforms, which were initiated after the Asian financial crisis. Key reforms were in the areas of public financial management and service delivery, national competitiveness, and social protection and health. From 2002-2005, the reforms were spear-headed by the TRT Government under Prime Minister Thaksin Shinawatra and supported by the bureaucracy. These programs were carried-on by the line ministries and agencies

22

even after the replacement of the TRT Government by the military Government in September 2006. Implementation of the reforms has been continued by the military Government in 2007 and subsequently by the PPP Government in 2008 and the current Democrat Party Government. The continuity in the reform program suggests that there is broad ownership of the program. Nevertheless, the political instability has inevitably had an impact. This is most clear where legislative changes are needed, for example with the delay in procurement reforms and the passage of the Public Financial Act.

A. Public Financial Management and Service Delivery

56. Thailand’s recent efforts to comprehensively reform the public sector started after the 1998 Asian financial crisis and have been sustained since then. The efforts were supported by key legislative documents – the 1997 Constitution and the Public Administration Act (2002), and the Royal Decree on Good Public Sector Governance (2003). In 2002, the Public Sector Reform Committee was replaced by the Public Sector Development Commission established by the Public Administration Act (2002), which was promulgated that year. The Act also established the Office of the Public Sector Development Commission (OPDC) as the secretariat and the implementing agency for the Public Sector Development Commission. In 2003, the Cabinet approved the Strategic Plan for the Thai Public Sector Development (2003-2007), and the follow-on Strategic Plan for the Thai Public Sector Development (2008-2012) was approved in 2008. 57. The impetus for reforms in public financial management (PFM) was supported by the 2007 Constitution which mandated more comprehensive public financial management framework, transparency and disclosure of public finances. It also stipulated the drafting and enactment of a Public Finance Act that would bring about the improvements to the PFM system, especially with regards to fiscal transparency. The Act has now been drafted and awaits enactment by Parliament. 58. In addition, the 10th 5-year National Economic and Social Development Plan (2007-2011) also has a strategy of good governance as one of the 5 national strategies. This is the first time for good governance to be explicitly included the 5-year plan. Moreover the 4-year Government’s Public Administration Management Plan (PAMP) also has good governance as one of the 9 policy areas that the government will pursue. Supporting this set of reforms is the focus of this PSRDPL.

B. Improving National Competitiveness

59. A parallel set of reforms have focused on improving national competitiveness. These are as follows:

(a) Improving productivity and moving towards a knowledge economy. Thailand has continued to make progress in improving its trade and investment regimes. The country undertook major tariff restructuring from 2003, and signed a number of free-trade agreements, for example, with Australia in 2005 and Japan in 2007. To improve the investment regime, bureaucratic processes were streamlined through the overall reform in public sector services. The Board of Investment (BOI) moved towards seeking investments (both domestic and foreign) that promote knowledge creation, skills development, technology transfer, and innovation. An ICT Ministry was also established in October 2002 with the specific responsibility to plan, promote and coordinate the development of information and communication technology within Thailand. The Tenth National Economic and Social

23

Development Plan (2007-2011) has specific chapters on moving Thailand towards a knowledge-based economy as well as the improving Thailand’s productivity. Following the Tenth Plan, the Government has drawn up an Industrial Productivity Master Plan aimed at improving productivity of the industrial sector6.

(b) Financial and corporate sector development and legal reform. Following the considerable

financial sector reform effort in the immediate post-crisis period, reforms aimed at further liberalization of the sector have continued at a more cautious pace in recent years but have still been sufficient to ensure further substantial reductions in financial vulnerability and improvements in the health and profitability of Thai firms and banks. Moreover, the implementation of the Financial Sector Master Plan (Phase I)7 also helped to further strengthen the structure of the financial sector. The BOT has been strengthening its supervisory policies, procedures and practices and moving to a more risk-focused supervisory regime; and the Department of Insurance8 has taken steps to improve its methods and capacity to supervise insurance companies. Voluntary debt workout mechanisms were established and new lending on a risk adjusted basis has been facilitated by the establishment of the Real Estate Information Center (REIC) and the new Credit Information Bureau Law. Important accounting and corporate governance changes have been introduced. The market infrastructure of the Thai capital markets has also been reformed considerably, progress has been made on promoting the supply side of the domestic bond market and a second phase of the Capital Market Master Plan has been proposed. Several financial acts were enacted in December of 2007. They are the Financial Institutions Business Act, Deposit Insurance Institutions Act, and a new Bank of Thailand Act. The ADB has been providing support to improve functioning and supervision of capital market. Finally, a modular Financial Sector Assessment Paper (FSAP) is being conducted jointly between the World Bank and the IMF to assess the government-owned Specialized Financial Institutions.

(c) Infrastructure development. Over the last few decades, economic infrastructure – including

energy, transport, water and sanitation, and telecommunications – has played an important role in supporting Thailand’s growth and development. However, since the 1997 financial crisis new investment in infrastructure has dropped significantly; and the growing demand for infrastructure services and concern about declining national competitiveness has again placed infrastructure high on the Government's development agenda. To address this challenge, the Tenth Five Year Plan gives strong emphasis on infrastructure, logistics and cluster development, and line agencies have prepared or are preparing investment programs to meet the rising demand. Attention now needs to be focused on improved clarity in infrastructure financing policy and improvement of the infrastructure prioritization and delivery process. There are also important capacity building needs for the newly established regulatory agencies.

6 Some of the findings from the joint NESDB-WB reports Thailand Investment Climate Study I & II (2006 & 2009) and Towards a Knowledge Economy in Thailand (2008) were incorporated in the Plan. 7 Currently, the government is working on the draft of the Financial Sector Master Plan Phase II which will continue to promote better environment for financial sector development through simplifying laws and regulations; improving financial data base; and developing risk management and human capital in the financial sector. 8 In September 2007, Department of Insurance was transformed into the Office of Insurance Commission (OIC) under the

Insurance Regulation and Promotion Commission Act.

24

C. Increasing social protection and health policy reforms

60. The 1997 financial crisis highlighted weaknesses in the formal social protection system. Subsequently, improvements have been made in the coverage as well as the efficiency of existing government programs. However, formal social protection mechanisms continue to have very limited coverage. To better protect those in the informal sector, in 2004, Parliament passed regulations that gave access to labor protection to home-workers and agricultural workers. The Government also introduced some large and ambitious programs for those in the informal sector, such as the universal health coverage scheme (launched in 2001), the “one-million baht village/urban fund”, the grants to small-medium-large villages (SML), the Ua-athorn low-cost housing programs, and the income-generating One Tambon, One Product scheme. 61. The Government has introduced a number of additional social protection policies in response to the economic and political crises. The Government has implemented a key reform to its agricultural support schemes, replacing a ‘crop mortgage’ scheme that was widely believed to be inefficient with a .crop price insurance scheme, which according to the Government has reached 4 million farmers, of which 3.5 million received compensation under the scheme. The Government has also launched a program to refinance debts of people who owed money to loan sharks (while giving amnesty to the loan sharks). This is being done through the Government Savings Bank and Bank for Agriculture and Agricultural Cooperatives (BAAC), and 800,000 people have registered. Once the beneficiaries repay the new (government-granted) loan, the amount becomes a line of credit that can be used in the future so that the individuals do not have to resort to loan sharks. Finally, the Government has proposed introducing a national savings/pension scheme whereby the Government contributes matching funds up to THB 100 per month to individual contributions. The idea is to cover many/most of the 40 million workers who are not members of the formal social security scheme. 62. Maintaining appropriate levels of health financing remains a key priority in Thailand. The public sector finances about half of all health expenditures, and about 95 percent of Thais have access to comprehensive health insurance coverage provided by Social Health Insurance Fund scheme for formal sector employees, Civil Servants Medical Benefit Scheme for civil servants and their dependants, and Universal Coverage Scheme (UC) administered by National Health Security Office to cover informal sector and the poor. UC, also popularly known as "30 Baht per visit scheme" provides coverage for 75 percent of the population and is financed through general budget outlay that is negotiated annually. UC has dramatically increased utilization rates and reduced catastrophic out of pocket costs for health services, but at significant cost. Although Thailand has achieved remarkable success in controlling infectious disease, emerging burden of chronic disease and advancing medical technologies will increase demand and cost of public health insurance schemes. IV. BANK’S SUPPORT TO THE GOVERNMENT’S PROGRAM

A. Thailand’s Interim Strategy Note

63. The Interim Strategy Note prepared concurrently with this operation has two pillars: (i) assisting the country to recover from the economic crisis; and (ii) helping improve Thailand's competitiveness and sustainable development. This operation is at the center of the Bank’s support in responding to the economic crisis, with financing as well as the support to the fiscal stimulus. The public sector reforms are an important component of the second pillar in improving the quality and efficiency of Thailand’s public expenditures.

25

B. Analytical Underpinnings

64. The design of the operation is underpinned by findings of the Public Expenditure and Financial Accountability (PEFA) assessment (2009), analytical work being undertaken in context of the on-going Public Expenditure Review (PER) (2010), review of the Results-Based Management system in Thailand, as well as from technical assistance under the CDP-G. The PEFA assessment pointed to the strengths and weaknesses in Thailand’s public financial management framework and has helped focus the reform program supported by the PSRDPL on addressing identified weaknesses. The on-going PER is analyzing issues related to service delivery at the local level, and as part of this process, developing a database of local authority expenditures by sector across the country for all 7,500 local authorities. The Bank also mobilized experts on budget formulation and service delivery, to work with government on an assessment of the Medium-Term Expenditure Framework (MTEF) process, public administration reform program and service delivery reforms, and to identify critical areas of reform focus for the PSRDPL. This work has helped identify key reform areas for this PSRDPL that will assist Thailand continuing down the reform path and address remain challenges and capitalize on strengths. 65. In addition to the substantial analytical work undertaken since lending to Thailand ceased, the World Bank and the MOF have also been collaborating extensively on improving the public financial management (PFM) system for timely and transparent implementation of the Government’s second Stimulus Package. In response to a request from the MOF, the World Bank provided: (i) just-in-time policy note and technical assistance on improving the e-Auctions system for timely execution of projects; (ii) technical assistance on implementation of a government-wide Project Financial Management System (PFMS) which links financial information from the Government Financial Management Information System (GFMIS) with physical progress information from respective agencies, and discloses the information at www.tkk2555.com; and (iii) advisory services on monitoring and evaluation system for improved results monitoring of the government’s stimulus package. This PSRDPL incorporates key issues and recommendations from this analytical and advisory work. 66. The World Bank has been providing technical advice on improving accuracy of reporting from GFMIS and unification of the Chart of Accounts (COA). In this regard an analysis of the COA and operational effectives of the GFMIS was conducted in collaboration with the Comptroller General’s Department, and work on unification of the COA and enhancing operational effectiveness of GFMIS remains on-going. The design of this Operation builds on the analysis conducted GFMIS and issues relating to the COA.

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Box 1: Thailand’s Public Sector Reform and World Bank’s Support

In 1999, the Bank granted a US$400 million Public Sector Reform Loan (PSRL) and a US$20 million Economic Management Assistance Loan (EMAL) to Thailand to develop and implement the public sector reform program focusing on strategic performance-based budgeting and results-based management in the public. After the PSRL closed in 2002, the Bank moved to a knowledge partnership and in mid-2001 began its Country Development Partnership with Thailand on Governance and Public Sector Reform (CDP-G I). CDP-G I a non-lending program of technical assistance, capacity building and knowledge sharing had the same five components as those in the PSRL: expenditure management, revenue management, civil service reform, decentralization, and cross-government accountability and transparency. The CDP-G I, which was primarily funded by various trust funds, ended in 2003 and was succeeded by CDP-G II which was primarily funded by the ASEM Trust Fund which was aimed at public sector reforms aimed at poverty reduction. CDP-G II focused on 3 thematic areas: improving resource management for poverty reduction, enhancing service delivery and strengthening governance, and strengthening external monitoring and evaluation of the public sector. The ongoing CDP-G III continues support in the same five broad thematic areas as the PSRL: (a) expenditure management; (b) revenue management; (c) public administration and civil service reform; (d) intergovernmental relations and local government capacity; and (e) external accountability organizations. The CDP-G III will span three years (2008-2011), as with other country development partnership programs in Thailand.9 Significant part of the analytical work on public sector reform and governance has been directly supporting strengthening of oversight bodies, as well as the public administration in general. Technical assistance has also been provided unification of the chart of accounts and improving operations of GFMIS. Fiduciary was also supported by two IDF Grants: (i) Improving the Effectiveness of Public Procurement; and (ii) Institutional Strengthening of the Office of the Auditor General and Performance in Public Audits. Notwithstanding the deeply divided political landscape, the World Bank’s work is to support the role of the public sector in promoting durable reforms, and the oversight bodies, in helping to improve governance.

Preparation of the PSRDPL allowed a deepening of the analytical partnership with the completion of a PEFA assessment and initiation of a Public Expenditure Review (PER). Key actions from this analytical work have been incorporated into the Government’s reform program going forward. This sustained involvement with Thailand’s public sector reform program makes the preparation of this loan possible. Two reforms include introduction of a performance based pay system for the civil service, and the certification of Government Accounts by the Auditor General for the first time since 2005 following improved reconciliation of accounts. Annex 5 provides a more detailed list of the activities supported under the CDP-Gs that directly link to the program matrix proposed for this PSRDPL.

67. Preparation of the PSRDPL also benefited from recent work from other institutions including the IMF and the OECD. The Fiscal Risk Disclosure and Management Report (IMF, 2008) points to challenges faced by Thailand on managing fiscal risks, and points to areas of improvements. The Financial Accountability Report (OAG Thailand, 2007), prepared with support from the World Bank, reviewed the overall budget execution system and financial reporting framework and highlighted areas requiring further improvements. The Budgeting in Thailand Report (OECD, 2006) provided an assessment of the budget planning process along with areas that the budgeting reform could focus. The IMF implemented the Report on Observance of Standards and Codes – Data Module (IMF, 2006) which confirmed that Thailand is in observance of the special data dissemination standards (SDDS), meeting the specifications for coverage, periodicity, timeliness and periodicity allowed by the SDDS. The Fiscal Discipline and Sustainability study (BOB, 2006) analyzed the fiscal sustainability issues facing Thailand and how the medium term fiscal/expenditure

9 There are currently three other on-going CDPs: CDP-Environment, CDP-Infrastructure, and CDP-Health.

27

framework approach could address those issues. The IMF has prepared a Report on Observance of Standards and Codes (ROSC, 2009) on fiscal transparency. This operation has also taken into account the issues identified in this report.

C. Collaboration with the IMF and Other Donors

68. Since the prepayment of the IMF loan in 2003, Thailand’s relationship with the IMF has been mainly through the Article IV consultations. The last Article IV consultations took place in September 2010 and noted the importance of sustaining growth through continued public investments in infrastructure, a conclusion that is consistent with the PSRDPL. The IMF’s macroeconomic projections are largely consistent with the analysis presented in this document with relatively small difference in the deficit projections10. 69. There has been active coordination with ADB and JICA who are providing parallel financing in the preparation of the PSRDPL. ADB has been providing technical advices to government in the area of capital market development, and the ADB Board approved a US$300 million budget support operation on September 21, 2010. The Government has also requested ADB to provide US$300 million in new investment projects. In addition, JICA has been requested for US$300 million for climate change support, and two new investment projects worth US$140 million11. V. THE GOVERNMENT’S REFORM PROGRAM 70. The proposed PSRDPL supports the Government’s immediate response to the financial crisis through the fiscal stimulus packages, as well as key elements of the Government’s on-going public sector reform program. This section first reviews the fiscal stimulus consisting of a package announced in January 2009 and the outline of a second package announced in May 2009. This is followed by a review of the Government’s public sector reform program in the following areas: (i) budget formulation and execution; (ii) reporting and accounting; (iii) internal control, internal and external audit; (iv) debt management; (v) governance and the anti-corruption framework; (vi) results based management; and (vii) civil service administration. 71. The World Bank’s technical support to this program has covered selective aspects of all of these areas. Policy notes on good practice in designing a stimulus and monitoring and implementation were prepared to support implementation of the stimulus. Support for budgeting reform included an assessment of performance based budgeting and the MTEF process in Thailand. Support for budget reporting included technical assistance to facilitate unification of the chart of accounts. An assessment of the internal control regime as well as IDF grants for procurement and the office of the auditor general are examples of support for internal and external audit. A more detailed account of Bank support to Thailand’s public sector reform program can be found in Box 1 and Annex 5.

10 The differences in projections of the deficit come from differences in projection of the off-budget balance, and Bank projection in 2011 of foreign financed expenditure. 11 One investment project for an urban line has already been signed with JICA while the rest are under preparation.

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A. The Fiscal Stimulus Package

72. In January and May 2009, the Government announced two rounds of fiscal stimulus totaling THB 1.53 trillion (US$47.8 billion) over the fiscal years 2009-2012. The actual disbursement in FY2009 amounted to THB 134.2 billion (1.5 percent of GDP, see Table 6). For 2010-2012, the Government initially announced a broad outline of areas expected to be supported together with some details of specific projects. This program is known as the Thai Kem Kaeng (TKK). The headline figure of THB 1.4 trillion (average of 4.8 percent of GDP per year) included already-planned public investments that could not be accommodated on the budget (the Government on-budget for capital expenditure in FY2010 had to be cut by almost half; see discussion above), and spending by state owned enterprises and government agencies. Therefore, additional investment spending from the stimulus packages in FY2010 contributed 1.5 percent of GDP. Our estimates (table 5) are that the additional spending by the central government and state-owned enterprises for 2010-2012 is between 0.6-1.5 percent of GDP per year. 73. For FY2009, the stimulus measures largely consisted of transfers and tax measures aimed to stimulate domestic demand and mitigate the impact on low-income individuals. Transfers include a one-time transfer of THB 2,000 (US$57) per person to 8.1 million workers registered with the social security system and 1.3 civil servants receiving a monthly salary of less than THB 15,000 (US$430), monthly transfers of THB 500 (US$14) per person to 3.8 million elderly who currently do not receive another form of pension or transfer, full subsidy on education for 15 years (kindergarten to grade 12 or vocational school) for around 11.8 million students, and an allowance of THB 600 (US$17) per month to each of the 987,000 community healthcare volunteers. In addition, free training programs for 240,000 unemployed were provided with a total stipend of THB 4,800 (US$137) per person for 3 months. At the community level, through the Sufficiency Economy Fund (formerly known as SML Village program), THB 15.2 billion (US$434 million) have been allocated to the 78,300 villages and communities in Thailand. The villages and communities will need to submit proposals for the use of the funds and will receive the transfer once their proposals are approved. In addition, subsidies on transportation and utilities were initially provided for 6 months (February to July 2009) and extended for another 5 months (August to December 2009; they have been subsequently extended through the end of 2010). The subsidies include electricity and water subsidy for households with low usage, fare waiver on many routes of non-air-conditioned public buses in Bangkok, fare waiver on third class train rides, and subsidy of cooking gas for household use. 74. The first stimulus package was reasonably well implemented in FY2009, meeting most of the four “Ts” (timely, temporary, targeted and transparent) that characterize well-designed packages. While the impact of the first stimulus package on overall GDP is likely to have been modest, the consumption-focused measures likely prevented a further decline in consumption as they were implemented on a timely basis. Nearly 99 percent of the planned transfer and tax measures were disbursed, while about 50 percent of planned infrastructure projects such as the construction of rural roads and small irrigation projects were disbursed, leading to an overall disbursement rate of the stimulus packages in FY2009 of 83 percent. The implementation of the second round of stimulus has been less timely due to its focus on infrastructure projects. Although measures were imperfectly targeted (given the focus on timeliness of implementation), some programs, especially the 500-baht pension to the elderly who were not enrolled in social security, likely supported the livelihoods of vulnerable households. The stimulus package proved to contain mostly temporary measures, but some programs were incorporated in the regular budget. The program was transparently implemented through a supplementary budget, which was appreciated and approved by the parliament. The quality

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of the fiscal stimulus also matters, and a preliminary review of the quality of Thailand’s package is provided below. 75. The second fiscal stimulus for 2010-2012 comprises mainly of infrastructure projects. The total planned spending is THB 1.48 trillion (US$45 billion), of which THB 54.9 billion represents carry-overs from FY2009, in particularly the small infrastructure projects and Sufficiency Economy Fund. Four-fifths of the total package was originally targeted for infrastructure investments, primarily for transport and logistics, by the central government and state-owned enterprises, and the remaining are for transfers and capacity building programs (see Table 6). This will add around 0.6 to 1.5 percent of GDP to government and state-own enterprises’ spending from FY2010-2012. The details of projects included in this stimulus package were approved by the Cabinet in May 2009 and implementation began in the last quarter of FY2009 (July-September 2009). 76. Implementation of the infrastructure-focused stimulus in FY2010 so far has been slow, reflecting the challenge of implementing these projects. Measures taken to speed up implementation together with the seasonal factors have accelerated implementation. The stimulus package in FY2010 amounts to THB 467 billion (US$14 billion) or 5.0 percent of GDP. As of March 2010, total actual disbursement against budget approval projects is around 27 percent or THB 93 billion, of which one half is the bullet payment projects consisting of Price Insurance Scheme, recapitalization to state owned Islamic Bank and Village Fund Project. Only 13 percent of actual disbursement has been done on the infrastructure investment projects. However, with the cabinet resolution requesting project managers whose budget were already allocated to complete their procurement process by end of March 2010, together with the seasonal factors on disbursement where most projects finish their procurement process in the first quarter is gradually bringing implementation back on track. 77. Financing for TKK projects will increasingly come from budgetary resources. Because the Public Debt Management Act limits on-budget expenditures to 125 percent of government revenues, the sharp upward revision of revenue projections thanks to the economic recovery has implied a proportional increase in the on-budget fiscal space. Therefore, although the TKK continues to exist as a separate program, projects under the program are increasingly expected to be moved on-budget in order to be financed through regular budgetary means as authorized under the existing PDM Act. This reduces or eliminates the need to seek special borrowing authority from Parliament for off-budget borrowing. It may also increase parliamentary oversight over the projects, as the projects will be formally endorsed by Parliament as part of regular budgetary approval. However, perhaps because of the original lack of formal parliamentary oversight, transparency of projects under the TKK program was already greater than that observed in the past for on-budget public investments as described below. 78. Attention has been paid to transparency and oversight although the stimulus program has not been without controversy. There have been public announcements with detailed information on how the programs would be implemented and how the beneficiaries of the programs can access them. This was done through websites, media, and public events as well as direct contact with the beneficiaries in some cases. A website (www.tkk2555.com) has been developed to provide access to information on the implementation. Information available includes progress of project implementation in different stages from project approval, budget allocation, procurement and disbursement process to project completion with the update in a weekly basis. In addition, the website also provides detailed information of each individual project such as rationale and

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background of the project, budget approval, and duration of project implementation, location and targeted output. Additionally, a Project Financial Monitoring System (PFMS) has been developed for implementing agencies to provide input of implementation plan including procurement plan and provide updates on actual disbursement and physical progress of implementation. PFMS will prepare reports relating to operations, analysis and administration of stimulus package to different group of end-users, project owners, executives and citizens through the website. All TKK projects will remain subject to audits by the Office of the Auditor General. The program has not been without controversy. There were press reports that some of the equipment purchased in the health sector were not the highest priority, and that the costs were too high. There have also been concerns from subnational governments about the prioritization of “dust free” roads over other projects. Weaknesses in Thailand’s public procurement system create risks for implementation of the stimulus. 79. Most of the programs in the stimulus package are temporary, hence, will not create a significant burden on the Government’s budget in the future. A few programs that will be on-going include the monthly transfer to the elderly (around 0.2 percent of GDP per year), 15-year free schooling for children (around 0.4 percent of GDP per year) and monthly transfer to public health volunteers (around 0.1 percent of GDP per year). Free public services for low income earners have been extended to December 2010, but the subsidies for water and cooking gas have been removed. The remaining transfer programs have sunset clauses already building in a phase-out date. The infrastructure projects will require maintenance expenditures, but otherwise can be easily scaled back as was the case following the Asian financial crisis. 80. The stimulus measures in 2009 could have been better targeted towards those in the urban informal sector. As discussed in Section VI.A, most of the poor are rural. The group likely to be most affected by financial crisis is the urban informal sector – contract workers in factories, tourism and construction. For timeliness of implementation, the Government chose to use existing mechanisms – such as the social security system – for reaching the beneficiaries of the consumption measures of the stimulus package. This resulted in benefits falling disproportionally on the urban formal sector despite an attempt to target the stimulus to the poor. As Table 7 shows, approximately 23 percent of the package went to this sector, which accounts for about 11 percent of the population. Meanwhile, the urban informal sector was the most under-represented, with 19 percent of the population receiving only 13 percent of the package. Although specific measures targeted at populations living in rural areas ensured that a large portion (about 64 percent) of the package reached this sector, it was also somewhat under-represented. This is largely because the THB 2,000 baht cash transfer and subsidies to urban transportation, water and electricity, which comprise about a third of the consumption measures, are expected to reach only a small proportion of those in rural areas. Table 7 also shows that the package had a small pro-poor bias: nearly 10 percent of the beneficiaries of the package are poor, compared to 8.5 percent of poor in the population. The most pro-poor measure are the cash transfers to the elderly, given that the elderly are over-represented among the poor and the measure targets specifically those that do not currently receive another form of pension. The incidence of benefits of the FY2010-2012 package will depend on how they are implemented. Public works programs are one way of trying to reach the needy while providing infrastructure.

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Table 6. Thailand’s Fiscal Stimulus Package (percent of total amount of stimulus per year unless otherwise stated)

Source: Cabinet resolutions, BOB, CGD, PDMO, www.tkk2555.com. Note: 1/ Capital injection to EXIM Bank of THB 5 billion, GSB of THB 3 billion, GHB of THB 3 billion, SME Bank of THB 2.5 billion and BAAC of THB 2 billion. 2/ Include developing Thailand towards a creative economy and budget for provincial cluster development plan. 3/ Actual spending, while FY2010-2012 is the budget expenditure.

81. The infrastructure projects within the stimulus package appear to be reasonably well justified. The package includes investment projects like the double tracking and rehabilitation of railways, and highway maintenance for which implementation readiness seems to be advanced, while energy projects are mostly the infrastructure investment in power plant and transmission line in which implementation timeline starts off this FY2010. These projects seem to address growth bottlenecks but have proven to be difficult to implement. The government has put in place a committee led by the National Economic and Social Development Board (NESDB) and comprising the Bureau of the Budget, MOF, the BOT, Thai Chamber of Commerce, Thai Industrial Federation and academicians to monitor the project implementation and report to the cabinet every month.

FY2009 3/ FY2010 FY2011 FY2012Tax 29.8 - - -

Transfer 46.9 6.0 - -

Total 76.7 6.0 - -

Transport & Logistics 1.1 27.0 44.5 47.2

Health - 6.9 8.0 5.9

Education - 11.5 9.4 8.1

Utility (water work&electricity) - 0.2 0.6 0.4

Energy - 16.4 10.7 15.4

Water resources 1.6 15.2 18.3 16.4

Telecommunication - 0.1 0.3 0.1

Science & Technology - 0.8 0.8 1.0

Housing+ small construction 1.7 1.2 0.5 0.3

Total 4.4 79.2 93.1 94.9

Tourism 0.5 0.7 0.7 0.4

Agriculture&Natural resources - 0.5 0.4 0.2

SFIs 1/ 10.8 - - -

Economic Sufficiency Program (small grant to villages) 3.7 2.2 - -

Others 2/ - 3.9 4.2 3.3

Total 3.9 7.5 1.6 1.1

134,228 466,780 446,625 527,033

134,228 137,553 56,815 139,924

1.5 1.5 0.6 1.3

Grand total of which additional to originally planned in budget (million baht) % GDP

Consumption

Infrastructure

Stimulus package

Others

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Table 7. Beneficiaries of Cash Transfer Measures under Fiscal Stimulus in 2009

Group Group Urban Total Non-Poor Poor Rural Formal Informal

Amount from cash transfer measures going to group (US$ million) 2,527

261

1,781

638

368

2,787

Proportion of package going to group (%) 90.6 9.4 63.9 22.9 13.2 100.0

Proportion of group in population (%) 91.5 8.5 70.0 11.2 18.8 100.0

Source: World Bank staff estimates based on the 2007 Socio-Economic Survey and 2007 Informal Labor Survey.

82. With regard to education, transfers under the program of 15 years of free education address an important need. The main focus of the transfer program in the stimulus package is on subsidizing books, uniforms and tuition fees. These measures are in the right direction since education expenditure is among unavoidable cost to most vulnerable families, and there had been a drop in public expenditures on education infrastructure since the 1997 financial crisis. To mitigate financial crisis impact on the vulnerable groups, as the government specifies the details of “enhancing quality of education” and “improve educational infrastructure” measures of the stimulus package, focus should be on expanding consumer expenditure and mitigate higher cost of living by continuing to subsidize education especially for schools in rural area and improving vocational education/training. 83. In health, it will be important to ensure that the universal coverage (UC) scheme remains appropriately funded and ensuring that medical personnel are available in rural areas. The focus of the stimulus package is on: (i) improving health service delivery at all levels; (ii) producing and developing more medical and public health personnel; and (iii) improving R&D in medical technology. These areas of focus are relevant, because (a) there has been underinvestment into health infrastructure in the last decade; (b) UC scheme and changing epidemic increases the need for healthcare; and (c) Thailand has suffered a chronic lack of medical and public health personnel, and that the doctor per population ratio of Thailand stands well below most of the upper-and middle-income countries. While these are all important, the existing UC system, an important part of the social safety net will come under stress as the number of unemployed rise in conjunction with Thailand’s already rapidly aging population, and it is important that the Government continues the commitment to fund the UC scheme. On the project to produce more medical and public health personnel, it is important to note that there is a disproportionate distribution of medical and public health personnel throughout the countries, with a big surplus of personnel in urban areas, and serious lack of personnel in rural areas. The solution is not simply to produce more personnel, but a strategy needs to be developed to ensure that sufficient number of personnel is willing to live and work in the rural areas in the long term.

B. Budget Formulation

84. The legislative framework governing budgetary management is clear. Fiscal relations between the executive and legislature are defined in the Constitution 2007 and the Budget Procedures Act of 1959, amended 2000. The Parliament is the principle legislative body and plays a significant role in reviewing the budget and fiscal policy. The budget is deliberated extensively by the Parliament’s budget scrutiny committee. The main government agency mandated with preparation of

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the Budget is the Bureau of the Budget, under the Prime Minister’s Office. The laws governing budget management clearly spell out the responsibility of the Bureau of the Budget and the MOF, and comprehensive regulations have been developed. While the Prime Minister, as head of the Government, has overall authority to exercise national fiscal management, the Budget Procedures Act and the Treasury Reserve Act clearly delegate the responsibility of overall fiscal management of central government finances to the Bureau of the Budget and the MOF respectively. 85. Budget documentation coverage is good and would benefit from information of previous year out-turn. The budget documentation includes full information on deficit financing, debt stock, financial assets, including extra budgetary funds. The budget documentation also provides information on the outlook for growth and inflation alongside the budget. According to PEFA analysis, improved areas in the budget documentation are the presentation of the prior year’s budget out-turn and the implications of new policy initiatives. 86. The budget presentation is detailed but could benefit with appropriate presentation of the Central Fund. Very detailed information is provided in the presentation of the budget regarding the economic, functional and administrative classification (consistent with GFSM 1986) of most of the expenditures for which approval of the Parliament is sought. However about 13 percent (for FY2009) of total expenditure is placed in a Central Fund – managed by the Bureau of the Budget under instructions from the Prime Minister. About 80 percent of the Central Fund accounts for identified expenditures (like pension payments, and civil servants health insurance scheme contributions), while the remaining 19 percent (about 2.4 percent of total expenditures) is held in a central contingency. Payments from this part of the Budget may be reallocated at the discretion of the Prime Minister. The management of the Central Fund weakens the overall efficacy of the budget process. The Government is cognizant of this weakness and aims to improving the management of the Central Fund by putting in appropriate provisions in the upcoming Public Financial Act – this Act has been mandated by the Constitution for 2007. The Government plans to submit this Act for parliamentary approval in June 2010. However, budget process for allocating Central Fund is governed by the 1959 Budget Procedure Act, thus an alternative to tighten the Central Fund allocation is to amend the 1957 Act. 87. The Government has adopted a Medium-Term Expenditure Framework and plans to further improve it over time, and consider developing forward estimates. The Government has implemented (since 2005) the bottom-up and top-down MTEF. The entire MTEF process is managed by the Bureau of the Budget and is anchored within the well defined annual budget formulation calendar. The bottom-up MTEF flows from the approved four year Government Administrative Plan and respective annual ministerial/agency level implementation plans. The top-down MTEF essentially determines the fiscal space, based on: (i) the agreed macro-fiscal aggregates; (ii) budgetary momentum and commitments; and (iii) changes to demographics prices, etc. The bottom-up MTEF brings together the financing requirements for achieving policy objectives as per respective ministry operating plans. The Bureau of the Budget then allocates the available fiscal space to the additional resource needs – the meeting point for the top down and bottom up MTEF. The Bureau of Budget has been working in 2008 on improving the costing norms for the MTEF. Overall the MTEF process has brought in some realism in the budget requests made by sector ministries. However, the MTEF at this stage not fully linked to strategic performance based budgeting which, in itself is very much in the embryonic stage at this time. Looking ahead, the proposal is for Thailand to develop forward estimates to represent the cost in future years of existing policy, and to develop a budget strategy paper. The Bureau of Budget is considering these two issues,

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which are part of the medium term reform agenda for implementing strategic performance-based budgeting further. 88. Local Authority Organizations are allocated 25 percent of total revenues by Constitutional provisions, but there is limited information on their fiscal operations and evaluation of their performance. The Constitution for 1997 and 2007, and the Decentralization Act of 1999 provides for local governments to receive approximately 25 percent of total revenues for executing approximately 245 functions, including health, education, and municipal services. Local governments are coordinated by the Ministry of Interior’s Department for Local Administration (DOLA). In order to improve financial management at the local level, DOLA has established a complete enterprise resource planning system called Local Authority Accounting System (e-LAAS). However only 1,000 out of about 7,500 local authorities are using this system. Therefore it is not possible for the Government to consolidate information from local authorities. The World Bank has started collaborating with DOLA on implementation of e-LAAS. At the same time a survey of all local authorities is being conducted with partnership of respective agencies to determine sectoral expenditure and revenue patterns of local authorities. Monitoring and evaluation framework for local governments remains weak. Improving performance and monitoring of local governments is on the central government agenda, and in this regard a new legislative framework is being developed. 89. The Government is in the process of improving monitoring and management of extra budgetary funds. The level and number of extra-budgetary funds is known, and annual contributions are appropriated through the budget. Extra-budgetary funds are governed by their respective legislative instruments and controlled by the Comptroller General Department (CDG), MOF. The extent of off-budgetary funds seems to be more significant. Moreover, the number and extent of extra-budgetary funds seems to be increasing. Therefore, CGD has conducted the performance measurement of extra-budgetary funds by using the Balance Score Card (BSC) approach. While the Bureau of the Budget is conducting a study at this time to gather information on the number and extent of off-budget funds and to develop a plan to bring them on-budget and record them in GFMIS.

C. Reforming Budget Execution, Accounting and Reporting

90. Legislative framework around cash management is clear. The Treasury Reserve Act of 1948, as amended in 1991 governs budget execution and financial management. According to this Act, MOF’s CDG is the custodian of all government bank accounts and is empowered to execute government funds and to report on the same. The CGD is mandated to ensure the accuracy of the reports. 91. The Government has established the Treasury Reserve Account (TRA) system (the Thai equivalent of the Treasury Single Account) managed by the CGD, and operated by BOT and Krung Thai Bank. The TRA comprises system: (i) the TRA-1 main holding account; (ii) TRA-2 disbursing account; and (iii) 5 sub-category accounts – vendor, human resources, direct payroll, and miscellaneous. The TRA-1 account holds the uncommitted balances and it is in this account that revenues are banked. Once payments instructions are processed, the corresponding funds are transferred to the TRA-2 disbursing account. Based on the volume and descriptions of the transactions/payments, TRA-2 passes the transactions through the 5 sub-category accounts. The TRA framework includes all government and extra budgetary funds and is executed nationwide through the on-line, real time payment settlement system managed by the BOT. The TRA framework allows daily sweeping of cash. The Treasury Reserve Act mandates that any spending agency has to seek prior approval of the CGD before opening any bank accounts.

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92. MOF has implemented a Government Fiscal Management System (GFMIS). Since 2005 the CGD has deployed a GFMIS across the country. The GFMIS (a SAP system residing on an Oracle database) is the centralized system with decentralized data processing architecture. GFMIS executes expenditure and revenue transactions through the TRA. Budgets and General Ledger accounting transactions are recorded in the GFMIS. GFMIS performs a budget check for available budget but does not check for cash availability – reflecting the fact that Thailand does not have problems with cash availability/management. It includes data for the Central Government Agencies and the Provinces. Local Authorities and autonomous state-owned enterprises maintain their own budgets and books of accounts. In the short term plan, CGD will manage GFMIS to extend data coverage to local government. 93. In 2010, OAG certified the consolidated financial statement of FY2005 for the first time since introduction of GFMIS. Since introduction of GFMIS, the Office of the Auditor General (OAG) had not issued an audit opinion on the consolidated financial statements because of data inconsistencies issues. According to the OAG, the data in the financial statements has inconsistencies that need to be reconciled before the financial statements could be certified. This is due to errors in data entry, transactions being duplicated, and transactions being miscoded in GFMIS. Since then CGD had been reviewing and reconciling data inconsistencies, and in 2010 managed to receive the audit opinion on the financial statements for FY2006. 94. The CGD plans that by FY2012 the Government will be current with its audited financial statements and plans to further improve operational effectiveness of GFMIS. In order to further improve operational effectiveness of GFMIS, end user hands-on training on system and functional areas should be conducted to eliminate errors and provide proper understanding of the financial information, and the SAP software should be updated to the latest version – as the new software has addressed many problems encountered in the previous versions. End user training should be supported by proper user guides and documented procedures. Looking ahead, the CGD have confirmed their intention to address these issues and that will be part of the program. The World Bank has been providing technical advice to the Comptroller General’s Department on improving accuracy of GFMIS information and on unification of the COA. 95. The Budget and the General Ledger (GL) data are recorded in GFMIS using different Chart of Account structures causing problems with generating budget-actual reports. A uniform coding structure is not used across both functions and also the GL codes cannot be mapped to budget item codes. In many cases the Budget items and GL codes have many-to-many relationships, instead of one budget item related one or more GL items only. Consequently, budget and GL data cannot be reconciled, leading to the Budget Execution data becoming unreliable. This reflects the need for developing a uniform chart of accounts (COA) structure and codes acceptable to Bureau of the Budget, CGD, OAG, Fiscal Policy Office and other impacted departments. An integrated budget and accounting system maintained on the same data base along with a uniform coding structure needs to be adopted for both Budget and the GL functions to avoid reconciliation issues and facilitate reliable management reporting. The uniform coding structure and codes should be finalized by the COA working group preferably before the start of the budgeting process and informed to all users. All relevant departments ought to be members of the COA working group, including fiscal policy, so that control and reporting needs of all users are uniformly met. 96. The budget system allows for carry-over of expenditures across fiscal years, but causes complications with reporting. The budget execution regulations allow for carry-over of unutilized budget appropriations into the next fiscal year, without re-authorizing from the Parliament is needed.

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The budget system incorporates commitment accounting, and commitments outstanding at the end of a fiscal year are carried forward into the next fiscal year and presented in the budget proposal. This makes budget to actual reporting more complicated. However, reports on carry-overs, authorized by the MOF, are currently requested by the Parliament on a regular basis as a supplementary document in the consideration of the Annual Appropriations Bill. 97. Predictability in the availability of funds for commitment of expenditures is good and cash management is not an issue. Once budgetary provision has been determined, the timing of the bulk central government expenditure can be forecast by CGD with a high degree of precision. The size of the Treasury bill issue can be varied flexibly to match fluctuations in cash needs, which are continuously monitored and assessed. Ministries and agencies can rely on the availability of cash at all times to meet payments which are within their overall budget allocations. Budget allocations for particular functions and sub-functions represent ceilings which are rarely changed, and there is very little scope for movement of provision between sub-functions. An overall increase in the Budget for economic management reasons requires the presentation of a revised Budget to the National Assembly. 98. In December 2009 the MOF operationalized the Project Financial Management System (PFMS) to manage and report the execution of the projects financed by the second Stimulus Package. The PFMS combines financial information on each project from GFMIS, with corresponding project procurement documentation, physical progress information from respective agencies, along with geodetic location of projects on Google-maps, for managing and reporting to public on projects financed by the second Stimulus Package (www.tkk2555.com). The PFMS is an effective system for project management and a significant step forward on fiscal transparency. Looking ahead the government aims to extend such a project monitoring and reporting system to all projects financed by the budget.

D. External Audit

99. The external audit framework is independent and appropriately funded. The State Audit Commission, the Auditor General and the OAG are three main components of State Audit structure, as mandate by Organic Act on State Audit (1999). The State Audit Commission has powers and duties in formulating the state audit policies, set out the standard rules for state audit, prescribe rules and procedures for budget and financial discipline as well as administrative penalties. The Auditor General is responsible for the administration on related state audit affairs. The OAG was established under the Constitution as an independent agency, which is departmental equivalent under the law of administrative organization of the state. The appointment of members of the Audit Commission and the Auditor General is made by the King with the advice of the Senate. The Auditor General is appointed for a fixed 6 year term, reports to the State Audit Commission, is independent from the executive, and presents annual reports to Parliament with a summary of key findings. 100. The OAG performs audits in the areas of financial, performance, procurement, subsidy use, tax collection and other specific audits. The OAG audits all central government revenue and expenditure, including revolving funds together with financial statement from state-owned enterprises as well as local authorities. Each state-owned enterprise is required to submit its financial report, according to International Financial Reporting Standard (IFRS). However, due to numbers of local authorities, approximately 7,900 across the country, and limited numbers of OAG staff, each local authority is audited by OAG at least once every three years. The audits are undertaken in accordance with the OAG Auditing Standards, which are mandated in section 333 of Organic Act on

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State Audit (1999). The audit standards are consistent with international standards (ISA); including the International Organization of Supreme Audit Institutions audit standards. 101. The OAG presents a detailed report to the Parliament, however there is no specialized body in Parliament that reviews this reports’ findings and solicits response from respective agencies. OAG’s annual reports are submitted to the House of Representatives, the Senate and the Council of Minister for their consideration. The reports of the Auditor General are discussed at the Parliament and by the Budget Scrutiny Committee; however there is no specialized body in Parliament that reviews this report findings and solicits response from respective agencies, like a public accounts committee. The OAG has initiated legislation to strength the audit follow-up process. This legislation has been submitted to Parliament. 102. There are efforts to strengthen the demand side of accountability. OAG has a significant out-reach program whereby presentations are made in the print media on procurement issues. Parliamentary deliberations on the Budget are broadcasted on television, and there is now enhanced disclosure of information on public finances by the MOF on the internet.

E. Internal Controls and Internal Audit

103. The internal control framework is extensive and appropriate. The State Audit Commission issued Regulation B.E. 2544 governing the internal control standards that must be adopted by government agencies that are audited by the OAG. This regulation came into effect on October 27, 2001. The prescribed internal control standards are based on the international benchmark of the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO) five components that are necessary for an effective internal control framework. The five components include: (i) environment of the control entity; (ii) risk assessment; (iii) control activities; (iv) information technology and communications; and (v) assessment. 104. The reporting requirements on internal control framework are in place. The internal control regulation requires the government agencies to report annually on their internal control system to the State Audit Commission, the agency’s senior management and the agency’s audit committee if one exist. The report should include comments on whether the agency’s internal control system is in compliance with the prescribed regulation; assessment of the adequacy and effectiveness of the system; and, weaknesses and recommendations for the internal control system. 105. One-fourth of total agencies are yet to comply with regulations on reporting on internal controls system. Although the regulation was issued in October 2001, there are approximately 25 percent of the agencies in 2008 that have not yet complied with the reporting requirements of the internal control regulation due to capacity constraints. Most likely this is a result of a lack of understanding by agency staff and an appreciation of the importance of an internal control system. The OAG along with the agency’s internal auditor are planning to disseminate more information regarding the importance of internal control systems to agency staff. In addition they aim to provide more hands-on experience to agencies in their implementation of internal control systems. 106. The established internal audit function has been strengthened in each government agency since 2001. The internal audit function reports to the agency’s top management advising them on issues that they need to address. Although it is noted that the amount of resources and budget allocated to internal audit function is limited, and there is some question as to the value

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management places on the internal audit function. Additionally, CGD has set up the Internal Audit Development Committee to set up policy and provide consultancy for internal audit areas. 107. The CGD issued internal audit standards in 2001 that are consistent with the International Institute of Internal Auditors Standards (IIA), including other related regulations and guidelines. Although, there is no systematic process to submit the internal audit reports to the CGD in order for them to evaluate whether there is a need to amend or modify the internal audit standards, CGD has periodically conducted the performance measurement and has recently included within the CGD KPIs since 2008. However, to improve the existing mechanism at CGD to review internal audit findings and to prepare lessons learned that can be shared more widely with the various government agencies, it is recommended that CGD establish an internal audit coordinating council that would meet periodically to coordinate the activities of the internal audit function and make recommendations to CGD and OAG for improving the internal audit function within the various agencies. The OAG provides some coordination and training to the internal audit function within each agency. The OAG does use the internal audit reports in planning their audits and also supports the internal audit staff in dealing with agency management.

F. Public Procurement

108. During recent years the RTG has undertaken various initiatives aimed at improving the overall public procurement system in the country to further increase transparency and competitiveness. Some of the measures have already been completed while others are underway or being considered for further improvement. The priority activities are listed below. 109. The legislative and regulatory framework needs improvement: The draft Royal Decree on Public Procurement was prepared by MOF and endorsed by the Cabinet in November, 2007, and is currently pending review by the Office of the State Council. Under the draft decree some new and useful concepts have been introduced such as the requirement for an annual procurement plan from the line agencies at the time of preparing the annual budget; requirement for disclosure of procurement information in MOF procurement website and line agencies’ web pages, and improvements in the procedures for the selection of consultant services. However, there are areas requiring further strengthening and the World Bank has also shared extensive comments on an earlier draft of the Procurement Decree for MOF’s consideration. The broader areas identified by the Bank include the needs for filling gaps in selection procedures, greater reliance on primary legislation rather than secondary legislation to address critical provisions such as . domestic preference, registration process; more specificity in the protection of national industry and provisions for regulating international competition; developing procurement capacity in line ministries rather than relying mainly on centralized and bureaucratic procedures for contractor and consultants’ registration and reference prices; rationalizing the institutional setup for formation of procurement committees to minimize discretion, avoid institutions overlap, and provide legal cover to secure professionalism and fairness of the subcommittees. Furthermore, the government Procurement Regulations of 1992 which are still applicable, provide sample national standard bidding documents for use on procurement from government budget. When the Royal Decree on Public Procurement is enacted, MOF intends to update the Standard Bidding Documents (SBDs) and also develop a standard Procurement Manual consistent with the Decree. The MOF aims to finalize, adopt and fully implement the Royal Decree on Public Procurement, and to keep incrementally strengthening the public procurement legislative underpinnings based on good public procurement principles and practices.

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110. MOF has planned to move ahead on procurement reform, and is awaiting the issuance of the Royal Decree on Public Procurement. In case the Royal Decree on Public Procurement is be enacted, the MOF has agreed that the SBDs should be improved to be in line with the Royal Decree and a Procurement Manual shall also be developed. The World Bank has agreed on a program of technical collaboration with the Comptroller General’s Department on improving the legislative framework governing public procurement in June 2010 over the next two year period. 111. Public procurement would benefit from measures to improve transparency and accountability. At present there is no central information system for collecting procurement data, monitoring and reporting on procurement performance and outcomes. Some procuring agencies have internal databases with monitoring and reporting systems, the functionality of which varies widely, while other agencies have no formal system. While current procurement regulations include some internal control mechanisms within line ministries, there is need for improving internal controls as well as external monitoring. In this regard the government plans to put in place a functional monitoring system for measuring and reporting the performance and outcomes of public procurement. Further efforts are needed to strengthen the mechanisms for improving integrity and transparency in public procurement, including putting in place effective complaint handling systems, ethical standards for government staff involved in public procurement as well as for contractors, suppliers and consultants, rationalized merit-based criteria for the composition, roles and accountability of procurement committees. 112. The OAG though, has powers to conduct procurement audits and refer any issues for further investigation. There have been many instances where the OAG has found irregularities in the procurement process, which has led to suspension of procurements and prosecutions. 113. Electronic Government Procurement (E-GP) was implemented in April 2010: The Office of Public Procurement Management (OPPM) is taking the lead from the government’s side in enabling implementation of e-GP at national and sub-national levels. Currently, on-line disclosure of procurement information, including advertisements and contract award information, has already been started through websites of OPPM and the line ministries. Over the last four years the Government through MOF has started to carry out public procurement of goods and works above specified thresholds through e-auction system. The Government has established an e-Government Procurement system linked with the GFMIS, and also put in place mechanisms to enforce its rationalized usage and monitor compliance. The World Bank has been providing technical assistance in this regard through an IDF Grant. Looking ahead, the CGD has also committed with the Prime Minister’s Office to implement full e-procurement by October 2012, and has requested for the World Bank’s continued collaboration in the form of technical assistance to achieve this objective. 114. Procurement Capacity Development: Procurement capacity of government staff needs strengthening, particularly at the provincial level. There is need for development of a national strategy for capacity building, which could facilitate and lead to the establishment of institutionalized in-country procurement training programs, promote the development of a cadre of procurement professionals, and also support the growth and development of private sector contractors, suppliers and consultants.

G. Debt Management

115. The legal framework for public debt management is well defined and all government borrowings and guarantees are managed by the Public Debt Management Office (PDMO)

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within the MOF.12 Public debt management is governed by the Public Debt Management Act of 2005. The Act entrusts public debt management to the MOF’s PDMO. Under the Public Debt Management Act PDMO is authorised to borrow domestically on behalf of the Government up to 20 percent of approved Budget expenditures for the year in question and up to 80 percent of budgeted debt repayments. With the approval of the Council of Ministers, PDMO may guarantee borrowing by state-owned enterprises up to the same limits. There are documented procedures for the granting of guarantees, and guarantee fees are charged according to the state-owned enterprise’s credit score. PDMO may also borrow to on-lend to local authorities, but to date this authority has not been used. The Act mandates half-yearly publication of information about public debt transactions, although in practice information is published monthly about all domestic and external public debt, including the non-guaranteed debt of non-financial state-owned enterprises and financial institutions which received government support in the 1998 crisis. At the end of FY2009 total public debt amounted to 45 per cent of GDP; of this debt only 8 per cent was external. 116. Domestic and external public debt data are complete and reliable, and are updated and published on a monthly basis on the PDMO website. There have been some problems reporting to the World Bank’s Debtor Reporting System (DRS) due to a transition in reporting responsibilities from the BOT to PDMO. The PDMO has been alerted to the DRS reporting requirements and is currently preparing the DRS submission. Overall the debt management framework, recording and monitoring systems, and debt management capacity is appropriate.

H. Anti-Corruption

117. Prevention and Anti-Corruption: The National Anti-Corruption Commission (NACC) takes the lead on investigating cases of alleged corruption by any branch of the executive and public sector. The NACC is an independent agency anchored within the Constitution of 1999 and 2007. NACC has demonstrated successful investigation of high profile cases and based on the investigations the Prosecutor General and the Special Supreme Court for Political Office Holders has been able to remove high profile political figures from office. In addition to investigation, the NACC is also playing a key role on prevention of corruption and upholding conflict of interest provisions in the Civil Service Act. The NACC seeks to develop capacity for forensic accounting, case tracking and identification, procurement investigations, and recently on recovery of stolen assets. The NACC plans to develop a framework for monitoring government agencies compliance with procurement procedures. This framework will be developed by NACC in close collaboration with Bureau of the Budget, Office of the Public Sector Development Commission (OPDC), and CGD. The World Bank support has been: (i) assisting the National Anti-Corruption Agency with forensic accounting and advanced training on financial crime investigative techniques to support its anticorruption work generally and its stolen asset recovery efforts in particular; (ii) WBI working with the Office of the Civil Service Commission (OCSC) to organize training of mid-level government officials on anti-corruption; and (iii) collaborating with the NACC on knowledge sharing on evidence based anti-corruption policies. The support in this area is being provided by the Stolen Assets Recovery (StAR) Secretariat, the Department of Institutional Integrity (INT), and the Poverty Reduction and Economic Management’s (PREM) Public Sector. The NACC has requested additional training on investigating financial crimes and recovering stolen assets.

12 Excludes borrowing for monetary policy purposes undertaken by the Bank of Thailand. Monetary policy operations by the Bank of Thailand are clearly separated from debt management operations by PDMO.

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118. Thailand has a vibrant civil society and an Official Information Act (Freedom of Access to Information). Civil society play a key role in providing an independent check and balance on government, and coupled with the fact that the Parliament enacted the Official Information Act in 1997, to mandate agencies to provide information to citizens as demanded within a stipulated timeframe. With support from the Governance Partnership Facility, the World Bank is working on improving the framework set up to implement the Official Information Act.

I. Revenue Management

119. The Revenue Department deployed an e-Revenue system and in 2007 implemented online registration for value-added and corporate income taxpayers, and an online refunds system. With continuous expansion in the areas of services offered, the e-Revenue system now allows taxpayers to obtain tax forms, file tax, request for tax refund, and make payments electronically. Tax records, such as financial statement, profit and loss statement, VAT reports, and tax invoice, can be kept in an electronic format rather than paper documents since 2002. This saves both compliance costs of taxpayers and administrative costs of the Revenue Department. As part of the e-Revenue system, a large part of tax resources is available online (e-Knowledge). The Revenue Department web services covers information such as tax calendar, public seminars on tax topics, tax laws, regulations and rulings, and double tax agreements between Thailand and its trading partners. The webpage also shows the lists of shops with VAT refunds, VAT registrants, and corporate income taxpayers. Services to check tax identification number and calculate corporate income tax are available. More recent developments (since 2007) include online registration for value-added and corporate income tax payers and online tax refund status system where tax claimants can check the refund progress electrically. 120. Other tax services are continuously introduced. In addition to the e-Revenue system, a call centre was launched in 2005 to enhance services delivery. The centre handles all public queries on tax issues, ranging from recent changes in tax laws and regulations to tax refund status and complaints. To ease tax payments, the Revenue Department introduced Tax Mobile Units at large markets and shopping centres since 1999. Tax payments can currently be made at post offices and commercial banks as well as through internet-banking and tele-banking. The Revenue Department also developed and distributed software to calculate withholding personal income tax since 2000. Finally, since 2006 individual taxpayers are allowed to use personal identification number (PIN) instead of tax identification number (TIN) for all tax transactions, which helps to save taxpayers’ time cost in requesting TIN. 121. Various reforms were introduced to speed up tax returns. In mid-2007, the Revenue Department adopted the VAT refund control and monitoring system that automatically alerts its staff for delayed cases, and allows officers to check the status of the online refund requests. The optical character recognition technology, which saves the time to perform manual data entry, was introduced to accelerate personal and corporate income taxes returns. To speed up VAT refund for small taxpayers, a pre-audit is waived if the refund value does not exceed 35,000 baht but post-audit is still needed. Since 2003, the refund can be put directly into bank account instead of cheques posted to claimants. Finally, the Revenue Department also established a reserve fund worth five billion baht or around 40 percent of monthly VAT refund value to advance refund payment to a claimant. This shortens disbursement period of obtaining cash transfer from the Treasury. 122. A comprehensive review of the overall tax structure is underway. Over the last 10-15 years there have been significant ad-hoc adjustments to different tax rates, which have resulted in

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an increasing number of tax exemptions, deductions, and privileges. These exceptions complicate the overall tax system, and make tax compliance more difficult. In order to streamline the tax system, the Revenue Department and the Excise Department are planning to have a comprehensive review of the tax structure. One of the focuses is on the rationale of levying certain tax types. For example, the Excise Department has levied taxes on air conditioners because they are classified as a luxury but this seems outdated now. The Revenue Department is also interested in a more efficient way to collect VAT on used products, especially used vehicles sales.13 The World Bank in collaboration with the MOF is now conducting a Revenue Policy Review that will provide issues and recommendations for revision to the tax code. 123. Expanding the use of IT to raise tax administration efficiency will be a priority. For instance, the e-filing is currently more common in the area of personal income tax, but less so for corporate income tax and VAT. The Revenue Department is designing ways to increase e-filing for these tax types. This could be achieved by either providing certain incentives for e-filing (such as accelerated refunds) or introducing an obligation for incorporated taxpayers to file electronically as in many other countries. 124. Transfer pricing framework will be further developed. Vertically integrated firms as well as conglomerates transfer goods/inputs between different component entities. The price at which goods are transferred is known as transfer price. Firms generally have an incentive to transfer inputs at lower prices in order to pay lower input taxes. This could result in a smaller tax base. To properly manage this, the Revenue Department issued transfer pricing procedures in 2002 to assist auditors dealing with transfer pricing issues. In 2004, the Department set up a specialised transfer pricing audit team, which subsequently led to numerous tax adjustments and penalties that are together worth THB 2.3 billion by 2007. The Revenue Department plans to further enhance its transfer pricing guidelines and framework, looking ahead. In April 2010, the Revenue Department launched taxpayers’ guidance on advance pricing arrangement (APA) procedures in order to facilitate taxpayers who are interested in applying for APAs.

J. Results-Based Management

125. The RTG has placed significant emphasis on results-based management (RBM) in its public sector reform program, and work is ongoing in parallel streams:

The OPDC has successfully implemented Key Performance Indicators (KPIs) across all

government agencies and a balanced score cards for improving performance at the Departmental Level. Agencies that meet their KPIs (monitored by an independent agency) and improve service delivery are provided an annual bonus.

The Bureau of the Budget has developed the Performance Assessment Rating Tool (PART) styled on the US Office of Management and Budget. Agencies use this tool to carry out an ex-post self evaluation of the linkage between the budget and performance information – between government strategy and policy, the budget plan, outcomes, outputs, activities and the budget. The resulting score, which is reviewed by the Bureau of the Budget, is used by

13 In addition to SMEs taxation, taxing used goods is another area where the Revenue Department has informally shown interest in World Bank’s technical support.

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agencies to improve the linkage between performance and budgeting. It also assists the Bureau of the Budget in reviewing agency budget bids. The Bureau of the Budget also carries out some evaluations of agency programs to inform the budget process.

The Office of the Civil Service (OCSC) is implementing an individual level performance management system for each civil servant as per the Civil Service Act 2008. In this regard, the OCSC has introduced performance pay in April 2010, phasing out the ‘step wise’ pay increase scheme. It is expected that staff who are assessed to have performed well through the performance management system will receive higher salary increase.

126. Service delivery has started to improve due to results based management reforms, with Thailand ranking at 12 in the World Bank Doing Business Report. Through the strategic application of KPIs the Government has managed to significantly improve service delivery by government agencies including: (i) reducing the service time for issuing permits; (ii) issuance of passports and driving licenses; (iii) reducing time taken for filing taxes etc. 127. Looking ahead the focus has to be on integrating the parallel RBM efforts by OPDC, Bureau of the Budget, and OCSC. There is no direct linkage between departmental performance (measured through KPIs) and budgetary appropriations (measured via PART). At the same time the linkage between individual performance measurement framework developed by the OCSC and departmental performance system is missing. The Government has established a Public Audit and Evaluation Committee under the Office of the Prime Minister to undertake this task of integrating the parallel RBM systems. The PSRDPL is supporting this integration of RBM by different agencies.

K. Civil Service Management

128. The Thai public sector is not large. The Thai public sector is made up of around 1.94 million employees (in 2007) who include government officials and permanent and temporary employees in all central government agencies, autonomous organizations, and local administration or local government organizations. This represents around 3 percent of the population or 5 percent of the Thai labor force. Government officials are made up of ordinary civil servants, teachers, university officials, police, judges, public prosecutors, legislative body officials, and autonomous organization officials. There are 1.28 million government officials, of which around 30 percent or 365,000 officials are ordinary civil servants (government officials in central government agencies). This section focuses on the management of ordinary civil servants which falls directly under the responsibility of the OCSC under the Office of the Prime Minister. 129. In 2008 a new Civil Service Act was promulgated, and implementation has been on-going:

The civil service classification was restructured in December 2008 to allow for more flexible

deployment of staff across ministries, develop a cadre of senior technical specialists, and differentiated pay structure. Prior to December 2008, there was only one classification with 1-to-11 grades for ordinary civil servants. Grades 1-4 were for support staff, Grade 5-8 for technical specialists and Grade 9-11 for senior management. This classification structure had resulted in the following issues: (a) technical specialists had move into the management stream for career progression, and it was not possible for the government to have a cadre of senior specialists; (b) staff with similar specialization could not move between agencies; (c) differentiated pay structures could not be considered because of a single grade structure.

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The new classification structure, introduced on December 11, 2008 comprises of four groups. These are: (i) operations staff; (ii) knowledge workers, (iii) mid-level management, and (iv) executives.

Performance Pay was introduced in April 2010, phasing out the step wise salary increase system to ensure salary increase is based on performance rather than be time-determined. In this system an overall salary increase percent will be provided to departments. This increase would be allocated to staff based on annual performance evaluations.

Royal Decree on Morals and Code of Civil Servants was issued in 2010. This Decree provides for establishing a code of ethics for all civil servants, implementation of which would be monitored on a regular basis. At the same time, for the first time a system for protection against harassment has been introduced.

130. The central government’s wage bill is a little more than a quarter of the central government’s annual budget and the wage structure is not compressed. Wages and salaries account for around 27 percent of the annual budget, which is slightly higher than the international benchmarks of 25 percent. The wage compression ratio is around 1:14, which is higher than those of many of its neighbors and higher than the good practice of 10. However, the gap between civil servants compensation and that of comparable positions in the private sector has been continuously widening over the last two decades, particularly in the higher positions in the ordinary civil service. 131. Greater mobility of the civil service could help break the silo mentality and promote greater coordination amongst line agencies. Thailand’s civil service has been characterized by silos down to the departmental level as according to the law, each department has a legal status of its own. For decades, civil servants typically pursue their career paths in one ministry as mobility across ministries and even across departments are difficult as there needs to be approvals from the heads of both the releasing and receiving agencies. This has not only limited the scope for broadening of knowledge and career advancement, but also created a silo mentality that many a times hindered collaboration across the departments. 132. The OCSC needs to have a comprehensive database of the civil service in order to be able to formulate accurate HR policies. However, the OCSC’s current database is still missing information on the Ministry of Public Health’s civil service as the Ministry has developed their own database, which is currently not linked to the OCSC’s.

L. Areas of Focus for Future Reforms 133. The review above suggests that the public financial management systems in Thailand have strengths and weaknesses14. Some of the strengths include: (i) orderliness and participation in the budget process; (ii) effective controls over stock and monitoring of expenditure arrears; (iii) revenue administration and collection; (iv) oversight of aggregate fiscal risk from other public sector entities; (v) predictability in the availability of funds for commitment of expenditures; (vi) recording and management of cash balances, debt and guarantees; and (vii) an operational system of results based management which informs budget allocations and monitors service delivery. Some of

14 Strengths and weaknesses are based on findings of the Public Expenditure and Financial Accountability Assessment, 2009, and technical review of the results based management framework in Thailand.

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the weaknesses include: (a) transparency of intergovernmental fiscal relations; (b) classification of the budget, primarily on account of the modalities of the management of the Central Fund; (c) follow through on the findings of the audit reports: (d) procurement legislative framework and monitoring and accountability systems; (e) lack of a uniform coding structure across both budgeting and accounting; and (f) multiple performance measurement exercises leading to significant transactions costs and loss of potential synergies across different performance management tools. 134. In the short-to-medium term, progress on the following on-going PFM reforms will be important to further improving Thailand’s public sector management.

Developing a uniform chart of accounts across all government entities to ensure consistency between budget and general ledger codes. This uniform COA will allow the Government to improve accuracy of budget-to-actual reporting and hence the quality of budget and management reporting;

Enhancing GFMIS operations so that it is able to prepare accurate financial reports for all government entities on a timely basis and that financial reports for each fiscal year since 2006/7 are certified by 2012;

Putting in place an appropriate legislative framework governing the Central Fund through the Public Financial Act;

Effective implementation of e-LAAS so that information on fiscal operations of all local authorities is recorded and consolidated. At the same time to continue integrating e-LAAS with GFMIS;

Improving central-local government coordination and bottom-up regional development strategies by operationalizing the newly established provincial clusters;

Develop a framework of forward estimates and budget strategy paper to further enhance the effectiveness of the MTEF, and implementation of the strategic performance based budget framework;

Link results based management systems across agencies in order to ensure that individual and departmental performance is linked internally as well with overall budgetary appropriation system.

135. The aforementioned reforms are being actively pursued and prioritized by the RTG. This proposed operation supports the key policy reforms that will ensure that Thailand continues to make progress on the results based management reform program and instills performance focus across the entire public sector. In addition, taking the view of the status to the PFM framework and focus of the reform program looking ahead, the Bank assessment team does not propose putting in place any additional fiduciary arrangements for this operation. VI. THE PROPOSED OPERATION 136. The prior actions for the operation reflect the status of the reform program at the time of negotiations in May 2009 and summarized in Table 8. However, as discussed in the previous section and summarized in Annex 3, the reform program has been sustained in the intervening eighteen months and there has been important progress consistent with plans at the time of

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negotiations. Annex 4 presents the reform program going forward as well has detail on how it has been sustained. 137. The reforms supported by the loan promote efficiency, accountability and results. In public financial management this includes increased policy focus on budget formulation, improved fiduciary controls, better monitoring and reporting of public finances, increased transparency and disclosure in the use of public resources, and an improved external audit system. Reforms in public administration aim to reduce rigidities in the civil service structure and improve incentives and performance monitoring for civil servants. Accountability for service delivery is being promoted by increased public monitoring and oversight over the quality and timeliness of services delivered by public agencies and enhanced internal performance measurement by aligning budget monitoring tools with service delivery indicators. Table 8 details the prior actions while Annex 3 covers the entire policy matrix.

Table 8. Status of Prior Actions negotiated in May 2009

Prior Action 1: Parliament approved and the Government is implementing an economic stimulus package for its Fiscal Year 2009 to mitigate the impact of the global financial crisis

Current status: Completed. While the implementation of the stimulus will continue until 2012, the prior action refers to the stimulus for FY2009. Disbursements were about 83 percent of planned disbursements, with transfer and tax measures disbursing almost fully, while the implementation of infrastructure projects including rural road construction and small water resource projects at 50 percent of plan.

Progress since May 2009: Implementation has slowed as the focus has shifted to the implementation of the larger infrastructure projects. However measures taken to speed up implementation together with the seasonal factors that typically peak in the second quarter could bring implementation back on track.

Prior Action 2: The Bureau of the Budget has (i) revised costing norms for its Medium Term Expenditure Framework under its budget for Fiscal Year 2008; and (ii) taken steps to ensure that the Performance Assessment Rating Tool (PART) is implemented in all Government agencies

This Prior Action was the responsibility of the Bureau of the Budget, in close collaboration with MOF and NESDB. The main objectives of this prior action are to: (i) improve the costing norms for the MTEF so that sector ministries can prepare better costs MTEFs (ii) operationalize a monitoring and evaluation system to determine the efficiency and effectiveness of public spending for projects and recurrent expenditures.

Current Status: Completed. In order to improve the costing framework for sectors to better plan their budget requests, in 2008 the Bureau of the Budget reviewed and revised the costing norms that were used by ministries for the FY2008/09 Budget. Improved costing norms have allowed the Bureau of the Budget to improve the policy-budgeting links and thereby increase the realism of the MTEF.

In 2008 the Bureau of the Budget rolled out the PART to all agencies and departments. The PART is an ex-post self-evaluation tool used by agencies to determine the efficiency and effectiveness of spending on pre-identified programs and projects. This deployment of PART, which continues to be refined for better integration with the MTEF process, would allow the Government to progressively link medium term resource allocations to effectiveness of spending programs and projects. Based on the pilot, the Bureau of the Budget commenced rolling out of PART to all agencies.

This prior action is the center-piece element of the budget formulation reform program and has allowed the government to significantly improve the policy consistency with budgetary outlays within a medium term perspective.

Progress since May 2009: The Bureau of the Budget (i) introduced agency level ceilings in the top down medium term expenditure framework which reduced the deviation between the top-down and bottom-up MTEF from more than 5 percent to in FY2009/10 to less than 2 percent in FY2010/11. This results in more predictability for agencies for their budget requests and less need for top-down budgetary adjustments by BOB; and (ii) set up six inter-ministerial budget appropriation committees to formally consider PART results to guide budget allocations.

Prior Action 3: (a) The Ministry of Finance has: (i) piloted the use of the e-financials accounting module for

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direct financial reporting from the Government Fiscal Management Information System (GFMIS); (ii) begun undertaking daily reconciliation between the GFMIS and the Treasury Reserve Account and targeted training; and (iii) introduced e-token interface with the GFMIS for secure data access for management reporting by budget entities; and (b) The Bureau of the Budget has piloted an e-budget system in the Government’s line ministries for improving links between sector policies and budget requests.

This Prior Action is the responsibility of the CGD at the MOF, with collaboration of the Bureau of the Budget and BOT. The main objectives of this prior action are to improve the operational effectiveness of GFMIS so that more accurate consolidated financial statements are prepared and to link the budget preparation process via e-Budget with the budget execution system, so that budget execution is timely with appropriate fiduciary controls, and to foster improved budget reporting.

Current Status: Completed. Since deployment of GFMIS, the OAG has not certified the financial statements because of reconciliation errors with system. These errors are a consequence of: (i) inadequate user training; (ii) compressed system deployment time with no parallel GFMIS run with the manual system; and (iii) system architecture and software limitations.

In order to rectify these data inconsistencies and related problems, the CGD has been providing user training and refining system functionality to minimize data errors and effectively reconcile expenditure information. Over the last two years the reconciliation errors have reduced. At the same time, in order to improve reporting, in 2008 the CDG has started deploying the e-financial module that will allow budget managers to generate customized reports. This system which is modularly linked to GFMIS to ensure that management reports and other budget reports can be generated in real time to budget managers. At the same time, the CGD has developed an “e-token” interface to GFMIS in order to extend access to the system for other budget agencies. It is expected that with on-going refinements and user training it will be possible for GFMIS to fully reconcile budget execution information with the Treasury Reserve Account information, so that by 2009/10 fiscal year, the Auditor General will be able to certify the consolidated financial statements in a timely manner. Furthermore, with the aim of linking the budget formulation process with budget execution, the Bureau of the Budget has developed the e-Budget system and commenced its pilot. The e-Budget system is linked up with GFMIS and should allow the government to generate budget-to-actual reports in a timely manner, with greater accuracy. Full deployment of e-Budget will be completed by 2010.

Progress Since May 2009: In 2010 the Auditor General certified for the first time since introduction of GFMIS the financial statements for FY2005 as the data inconsistencies were reduced by MOF; (ii) Real time payment order interface to the GFMIS was introduced – “web-online” – to improve accuracy and speed of budget execution; (iii) the Executive Information System for financial reporting to agency level management was implemented; and (iv) integration of GFMIS with e-Budget at the Bureau of the Budget was completed.

In order to rectify these data inconsistencies and related problems, the CGD has been providing user training, refining system functionality to minimize data errors and effectively reconcile expenditure information, and correcting data inconsistencies. As a result of this work, in 2010, the CGD managed to obtain audit opinion from the Auditor General for FY2005/06 financial statements. The CGD is now working on addressing data issues so that by FY2011/12 they will be current with the audits of government financial statements. This was a key recommendation from the PEFA.

At the same time, in order to improve reporting, in 2010 the CDG implemented a real-time payment order interface to GFMIS, allowing agencies to directly enter in real time Payment Orders through the internet (web on-line). This has resulted in more accurate data recording and faster budget execution. In order to foster greater management reporting – a weakness identified in the PEFA analysis – the CGD has deployed the Executive Information System. This system draws information from GFMIS and provides management level reports to agency heads. With the aim of linking the budget formulation process with budget execution, the BOB has developed the e-Budget system and by 2010 this system has been implemented across all government agencies.

In order to improve transparency and management of the second Fiscal Stimulus projects, MOF established in December 2009 a comprehensive Project Financial Management Reporting System which publically identifies each project on Google maps using GPS coordinates, and reports in real-time on: (i) project financial information; (ii) procurement documentation; and (iii) physical progress of projects. The Ministry of Finance established the Project Financial Management Reporting System– see www.tkk2555.com. The Project Financial Management Reporting System combines financial information from GFMIS, procurement information from CGD, physical progress information from agencies for all projects being financed by the stimulus package and publishes this

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information for each project using project GPS coordinates on Google maps. Analysis conducted by the World Bank team providing assistance on developing of PFMS show that indeed the reporting system is a very comprehensive and appropriate system for reporting on projects and a significant leap on transparency.

Prior Action 4: Nine working committees constituted by the Government and representing forty Government agencies have taken necessary actions to: (a) shorten their service-delivery times; (b) streamline processes, and (c) and reduce the costs of interacting with government in ten district areas of dealing in which they deal with private businesses.

This Prior Action is the main responsibility of the OPDC. The main objective of this policy action is to specifically improve service delivery of agencies that are related to improving the business climate in Thailand.

Current Status: Completed. By 2008, 40 government agencies that are related to improving the business climate have reduced their service delivery time, processes and direct costs according to the indicators of the Doing Business. This followed from the Cabinet resolution in December 2005 which had led to an establishment of 9 working committees, one for each area of the Doing Business (with the 9th committee responsible for 2 areas). The resolution stated that the agencies in the working committees will improve their service delivery in the areas the Doing Business so as to help increase competitiveness. These achievements were monitored by the OPDC through the targets and KPIs of each agency. This has led to an increase in Thailand’s Doing Business ranking from 20 in Doing Business 2006 to 13 in Doing Business 2009.

Progress since May 2009: The committees have continued to function, and Thailand is ranked 12 in Doing Business 2010.

Prior Action 5: The Office of Public Sector Development Commission and the Bureau of the Budget have harmonized their reporting systems to facilitate the formulation of key performance indicators (KPIs) for a four year ministerial and departmental operation plan covering all Government agencies.

This Prior Action is the responsibility of the OPDC in coordination with respective government agencies. The main objective of this prior action is to shorten delivery times, improve quality, and foster greater accountability in the provision of public services, and move the public sector towards more results based one that is responsive to the needs of the citizens.

Current Status: Completed. Since the promulgation of the Public Administration Act and the Royal Decree on Good Public Sector Governance, all government agencies and public schools, hospitals, and universities have established targets and KPIs as mandated by the Act and the Royal Decree. KPIs have been used a tool to monitor the achievements of the targets (as stated in each department’s 4-year Operations Plans) as well as to further improve their service delivery. Currently, each department identifies its own targets and the KPIs. The targets and the KPIs are however checked by an independent evaluator hired by the OPDC (currently, the Thailand Rating and Information System Company) to make sure that they are realistic. Service delivery agencies also conduct customer satisfaction surveys which are used as an input to the achievement of their KPIs. Government units that meet their output targets according to their KPIs and have passed the OPDC’s evaluations are awarded lump sum cash bonuses at the end of each fiscal year.

In order to develop an integrated results based management framework, the Bureau of the Budget and the OPSDC started in 2008 to harmonize reporting systems that request agencies to provide the key performance indicators (KPI’s) for the Ministerial and Departmental 4-year Operational Plan. The new forms were distributed to all government agencies to fill for FY2010/11.

Progress since May 2009: In order to consolidate and integrate these systems, in 2009 a Public Audit and Evaluation Committee was established with participation by the concerned agencies to review all the different RBM systems and make concrete recommendations how these systems could be linked and integrated. This review and its subsequent implementation are critical to have an operational integrated results management framework across the public sector. The Public Auditing and Evaluation Committee in 2009 conducted a review of results based management systems in government in order to consolidate and integrate them appropriately

Prior Action 6: The Parliament promulgated the Civil Service Act in 2008, and the Office of the Civil Service Commission has taken necessary action to implement a new grading structure across the entire civil service with effect from December 11, 2008.

This Prior Action is the main responsibility of the OCSC. The main objective of this to allow for the Government to have a differentiated career stream for technical and management officers, increase flexibility of moving staff

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between agencies, introduce differentiated salary levels based on skills and competency, and increase competitiveness for skilled positions vis-à-vis private sector.

Current Status: Completed. The Civil Service Act (2008) was promulgated in January 2008. Effective December 2008 the civil service grading system was reclassified from eleven grades into four groups: (i) operational and support staff (4 levels); (ii) knowledge workers (5 levels); (ii) middle management (2 levels); and (iv) senior executive service. At this moment the OCSC is considering increasing steps within the levels to make sure that the overall structure is not too broad banded. Additionally, the Government is considering developing differentiated pay policies for each group.

Progress since May 2009: The OCSC implemented performance based pay from April 2010, thereby phasing out the common ‘step wise’ compensation scheme. Following though on the reclassification system OCSC moved ahead to implement the performance based pay system across the civil service and in April 2010 this new system was introduced. With this system departments are provided a general salary adjustment amount, which is then provided to officials based on annual performance assessments. Looking ahead, this system will be reviewed and adjusted as appropriate to ensure the link between salary adjustments and performance is further strengthened.

VII. OPERATIONAL AND IMPLEMENTATION ISSUES

A. Poverty and Social Aspects

138. Over the past decades, high rates of economic growth have been an important contributor to poverty reduction in Thailand. Based on the national poverty line, Thailand has made impressive progress in reducing poverty from 42 percent headcount ratio15 in 1988 and its recent peak of 21 percent in 2000 (as a result of the 1997 Asian crisis) to 8.5 percent in 2007 (see Figure 8). This represents 7 million people being lifted out of poverty from 2000 to 2007. Poverty reduction has been driven by high rates of economic growth: over the past 20 years, real GDP grew an average of 5.9 percent per annum and poverty declined by 34 percentage points, implying that each percent of real GDP growth per annum helped to reduce the poverty headcount ratio by roughly 0.1-0.3 per year per year.

Figure 8. Thailand Poverty Headcount Ratio and Economic Growth: 1988-2007

Figure 9. Proportion of Poor Households Classified by Economic Activities, 2007

Source: 2007 Socio-economic Survey (NSO). Source: 2007 Socio-economic Survey (NSO).

15 Poverty head count ratio of certain geographical area is the share of poor people in the total population in that area.

33.7

28.4

19.0

14.817.5

21.0

14.911.2

9.5 8.5

42.2

0

5

10

15

20

25

30

35

40

45

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2007

Per

cent

0

50

100

150

200

250

300

Inde

x (1

988=

100)

Poverty headcount ratio (%)

Real GDP Index (1988=100)Farm

operator, mainly

owning land29.9%

Economically Inactive household

22.1%

Manufacturing10.6%

Other employee

4.6%

Entrepreneur, trade, industry

9.3%

Professional, technical & managerial

0.8%

General worker1.5% Farm worker

7.0%

Fishing, forestry

7.2%

Farm operator, mainly

renting land7.2%

50

Table 9. Thailand Poverty Headcount and Number of Poor, 2000-2007 (Percent)

2000 2002 2004 2006 2007 Thailand 21.0 14.9 11.2 9.5 8.5 No. of poor(‘000) 12,555 9,135 7,019 6,057 5,422

Urban 8.6 6.4 4.6 3.6 3.3

No. of poor(‘000) 1,595 1,257 933 678 636 Rural 26.5 18.9 14.2 12.0 10.7 No. of poor(‘000) 10,961 7,878 6,086 5,379 4,786

Bangkok 1.2 2.2 0.8 0.5 1.1

No. of poor(‘000) 107 145 51 29 64 Central 6.1 7.6 4.5 3.3 3.1 No. of poor(‘000) 1,247 1,090 666 525 496 North 17.8 20.3 15.7 12.0 12.9 No. of poor(‘000) 2,590 2,290 1,842 1,410 1,518 Northeast 24.5 23.1 18.6 16.8 13.0 No. of poor(‘000) 7,282 4,827 3,954 3,620 2,830 South 10.3 9.6 6.0 5.5 5.9

No. of poor(‘000) 1,330 784 505 472 513 Source: Socio-economic Surveys by NSO.

139. Poverty in Thailand is primarily a rural phenomenon and is concentrated in the Northeast. Out of 5.4 million poor, 88 percent live in rural areas. In 2007, over half of the poor were engaged in agricultural activities with the 60 percent being farmers who own land (see Figure 9). About 20 percent was engaged in trade and manufacturing, which are activities in the urban sector and another 20 percent was economically inactive, relying on charity or remittances from family members for their livelihoods. Eleven percent of the rural population is poor as compared to 3.3 percent in the urban areas (see Table 9). The populous Northeast is home to both half of the poor in the rural areas and the poor in Thailand. Nevertheless, the Northeast had made the most progress in reducing poverty over the past few years; poverty headcount in the Northeast fell from 35 percent in 2000 (7.3 million people) to 13 percent in 2007 (2.8 million people). Of the 4.5 million people in the Northeast who moved out of poverty from 2000 to 2007, 4 million were those in the rural areas. 140. The global financial crisis likely halted poverty reduction in 2009. The net effect of the economic volatility of 2008 and 2009 on Thailand’s poor is difficult to measure, but poverty likely increased in 2009 compared to 2008. As a result of the crisis, real per-capita consumption levels, which are highly correlated with the poverty rate, contracted in 2009 for the first time since the 1997 crisis. Given the elasticity between per-capita household consumption and the poverty rate, the observed 1.7 percent decline in real per-capita household consumption in 2009 is associated with an increase in the poverty rate between ½ to one percentage point from 2008. 141. The global economic crisis affected vulnerable households through two main channels: a decline in agricultural prices and softer labor markets. The contraction in household consumption and associated increase in poverty was due to a decline in agricultural incomes from lower agricultural prices compared to 2008 (on average, rice prices in 2009 have declined by 15 percent from 2008; see also Figure 10) and a relative shift of labor towards lower-productivity (and lower-wage) sectors, which contributed to a decline in average real wages. Although labor markets appear very tight (the unemployment rate is currently below one percent), real wages remain

51

below their pre-crisis levels. This is due to the flexibility of Thai labor markets and limited formal safety nets, which implies that employment is usually high and labor market adjustments take place through sectoral shifts (e.g. from manufacturing to agriculture and informal services, such as retail), reduced work-hours (35 percent of the workforce works over 50 hours per week on average), and lower wages. 142. The social impact of the political crisis was larger than the GDP impact because of the large number of workers in affected sectors. The external-demand-driven manufacturing and logistics sectors, which are expected to continue to perform well and be relatively unaffected by the crisis, account for only 17 percent of the labor force. On the other hand, the retail and tourism sectors, which have been hit hardest, account for 23 percent of the labor force. This suggests that incomes of many Thais are likely to be affected through job losses, shift to lower-paid jobs (such as agriculture), or reduced work hours. Because labor adjustments take place through hours worked and sectoral shifts, drastic changes in unemployment figures are not expected. But household incomes, for which data is harder to come by, are likely to suffer nonetheless as individuals are forced to accept lower-paying jobs or work fewer hours. 143. The outlook for poverty in 2010 is uncertain as a major drought is underway but GDP growth has started to pick up. Labor has started to shift back from agriculture to higher-paying manufacturing jobs (Figure 11) and overtime has picked up. Downside risks are significant, however, as a severe drought is currently affecting 53 out of 76 provinces and has already destroyed over 230 sq. km of agricultural land. While irrigation, higher prices of agricultural goods and public sector support should partly mitigate the impact of the drought, the situation needs to be carefully monitored. The continuation of pro-poor policies, especially the pension to the elderly (who are over-represented among the poor) and free education should support consumption levels in low income households. Figure 10. The decline in agricultural prices was the

main channel through which the crisis affected vulnerable households.

Figure 11. Labor initially shifted to agriculture during the crisis, but as the recovery took hold

manufacturing employment gained.

Source: BOT, MOC and World Bank staff calculations. Source: NSO, BOT and World Bank staff calculations.

144. The first stimulus package, while unlikely to have had a large impact on overall GDP, may have helped limit the impact of the crisis on the poor. Disbursements under the first stimulus package are estimated at 0.8 percent of GDP between March and September. While the stimulus

190

200

210

220

230

240

250

260

270

280

350

370

390

410

430

450

470

490

510

530

550

2008Jan

2008Feb

2008Mar

2008Apr

2008May

2008Jun

2008Jul

2008Aug

2008Sep

2008Oct

2008Nov

2008Dec

2009Jan

2009Feb

2009Mar

2009Apr

2009May

2009Jun

2009Jul

2009Aug

2009Sep

2009Oct

2009Nov

2009Dec

2010Jan

Index, 12‐m

onth m

oving average

Index, 12‐m

onth m

oving average

Crop Production (right axis) Crop Prices (right axis) Farm Income (left axis)

14,450

14,500

14,550

14,600

14,650

14,700

14,750

14,800

14,850

5,250

5,300

5,350

5,400

5,450

5,500

5,550

2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4

Agricultural Em

ploym

ent 

(thousand persons, 4‐quarter moving average)

Manufacturing Em

ploym

ent 

(thousand persons, 4‐quarter moving average)

Manufacturing

Agriculture

+ 228K

‐150K+20K

‐122K

52

package was not particularly well-targeted towards the poor, it did contain a number of measures that likely reached vulnerable households. The old-age pension may have been especially effective, since the elderly are over-represented among the poor and the measure specifically targeted those individuals not receiving formal pensions. 145. The institutional framework for delivering anti-poverty programs including through the stimulus is stronger than after the Asian financial crisis. A number of institutions were put in place over the course of the last decade that will allow anti-poverty programs to reach those in need. The most important of these are the Universal Coverage (UC) Scheme for health insurance and the S-M-L community development program, now known as the Sufficiency Economy Fund. As workers faced the prospect of falling out of the formal social security system, the UC scheme is an important buffer. Secondly, the Sufficiency Economy program makes it possible to disburse funds at the village level for community infrastructure, and this scheme has now reached all villages. While both programs, and particularly the Sufficiency Economy program face implementation challenges, they do provide a vehicle for reaching a large portion of the population. 146. The proposed operation contributes to poverty reduction in two main ways: (i) by supporting the implementation of the fiscal stimulus without which the contraction in GDP growth and increase in the poverty rate would be greater; and (ii) by supporting the improvements effectiveness of fiscal policy through improvements in public financial management. Without the fiscal stimulus the contraction in GDP growth may have exceeded 3 percent in 2009, with an even greater increase in poverty. Further, since the fiscal stimulus is moderately pro-poor, the impact on the poor will be greater. The proposed operation also supports the more effective use of all public sector resources at a time that the impact of fiscal policy needs to be maximized to prevent further deterioration in the growth rates, which as argued above are the main drivers of poverty in Thailand.

B. Implementation, Monitoring and Evaluation

147. The Government launched the implementation of reforms in the PSRDPL through a high level implementation and monitoring structure. The Government established a “Policy Steering Committee” to oversee and coordinate the implementation of the reform program, largely based on the findings of the PEFA assessment. This Policy Steering Committee was led by the Deputy Permanent Secretary of the MOF and comprised senior management from eight central line agencies; the PDMO, Fiscal Policy Office, CGD, Bureau of the Budget, the National Economic and Social Development Board, the Revenue Department, the OCSC, and the OPSDC. This policy steering committee was responsible for ensuring that all prior actions for the proposed operation were implemented. Implementation of projected policy actions in the medium term has now been delegated directly to the individual agencies. Progress on the reform program has been reported on a periodic basis by the individual agencies. The structure of the committee helped inter-agency coordination on key cross-cutting issues and provided momentum for reforms during a difficult period politically. For example, during the preparatory meetings, the OCSC presented its plans for the upcoming broad-banding of the civil service structure. That presentation generated positive discussions across the range of further relevant issues. Therefore, in addition to directly implementing policy reforms, such an implementation structure will also provide a forum for cross-sectoral discussions across different agencies and help to reduce the silo working style of agencies, and thereby increase efficacy of policy reform.

53

148. Country capacity for monitoring will be strengthened through the ongoing country development partnerships (which includes CDPs on governance and public sector reform, poverty analysis monitoring, financial and corporate competitiveness, infrastructure, social protection, education, health, and environment), especially the CDP on Governance and Public Sector Reform, which is in its third phase on implementation. Bank staff will continuously provide technical assistance for implementing the policy reforms and also monitor implementation of the reforms specified in the program matrix of the proposed and any subsequent DPLs. 149. The results measurement and monitoring framework will be closely monitored. The PEFA assessment for 2009 has established baseline scores across its 28 component indicators on performance of the public financial management system. The on-going Public Expenditure Review is providing policy advice and implementation support on issues relating to service delivery at the central and local level. The public financial management reforms supported under the DPL are expected to have a positive impact on the indicators relating to medium term budget planning, and access to key fiscal information. Specific aspects relating to the relevant PEFA indicator have been included in the Annex 3 – “Results and Outcomes Indicator” column. The impact of the reforms on outcomes on the performance of the PFM system will be monitored by the Bank team together with respective agencies over time, and documented when the next PEFA assessment is conducted in 2012. On the results based management reforms, the World Bank team will discuss with the respective agencies on the outcomes from the reform under the CDP-G umbrella, and capture outcomes within the DPL’s Implementation Completion Report.

C. Fiduciary Aspects, Disbursement and Auditing

150. Borrower and Credit Amount: The borrower is the Kingdom of Thailand and this operation is a single-tranche loan of US$1 billion that would be made available upon loan effectiveness, as all policy actions supported by the loan would have been completed prior to Board presentation. 151. Disbursement Arrangements and Use of Funds: The loan disbursement will follow the standard Bank procedures for Development Policy Lending as provided in OP/BP 8.6. The loan amount will be disbursed, through a single or multiple withdrawals prior to the Closing Date, in US Dollars into a bank account managed by the central bank, BOT that forms part of Thailand's official foreign exchange reserves. An equivalent amount in Baht will immediately be transferred in to the Treasury Reserve Account of the Borrower that is used to finance budget expenditures. The Borrower intends to use loan proceeds for expenditures with high import content, and may disburse the loan through multiple withdrawals as part of its standard debt management operations. The Borrower would provide to the Bank a written confirmation that this transfer (transfers) have been completed, and provide to the Bank any other relevant information relating to these matters that the Bank may reasonably request. 152. With regards to fiduciary risk, it was assessed to be low-to-moderate as: (i) GFMIS provides real time information with adequate core internal checks and balances; (ii) independent and well functioning of accountability mechanisms (see paragraph 160 onwards) exist to audit and monitor budget implementation. Therefore no additional FM requirements are being proposed for this operation. 153. Disbursements of the loan will not be linked to any specific purchases, except that the Borrower is required to comply with the standard negative list of excluded items that may not be

54

financed with Bank loan proceeds. Prior to disbursement, the Borrower would provide to the Bank a copy of written instructions issued to the Bank of Thailand for conversion of the foreign exchange amount of the loan into local currency and that an equivalent amount be credited to an account of the Government available to finance budgeted expenditures.

D. Risks and Risk Mitigation

(i) Political Risks 154. The political situation remains subject to significant risk. As noted above, a coalition of opposition groups, the United Front for Democracy against Dictatorship (UDD), staged large protests in Bangkok in April and May that culminated in violence that led to nearly 100 deaths and more than 1,000 injured. The ruling coalition is working on a national reconciliation agenda, which may involve an early dissolution of parliament. While relative calm has followed the end of the protests, the underlying political divisions remain. The Government’s parliamentary majority was unaffected, and Parliament has approved the FY2011 budget and financing plan in August 2010. The financing plan includes borrowing from the ADB and JICA in addition to borrowing from the World Bank. Although plans to borrow from international financial institutions (IFIs) were approved in parliament by a wide margin, the vote was largely along party lines and there is a risk that borrowing from IFIs may be politicized, and that these institutions are seen as supporting the ruling coalition. Several factors mitigate this risk: (i) the loan is being submitted to the World Bank Board only after Parliamentary approval has been received; (ii) the loan received votes from opposition MPs, as well as broad support by the Senate; (iii) the MOF has carried out public consultations on the operation and solicited comments on its website; (iv) the loan was originally requested by a finance minister currently in the opposition; and (v) designing the operation as a standalone operation rather than a programmatic one helps Government manage the political risk. (ii) Implementation Risks 155. Notwithstanding the political instability, the public sector reform agenda has been maintained under different political administrations. This has been the case over the past twelve months as the reform program has been sustained despite the political turmoil. This is because the underlying reform program has broad support across the political spectrum and is owned by senior civil servants in respective agencies. Therefore the risk to reform program implementation is modest. Inevitably, continued political turmoil will have some impact on the implementation of the program, and especially through delays in passage of needed legislation 156. The reform program itself is non-partisan, and has broad private sector as well as public sector support. On the fiscal front, the constituency for fiscal reform is wide and vocal and very influential and a change in government is unlikely to result in deep reversals in the fiscal program as this will be detrimental to the economy as the whole. Thailand has already demonstrated steady reform implementation through successive governments. This is because there is broad political support across the political spectrum towards improving public sector management, and the details of the program are part of the each department’s core operations which are spearheaded by the bureaucracy – which does not experience wholesale reshuffles in wake of changes in the political administration.

55

(iii) Macro-Economic and External Risks 157. Thailand is recovering strongly from the global financial crisis, with year-on-year GDP growth coming in at 10.6 percent in the first half of 2010 and projected to reach over 6 percent for the year as a whole. However, growth remains largely dependent on external demand conditions, and a new contraction in world trade would have a substantive negative impact on Thailand’s economy, including posing a threat to debt sustainability. A track record of prudent macroeconomic management and conservative banking practice means that the likelihood of a balance of payments or banking crises is relatively low. Given the strong macroeconomic fundamentals, markets have reacted fairly calmly to political events, although a renewed escalation in violence may lead to market reappraisal. 158. A significant deterioration in the political situation would further jeopardize Thailand’s growth prospects. A new escalation or increased frequency of politically-motivated violence could lead to a weakening of economic conditions through a slowdown in investment, a significant reduction in tourism, and possible disruptions to export-oriented manufacturing activity. Nevertheless, the situation has been relatively calm since May and, reflecting the team’s view on the most likely scenario, the projections in this document assume ongoing and elevated risks of political instability, but not renewed violence. (iv) Fiduciary and Reputational Risks 159. A detailed assessment of the PFM framework in Thailand carried out as part of project preparation points to overall low-to-moderate fiduciary risks. Since 2003, Thailand has significantly improved the core public financial management systems. The GFMIS (2005) has been deployed nationwide to execute expenditures in real time via the consolidated Treasury Reserve Account at the BOT. The GFMIS incorporates all the core internal checks and balances to ensure that there is an undeletable audit trail for all expenditures. In addition, the revenue department has also developed an eRevenue system for electronic filing of taxes. The GFMIS automatically cross-checks tax collections reported via the eRevenue system, with the amount banked at the Treasury Reserve Account. 160. External accountability mechanisms are independent, adequately resourced, and have appropriate capacity to ensure that the executive branch of government can be held accountable for any issues arising. Coupled with the vibrant civil society and free media, the overall external accountability framework is reasonably robust. 161. Progress on improving the legislative framework governing public procurement has been slow. A new Procurement Act has been approved by the Cabinet and is pending consideration with the State Council. The World Bank will assist the Government in effective implementation of this new Procurement Act once the same is promulgated. The government has already developed an e-Procurement system that is a central repository of all procurement related information across the entire procurement process for capital procurements. 162. Broad consultation, especially in the context of a parallel Interim Strategy Note has facilitated broad ownership of the World Bank’s country program. This work, and accompanying technical assistance in key areas, will ensure that the underlying analytics for the PSRDPL program are well understood and articulated. The monitoring framework for the DPL

56

provides an opportunity for these results to be shared and for any issues or slippages to be brought to the attention of senior policymakers in a timely fashion. Moreover, the process of parliamentary consultation and approvals has enabled the participation of opposition and civil society in reviewing this operation.

E. Environmental and Social Aspects

163. While the prior actions for this operation are not likely to have a significant environmental effect, the environmental effect of ongoing projects will need to be managed. The proposed operation does not directly support any specific policy actions that could have negative effects on environmental, forests and other natural resource aspects. The FY2009 stimulus package that is covered by a prior action does support small-scale infrastructure. However, this is only 5 percent of the stimulus package (which itself is 1.6 percent of GDP), spread out over many projects all over the country. A further 10 percent of the stimulus package consists of transfers averaging THB 195,000 (US$5,560) to 78,358 villages which may be spent amongst other things on micro-infrastructure. Even taken together these are unlikely to have a significant environmental effect especially when economic activity has slowed significantly. By supporting better integration of key performance indicators with budgetary performance management, there will be likely some positive second order benefits by improving service delivery and management of revenues. At this time it is not possible to quantify these second order impacts, and these may not be significant but the team will continue to assess positive externalities and report appropriately in the Implementation Status and Results report for the operation. 164. Thailand has adequate environmental controls in place. Thailand has well established governmental and nongovernmental institutions. Collectively, they have supported development of policies related to the protection and sustainable use of the country natural resources and environmental management, over the last two decades. There is a legal framework governing the Environment Impact Assessment (EIA) and Initial Environmental Examination (IEE) that applies to projects. In particular, the large infrastructure projects that will be a large share of the fiscal stimulus in 2010-12 will be covered by requirements for EIA16. Smaller projects that do not anticipate much environmental impact and projects in special governing zones needs to conduct IEEs following the guidelines for various types of projects (e.g. irrigation, health, transportation) as set forth by the National Environment Board, the Ministry of Natural Resources and Environment (MONRE). The new Constitution of the Kingdom of Thailand B.E.2550 (2007) also provides right to public participation in the prevention and elimination of any actions that deteriorate natural resources and pollute the environment. 165. There is still room for improvement in environmental management. Further strengthening and improvements regarding public education, civil participation, effective implementation of environmental laws; stronger institutional capacity, both national and local; and increased investments in pollution prevention and control, with private sector participation are needed. The actual implementation of environmental protection sometimes does not keep up with laws as seen recently in the Map Tha Put industrial estate. The Government has prepared a

16 Section 46 of the Enhancement and Conservation of Nation of National Environmental Quality Act 1992: The MONRE with the approval of the National Environmental Board (NEB) have the power to issue the notification prescribing the categories and magnitude of 22 types of projects of government agency, state enterprise or private organization, which are required to submit the EIA report to the Office of Environmental Policy and Planning and the Expert Review Committee for review and approval before proceeding.

57

comprehensive Climate Investment Plan, which has been approved by the Clean Technology Fund (CTF) committee for concessional financing for introducing clean technologies to promote low-carbon sustainable growth. New operations promoting energy efficiency and greater use of renewable energy sources are now under preparation for support by IFC and IBRD. As only large public investment projects are required to undertake EIAs and integrated natural resources management (especially in the context of river basin management) is a key for forging effective involvement of local stakeholders it would be useful to engage with the government to discuss inclusion of the environment and social performance indicators, including integration measures, in the KPIs established by the OPDC. In the long-term, KPI may be linked with the Budgeting Process. 166. Implementation of the stimulus package will be the prior action that has the most direct social impact. The stimulus package was intended to address the social impact of the crisis which most directly affected the urban informal sector. As discussed in more detail in Section V.A, the stimulus could have been better targeted to this group. Effective targeting was constrained by the existing social protection system which mostly reached the formal sector. Nevertheless, our estimates are that the stimulus package for 2009 was moderately pro-poor, with almost 10 percent of the beneficiaries being poor, compared to 8.5 percent of the population being poor. This is because the stimulus package also explicitly targeted rural areas where most of Thailand’s poor live (Section VII.A). The second phase of the stimulus package (which is not a prior action) is likely to be less targeted to the poor because of the emphasis on urban infrastructure although there has been attention paid to geographic distribution. Nevertheless, it is funding small-scale irrigation projects as well as the government’s new farm income support scheme, which has benefited about three million farming households. 167. The other prior actions are likely to have a positive social impact. Over time these reforms should lead to better service delivery in the public sector, including for the poor. Thus, prior actions to improve fiduciary controls and accountability in public financial management, enhance the policy focus of budget formulation, reduce rigidities in the civil service and strengthen the oversight of public agencies should lead to efficiency and accountability in the delivery of public services. None of these measures are expected to have negative consequences for the poor. The Civil Service Reform explicitly ensures that the changes do not lead any civil servant worse off relative to before the reform.

58

Annex 1. Letter of Development Policy

59

60

61

62

Annex 2. Application of Good Practice Principles on Conditionality

The design of this Development Policy Loan has drawn extensively on the lessons learned by the World Bank on application of conditionality and the Public SRL. The following are the key good practice principles and lessons learned, and as they have been applied to this DPL.

Principle 1: Reinforce ownership

The DPL supports policy and institutional reforms in line with the government’s priorities. The reform program being supported by the DPL has been developed by the government and implemented already for many years. Policy actions on the public financial management stem from on-going the laws and institutional arrangements already put in place by the Government, and have been jointly identified as the key ones where the World Bank can provide implementation support for assisting in the reform implementation. The policy actions on public administration and service delivery, likewise, stems from the Royal Decree on Good Governance 2003 and the Civil Service Act of 2008 and are already under implementation by respective government agencies.

Principle 2: Agree up front with government and partners on a coordinated accountability framework

The policy matrix represents an agreed framework with government, based on the government’s own on-going public sector reform program. This DPL has been discussed with Japan and ADB, the two major development partners also considering budget support loans at this stage. The policy matrix also sets out the medium term outcome indicators with targets to be achieved by the government’s public sector reform program. The short and medium term reform focus will be adjusted as the program evolves.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances

The policy matrix comprises a subset of reform measures that are part of the government’s broader development program. It does not pretend to capture the totality of reforms being implemented, nor to raise issues that are key to growth or poverty alleviation but that, for various reasons, may be counterproductive if part of a high profile program, such as the DPL. Hence, although the World Bank is engaged in a dialogue across a number of sensitive policy areas, many policy actions are left outside the scope of the DPL to take into account country circumstances and the political economy.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement

The actions supported by the operation are based on joint analytical work and technical discussions with the authorities, and focus on issues central for achieving results on performance based public sectors that the authorities are already focusing. The medium term focus also remains on key policy reforms that are important for achieving results and on the governments’ reform agenda.

Principle 5: Conduct transparent reviews conducive to predictable and performance based financial support

The preparation of this operation has centrally been aligned with the governments’ request and needs for financial support, and based on a process of preannounced reviews of the public finance management and service delivery reforms. Given the decentralized Bank program, discussions with government counterparts and development partners are done on a regular basis in-country.

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Annex 3. Development Policy Matrix

Objectives Prior Actions

Negotiated in May 2009

Progress since May 2009 Results and Outcome Indicators

Responsible Agencies

Mitigating the impact of the global financial crisis through fiscal stimulus and investing in infrastructure for long term growth

Prior Action 1: Parliament has approved, and the Government is implementing, an economic stimulus package for its Fiscal Year 2009 to mitigate the impact of the global financial crisis.

Nearly all of the planned transfer and tax measures and about half of planned infrastructure projects were disbursed in FY09 for an overall disbursement rate of 83 percent. Progress has been slower in FY10 but measures taken to speed up implement-ation together with seasonal factors could bring disbursements back on track.

GDP is at least one percent higher in 2009 relative to without stimulus. Govt. forecast for 2009 GDP in April 2009 was -3.0 to -3.5, WB forecast was -2.6 percent actual 2009 outcome was -2.2. Recovery has been sustained in 2010.

Deputy PM’s office, NESDB, MOF.

Improving expenditure planning, aligning budgetary resources to development priorities within the Strategic Performance Based Budgeting Framework

Prior Action 2: The Bureau of the Budget has (i) revised costing norms for its Medium Term Expenditure Framework under its budget for Fiscal Year 2008; and (ii) taken steps to ensure that the Performance Assessment Rating Tool (PART) is implemented in all Government agencies.

The Bureau of the Budget: (i) introduced agency level ceilings in the top-down medium term expenditure framework which reduced the deviation between the top-down and bottom-up MTEF from more than 5 percent in FY2009/10 to less than 2 percent in FY2010/11: (ii) six budget appropriation committees formally considered PART results to guide budget allocations; and (iii) completed guidelines for

Improved links between multi-year estimates and subsequent setting of annual budget ceiling as determined by: (i) reduction in the difference between budget requests by sector ministries and outer year budget projection in the MTEF; (ii) results of ex-post assessment

BOB

64

Objectives Prior Actions

Negotiated in May 2009

Progress since May 2009 Results and Outcome Indicators

Responsible Agencies

MOF prepared the Public Financial Act as mandated by the Constitution, held inter-agency consultations, and submitted the revised draft to the Office of the Secretary to the Minister at the Ministry of Finance for further submission to the Cabinet.

expenditure policies and programs.

MOF submitted the Public Finance Act to the Council of State after Cabinet approval

of expenditure programs and projects for FY2008/9 inform budget allocations for FY2010/11. Improvement in PEFA score on multi-year perspective in budget planning from current “C” in 2009 to “B” by 2011.

MOF

Enhancing effectiveness of budget execution, timeliness of financial reporting, strengthening revenue administration

Prior Action 3: a) The Ministry of Finance has: (i) piloted the use of the e-financials accounting module for direct financial reporting from the Government Fiscal

MOF was able to improve reconciliation such that in 2010 the Auditor General certified for the first time since introduction of GFMIS the

Consolidated financial statement certified by the Office of the Auditor General for

MOF

65

Objectives Prior Actions

Negotiated in May 2009

Progress since May 2009 Results and Outcome Indicators

Responsible Agencies

and public procurement Management Information System (GFMIS); (ii) begun undertaking daily reconciliation between the GFMIS and the Treasury Reserve Account and targeted training; and (iii) introduced e-token interface with the GFMIS for secure data access for management reporting by budget entities. (b) The Bureau of the Budget has piloted an e-budget system in the Government’s line ministries for improving links between sector policies and budget requests. MOF migrated the government accounting system from cash basis to accrual

financial statements, for FY2005; (ii) MOF introduced real time Payment Order interface to the Government Fiscal Management Information System – “web-online” – to improve accuracy and speed of budget execution; and (iii) implemented the Executive Information System for financial reporting to agency level management; and (iv) completed integration of GFMIS with e-Budget at BOB

MOF prepared a comprehensive plan for accounting reform including development of an accounting profession, to support the migration from cash to accrual reporting

In order to improve transparency and management of the second Fiscal Stimulus projects, MOF established in

the 2010/11 fiscal year by 2012. Improvement in PEFA score on effectiveness of internal controls improve from C+ in 2009 to B in 2011.

Budget-to-actual reports prepared and published for the first time starting FY2011/12

Reduced reconciliation errors in consolidated financial reports

Improved transparency by providing public access to the year-end financial

MOF

MOF

66

Objectives Prior Actions

Negotiated in May 2009

Progress since May 2009 Results and Outcome Indicators

Responsible Agencies

MOF implemented program for improving public procurement comprising: (i) introduction of electronic-based procurement system; (ii) initiating the procurement monitoring system by using the OECD-WB Baseline Indicator System framework; and (iii) submitted the Royal Decree on Public Procurement to the State Council in 2008 In 2007 the Revenue Department allowed taxpayers

December 2009 a comprehensive Project Financial Management System which publically identifies each project on Google maps using GPS coordinates, and reports in real-time on: (i) project financial information; (ii) procurement documentation; and (iii) physical progress of projects

MOF: (i) operationalized the e-Government Procurement system in April 2010 including posting of procurement information by public agencies on the internet; and (ii) submitted procurement decree to Council of State Revenue Department upgraded the e-filing application systems in 2009 system capacity to

statements, in addition to the current public access to the annual budget documentation, in-year budget execution reports and external audit reports by 2011.

Reduction in interaction between tax payer and

MOF

RD

67

Objectives Prior Actions

Negotiated in May 2009

Progress since May 2009 Results and Outcome Indicators

Responsible Agencies

to obtain tax forms, file tax, request for tax refund, and make payments electronically, hence reducing compliance costs of taxpayers and administrative costs of the revenue department within an e-Revenue system

deliver services in a timely and effective manner

collector reducing avenues for rent-seeking

Strengthening the performance management framework, and improving quality and timeliness of service delivery

Prior Action 4: Nine working committees constituted by the Government and representing forty Government agencies have taken necessary actions to: (a) shorten their service-delivery times; (b) streamline processes, and (c) and reduce the costs of interacting with government in ten district areas of dealing in which they deal with private businesses.ove the business climate.

All central government agencies covered by a system of Performance Agreements stipulating agency outputs against service delivery targets.

The nine committees have continued to function and in 2010, Thailand’s rank in Doing Business was improved to 12.

OPDC decentralized in 2009 KPI determination to four ministries – Ministry of Finance, Ministry of Industry and Commerce, Ministry of Energy, and Ministry of Environment and Natural Resources

In FY2010, each of 40 the agencies reduce their service delivery time, processes, and/or costs by 5-10% relative to FY2009. From FY2010/11, more than half of the agencies use the new form for reporting systems of OPDC that develops the respective KPI’s for the Ministerial and Departmental 4-year

OPDC

OPDC

68

Objectives Prior Actions

Negotiated in May 2009

Progress since May 2009 Results and Outcome Indicators

Responsible Agencies

Prior Action 5: The Office of Public Sector Development Commission and the Bureau of the Budget have harmonized their reporting systems to facilitate the formulation of key performance indicators (KPIs) for a four year ministerial and departmental operation plan covering all Government agencies.

In 2009 a Public Audit and Evaluation Committee was established with participation by the concerned agencies to review all the different RBM systems and make concrete recommendations how these systems could be linked and integrated so as to move to an integrated results management framework across the public sector. The Public Auditing and Evaluation Committee in 2009 conducted a review of results based management systems in government in order to consolidate and integrate them appropriately

Operational Plan, thereby reducing overlap between OPDC and BOB reporting systems. (Baseline was 0 in 2008/9).

OPDC and BOB

69

Objectives Prior Actions

Negotiated in May 2009

Progress since May 2009 Results and Outcome Indicators

Responsible Agencies

The Second Strategic Plan for the Thai Public Sector Development (2008-2012) was approved by the Cabinet in August 2008. This strategy has four key strategies: (i) develop service quality and work process to best respond to public needs, (ii) enhance a comprehensive work modality with involvement of all stakeholders, (iii) raise public sector’s competency and productivity to be on par with international standards, and (iv) strengthen ethics and good governance. Prior Action 6: The Parliament promulgated the Civil Service Act in 2008, and the Office of the Civil Service Commission has taken necessary action to implement a new grading structure across the entire civil service with effect from December 11, 2008. The new range-based salary structure aligned with the new

As part of the implementation of the Thai Public Sector Development (PSD) plan the OPDC launched the Role of the State analysis in 2010 across 13 sectors of the economy OCSC implemented performance based pay from April 2010, thereby phasing out the common ‘step wise’ compensation scheme

OCSC established the Merit System Protection Commission (MSPC) to: (i) advise and prevent government agencies

Increased flexibility within the civil service cadre’s as evidenced by staff being able to transfer to different agencies within the same technical specialization field by 2010 and pay differentials between staff subject to performance assessments by 2012

OPDC

OCSC OCSC

70

Objectives Prior Actions

Negotiated in May 2009

Progress since May 2009 Results and Outcome Indicators

Responsible Agencies

position classification was implemented to allow for differentiated salary structures across the 4 professional streams.

Royal Decree on Integrated Administration for Provinces and Provincial Clusters (2008) was issued on December 25, 2008 and Bureau of the Budget provided budgetary allocations for provincial clusters starting FY2008/09 Budget.

from issuing or regulating unmerited rules and regulations, (ii) consider appeals, and (iii) consider complaints

Bureau of the Budget provided allocations for Provincial Administrative Organizations from FY2009/10 budget year – in addition to provincial clusters, consistent with the Royal Decree on Integrated Administration for Provinces and Provincial Clusters

OPDC, BOB, NESDB

71

Annex 4. Governments Public Sector Reform Program –Key Reforms and Plans

Focus Area Actions and Plans for Policy Development

Expected Outcomes Lead

Agencies Recent Reforms (2000 – 2008)

Current Reforms (2009-2010)

Short-Term Reform Plans

Medium-Term Reform Plans

Component A: Improving Expenditure Management, Revenue Administration, Fiscal Reporting, and Auditing Procedures Improving expenditure planning, aligning budgetary resources to development priorities, and improving budget reporting

- Bureau of the Budget (BOB) adopted and implemented strategic performance based budgeting system by moving progressively away from line item budgeting to programmatic budgeting using the “hurdle approach” to transfer more budget formulation authority to line ministries and deploying the Medium Term Expenditure Framework. In this regard, recently BOB has been: (i) revising costing norms for the MTEF framework for the FY2008/9 budget; and (ii) developed and rolled out the Performance Assessment Rating Tool (PART) to all Government agencies for improving monitoring efficiency of budget programs

- The Bureau of the Budget employed bottom-up MTEF in the process of setting up FY2010/11 ministerial level top-down ceilings which helps increase FY2011 allocation effectiveness. - BOB’s budgetary appropriations subcommittees formally used performance information from PART in the budget allocations decisions for FY2010/11

- Bureau of the Budget: (i) continues to refine the costing norms, linking further the top-down and bottom-up MTEF, assist ministries to develop costed and prioritized sectoral MTEF’s including possibility of developing a set of forward estimates and budget strategy paper; (ii) reviews budget appropriations in light of PART and KPI results; and (iii) refines guidelines for expenditure policies, programs and outputs

- Government has at its disposal appropriate tools for operationalizing performance based budgeting framework, and effective strategic allocations and prioritization of public resources

Increased consistency and linkage between government policies and budgetary allocations and ensuring realistic allocations are made to sectors within an appropriate legislative framework Ensure structure of budget provides for appropriate allocation for productive sectors and social sectors, based on government policies

BOB, MOF, OPDC

72

Focus Area Actions and Plans for Policy Development

Expected Outcomes Lead

Agencies Recent Reforms (2000 – 2008)

Current Reforms (2009-2010)

Short-Term Reform Plans

Medium-Term Reform Plans

- The 2007 Constitution mandated the government to develop a new Public Financial Act. MOF prepared this draft Act, held inter-agency consultations, and submitted the revised draft to the Office of the Secretary to the Minister at the Ministry of Finance for further submission to the Cabinet.

- The Draft Public Finance Act was approved by the Cabinet on October 13, 2009 and is in the process of the Council of State Council consideration. - The Act aims at imposing fiscal discipline on the while public sector including the medium term fiscal financial plan preparation, revenue collection, budget preparation process, cash and asset management, and making the fiscal report publicly available.

- Public Financial Act and respective regulations approved by the Parliament, and implementation commences

- Implement the Public Finance Act and ensures that the legal underpinnings of the public finance management framework are robust

- Fiscal discipline is in shape - Government has more accountability and transparency towards its policy implementation

Enhancing effectiveness of budget execution and strengthening the fiduciary environment

- MOF implemented an integrated Government Fiscal Management Information System country wide; (i) executing budget appropriations through the centralized Treasury Reserve Account; (ii) incorporated system of commitment roll-overs for budget appropriations; and (iii) commenced development of the accounting management information system for improved financial

- In 2010 MOF: (i) resolved data inconsistencies appropriately so that the Auditor General issued for the first time since introduction of GFMIS the audit opinion to financial statements for FY2005/06; (ii) introduced real time Payment Order interface to the Government Fiscal Management Information System – “web-online” – to improve accuracy and speed of budget execution; (iii) implemented the

- MOF resolves reconciliation problems within the financial statements for FY2006/7 and FY2007/8 in 2011,conducts analysis of GFMIS and makes appropriate refinement to GFMIS to improve its operational effectiveness, refines the chart of accounts to facilitate

- MOF continually improves GFMIS in order to ensure that financial statements are certified by the OAG for all fiscal years, and remains current thereafter, develops a comprehensive e-Financials MIS system that can generate accurate and timely consolidated financial statements from GFMIS for the whole of government, including all

- Improved timeliness of reporting and flexibility in budget execution; - Increased accuracy of consolidated financial management reports and facilitate external audit - Better cash management and increased cross-checks on revenue collection and expenditure execution - Different tiers of

MOF, BOB, OPDC

73

Focus Area Actions and Plans for Policy Development

Expected Outcomes Lead

Agencies Recent Reforms (2000 – 2008)

Current Reforms (2009-2010)

Short-Term Reform Plans

Medium-Term Reform Plans

reporting. In 2008 the Ministry of Finance; (i) developed the accounting module (e-financials) for direct financial reporting from GFMIS; (ii) reduced reconciliation errors in financial reports by conducting daily reconciliation between GFMIS and the Treasury Reserve Account and targeted training;(iii) introduced e-token interface with GFMIS for improved management reporting by budget entities; and (iv) BOB piloted the e-Budget system in line ministries (to be implemented across all ministries by 2010) for improving links between sector policies and budget requests - MOF changed the government accounting system from cash basis to accrual

Executive Information System for financial reporting to agency level management; and (iv) completed integration of GFMIS with e-Budget at BOB MOF commenced pilot integration of GFMIS with the Local Administration Accounting System (e-LASS) revenue module in April 2010 - MOF prepared a comprehensive plan for accounting reform including development of an accounting profession, to support the migration from cash to accrual reporting

improved reporting - MOF integrates the GFMIS with the e-LAAS, thereby moving towards a fully integrated financial management information system architecture - MOF implements accounting reform plan

controlled public enterprises and - MOF has in place a fully integrated financial management information system architecture across the public sector - MOF prepares consolidated government accounts on full accrual basis

management can have accurate and appropriate financial management reports in a timely manner. - Increase the transparency and accountability of the public procurement thereby improving effectiveness and value for money of public resources.

74

Focus Area Actions and Plans for Policy Development

Expected Outcomes Lead

Agencies Recent Reforms (2000 – 2008)

Current Reforms (2009-2010)

Short-Term Reform Plans

Medium-Term Reform Plans

- MOF commenced program for improving public procurement comprising: (i) introduction of electronic-based procurement system; (ii) developing the procurement monitoring system by using the OECD-WB Baseline Indicator System framework; and (iii) revising the legislative framework by preparing and submitting the Royal Decree on Public Procurement to the State Council

- MOF operationalized the e-Government Procurement system in April 2010 including posting of procurement information by public agencies on the internet - In order to improve transparency and management of the second Fiscal Stimulus projects, MOF established in December 2009 a comprehensive Project Financial Management System which publically identifies each project on Google maps using GPS coordinates, and reports in real-time on: (i) project financial information; (ii) procurement documentation; and (iii) physical progress of projects

- MOF; (i) further refines electronic procurement system to improve effectiveness of e-e-GP system, (ii) finalizes the new procurement decree considering feedback received during review process (iii) establishes a functional procurement monitoring system

- e-GP is fully operational and linked with GFMIS, together with adequate support and training provided by MOF to agencies to operate the system appropriately; (ii) new procurement decree based on sound public procurement principles and practices is adopted and implemented, and (iii) regular procurement monitoring reports are issued on the performance and outcomes of public procurement; and (iv) develop a mechanism to facilitate accession to GPA (WTO)

Strengthening public revenue management policy and administration

- The Ministry of Finance implemented a system of using real-time, pooled online database containing taxpayers profile and other revenue agencies to

- Revenue Department upgraded the e-filing application systems in 2009 system capacity to deliver services in a timely and effective manner

- Expanding and upgrading the e-Revenue system to ensure accuracy and timeliness of revenue collections,

- A comprehensive review of the overall tax structure to reduce the number of tax exemptions and incentives, update certain

Streamlined bureaucratic procedures, fewer direct interactions between taxpayers and tax officials, and wider tax base

Revenue Department, MOF

75

Focus Area Actions and Plans for Policy Development

Expected Outcomes Lead

Agencies Recent Reforms (2000 – 2008)

Current Reforms (2009-2010)

Short-Term Reform Plans

Medium-Term Reform Plans

strengthen enforcement capacity and replace post audit approach with a supervision system - Introducing new units to boost tax collection efficiency, e.g. Large Taxpayer Office and Tracking Non-compliance Business Unit - The Government deployed an e-Revenue system that allows taxpayers to obtain tax forms, file tax, request for tax refund, and make payments electronically, hence reducing compliance costs of taxpayers and administrative costs of the revenue department

- Revenue Department established expert committee to develop manual and guideline on transfer pricing and advance pricing arrangements.

e.g. offering incentives for e-filing for corporate income tax and VAT. - Further developing the transfer pricing system framework and regulations

tax rules (e.g. classifying luxury goods), and design efficient ways to tax used goods. -Ensure the e-Revenue system remains up-to-date and more widely used

COMPONENT B: Improving Public Service Delivery Strengthening the performance management framework

- All central government agencies covered by a system of Performance Agreements stipulating agency outputs against service delivery targets. OPDC and BOB initiated

- OCSC provided more than 100 training sessions by 19 teams across government agencies across the country on individual level performance management to increase understanding and

- OCSC continues to provide additional training in performance management to increase understanding and

- Harmonized performance management framework across the public sector operational

Improve performance of the public sector towards better quality of service delivery to citizens

Office of Public Sector Development Commission (OPDC)

76

Focus Area Actions and Plans for Policy Development

Expected Outcomes Lead

Agencies Recent Reforms (2000 – 2008)

Current Reforms (2009-2010)

Short-Term Reform Plans

Medium-Term Reform Plans

merger of Key Performance Indicators and the PART to move towards a unified results based management framework for Government - The Office of the Public Sector Development Commission (OPDC) instituted a system of key performance indicators (KPI) for all agencies (developed by agencies); performance against KPI’s monitored by OPDC as a performance monitoring tool

ownership in line ministries in 2009 and 2010 - OPDC decentralized in 2009 KPI determination to four ministries – Ministry of Finance, Ministry of Industry and Commerce, Ministry of Energy, and Ministry of Environment and Natural Resources - The Public Auditing and Evaluation Committee in 2009 conducted a review of results based management systems in government in order to consolidate and integrate them appropriately

ownership of individual level performance management in line ministries - The OPDC pilot decentralization of the performance audit and evaluation based on the Performance Agreements, targets, and achievements of KPIs to additional agencies - OPDC, BOB and OCSC collaborate to implement recommendations of the PAEC on reducing duplication and make it more useful to agency management

- Decentralize performance audit and evaluation to all ministries - OPDC, BOB, and OCSC consolidate and integrate respective results based management systems so that Thailand has unified performance based results focused system in the public sector

77

Focus Area Actions and Plans for Policy Development

Expected Outcomes Lead

Agencies Recent Reforms (2000 – 2008)

Current Reforms (2009-2010)

Short-Term Reform Plans

Medium-Term Reform Plans

- In 2008, 9 Government working committees comprising 40 agencies implemented the Cabinet resolution to shorten the service delivery time, streamlining processes, and reduce direct costs across 10 areas for improving the business climate - The second strategic plan for the Thai Public Sector Development (2008-2012) approved by the Cabinet in August 2008. The Plan has four key strategies: (1) develop service quality and work process to best respond to public needs, (2) enhance a comprehensive work modality with involvement of all stakeholders, (3) raise public sector’s competency and productivity to be on par with international standards, and (4) strengthen ethics and good governance. Royal Decree on Integrated Administration for

- As part of the implementation of the Thai Public Sector Development (PSD) plan the OPDC launched the Role of the State analysis in 2010 across 13 sectors of the economy - Bureau of the Budget provided allocations for Provincial Administrative Organizations from FY2009/10 budget year, consistent with the Royal Decree on Provinces and Provincial Clusters

- OPDC continues to implement the PSD plan and assists ministries to draft ministerial action plans to reduce work processes and improve governance in line with the ministries’ 4-Year Operational Plan and the government’s 4-Year Public Administration Management Plan. Pilot at Public Health, Finance, Energy, and Industry Ministries.

- Pilot projects to provide citizen feedback on public services in service delivery units such as public hospitals in 2012 - Each central government’s provincial administration continues to be given its own budget and flexibility to manage it.

78

Focus Area Actions and Plans for Policy Development

Expected Outcomes Lead

Agencies Recent Reforms (2000 – 2008)

Current Reforms (2009-2010)

Short-Term Reform Plans

Medium-Term Reform Plans

Provinces and Provincial Clusters (2008) was issued on December 25, 2008 and Bureau of the Budget provided budgetary allocations for provincial clusters starting FY2008/09 Budget - Parliament promulgated the Civil Service Act (2008) and subsequently the Government changed the grading structure across the civil service in December 2008, in line with the Act, and started preparing respective implementing regulations for the Act - Implemented the new range-based salary structure that is aligned with the new position classification

- Code of Ethics of the Civil Service was approved by the Cabinet and announced in the Royal Gazette in November 2009 to provide the basis for ethical standards as well as mechanism to ensure such standard for the Civil Service. - OCSC implemented performance based pay from October 2009, thereby phasing out the common ‘step wise’ compensation scheme

- OCSC implements ethic survey across government agencies. Royal Decree on Transfers and Promotions of Civil Servants approved - OCSC refines the performance based pay system as appropriate to ensure appropriate skills mix are retained in the civil

- OCSC reports on evolution of ethics from survey results - Develop a compensation management system which includes compensation system for aging workforce, locality pay system, and new

Office of Civil Service Commission (OCSC)

79

Focus Area Actions and Plans for Policy Development

Expected Outcomes Lead

Agencies Recent Reforms (2000 – 2008)

Current Reforms (2009-2010)

Short-Term Reform Plans

Medium-Term Reform Plans

- OCSC established in 2008 the Merit System Protection Commission (MSPC) to (i) advise and prevent government agencies from issuing or regulating unmerit rules and regulations, (ii) consider appeals, and (iii) consider complaints - Government piloted decentralization of position and transfers to from OCSC to ministerial and departmental levels in 2009

service - Review the operations of the MSPC and take appropriate actions for improving its operational effectiveness. - Pilot further decentralization of HRM functions from OCSC to ministerial and departmental levels

compensation system for certain priority class-series - Implement a system of regular assessment of the performance of individual staff members, to also be used in a performance based pay system based more on individual performance - Decentralize HRM functions to all ministries and Implement and facilitate open system promotion and selection in particular for middle management and senior executive positions

80

Annex 5. World Bank Support to Thailand’s Public Sector Reform Program (1998-2008): Inputs (TAs and ESWs)*

Area EMAL (US$15M, TA) (1998-2003)

PSRL (US$100M for PSR) (1999-2001)

CDP-G I and CDP-G II (2002-2006)

CDP-G III (2007-2011)

DPL (2009 – 2011)

A. Budget Formulation

Established Public Debt

Management Office and drafting Public Debt Management Law (TA)

Developed performance based budgeting conceptual framework (TA)

Improved budget classification system (TA)

Enhanced links between annual plans and budgets (TA)

Formulated the “hurdle

approach” to implement performance based budgeting and began piloting in 2 agencies (TA)

Prepared the medium term fiscal strategy as a precursor to the MTEF (TA)

Developed manual on

Hurdle Approach to Budget Reforms (TA)

Established CS-DRMS for improved debt management (TA)

Drafted guidelines on budget and financial discipline of government agencies (TA)

Public Expenditure Review (ESW)

Conducted

Assessment of Strategic Performance Based Budgeting and MTEF in Thailand – (TA)

Reviewed the Performance Assessment Rating Tool for consistency with KPI’s

PEFA Assessment (ESW)

Public Expenditure Review 2010

For MTEF looking

ahead develop a system of forward estimates and budget strategy paper

Integration of the PART framework with the KPI’s for a single performance management system

B. Budget Execution

Assisted in implementation

of decentralize budget execution process (TA)

Guidance on developing model for medium term budget expenditures (TA)

Conducted evaluation of the payment settlement system and IT; upgrade of the fiscal information system (TA)

Initiated work at the

Comptroller for deployment of the integrated financial management system (TA)

Assisted with inclusion of off-budget fiscal operations in budget and financial statements (TA)

Drafted Organic Law on State Audit (TA)

Supported preparation

for integrated financial management information system planning and agency financial management information system (TA)

Developed accrual accounting framework to support output-based budgeting (TA)

Reviewed GFMIS

implementation and issues with the Chart of Accounts for budget-actual reporting (TA)

Assessed implementation of internal control and internal audit framework (TA)

Resolve data

inconsistencies in the consolidated financial report for sign-off from OAG by FY2009/10 budget

Unification of the chart of accounts for budget-actual reporting and internal management reporting

* This is not an exhaustive list of the World Bank’s work on PSR in Thailand. The inputs listed in this table are only those that relate to the DPL.

81

Area EMAL (US$15M, TA) (1998-2003)

PSRL (US$100M for PSR) (1999-2001)

CDP-G I and CDP-G II (2002-2006)

CDP-G III (2007-2011)

DPL (2009 – 2011)

Formulated new accounting standards (TA)

Initiated work on procurement reform (TA)

Country Procurement Assessment (ESW)

Developing cost accounting for public service agencies (TA)

Analyzing the usefulness of the information from GFMIS (TA) Reviewed of the efficacy of external audit (ESW)

Developed plan for full e-procurement (IDF Grant)

OECD-DAC Procurement Baseline Assessment (GPF)

Improving legislative framework governing public procurement (TA from IDF and GPF)

Develop e-budget further to integrate with GFMIS

C. Revenue Management

Developed projects on tax

administration, automated audit system, and tax ID system (TA)

Modernized the documentation and information system and set up the computer cabling system (TA)

Developed microeconomic model to project excise revenues more

Established the large

taxpayer office at the Revenue Department (TA)

Redeveloped the taxpayer ID number system (TA)

Strengthened tax compliance through audit case selection system (TA)

Developed the use of

withholding taxes (TA) Built web-based revenue

projection and evaluation ICT system (TA)

Technical assistance

to Revenue Department on: (i) overall tax structure reform, (ii) transfer pricing taxation, and (iii) taxing used motor vehicles (TA)

Implemented real-time,

pooled online database to strengthen enforcement capacity and introduce a supervision system

- Enhanced the e-Revenue system by allowing taxpayers to use personal ID number for all tax transactions, and

82

Area EMAL (US$15M, TA) (1998-2003)

PSRL (US$100M for PSR) (1999-2001)

CDP-G I and CDP-G II (2002-2006)

CDP-G III (2007-2011)

DPL (2009 – 2011)

systematically (TA) Prepared master and

implementation plans for the Customs Department (TA)

register value-added and corporate income taxes payments online.

D. Service Delivery and Public Sector Administration

Developed results-based

management system and piloted in 7 departments of the Ministry of Commerce; includes providing internet-based software application (TA)

Funded Graham Scott as Public Sector Reform Advisor to the Thai Government

Designed and prepared proposal for Ethics Center , which was thereafter established under OCSC (TA)

Prepared Custom

Administrative Reform Master Plan and training of Customs Dept staff (TA)

Supported the preparation of Privatization Master Plan, which led to restructuring and corporatization of SOEs e.g. Petroleum Authority of Thailand, Airports of Thailand, and Telephone Organization of Thailand

• Results-based

management pilot program extended to 14 departments (TA)

• Conducted functional reviews relating to the allocation of activities within and between the six Economic Ministries; initiated Functional Reviews in other ministries. This led to the enactment of the Public Sector Restructuring Act (2002) which restructured all ministries in Thailand (TA)

• Established a voluntary Early Retirement Program (TA)

• Prepared Senior Executive Service (SES) proposal and identified initial cadre of eligible candidates which was passed by the Cabinet in 2001; the SES is currently in operation (TA)

• Prepared framework for position classification,

A study to assess and

give suggestions on Results-Based management on Good Governance (TA)

A study to develop key performance indicators on good governance for regional public affairs management (TA)

High-level policy note led by Graham Scott which identifies critical gaps, weaknesses, and implementation of on-going reforms (TA)

Report on proposed

revision of roles and restructuring of provincial treasury offices to improve local administrations’ financial management (TA)

Supported survey of customer satisfaction of 138 agencies (TA)

Develops practical user friendly tools that assess

Assist in peer-

reviewing the draft strategy on the Role of the State, which will be presented to the Prime Minister in October 2008 (TA)

Assist in developing development strategies for provincial cluster (part of the implementation of the Royal Decree on Integrated Administration for Provinces and Provincial Clusters 2008) (TA)

Development of framework for Citizen Participation (with the Global Expert Team on Public Sector Reform) (TA)

• The Office of the

Public Sector Development Commission (OPDC) instituted a system of key performance indicators (KPI) for all agencies (developed by agencies); performance against KPI’s monitored by OPDC as a performance monitoring tool

• In 2008 Government agencies implemented the Cabinet resolution to reduce the service delivery time, processes, and direct costs across 10 areas for improving the business climate Parliament promulgated the Civil Service Act (2008) and subsequently the Government changed the grading structure across the civil service in December 2008, in

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Area EMAL (US$15M, TA) (1998-2003)

PSRL (US$100M for PSR) (1999-2001)

CDP-G I and CDP-G II (2002-2006)

CDP-G III (2007-2011)

DPL (2009 – 2011)

(all are now listed firms) (TA)

performance appraisal, variable performance pay and redundancy provisions (TA)

financial impacts of civil service pay and employment policy options (TA)

Report on Decentralization Capacity Assessment (TA)

line with the Act, and started preparing respective implementing regulations for the Act

84

Annex 6. IMF Public Information Notice

85

86

87

88

Annex 7. Thailand at a Glance

Thailand at a glance 9/24/08

East Lower-POVERTY and SOCIAL Asia & middle-

Thailand Pacific income2007Population, mid-year (millions) 63.8 1,914 3,437GNI per capita (Atlas method, US$) 3,400 2,180 1,887GNI (Atlas method, US$ billions) 217.3 4,174 6,485

Average annual growth, 2001-07

Population (%) 0.7 0.8 1.1Labor force (%) 1.1 1.2 1.5

Most recent estimate (latest year available, 2001-07)

Poverty (% of population below national poverty line) .. .. ..Urban population (% of total population) 33 43 42Life expectancy at birth (years) 70 71 69Infant mortality (per 1,000 live births) 7 24 41Child malnutrition (% of children under 5) 7 13 25Access to an improved water source (% of population) 98 87 88Literacy (% of population age 15+) .. 91 89Gross primary enrollment (% of school-age population) 108 110 111 Male 108 111 112 Female 108 109 109

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1987 1997 2006 2007

GDP (US$ billions) 50.5 150.9 206.7 245.8

Gross capital formation/GDP 27.9 33.7 27.8 29.9Exports of goods and services/GDP 28.9 48.0 73.6 68.1Gross domestic savings/GDP 28.4 35.1 31.8 33.4Gross national savings/GDP 27.2 32.8 29.3 32.0

Current account balance/GDP -0.7 -2.1 1.6 2.2Interest payments/GDP 2.1 2.3 0.5 ..Total debt/GDP 40.2 72.7 26.7 ..Total debt service/exports 21.9 15.2 9.6 ..Present value of debt/GDP .. .. 26.0 ..Present value of debt/exports .. .. 35.2 ..

1987-97 1997-07 2006 2007 2007-11(average annual growth)GDP 8.7 4.2 5.1 4.8 5.1GDP per capita 7.4 3.4 4.4 4.1 4.6Exports of goods and services 13.2 7.6 8.6 6.5 7.7

STRUCTURE of the ECONOMY

1987 1997 2006 2007(% of GDP)Agriculture 15.7 9.4 10.7 10.8Industry 33.3 40.2 44.5 43.8 Manufacturing 24.3 30.2 35.0 34.5Services 50.9 50.4 44.8 45.3

Household final consumption expenditure 60.2 54.8 56.7 57.0General gov't final consumption expenditure 11.3 10.1 11.6 9.6Imports of goods and services 28.3 46.6 69.7 64.5

1987-97 1997-07 2006 2007(average annual growth)Agriculture 1.5 3.0 4.8 4.8Industry 11.7 5.4 5.8 4.6 Manufacturing 12.1 6.0 6.1 4.8Services 8.2 3.4 4.4 4.9

Household final consumption expenditure 7.9 4.0 3.3 2.6General gov't final consumption expenditure 5.9 4.2 3.4 8.3Gross capital formation 11.5 3.7 -7.2 -0.5Imports of goods and services 13.8 7.6 1.6 3.2

Note: 2007 data are preliminary estimates.

This table was produced from the Development Economics LDB database.

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

-10

0

10

20

02 03 04 05 06 07

GCF GDP

Growth of capital and GDP (%)

-10

-5

0

5

10

15

02 03 04 05 06 07

Exports Imports

Growth of exports and imports (%)

Thailand

Lower-middle-income group

Development diamond*

Life expectancy

Access to improved water source

GNIpercapita

Grossprimary

enrollment

Thailand

Lower-middle-income group

Economic ratios*

Trade

Indebtedness

Domesticsavings

Capital formation

89

Thailand

PRICES and GOVERNMENT FINANCE1987 1997 2006 2007

Domestic prices(% change)Consumer prices .. 5.6 4.7 2.5Implicit GDP deflator 4.7 4.1 5.0 3.4

Government finance(% of GDP, includes current grants)Current revenue 15.3 17.9 18.3 17.8Current budget balance 1.1 5.2 2.2 0.0Overall surplus/deficit -2.1 5.2 2.0 -1.9

TRADE1987 1997 2006 2007

(US$ millions)Total exports (fob) 11,595 56,725 128,220 137,219 Rice 884 2,080 2,568 2,695 Rubber 799 1,900 5,394 5,886 Manufactures 6,989 48,287 113,382 121,308Total imports (cif) 12,993 61,349 125,975 135,951 Food 601 1,081 1,920 2,243 Fuel and energy 1,717 5,794 25,043 27,385 Capital goods .. 21,647 33,103 39,112

Export price index (2000=100) .. 107 118 121Import price index (2000=100) .. 111 124 132Terms of trade (2000=100) .. 97 96 92

BALANCE of PAYMENTS1987 1997 2006 2007

(US$ millions)Exports of goods and services 14,665 72,504 152,360 167,374Imports of goods and services 14,361 72,634 145,452 158,606Resource balance 304 -130 2,563 8,768

Net income -894 -3,455 -7,037 -7,556Net current transfers 225 475 3,369 4,294

Current account balance -365 -3,110 3,240 5,306

Financing items (net) 1,277 -7,539 9,501 21,975Changes in net reserves -912 10,649 -12,742 -27,281

Memo:Reserves including gold (US$ millions) 5,212 26,968 66,985 92,574Conversion rate (DEC, local/US$) 25.7 31.4 37.9 34.5

EXTERNAL DEBT and RESOURCE FLOWS1987 1997 2006 2007

(US$ millions)Total debt outstanding and disbursed 20,330 109,699 55,233 .. IBRD 3,413 1,728 336 63 IDA 111 98 69 66

Total debt service 3,454 11,810 14,686 .. IBRD 445 296 103 290 IDA 1 3 4 4

Composition of net resource flows Official grants 129 88 119 .. Official creditors 30 5,929 -700 .. Private creditors -103 173 1,693 .. Foreign direct investment (net inflows) 352 3,895 9,010 .. Portfolio equity (net inflows) 499 3,868 5,300 ..

World Bank program Commitments 34 767 0 0 Disbursements 157 443 31 2 Principal repayments 181 194 85 278 Net flows -25 249 -54 -276 Interest payments 264 105 22 16 Net transfers -289 145 -75 -292

Note: This table was produced from the Development Economics LDB database. 9/24/08

-6

-4

-2

0

2

4

6

01 02 03 04 05 06 07

Current account balance to GDP (%)

0

50,000

100,000

150,000

01 02 03 04 05 06 07

Exports Imports

Export and import levels (US$ mill.)

0

2

4

6

02 03 04 05 06 07

GDP deflator CPI

Inflation (%)

G: 17,812

A: 336

D: 227

B: 69

F: 30,069

E: 6,720

A - IBRDB - IDA C - IMF

D - Other multilateralE - BilateralF - PrivateG - Short-term

Composition of 2006 debt (US$ mill.)

Doi InthanonDoi Inthanon(2,576 m) (2,576 m)

K h o r a tK h o r a t

P l a t e a uP l a t e a u

PPiiiinngg

WWaa

nngg

NNaann

PPaassaa

kk

MMuunn

CChhii

CChhaaoopprraayyaaKKhhaaKKhhaaeenngg

YalaYala

PhetchaburiPhetchaburi

ChonChonBuriBuri

NakhonNakhonRatchasimaRatchasima

AyutthayaAyutthaya

PhitsanulokPhitsanulok

Chiang MaiChiang Mai

UdonUdonThaniThani

NongNongKhaiKhai

UbonUbonRatchathaniRatchathani

Amnat ChareonAmnat Chareon

Lop BuriLop Buri

ChiangChiangRaiRai

PhayaoPhayao

LamphunLamphun

PhraePhrae

LampangLampang

Mae Hong SonMae Hong Son

NanNan

SukhothaiSukhothai

TakTak

KamphaengKamphaengPhetPhet PhichitPhichit PhetchabunPhetchabun

LoeiLoei

KalasinKalasin

YasothonYasothon

SurinSurin

Si Sa KetSi Sa KetBuri RamBuri Ram

Sa KaeoSa Kaeo

ChaiyaphumChaiyaphum

KhonKhonKaenKaen

Chai NatChai Nat

MukdahanMukdahan

Sing BuriSing Buri

Ang ThongAng ThongSaraburiSaraburi

Nakhon NayokNakhon Nayok

ChachoengsaoChachoengsao

RayongRayong

TratTrat

SamutSamutPrakanPrakan

NonthaburiNonthaburi

Samut SakhonSamut Sakhon

Pathum Thani Pathum Thani KanchanaburiKanchanaburi

RatchaburiRatchaburi

RanongRanong

SuratSuratThaniThani

PhangngaPhangnga

KrabiKrabi

TrangTrang PhattalungPhattalung

SatunSatun

Suphan BuriSuphan Buri

Uthai ThaniUthai Thani

UttaraditUttaradit

MahaMahaSarakhamSarakham

Roi EtRoi Et

SakonSakonNakhonNakhon

Nakhon PhanomNakhon Phanom

NakhonNakhonSawanSawan

Nakhon PathomNakhon Pathom

Prachin BuriPrachin Buri

Nong BuaNong BuaLamphuLamphu

BANGKOKBANGKOK

MALAMALAYSIAYSIA

CAMBODIACAMBODIA

LAOLAOPEOPLE'SPEOPLE'SDEM. REPDEM. REP.

MYMYANMARANMAR VIETNAMVIETNAM

To o Taipingaiping

To o BerBertamtam

To o MawlamyinetMawlamyinet

To o Möng Panng Pan

To o KengtungKengtung

To o LouangphrabangLouangphrabang

To o Quang TQuang Triri

To o Phnom PenhPhnom Penh

Yala

Nakhon SiThammarat

Phetchaburi

ChonBuri

NakhonRatchasima

Ayutthaya

Phitsanulok

Chiang Mai

UdonThani

NongKhai

UbonRatchathani

Amnat Chareon

Lop Buri

ChiangRai

Phayao

Lamphun

Phrae

Lampang

Mae Hong Son

Nan

Sukhothai

Tak

KamphaengPhet Phichit Phetchabun

Loei

Kalasin

Yasothon

Surin

Si Sa KetBuri Ram

Sa Kaeo

Chaiyaphum

KhonKaen

Chai Nat

Mukdahan

Sing Buri

Ang ThongSaraburi

Nakhon Nayok

Chachoengsao

Rayong

ChantaBuri Trat

SamutPrakan

Nonthaburi

Samut Sakhon

SamutSongkram

Pathum Thani Kanchanaburi

Ratchaburi

PrachuapKhiri Khan

Chumphon

Ranong

SuratThani

Phangnga

Krabi

Phuket

Trang Phattalung

Songkhla

Satun

Pattani

Narathiwat

Suphan Buri

Uthai Thani

Uttaradit

MahaSarakham

Roi Et

SakonNakhon

Nakhon Phanom

NakhonSawan

Nakhon Pathom

Prachin Buri

Nong BuaLamphu

BANGKOK

MALAYSIA

CAMBODIA

LAOPEOPLE'SDEM. REP.

MYANMAR VIETNAM

Piing

Wa

ng

Nan

Pasa

kMek

ong

Mekong

Mun

Chi

ChaoprayaKhaKhaeng

Gul fof

Thai land

Gulfof

Tonkin

AndamanSea

Ko Phuket

Ko Tarutao

Ko Samui

Ko Phangan

Ko Kut

Ko Rong

To Taiping

To Bertam

To Mawlamyinet

To Möng Pan

To Kengtung

To Louangphrabang

To Quang Tri

To Phnom Penh

K h o r a t

P l a t e a u

Doi Inthanon(2,576 m)

96E

100E

104E

104E

20N

16N

12N

20N

16N

12N

8N 8N

THAILAND

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

IBRD 33495

JANUARY 2005

THAILANDPROVINCE CAPITALS*

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES*

INTERNATIONAL BOUNDARIES

0 50 100

0 25 50 75 100 Miles

150 Kilometers

*Province names are the same as their capitals.