Local Government Finance and Bond Market Financing in Thailand

By

Sakon Varanyuwatana

Associate Professor of Faculty of EconomicsThammasat University

Bangkok, Thailand

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Table of Contents

- Section 1: Introduction 2

- Section 2: The Development of Thai Local Governments 3

- Section 3: Local Fiscal Development Before the New Constitution 12 3.1 Early Measures to Improve Local Financing 13 3.2 Thailand Local Government Reform Experiences under the New Constitution 14

- Section 4: Structure of Present Local Finance System in Thailand 18

- Section 5: Impact of Decentralization Process on Local Government Finance

- Section 6: Patterns of Thailand Local government Finance 25 6.1 Pattern of Thailand Local Government Revenue 25 6.2 Patterns of Thailand Local Government Expenditure 28

- Section 7: Existing Regulatory and Institutional Framework for Bond Market Development 30

- Section 8: Impediments to Local Bond Market Development 35

- Section 9: Roadmap to Develop Local Bond Financing in Thailand 36

- Section 10: Recommendations 39

- Section 11: Possibility of Assistance Role of the ADB 40

- Appendix 53

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List of Tables

- Table 1 Total Local Government revenue: 1996-2001 45

- Table 2 Local Government Revenue by Entities in Thailand 46

- Table 3 Local Revenue from Accumulated Funds and Borrowings Fiscal Year 1999 47

- Table 4 Total Local Expenditure: 1996-2000 48

- Table 5 Local Government Expenditure by Entities in Thailand 49

- Table 6 Size of Thai Financial Markets 50

- Table 7 Outstanding Value of Domestic Bonds 51

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List of Charts

- Chart 1 Thailand Government Structure (Before the new Constitution) 43

- Chart 2 Revenue Structure of Local Government 44

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List of Boxes

- Box. 1 Local Government Reform in 1994 12

- Box. 2 The Roles of the National Decentralization Committee 15

- Box. 3 Regional Urban Development Fund (RUDF) 30

- Box. 4 Thailand Bond Market Development 33

- Box. 5 Background of Rating Company in Thailand 37

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Abbreviations

BMA = Bangkok Metropolitan AdministrativeCAO = Changwat Administration OrganizationMA = MunicipalitiesSDA = Sanitary DistrictSEC = Security and Exchange CommissionSET = Stock Exchange of ThailandTAO = Tambon Administration OrganizationThai BDC = Thai Bond Dealing Centre

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Map of Thailand

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Local Government Finance and Bond Market Financing in ThailandSakon Varanyuwatana

Section 1: Introduction

Thailand is a unitary state that has a high degree of centralized fiscal system. Over the part decades there has had various measured to decentralize authority and responsibility to local government. The record of the decentralization can trace back to revolution to transform the country from absolute monarchy to democratic system. It generally recognizes in Thailand that the role of local government must be strengthened to enhance public service provision and democratic in the country. The

Associate Professor of Faculty of Economics, Thammasat University, Bangkok, Thailand

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major task to support the role of the local government is to strengthen their local fiscal system. There have been many attempts to increase the local government capacity in many aspects. But it lacks clear direction and resources to facilitate the intentions. However, the most recent decentralization process in Thailand has been introduced by the new constitution. The new constitution has transformed face of the nation in all aspects. It overwhelmingly restructures Thailand democratic system and reforms the country public administration and public services delivery system. It believes that restructure in local public governance would also support country democratic system. This is mandatory under the decentralization process to devote of public administration that previously carried out by the central or higher agencies to local governments. The role of local government has regarded as a key element to ensure of the new democratic system and more active roles in public services to people in the country. The devolution of public services delivery by the local governments expect to be mechanism to more effective way to meet the basic needs of the people that could lead to local political reform and social responsibility.

An importance element of the decentralization in Thailand is to increase fiscal capability of local governments to finance their own local public services. Local governments in Thailand have increasing role under the new constitution in providing public services. Number of fiscal responsibilities traditionally associated with the central government has been progressively decentralized to local governments. The purpose of the Thailand fiscal decentralization is aimed to build up fiscal autonomy and responsibilities of local governments. Based on the public finance principles, public provision should carry out by the smallest jurisdiction capable of internalized its benefit and costs. However, the principle can not be materialized due to strictly control of the central government. The local government enactment may vastly provide fiscal power for each type of local government to mobilize its own sources of revenue from tax and non-tax revenues, and other conventional local revenue sources. In fact, the local government in Thailand remains highly dependence on the central government financial assistance. On the revenue side, the local governments are unable to mobilize resources in their jurisdictions to finance an increase volume of expenditures. These are due to few and narrow tax bases assigned for them and limited in revenue generating capacity. Under the new constitution the central government has to increasingly transfer budget and functions that previously under its control to local government. As a result of rapid decentralization, local government must strengthen its fiscal capability to handle local infrastructure investment. This would put more fiscal pressure on the local governments due to limited revenue generating capacity from conventional sources. The local governments have to look for other sources of revenue to finance their expenditure burden. Borrowing has been suggested as an alternative revenue source for Thailand local governments. The arguments in favor of borrowing are three reasons. First on pragmatic reason, the amount of fund needs for the expenditure is too large to raise from local own revenue sources even with the transfer revenue from the central government to secure long-term investment in infrastructure for local development. Second, the local infrastructure need to accommodate future growth is needed maintenance today. The third reason is that it is more equitable and efficient to have those who receive benefit from local public services in overtime contribute to the costs of investment. But it is necessary to design local fiscal system from the least developed to meet such basic principle of autonomy devolution and to meet mandatory condition of a relatively well-developed financial market to have a prudence local financial system.

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Financial sector in Thailand is sophisticated and well developed to international standards in many aspects. Many financial institutions have been established to serve fast growing domestic financial section. But local bond financing in Thailand today remains not exist. There is lack of awareness on benefit of bond financing and technical knowledge among local government authority and people involved. It is why there is no support or development from any agency on how the local government can gain direct access to the capital market. Assess into the market it requires many resolutions that local government in Thailand must prepare to qualify as a prudent borrower. Without fully understand of consequences from bond financing it may do harm than good to the local government and perhaps affect the country macroeconomic policy. If there is uncontrollable access to capital markets and mismanagement of budgets by local government, it could jeopardize stability on the national economy. For this reason, local budget in Thailand is subjected to tightly central control and monitoring. Such rule may, on other hand, helps to enhance creditworthiness of local government, yet it can also render to inflexibility or negative incentive for local bond market development.

The paper intends to provide country background of the on going fiscal decentralization attempts under the new constitution and possibility of introducing local borrowing as alternative revenue source for financing local public services investment. Before analysis of possibility of local borrowing it is needed to understand present local government structure and its financial condition as basic requirement for any borrowing. Particularly, there has been attempt for decentralization to enhance local independence and financially self-sustainable by introducing the new constitution as legal framework for initiative.

Section 2: The Development of Thai Local Governments

The public administration of Thailand has evolved from many reformations. The present public administration structure in Thailand can be categorized into 3 separated system as showed in chart 1. The first is central or national government that aggregate authority to administer all concerning national affairs. The executive body of the central government composes of agencies from ministries, and various departments. Every ministry divides and delegates its power and decision making to its representatives at provincial level. The second level of public administration is the ministry field staffs are assigned hierarchy to govern public administration at provincial (Changwat) level called regional or provincial administration. The provincial governor, who is appointed by the Ministry of Interior, acts as chief of provincial field staffs to supervise them to ensure that they comply with their powers and functions that delegate from central ministries. The provincial governor and central staffs act as representative of the ministries that they are attached to within the province rather than account to local citizens. They must strictly follow policy guideline provided by their own ministries.

The final component of Thailand public administration is local government administration. The central government delegates autonomy to local government to govern the local affairs in response to demand from local people. Earlier all the local governments are under supervision of the Department of Local Administration, Ministries of Interior until the new constitution of 1997 introduce.

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Prior to the new constitution of 1997 there were 6 forms of Local Administrative Entities that are Sanitary District, Municipality, Changwat (Provincial) Administrative Organization (CAO), Tambon Administrative Organization (TAO), Pattaya City and Bangkok Metropolitan Administrative (BMA). They have been continuously developed over the past 100 years. The following is a brief description of their historical background.

The Sanitary District. The sanitary district is the first type of local administration unit in Thailand. Bangkok Sanitary District was established in 1898 as an experimental of local administration. The idea was adopted from British Colonization local governing units such as in Malaya and India. The functions are to taking care of local sanitation and health. In 1908, the Sanitary Act was issued to establish sanitary district in big cities around the country. It was the first trial of the central government to delegate some activities concerning with local administration, such as sanitation, cleaning and controlling of buildings to be carried by local government unit, and financed by local household and commercial tax and fees. After the 1932 revolution, all sanitary, 35 districts were upgraded to Municipalities through the policy oriented toward one type of local self-government. However, the expansion of municipality establishment numbers was very sluggish due to the difficulty of financial constraint since most revenue used to pay for the official salary. The government then returned to promoting sanitary districts through the 1952 Sanitary Districts Act. Sanitary Districts were supposed to act as training ground for officials outside of municipalities, CAOs and TAOs and were to evolve toward municipalities. The establishment criteria of sanitary districts based on population size, area sizes, and revenue collected. The structure of sanitary committee does not have distinction between a legislative body and executive body, but consists of both ex-offcio members and locally elected people.

All of present sanitary districts are phased into Municipalities according to the 1999 Law. This is part of the requirement as state in the new constitution that all local affairs must govern by the local representative only. To avoid any conflicting with the new constitution and to enhance role of the sanitary districts the central government decided to upgrade all sanitary districts to be municipalities. The upgrading of the sanitary districts to be municipalities is due to their administration structure does not binding with the new constitution which indicates that all local administration must conduct by elected administrative body. The promotion, however, does not take fiscal conditions of sanitary districts into considerations. As a result, it causes great fiscal disparity between old municipalities and the newly established ones because they have unequal revenue bases and economic conditions. To solve the problem the central government must allocate revenue to fill revenue gap. There is attempt to formulate revenue allocation criteria with many indicators but allocation formula used is on ad hoc basic that widens the revenue gap and has worsened both horizontal and vertical imbalance among local governments.

Municipality: The municipality can be considered as the most important form with the greatest degree of autonomy. Their structure, consists of a legislature and an executive, allows less interfere for central government. They are first established by the Municipal Act of 1933, after the revolution in 1932. According to the Revolution Party, the municipality was to be an example to decentralized autonomy to the local

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level, with the establishing them in all 4,800 Tambons across the country. However, the development of the municipalities had been stagnated after introduced. During 1946-1971, only 3 municipalities were newly established. Thereafter, Sanitary Districts were reintroduced (1952 units) with the intention of potential upgrading.

There are 3 types of Municipalities: Nakorn, Muang and Tambon, classified by their population, revenue capacities, and ability to provide public services. They are established in the densest area in every province and other areas that meet the required criteria. In 1998 the pre-decentralization implementation era there were 150 MA through out the country: 9 Nakorn, 90 Muang, and 51 Tambon municipalities.

The basis for classifying the municipalities is as followed: Nakorn Municipality must have 50,000 or more inhabitants; average population density is not less than 3,000 persons per square kilometer with the adequate revenue for discharge of its stipulated duties. Muang Municipality must have 10,000 or more inhabitants; with population density is not lee than 3,000 persons per square kilometer; or is the site of provincial administration office with the adequate revenue to perform the duties. The Tambon municipalities must have over 7,000 population with population density over 1,500 person per square kilometer, and annual revenue (exclude subsidy) over 12 million bath.

According to the Municipal Act, municipality organization consists of municipal assembly head by lord mayor and municipal council. Municipal assembly members are elected from citizen in its jurisdiction.

Under the Municipal Act of 1953, all municipalities are able to collect revenue from:

(1) Taxes;(2) Fees and Fines;(3) Income from assets;(4) Public Services fees;(5) Revenue from bond issuance and borrowing (prior to municipal bond

issuance and borrowing they must receive approval from municipal council and the Ministry of Interior);

(6) Borrowing from central ministries, departments, organizations, and other public entities;

(7) Subsidies from central government and CAO;(8) Donation;(9) Other revenue as indicated by laws.

According to the establishing of municipality law, they have the right to collect taxes in forms of local levied taxes, surcharged taxes and shared taxes. Local levied taxes are house and rent tax, land development tax, signboard tax and slaughter tax. Also they are legally authorized to add a surcharge of up to 10 percent of certain central-government taxes. All these taxes are often called surcharged taxes that are:

(1) Business Tax(2) Gambling Tax (3) Liquor and Non-alcoholic Tax(4) Rice-export Tax

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(5) Value-added Tax

In addition, the municipalities can receive tax revenue that is levied and administrated by central government but the total receipt is given to the local government is motor and vehicle tax.

Municipalities duties specified by establishing law categorized into two categories of function, compulsory and discretionary duties. The scope of responsibility varies with different type of municipalities. Functions under responsible of each type of municipality are as follows:

1. Compulsory duties

Tambon Municipality Muang Municipality Nakorn Municipality1. Law and order

maintenance2. Provision and

maintenance of land and water way for communication

3. Keeping cleanliness of streets, walkways and public places as well as disposal of solid waste and sewage

4. Prevention and control of communicable disease

5. Provision of fire-extinguisher or fire engine

6. Providing public training and education for local people

7. Promotion of development of woman, children, juvenile, elderly, and disable people

8. Maintenance of art, traditions, local wisdom, and culture

9. Performing other tasks specified by the orders of the Ministry of Interior or other law as municipal duties

Performs the same duties as Tambon municipality and additional duties as follows:1. Provision of water

supply or clean water2. Provision of abattoir or

slaughter house3. Provision and

maintenance of places to treat illness

4. Provision and maintenance of water way

5. Provision and maintenance of public toilet

6. Provision and maintenance of electricity and lighting

7. operate pawn shop or local credit extensions

Performs the same duties as Tambon municipality and additional duties as follows:

1. provision and maintenance of social welfare for mothers and children

2. performing other tasks which is necessary for medical care tasks

3. control sanitation and hygiene of food shop, theater, and other entertainment places

4. administer dwelling and improvement of slump areas

5. provision and control market place, port, ferriage, and parking space

6. provision of city planning, and building control

7. tourism promotion

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2. Discretionary duties:

Tambon Municipality Muang Municipality Nakorn Municipality1. Provision of clean

water or water supply2. Provision of abattoir3. Provision of market

place, ports, and ferriage

4. Provision of tomb and crematorium

5. Occupational promotion for the inhabitants

6. Provision and maintenance of medical care centers

7. Provision and maintenance of electricity or other means of lighting

8. Provision and maintenance of drainage system

9. Operation of municipal enterprises

1. Provision of market place, port and ferriage

2. Provision of tomb and crematorium

3. Occupational promotional for the inhabitants

4. Provision and maintenance of social welfare for mothers and children

5. Establishment and maintenance of hospital

6. Provision of public utilities

7. Performing other tasks necessary for public health

8. Establishment and maintenance of vocational school

9. Provision and maintenance of sporting places and athletic

10. Provision and maintenance of parks, zoos, and other recreational places

11. Upgrading of dwelling and maintenance of local cleanliness

12. Operational of municipal enterprises

Performs the same duties as Muang municipality as specified by law

Source: Municipal Act of 1953, Amendment of municipal Act of 1990After the introduction of the new constitution the functional and the revenue

assignments of municipalities has been redefined (the new functional and revenue assignments can see in appendix Table A.1). It can see that the municipalities have been broadened their functional responsibilities under the new constitution. Changwat Administrative Organization (CAO): they are provincial unit of local government. It was initially created by the Changwat Administration Act of 1955 to provide government service to all inhabitants who are not within the geographical jurisdiction of a municipality, a sanitary district or a TAO. According to the 1955 Act, the CAO has 2 major components: the elected Changwat assembly, and the provincial governor, who acts as its chief executive. The assembly has the main function of meeting annually to pass the annual provincial budget and to audit the previous year’s expenditures. However, in the year 1997, the CAO Act was issued to abolish the governor’s role from being the chief executive by position; henceforth the chief must

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be chosen among the elected members of the assembly only. The 1997 law provides new functions for the CAOs to have responsibility in coordinating and providing support for local government units within their districts. The intention is to make the CAO as the first level of local government within each province. Thus duties of the CAO are then designed to be different from other local governments. Duties of the CAO are as follows:

1) Prepare CAO planning, and collaborate with provincial plan;2) Support Tambon council and other local administration in development;3) Coordinate and jointly operate duties of Tambon council and other local

affairs;4) Provide grant to others local government units as laws indicated;5) Protect, maintenance and preserve forest, land, natural resources, and

environment;6) Provide education services;7) Support democracy, equity, and people rights;8) Support people participatory rights in local development;9) Support suitable technological development;10) Provide and maintenance public water sewage;11) Provide public garbage disposal and waste treatment;12) Administer environment and pollution;13) Administer and maintenance land, and water transport terminals;14) Support tourism;15) Support commerce, investments by joint venture or syndication with

others;16) Construct and maintenance land and water transport hub with other local

governments;17) Provide and maintenance central market;18) Support sport, athletic, tradition and local culture;19) Provision of provincial hospital, medical treatment, protection, and control

contagious disease;20) Provision of museum;21) Provision of mass transit and traffic engineering;22) Protect and provide disaster relief;23) Maintenance of public orderly;24) Support other government agencies and local government in local

development;25) Provision of social welfare services for child development, woman,

elderly, and disadvantage;26) Provision other services as mandated by other laws or decree.

On the revenue side, under the Plan and Procedures for Decentralization Law, the revenue sources that assigned to CAOs are;

1) Petroleum and Petroleum Products Tax2) Tobacco Tax 3) Value-added Tax 4) Specific Business Tax5) Vehicle Tax 6) Education Tax7) Bird-nest Tax

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8) Mineral Tax9) Hotel Receipts Tax10) Fees, Fines, and License Permit Fees11) CAO public utilities income.

Bangkok Metropolitan Administration (BMA): The BMA is a special form of local government. It was established in 1972. It was created by merging all local government units within the Bangkok and Thonburi boundaries into one government entity with its own unique organization and functions. The BMA government consists of an assembly body (similar to other local government units) and the governor. The BMA assembly acts like a legislative body reviewing and supervising all administrative work of the governor and his staff and proposing and passing city ordinances. Assembly members and the governor are directly elected by citizen of the BMA. The term for the Assembly and the governor is four years. The governor administers his duties with the assistance of four appointed deputy governors.

Currently, BMA is under the BMA Act 1985. Under the 1985 Act, the BMA revenue is as follows:

(1) Taxes;(2) Fees and fines;(3) Income from assets; (4) Public utilities income;(5) BMA Business;(6) Issuing BMA bonds and borrowing from public agencies and corporate;(7) Subsidy and grants;(8) International assistance;(9) International borrowing;(10) Revenue from state-enterprises operating in Bangkok.

According to the Decentralization Plan and Procedure Law of 1999 that issued in support of the new constitution indicates taxes that BMA can collect from are:

(1) Land and Building tax(2) Land Development tax(3) Signboard tax(4) Petroleum and petroleum products tax(5) Tobacco tax(6) Value-added tax(7) Specific business tax(8) Excise taxes on liquor and tobacco(9) Education tax(10) Vehicle tax(11) Gambling tax(12) Mining royalty fee(13) Animal slaughtering tax(14) Hotel tax(15) Airport fee(16) Real-estate registration tax

Pattaya City: Pattaya city is a newly established local self-government form. It is a chartered city created by Pattaya City Act of 1978 similar to city management in the

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United States. The city itself has been developed from Pattaya sanitary district. But the rapid growth of the district as a tourist attraction made the district incapable of handling problems and urban development. Hence the Pattaya City was established with greater independence and flexibility. Basic functions of Pattaya city council are to oversee planning and policy implementations for city development and to pass city ordinance that is not in conflict with national laws.

By the Pattaya City Act of 1999, the Pattaya City consists of Pattaya Council and Pattaya Mayor. The City can gain revenue from;

(1) Taxes;(2) Fees, fines, and permit fee;(3) Property income; (4) Pattaya social services;(5) Pattaya business income; (6) Issuing Pattaya City bonds;(7) Borrowing including borrowing from aboard;(8) Subsidy;(9) Oversea assistance funds.

Additionally, under the Decentralization Plan and Procedure Act of 1999, Pattaya City sources of revenue is assigned to be the same as sources of revenue of Municipality and TAO.

Tambon (Village) Administrative Organization: The TAO is the latest form of the local government in Thailand but it is the smallest unit of local government. Tambon administration was first established under the Tambon Authorities Act of 1956, revised in 1968. TAO was meant to be a delegated unit from central government at the village level. TAO expenditures are financed through appropriations from the Department of Local Administration under the budget of the provincial council and from the Department of Community Development through its rural program budget. In the year 1995 Tambon Council and Tambon Administration Organization Act was introduced. In the past TAO has not been a legal entity. This means that they have no legal power to perform public functions. It makes TAOs and Tambon Council becomes under financial and legal constraints to fulfill their assigned functions. On financial side, they have to rely on only source of finance from central allocation through regional administration.

However, after the TAO Act of 1995 is introduced, it gives legal entities for all the TAOs. The law also changed the status of kamnun (Sub-District Chief) and village header completely. Under the new law, kamnun and village head man is limited to being only central government officer; the executive role is now to be fulfilled by TAOs members who must be directly elected from local people. Moreover, being legal entity enables TAOs to issue their own regulations and to developing plans for their areas. This is an improvement over the pre-1995 Act situation when they had to strictly perform public services as commands from Ministry of Interior.

According to the Tambon Council and TAO Act of 1994, the Tambon council revenue consists of:

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(1) Taxes (comprises of Land and Building tax, Land Development tax,

Signboard and Slaughter taxes);(2) Fees, fines;(3) Gambling tax; (4) Value-added tax, Business tax, Liquor tax, Motor and Vehicle tax

(allocated from CAO after its establishment);(5) Central-government subsidy;(6) Income from assets;(7) Public utilities revenue;(8) Donation;(9) Subsidies from other government agencies;(10) Other revenue as law indicated.

A Tambon Council can be promoted to be TAO if it has regular revenue more than 150,000 baht a year or the average for 3 years is able to evaluate to TAO. The only thing that make TAO different from the Tambon council is its structure of administration that the TAO organization consists of both council and committee who act as executive body of the TAO.

TAO revenue is come from; (1) Taxes;(2) Fees and fines;(3) Income from assets;(4) Public utilities revenue;(5) TAO business;(6) Central government subsidy;(7) Borrowing from public agencies or corporate;(8) Other revenue as law indicated.

The Tambon Council and TAO Act of 1994, 1995 indicate that TAO can levy taxes on Buildings and Land, Land Development, Signboard, Animal Slaughtering, Educational tax, and Bird-Nest tax. TAO also received shared tax on motor and vehicle tax, and surcharge taxes on Specific Business tax, Liquor tax, Gambling tax, Value-Added tax, Tobacco tax and Mining Royalty tax. Also TAO receives fees from underground-water use, airport use, and also concession fee from fisheries, mining, timber, petroleum exploration, and National-Park fee from central government as well.

Box. 1 Local Government Reform in 1994A significance change of local government reform in Thailand is 1994 law

gives juristic body legal status to all Tambon councils and creates the Tambon administrative organization (TAO). The Tambon council consists of one elected member from each village plus ex officio members who are the kamnan (subdistrict chief) and the member village chiefs. In the event of a council dissolution, only the ex officio members would remain until new elections could be held. Juristic body status under Thai law, confers the rights to: 1) enter into contracts; 2) levy taxes and collect fees and fines; 3) borrow from commercial sources; and 4) receive subsidies from the central government. A Tambon council which collected more than 150 thousand baht (roughly US $ 4000 at 1999 exchange rates) for three consecutive years would be eligible to be upgraded to a TAO. TAO consists of a locally elected

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legislative assembly and a local executive council, a structure somewhat similar to that for municipalities in Thailand.

The purpose of the 1994 Law is to loosen the control from Ministry of Interior

and give more administrative freedom to TAOs. It is also a means to generate more local participation. Before the changes, the administrative line of power in the TAO comes directly straight from Ministry of Interior into the villages. Every decision is made centrally, and people had little say in local affairs. Therefore, many public services provided by the village headman and Kamnun need not necessarily meet the local demand.

The major cause of these changes is the public trend toward the more empowerment of local areas as well as a growing recognition that over centralization was leading to heavy national burdens and questionable performance locally. In addition the new constitution has ignited public demand for more decentralization. One crucial condition stated in the new constitution is the limit role of the village headman and Kamnun from local administration and executive functions. It leads to changing of local political condition and enhances more people participation in local affairs.

There have also been a number of measures to increase the role of elected officials in local political and economic affairs:

The CAO, formerly headed by the provincial governor (a Ministry of Interior appointee), is now headed by a directly elected official;

Kamnan and phuyaiban (sub-district and village headmen), who are presently appointed members of various local development committees must now be directly elected.

Therefore there is a clear distinction between the role of central government agents (e.g. village headman, kamnun) and those of local representatives. If village headman and kamnun desire to participate in performing local government administration, they must resign their position and enter the election process on thesame basis as ordinary people. This process would clarify the role of TAO executive and separate the function between the TAO’s executive and legislative by being the check and balance mechanism.

Section 3: Local Fiscal Development Before the New Constitution

Prior to the new constitution, local government reforms had been fragmented and focused on certain local governments. The changes occurred at different time span and it never accounted from broad perspective that might have effects upon other type of local governments. One noticeable point was that the previous reform focused mostly on administrative and bureaucratic structure, very few attempts tried to improve financial conditions of local governments. After all of the efforts the local finance has remained under tight control by central agencies. Result from the efforts has been only superficial level.

3.1 Early Measures to Improve Local Financing

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Efforts have been made to increase the revenue resources flow to local governments through a number of central fiscal reform. The most significance intention to improve local fiscal conditions is the 1997 constitution. However, initial major attempt to allocate more revenue sources for local government can traced to local revenue reform in 1992. These initiatives have involved: (1) increasing (or improving) the revenue instruments available to local government; (2) increasing the proportions allocated to local governments in surcharged and shared taxes; and (3) changes in the allocation formulae for central government grant programs. The following revenue reform has been introduced, some of which have already been implemented.

1. Reduction in the tax collection fee by central government on the value added tax from 5 to 3 percent;

2. Transferring tax levy on bird nest to local entities that the tax is collected; 3. Improvement of the criterion for allocating the prior of the value added tax

revenue to local self-governments (currently 10 percent of the 7 percent tax) from a formula based on the amounts of business tax revenue collected by each local government area in 1960 to be allocated base on the amount of business tax revenue currently collected by each area;

4. Increasing the excise duty on tobacco by 10 percent and wholly allocate the revenue generated to local self-governments;

5. Transferring a portion of duties on natural resources e.g. minerals petroleum, forestry and fisheries levies, from the central government to local governments;

6. Reallocating the fees generated on the transfer and sale of land, and properties to the local governments. With the current system the fee is set at 2 percent of property value with 1.8 percent of the 2 percent annual fee being retained by local government and 0.2 percent accruing to central government;

7. Increasing vehicle registration fees and transferring allocation of automobile annual registration and transfer taxes from the Land and Transport Department;

8. CAO have been given the power to levy taxes on cigarettes, petrol and taxes on local resources (e.g. bird’s nest taxes, license fees for fishing or fish hatcheries, and taxes on logging), formerly collected by the central government and not directly shared, have been transferred to the relevant local governments;

9. Combining the land and building tax, and land development tax to a single property tax, based on market value of land and property. The new property tax system is expected to boost local self-government revenue substantially because the current is highly inefficient due to many exemptions and loopholes.

Implementation of these reforms required amending of more than 40 related laws that would be time consuming and eventually might not meet the needs of local demand that impeded from inadequate revenue. Eventually of all 9 measures to improve local revenue conditions, only reduction of VAT collection fee, and transfer of bird nest tax became effective while the rest of the measures had been disregarded because of changed in national policy toward local fiscal devolution. As result, the size of local revenue received from the adjustment in revenue bases remained

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relatively insignificance and virtually no major impact on local revenue conditions of any local governments. In addition, during economic crisis central government also implemented some economic stimulus package. One of them was reduction of fee from transferring property and land from 2 percent of total property value to 0.01 percent. The measure had significantly hampered local revenue capacity. Furthermore, during political reform during 1995-1996, there was attempt to draft a new national constitution and decentralization received attention as a scheme to encourage people participation in democratic system. As result, the new constitution provides fresh opportunity to overwhelmingly reform local fiscal system. The rest of the local fiscal reform efforts that introduced, then, had not been progressed.

3.2 Thailand Local Government Reform Experiences under the New Constitution

During the 1990s Thailand has witnessed a number of reforms moving toward a larger and increasing participatory role for local governments. While a number of these reforms remain to be translated into more concrete form they offer the potential for a significant change. Among the most important reforms are: (1) institutional changes at the Tambon level, (2) an increased role for elected officials at the provincial, sanitary district; (3) a new constitution created with substantial inputs from civil society; and (4) a number of tax (and budgetary) initiatives aimed at generating more revenue resources for local government. However, the most concrete effort for local administrative reform is initiated by the new constitution that has been promulgated in 1997.

With the attempts to decentralize fiscal autonomy to local governments the 1997 Constitution gives a further effort for fiscal decentralization. It is the first time in Thailand history that the decentralization is clearly stated in the constitution. There is a section of the constitution specifically devoted for the decentralization. According to Article 285 of the new constitution, all local administrative organizations shall have a local assembly and a local administrative committee or local administration. The members of the local assembly must be directly elected; and local executive may be directly elected or may be chosen from member of local assembly. Direct democracy is enhanced further by Article 286. Under the article 286 of new constitution allows three quarters of the participating voters (who must represent at least half of the eligible voters) to request dismissal of members of the local assembly or local administrators. By article 287 of the constitution allows a group representing at least half the eligible voters to request the chairman of the local assembly to issue a local law or regulation (a draft of which must accompany the request). These constitutional changes represent a major potential step forward. Previously some local government administrators could be appointed by the governor and local citizen had no rights to recall local officials or to propose their own laws and regulations which required approved by the provincial governor.

In addition, and perhaps one of the most important, the 1997 Constitution gives a substantial impetus to an expanding role for local governments. The constitution indicates that the central government shall delegate autonomy to localities in accordance with the will of the people (excerpt from article 282); that any locality which meets the conditions of self-government shall have the right to be formed as a local administrative (excerpt from article 283); and that any supervision by higher

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levels of government shall be for the purpose of protecting the interests of local citizens or the nation as a whole and should not substantially affect the principle of self-government according to the will of the people in the locality (excerpt from article 283).

To provide for the continuity development of decentralization, the article 284 calls for the creation of a law on the plans for and the procedure of decentralization which must covers the follow requirements: (1) the delineation of powers and duties between the State and local organizations in the provision and management of public services; (2) the allocation of taxes and duties between the State and local administrative organizations; and perhaps the most crucial one is (3) the creation of a committee called the National Decentralization Committee to carry out tasks (1) and (2), consisting of equal numbers of representatives of State agencies1, Representatives of local organizations, and other experts on decentralization.

Box. 2 The Roles of the National Decentralization CommitteeThe national commission is preside by the Prime Minister to ensure neutrality

from other state agencies. Moreover this commission shall review the delineation of responsibilities and resources every five years.

This national decentralization committee is responsible for:- Producing a decentralization Plan for submission to the cabinet and parliament approval that: - Defines the relationships an functional responsibilities between the central and local governments, as well as among local governments, including the allocation of functions, subsidies, and central budget- Defines local revenues sources and identifies means to improve local tax and revenue mobilization- Outlines the stages and means to transfer functions from the central government to local governments- Recommends means to coordinate the transfer of public officials from the central agencies, to new assignments of functions and resources- Proposing criteria for allocating resources among different levels of government including subsidies and central budget- Proposing legislation, decrees, regulations, administrative guidelines and rules to implement the decentralization plan in a timely manner- Proposing a system to achieve transparency and public participation at the local level in terms of government functions- Monitor progress in implementing the decentralization plan.

As it is indicated the new constitution strongly supports decentralization and specifies principles of local autonomy. Objectives envisioned in the constitution

1 The members of the national decentralization committee comprises of Prime Minister, Minister of Interior, Minister of Finance, permanent secretary of Ministry of Interior, ministry of Finance, Education, and Public Health, secretary of State Council committee, secretary of Civil Servant Committee, Budget Bureau Director, Secretary of National Economic and Social Development Board, and Director General of Local Development Department, other 12 representatives of each type of local entities divided equally, and 12 experts from various fields that related to local and public administration.

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include increasing the share of local government expenditures through transferring of responsibilities from central government, assigning more revenue sources to local governments, revising grants transferring system to be more transparent and predictable, and promoting local accountability. The first task of decentralization initiative is to clearly define central-local expenditure functions, i.e. identifying function assignments that are compulsory or optional for local government to perform. Only the clarity in expenditure assignment then can the overlapping functions performed by the central and local government can be eliminated. Consequently, a clear expenditure assignment between the central government and local government would provide idea of the appropriate revenue size of the local governments. For functions that most suitable provide by local governments, the central government‘s role will be limited to only monitoring and regulating outcomes and giving technical assistance for local governments.

It is observed that there are many duplicated functions between central agencies and local government and across local governments themselves. This bring up confusion in public services delivery whether it under supervision of which agencies, and it has caused confusion in budget allotment. The first task under the Plan and Process of Decentralization Law of 1999 is to clarify function assignments vertically between central agencies and each type of local government, and across local government entities. The principles that apply in function assignment are as follows:

1) Any duplicated functions means any functions of providing public services that any laws assign power and responsibilities to the state and local government to carry out the same functions and that the local government has preformed the functions already.

2) Any functions that the state performs in the boundary of one local government means any functions that any laws prescribe the state and local government to have power and responsibilities to provides services, and local government do not perform or have never performed those functions.

3) Any functions that the state provides services in the boundary of one local government and have impact on another local government means any functions that the state has power, responsibilities and fund and that the state has performed those functions in more than one local government.

4) Any functions according to the policy of the government.

Delineating of function responsibility involve re-categorizing duties that each local government must be in charge of providing them for local citizens. The law that has been issued in support of the new constitution called the Plan and Process of Decentralization Law of 1999 provide details of functional responsible for each type of local government. The law reclassifies functions for municipalities, Pattaya city, and TAOs to have identical 30 functions, and 29 functions for CAOs, while the BMA can perform all the functions from both groups. (The details of these functions can see in appendix)

Similar to rearranging of expenditure, the law reassigns revenue sources for municipalities, TAOs, and Pattaya to be the same, and CAOs have different set of revenue sources. The BMA as special local government entity, is able to mobilize

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revenue from both groups combined. (The details of revenue sources for each group can see in appendix)

Perhaps the most importance feature of the Plan and Procedure for Decentralization Law is mandatory of fiscal target to be achieved and also reclassifies revenue sources for each local government. Unlike expenditure side, the law provides mandate that government must devolve revenue of local government at least 20 percent of total central government revenue, and the share must increase to not less than 35 percent the fiscal year 2006. The goal of 20 percent local share of revenue is achievable by transferring or devolving of central transfer revenue to local government. An importance note is that the on going financing decentralization may lead to macroeconomic disaster if financing precedes functional assignment of responsibility. Some evidences have paced for the concern. The Budget Bureau under instruction from the central government has relinquished budget of central agencies and distributed to local government. However, actual function transferring can not proceed as plan due to resistance and ignorance of central officers.

Furthermore, there is need for capacity buildings program for local government in revenue generating to be self-sustained and accountable for their public services. To do just that the law categorizes revenue sources for each local government. Unlike previous laws, the Plan and Process for Decentralization law specifically regroups municipalities, Pattya city, and TAOs together and identify the same 20 revenue sources for them. Some of the revenue are newly introduced such as education tax, or provide opportunity to improve revenue generating capacity of local government, for example, increasing the surcharge rate of the VAT, and excise tax from 10 percent to 30 percent. However, there is a major set back from the law; that is the law itself does not overrule the previous laws and it does not provide solution in how to improve the existing tax revenue sources. The weaknesses of the existing tax revenue sources remain intact. For example, there is not mention of how to resolve the Land and building tax that should has been major contribution to local levied revenue but it is weakened by many exemptions and poor administration that are results of out of date tax law. Therefore, it creates fiscal gap between local revenue generating and fiscal burden from central function transferring.

Yet, the structure of each revenue source under the Plan and Procedure for Decentralization Law still does not affect from the changes. The only obvious changes that occurred have been on increase of the share of local government revenue to total central government revenue and distribution formula of revenue among the local governments. The weaknesses of local tax revenue remain intact. Yet, many new taxes are introduced, but so far none have become realistic.

Section 4: Structure of Present Local Finance System in Thailand

This section aims to provide a detail of revenue structure of local government in Thailand. The structure of local government revenue in Thailand composes of regular and special revenue. Tax and non-tax revenue sources are categorized as regular revenue while subsidy, trust fund and borrowing are special revenue. The tax revenue sources for Thailand local government composes of both locally levied taxes and shared taxes. On the other side there are also many non-tax revenue sources. It

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is, then, worthwhile to investigate the detail of structure of taxation in local government financing. The structure of local revenue sources is presented in chart 2.

Structure of Locally Levied Tax for Thailand Local Government

1. Tax Revenue

There are two types of local tax revenues: locally levied taxes, and shared taxes. For the locally levied taxes comprises of land and building tax, land development tax, signboard tax, and animal slaughtering duties. These taxes are levied and administered by the local governments. The detail of each tax can be described as follows:

1.1 Locally Levied Taxes

The tax under this category is locally administering. However, all of the tax bases and rate are still under control of the central government. The taxes under this category are:

1.1.1 The Land and Building Tax

The tax is levied on houses, buildings for commercial and manufacturing purposes. It was initially levied only in Bangkok but later it was extended to include all municipalities and sanitary districts, and in 1972 to include CAOs. After the Law for Plan and Process of Decentralization introduced in year 1999, every local government entitle to collect this tax except the CAOs. The tax rate is 12.5 percent of the annual rental value of the property. Annual rental value calculated from the rent received during the previous year as reported by the property owner. If the property is not rent its assessment would on the sum which the property might be reasonably expected to rent from year to year. Thus, this tax is essentially a rent tax where owner-occupied properties generate no rent value and therefore are not taxed. Hence the tax is tend to violate horizontal equity principle. The obstacle to make this tax to become a good revenue source for the local government is its exemption for own-occupied residential house and buildings, weak enforcement, and tax evasion.

1.1.2 The Land Development Tax

This tax can be considered as a real property tax for Thailand. The tax base is value of land. The tax requires every land-owner must pay the land development tax. The crucial issue of this tax is assessment of the land value. are responsible in assessing the land value. The value of three recent sale values in the district within one year of each local government is use as medium value or benchmark for tax calculation. The assessed values once determined are used for a period of four years. A local committee appointed by the governor or the chairman of the municipal council is assigned to reassess land values for every four years or sooner if they deem appropriate.

1.1.3 The Signboard Tax

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This signboard tax is a tax imposed on any signs or billboards that show name, trademark and product for the purpose of advertisement. The tax is calculated base on the signboard area, number of foreign language characters contained in the advertisement.

1.1.4 Animal Slaughter Duties

These duties are levied on animal slaughtering. The rate is varied subject to animal types.

1.2 Surcharged/Shared Taxes

The characteristics of this type of tax revenue is its base is under central government responsible to collect the tax and give to local government partially or in full amount of tax collection. There are several taxes that can be classified under this tax group. The brief discussion of these taxes are as following:

1.2.1 Surcharge Taxes

1.2.1.1 The Value Added Tax (VAT)

The Revenue Department of the central government is responsible to collect the VAT. It is tax imposed on consumption value at the rate 10 percent of the consumption value. The 10 percent of the total rate imposed is surcharged for the local governments. In the year 1998 the central government reduced the surcharge rate from 10 percent to 7 percent as a country macroeconomic stimulus measure. The Revenue Department is responsible for tax collection then forwards the receipts to the Department of Local Administration of the Ministry of Interior for distribution among the local government base on the proportion of the business tax revenue collected from each local government in the year 1960.

After the implementation of the Plan and Procedure for Decentralization Law, it introduced new allocation for local governments from the VAT collection. Under the new tax scheme the central government is binding by law to gradually increase the contribution rate of the VAT for local government from 10 percent to 30 percent of the total VAT revenue collection. The objective of the Law aimed to replace the old VAT revenue with the new revenue allocation scheme. However, there was a pitfall when the State of Council who is legal advisor to central government stated that the Plan and Procedure for Decentralization Law could not overrule the existing local government laws. Thus, all local governments are eligible to receive the VAT from both schemes.

1.2.1.2 Excise Taxes

Similar to the VAT the Excise Tax Department handles liquor and excise tax collection and imposes extra 10 percent of the tax rate for the local government. The commodities under the excise tax collection are cigarettes, petroleum, liquor and non-alcoholic beverage. The tax revenue from the excise tax is then distributed base on share of population live in each local government.

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1.2.2 Shared Tax

Only tax that categorized under this type of taxation is the motor and vehicle tax. It administers by the Land Transportation Department, Ministry of Transportation. The tax is imposed on automobile registration with the rate vary according to type of vehicles. Prior the new decentralization law, the revenue from motor and vehicle tax that collected within BMA jurisdiction belongs to BMA. For the motor and vehicle tax that collect elsewhere is distributed for the rest of local governments. The original allocation formula use in distributing the tax revenue is 50 percent of the total revenue collected allocate for municipalities, 25 percent for CAOs, and the rest is for the sanitary districts. After the implementation of the Plan and Procedure fort Decentralization Law, there is still no acceptable formula on how to distribute the tax. The allocation formula for fiscal year 2001 is ad hoc basic that shift a certain share of the revenue from municipalities to CAOs and TAOs.

1.3 Revenue from Natural Resources

Revenue under this category composes of bird-nest tax, royalty fees, and fee for transfer of real estates. They are in fact royalty fees from exploring natural resources except fee from transfer of real estate, which is fee charge on value of assets transferring. The rate of transferring fee was 2 percent until the year 1998 when central government reduced the rate to 0.1 percent of the transferred assets value as a scheme to stimulate national economy.

2. Revenue from fees, fines and others

Other revenue from non-tax composes of fees, fines, and permission fees, revenue from assets, and utilities. There are fees, fines, and permission that collect by local government. Objective of assigning to local government is to use them for controlling and regulating local affairs such as parking fines, building construction control, etc. The rate of all fees, and fines are specified under many laws and regulations. Existing rates are very low and out of date. That explains why the collection from this revenue sources never be important from local government perspective.

3. Local Borrowings

The local government has legal right to borrow to finance their expenditure but they are discouraged to do so. They are implicitly prohibited to borrow from private financial institutes except from the trust funds created for each type of local government. Every local borrowing must receive approval from the Ministry of Interior who will scrutinize all proposals for borrowing. The only source of fund for local borrowing is from local trust fund. The trust fund is essentially the local government’s saving which is imposed by the law. All local governments are required by the local budget regulation to set its expenditure not more than 97 percent of the three years average of previous total revenue. This means that every local government will always have a budget surplus every year. The total amount of the budget surplus will be accumulated under the trust funds for each type of the local government to use as contingency fund. Afterward ten percent of the trust fund must contribute the development fund called “Local Development Funds” for each

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respective type local government. Each local government unit can borrow only from this development fund.

To manage both funds there is a committee which its member compose of both representatives from local government and the Ministry of Interior to act as scrutinizing committee to consider proposal for withdrawing of each local government whether it under the rule and regulation that has been indicated. The committee has set conditions for withdrawal from the trust fund as follows: 1) the local governments can borrowing from the funds in case of emergency to finance unanticipated spending such as natural disaster or the estimated budget can not cover personal expend. 2) If the first three months of the local fiscal year, the local revenue generating is not enough to cover the spending, the local government can borrow from the trust fund to spend on salaries and wages, remuneration services and materials, and utilities expend.

4. Intergovernmental Transfer Revenue

Additional to conventional own tax revenues and shared revenues, local governments have received general and specific grants from the central government. The grant system suffers from problems in that the amounts available each year is quite unpredictable making it very difficult for local governments to plan expenditures and in that the criteria for allocating grants are not systematic. Over 70 percent of the intergovernmental transfers are allocated for specific purposes. The Ministry of Interior allocates these grants in an ad hoc and highly politicized manner. Though there are criteria for allocation as shows in appendix Table A.3. but the results of allocation vary greatly from the formula. Recent reform proposals appear to be aimed at reducing some of these problems. First the size or the grant pool would be made more predictable each year by trying it to a stated (but increasing) share of central government expenditures. Second specific grants would be phased downward, and being limited to areas to which the central government gives high priority. Third the allocation formula for general grants would be made explicit and based on a number of income/demographic indicators and a number of performance indicators such as fiscal effort, cost recovery, project evaluation that reflect effectiveness.

Section 5: Impact of Decentralization Process on Local Government Finance

Devolution of autonomy to local governments has affected on both central and local government. At central level, in compliance with the law central agencies must transfer of functional responsibility from central agencies, trim down central budgeting, and most importance is transferring of central employees to local governments. Financially, the local government must cope will its original functions and with for newly transfer functions from central agencies. Aware of the burden that the decentralization has placed on local government, the central government is binding by law to transfer enough revenue sources to support the expected increase of local expenditure. The first obvious impact of the Plan and Process of Decentralization law that has upon local financial condition is that it has broadened local revenue base from the existing revenue sources and introduced opportunity for local government to mobilize new revenue sources as well. Initially, the expansion of revenue from existing sources increased the share of local government revenue to central budget from around 11 percent annually during the pre-decentralization law

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era to over 20 percent in fiscal year 2001 and gradually increase to around 22 percent in following fiscal year 2002. This helped to increase local fiscal revenue capacity enormously

Second, there was greater disparity of fiscal position after central allocation of transfer payment under the decentralization scheme. The revenue distribution formula focused on aggregate level of local revenue without taking into account of contribution of share from locally own revenue. It leads to moral hazard in local revenue generating effort. Though all of local government received benefit from the revenue incremental scheme under the Plan and Process of Decentralization Law. There has been existing great disparity of revenue among the local government because there were vast different of local government socio-economic conditions, for example, population, own revenue base, etc. that not used as criteria for revenue allocation formula to reflect actual local conditions and responsibility. As result, there was both vertical and horizontal imbalance of revenue allotment among the local governments. There were some local governments who gain and lose from the allotment formula. Municipalities and CAOs were obvious losers while TAOs were considered gainers. This is not only there are greater number of TAOs relative to the municipalities and CAOs combined but partly because TAOs received most of the devolved functions from the program compared to municipalities and CAOs, combined with poor revenue generating capacity of TAOs. Another importance element that made TAOs be gainer from transfer payment scheme was its services that closely affect well beings of local citizen. As such the revenue allocation fomulaBiased toward the TAOs.

For municipalities, there was diversified of revenue allotment disparity between the original municipalities and newly promoted municipalities. Unlike the newly promoted municipalities, the original municipalities have been established revenue bases and efficiency in collection that made them relatively self-sustained at a certain level. While the newly promoted of sanitary districts to be municipalities are not taken into account of local economic conditions, the revenue allocation formula based only on equality aspect would adversely impact on efficiency and fiscal imbalance. As result, the original municipalities that have more responsibilities and previously accounted greater share of revenue required greater share but received smaller share of revenue allotment under present fiscal decentralization scheme. Under the revenue allocation scheme, it adversely affected on relatively large local governments and disrupted local public services delivery.

Third, the increment of local revenue was substantially result of transfer payments of central grants and shared tax revenue bases regardless of increase from local government own revenue to cover the devolution of functions. Insignificance contribution of local own revenue sources can simply explain that there has been neither improvement in revenue collection nor expansion of new revenue base for many years. Prior to the new constitution, all local governments have virtually same revenue sources and some of them had not been exploited their potential. The local governments simply relied on central financial assistance instead of on their own revenue in order to avoid people objections that may lead to local political resistance. Even under the new Law, there was no specific guideline on how the 20 percent of revenue would generate from. The local authority, then have presumption that their budget would increase at least 20 percent from central distribution rather than locally

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mobilized revenue and the central government would guarantee the local revenue increased gradually as required by law. Thus, the objective of the decentralization to be financially self-reliance is not observed under the revenue transfer scheme.

Finally, during the initial years of the decentralization implementation program, it has proceeded under great constrained of time available for budget appropriation at both central and local levels. There was no grace period for capacity building and program to improving public administration at local level, in addition, the national budgeting process had already distributeded to central agencies when the decentralization process introduced. To avoid duplication of budget allocation the initial transfer budget under the decentralization scheme, thus, must allot through central agencies, otherwise disbursement of budget for local government can not proceed within the fiscal year. The local government merely submitted budget disbursement request to central agencies but the actual work still perform by the existing central agencies. This meant that the objective of fiscal autonomy devolution to local government was not realized during the initial years of the decentralization program. It was also observed that reluctance to restructuring bureaucratic system at local government level was not organized to meet such magnitude of fiscal management. To avoid disruption of public services, thus, the transfer payments were spent on pre-determined functions by central agencies instead of on local discretionary.

Local Revenue Capacity Building Schemes

In summary under the new decentralization process, problems of traditional revenue sources of local government in Thailand are remained intact without any solution in short run. If nothing is done to widen revenue capacity for local government, it is certain that the central government can not solely bear the fiscal burden as stated by the law. It is necessary to increase local fiscal capacity through their owned sources to ensure self finance reliance in long run. The solution to strengthen local revenue capacity may include the followings:

1. Locally generated revenue from property tax, i.e. Land and Building tax, and Land Development tax must be enhanced. Recommendation is to introduce new property tax to replace the existing Land and Building tax, and Land Development tax. The new property tax should base its collection on capital value at market rate, and provide no exemption for own occupied properties. It may exempt or levy with lower rate for manufacturing equipment in order to support domestic investment. The new property tax rate should vary according to each type of local government to provide discretion autonomy for local authority to determine the tax rate.

Combining the two existing property taxes into a uniform property tax will greatly enhance its ease of administration and should also enhance taxpayers compliance. A significant advantage of moving to a capital vale system is that it provides the same assessment basis for owner-occupied, rented and non-residential property, thereby, substantially improving horizontal and vertical equity. In addition, including owner-occupied in the new proposed property tax would not only enhance revenues, but also enhance the administration and equity of the tax since all buildings would subject to the tax. The important issue is the definition of the tax base must be

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clarified and based on the concept of property that is, land including all improvements and buildings on the land.

To promote local fiscal autonomy local discretion in setting property tax rates should be devolved to local government. A key justification is to improve accountability that is to hold local officials to be accountable, they must have certain level of control over their revenues that they collect.

Exemption that has been major loophole of the existing property taxes for local government should be minimal. However it may still need exemption to address equity problem concerning low-income owners and also to enhance administrative effectiveness from cost of collecting revenue from low-value properties that often exceed the revenues collected.

Property tax structures and valuation processes should be clearly separated to enhance not only the overall system but also diminish potential corruption. Valuation should be conducted on a standardized basic. The existing Central Valuation Agency (CVA) within the Land Department should be undertaken to strengthen the base of the new property tax.

2. There should be reforms of local user charges that base on market-oriented rate as venue for developing cost recovery scheme from local capital investment. The user charges must reflect investment cost an operating cost of public services. Unfortunately, the autonomy in determining the existing user charge rate remains mostly with central agencies particularly the Ministry of Interior who issue many regulations and ordinance for local government to set the rate accordingly. Ability to set the user charge rate freely would be the first step for local government to mobilize revenue from investment in efficient and effective manner and provide experience in project evaluation training for local authority.

3. There are too many of local government units particularly at TAO level. Many of them are too small to deliver public services efficiently and effectively. Their revenue base is also too narrow to be self-financial reliance. Recommendation is the small unit of the TAOs should be merged to become an effective local government unit in public service delivery. Basic criteria to qualify for being an self-autonomy local government must be raised and strictly enforce otherwise they will be burden to central government transfer payments.

4. Local government should have discretion autonomy in determine its own tax rates and tax base to enhance local accountability of local authority to its citizen. In response to economic disparity across local governments, they must have greater fiscal autonomy to set the tax rate in according to their bases to reflect benefit principle of publics services delivery.

5. The central government must establish consistence formula in intergovernmental transfer payments. With definite formula of transfer payment from the central government, the local government can estimate funds from the transfer payment effectively and have better expenditure planning. Fiscal transfer should be decided by objectives, reasonable and, widely accepted allocation formula. They should not be affected by political negotiations, but the formula adopted should be

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made by a neutral organization, or an official intergovernmental committee. The extent of the central governmental fiscal transfer should also be stable every year so that local governments can draw up appropriate budgets. At the same time, the transfers should be flexible so as to avoid a situation in which local finances adversely affect macroeconomic stability. However the most important issues are that the fiscal transfer formula must be reviewed regularly and must be kept simple as much as possible.

6. Local tax administration must be improved in all aspects. Local tax mapping must be updated regularly and use as basic tax collection instrument in improving collection efficiency.

Section 6: Patterns of Thailand Local Government Finance

6.1 Pattern of Thailand Local Government Revenue

Data of Thailand revenue structure are presented in Table 1. As already described Thailand local government revenue is composed of both tax and non-tax revenue. The local government entities are empowered by law to raise their own revenue sources and also receive certain revenue transfer from the central government. The tax revenue sources comprise as follows: locally levied taxes, and shared taxes. The non-taxes are grants, borrowing, and others. Among the local government revenue sources the surcharged and shared taxes is the most important revenue sources for Thailand local government. Table 1. Shows that they have a consistent share around 40 percent of total local government revenue during 1996-2001. Locally levied taxes have their share only around 10 percent of total revenue, and the share having declining trend over the period of 1996-2001.

Among the locally levied tax revenue the Land and Building tax contribute largest share at about 8 percent in year 1996 but its important had slipped to only 5 percent in year 2001. The rest of the locally levied tax revenue has remained insignificant during the period. The insignificance of locally own tax revenue sources would imply a heavily financial dependent from central government. Table 1. illustrates that the major contribution from tax revenue is the VAT, and excise tax. Furthermore, in 2001 new VAT was introduced to add on the existing one. This VAT has been used as other transfer revenue in agglomerate with grants to fulfill local revenue size requirement as mandated by the Law that required total local revenue to be at least 20 percent of total central government revenue.

Another source of revenue need to be mentioned is revenue from central grants. It has increasing role as its share to total local government revenue from 26.2 percent in 1996 to more than 47 percent in 2001. Specific grant registers uprisings trend during the period of analysis but was substituted by new transfer revenue that introduced for the first time in year 2001 as result of implementing the decentralization plan that transferred budget for decentralization functions to local level. The amount of the transfer payment accounts for over 20 percent of total local budget in year 2001. Unfortunately, there is no information breakdown of the transfer payment to each local government but it is believed that TAO would receive benefit most from the allocation.

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For borrowing, since local government in Thailand can have limited access to outside financial sources due to prohibition by local budgeting laws and regulations. Its share remains at insignificance level through out the period of analysis.

If the revenue sources for local government are broken down to each type of local bodies it shows that the share of the revenue is significantly increase with the size of the local entity. Before implementation of the decentralization plan in 1997, the BMA receives the largest proportion of the revenue relative to other local entities as shown in Table 2. The BMA has its revenue around 45 percent of total local revenue. In the year 2001 the BMA revenue share may seem to be lowered. This is due to central government policy to increase financial support to other local government particular the TAOs and Tambon council. The BMA also is local unit that can collect most of locally levied revenue relative to other local government and receive largest share of surcharge and shared taxes from central government in pre-decentralization year. Afterward, the CAO received larger proportion than others did.

Revenues that need to be mentioned are trust fund and borrowing. The trust fund is comparable to reserve account from annual budget surplus. The purpose of having this fund is for emergency and/or contingency liability of local budgeting. Table 1. shows share of the revenue from trust fund in 1996 registered about 4.2 percent of total local revenue but it sharply increased in 1997. This pattern should not be surprised due to shortfall of national economic crisis that made central grants unavailable, then, the local government had to withdraw from their owned reserve from the trust funds. For the loan remained insignificant through out the period. Since the latest break down information of loan and trust fund for each local government entity is only available for fiscal year 1999 (as see in Table 3), it revealed that in 1999 the total local government trust funds was at 6,131 million baht which was accounted for about 5.8 percent of the 1999 local government revenue. Among the amount, 219.4 million baht was came from the CAO (3.58 percent) 1,835.6 million baht was from municipalities (29.94 percent), 2,395.2 million baht from TAO (39.07 percent), 40.0 million baht from Pattaya City (0.65 percent) and the rest of 1,641.0 million baht was the share from the BMA (26.76 percent).

According to the Table 3. TAO registers the major share of trust funds followed by municipalities and BMA. However, the trust funds share of Pattaya City was the lowest.

On the unconventional source of revenue that is borrowing, it has remained an insignificance revenue source for local government since the only source of borrowing fund that local government can borrow is the Local Development Funds. Taking all local government borrowing together it registered less than a percent of total local revenue. Therefore it is obviously that borrowing is not the main sources of funds for local government. Moreover, there were only 3 types of local government use borrowing as methods of budget financing which were CAO, municipalities, and Pattaya City. Municipalities were the leaders in borrowing which account for 93 percent. But it accounts for only 0.81 percent of Municipal expenditure in 1999. Surprisingly, TAO, who is the main player in Trust fund, did not borrow any in 1999.

For the borrowing from the Local Development Fund, municipality has registered substantial borrowing from the Fund. According to the Ministry of Interior

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Regulation on Municipality Development Fund 1997, the Development Fund mobilizes from the portion of annual budget surplus. The formula use to allocate money to the development fund is that 10 percent of the excess budget must be transferred to the Development Fund within the first 3 months of the fiscal year. Each municipality is able to borrow from this municipality development fund for investing in municipal public utility services or other municipal public service functions with the payback period of 15 years.

The detail of projects that municipality can borrow are:

(1) The investment projects on public utility services such as electricity and running water system. This loan would be charged only 4 percent interest rate.(2) The public service projects, such as road construction and maintenance, sewage system construction and maintenance, bridges and waterways, trucks and machinery, the interest rate is set at 4 percent for this type of borrowing.(3) The profit-seeking projects with the short-term payback period such as market construction, dock construction, hotel construction, and commercial building construction. This kind of loan will be charged at 7 percent interest rate.(4) The public welfare project with return benefits, such as pawnshop business. The municipality can borrow with 6 percent interest rate.(5) Other types of project from above will be charged with 8 percent interest rate.

In order to control disbursement from both the accumulated and the development funds, the Ministry of Interior Permanent Secretary is appointed to be the chairperson of the committee. The primary duty of the committee is to scrutinize withdrawal from the funds to prevent the risk of local financial bankruptcy and fiscal mismanagement that might take place from local governments.

6.2 Patterns of Thailand Local Government Expenditure

Local government in Thailand is much smaller than central government and in no major role of public service provision as illustrated in Table 4. The local government registered only 7.4 percent of total central government expenditure in 1996 however the share of the local expenditure was an uprising trend over the period of 1996-2000. The local government expenditure is composed of four categories: central expenditure, regular expenditure, investment expenditure, and special expenditure. The central expenditure is comprised of debt repayment and interest payment, other committed budget, temporarily assistance fund, and contingency fund. Regular expenditure are salaries, wages, remuneration, utilities, materials cost, and grant payment. The expenditure for investment comprises cost of construction and land. Special expenditure is spending from specific grant, trust fund and loan. The data reveals a consistently large share of local revenue from central specific grant. Such categorizing method, make it is difficult to get a clear picture of the role it plays since there is no data exists on local government expenditures by functions (e.g. education, roads, etc). Instead all we have is a so-called economic classification see Table. 4 illustrate trends for local government expenditure since 1996. It reveals very little except that regular expenditure is the largest expenditure item of local

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government expenditure follow by the construction the two items absorbs over one half of the total budget. Unfortunately, there is no evident of how the budget is allocated for infrastructure investment.

The trends for local government expenditure in Thailand as illustrated in Table 5.three issues can be raised here. First, it is the very large share for Bangkok which, with only 10 percent of the population, absorbs more than a third of local government expenditures. Municipalities receive the second largest share. The second issue is the rising share going to the newest form of local government, the TAOs. The intention appears to have the TAOs grow at the expense of allocations to the provinces or the CAOs for which the share of total local government expenditures appears to be on a downward trend. Third there is a rather steady share of the expenditure across the local bodies. This would indicate a conservative role of the local government in Thailand. The reason that could explain this pattern of local fiscal position may attribute from insufficient own revenue resources generated by local governments to perform their duties.

Inadequacy of revenue is the major obstacle that hampering delegation of autonomy of local government in Thailand. To fulfill the decentralization the local government must have substantial own revenue in finance wholly or in parts of their service cost. Inadequate local revenues arise from limited taxation powers and their limited ability to generating non-tax revenues from local sources. Borrowing can be one of an important source of fund that can be use to solve inadequacy of revenue problem if it is used properly. In Thailand it may be difficult inadequacy of revenue at local government levels due to prohibition by law to have only surplus budgeting. The evidence that may be good indicator have the problem is the size of transfer payment from the central government that include surcharge taxes, shared tax, and grants to local governments that account more than 50 percent of total local government revenue as showed in Table 1.

To expand local fiscal capacity local borrowing has been introduced as an unconventional revenue source for local government. The law for decentralization that introduced in 1999 to support the new constitution has initiated channel for local government borrowing by stated that local government can mobilize revenue from borrowing from ministries, bureaus, or any public entities from abroad or international organizations. The only condition is that the borrowing must receive approval from the cabinet before the actual loan. Under this principle, it aims to give opportunity to self-finance by local government’s creditworthiness without government guarantee. Unlike present system where the local governments can borrow only from the development fund, though advantage of loan from the local development funds is the repayment and interest rate condition term are predetermined. Because the committee of the fund will evaluate repayment capability in favorable term before the loan is provided to.

The constraints that obstruct local borrowing development in Thailand may be distinguished in to two major problems. They are 1) local financial moral hazard, particularly under the decentralization program, 2) lack of local financial management capacity. The possibility of moral hazard originates from limitation of to the fiscal autonomy of local governments. The local governments generate only a small share of own revenue bases and limited authority to adjust the bases and rates to fit with

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local economic conditions. If the local government have authority to borrow freely, but have limited own revenues, it would encourage moral hazard because they (local governments) can shift debt obligations against transfer from the central government, thereby escape the need to broaden their own revenue base to meet debt service payments. Also the local financial moral hazard can generate from the present grant allocation formula where it lacks of transparency.

The second problem that hampers local government from borrowing is lack of local financial management capacity. At the fundamental level, local governments in Thailand have weak accounting and budgeting practices. Their accounting is on cash basis that can not clearly distinguish between current and capital expenditures. In such situation, it is difficult to ensure that borrowing is for capital investments. In addition, the present budget system of local governments still applies year-to-year process. As a result it is extremely difficult to thoroughly assess effect of investment plans and alternative of financial schemes over longer term. In addition, there is no accurate valuation of local assets. As a result they can not rely on the basic of asset-liability management technique to optimize their financial conditions and decision.

To provide example and training ground for local government for borrowing development, there is a pilot program to trial on lending to local government. The program is the development of the Regional Urban Development Fund (RUDF) that operates by the Government Saving Bank to provide long term loan at market rate to qualified municipalities. To date very few municipalities can access to this fund because of many qualifications to meet before the loan can be extended.

Section 7: Existing Regulatory and Institutional Framework for Bond Market Development

The lists of regulations on local bond issuance appear in the establishment laws of each type of local government. They are:

Box. 3 Regional Urban Development Fund (RUDF)

To develop foundations for decentralization and future local borrowing, Department of Local Administration with cooperation of Government Savings Bank under support from the World Bank had initiated Regional Urban Development Fund: RUDF) as revolving fund for local borrowing especially for municipalities. Size of the fund was set at 30 million US$ to spend as initial fund for loan project that not last longer than 15 years. The aims of the loan are for public infrastructure and public services investment that can generate income. The RUDF was considered as pilot program to use the fund as financial instrument in supporting investment program of municipalities. As part of establishment the RUDF, considerable technical assistance was provided to strengthen local government’s capabilities in preparing and managing projects, financial reporting, and enhancing local accountability. Establishing a framework for responsible borrowing would require future reforms in: establishing aggregate limits on local indebtedness, local bankruptcy regulations and other mechanisms for promoting responsible borrowing. (See example of loan from RUDF program in appendix)

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1. The Municipal Act of 1953;2. Amendment of the Municipal Act of 2000;3. The Municipal Revenue Act of 1997;4. The Changwat Administrative Organization Act of 1997;5. The Bangkok Metropolitan Administrative Act of 1985;6. Amendment of The Bangkok Metropolitan Administrative Act of

1999; and7. The Plan and Procedure for Decentralization Act of 1998.

The details of the existing regulatory and institutional framework for the local government bond market are written in various laws for each local government entity establishments. The laws and regulations use in controlling and monitoring local government bond issuance are not synchronized at the same level. Under the law, TAOs and Pattaya City are not allowed to float bond while municipalities, CAOs, and the BMA can issue bonds to finance their budget. Generally, local government bond issuance is not explicitly prohibited under the existing local government laws. Impediment factor preventing local government from bond issuing is to secure approval from various central agencies. The central agency that oversees the approval of bond issuance depends on the types of local government. The BMA bond financing must submit proposal for cabinet approval partly because no direct control by any ministry, and the size of borrowing fund may affect on national fiscal position. For municipalities bond issuance the decision remains only at the Minister of Interior. The CAO, though, the law permit to issue bond but so far there is no single ordinance from the Ministry of Interior has been issued to facilitate the objective. The Plan and Procedure for Decentralization Law tightens bond issuance and local borrowing by indicating that all local borrowing must get approval from the cabinet only. The objective of the law is to prevent any mismanaging of local authority in the borrowing that may escalate to affect national economy.

On financial market side, Thailand has witnessed significant growth of financial market during the last two decades. There have been many new financial instruments emerged, and increased in volume of financial transactions, expansion number of investors from both domestic and abroad. Along with the growth in financial market transactions, many significant institutional and regulatory have emerged to facilitate and regulate market to meet international standards. The overall financial market growth has been in securities trading until after the economic crisis in year 1997 it witnessed rapid growth in traditional bank loans and sharp declined in equities traded as see in Table 6. Furthermore, it also recognized an emerging trend in trade of domestic bonds from merely at 262 million baht to almost 2 billion baht over a decade. With the growth of private financial sector it provides new dimensions for many government agencies to finance their long term capital investment. The central government thus has issued regulations to mandate accessibility of public agencies to borrowing from growing private financial sector to prevent possibility of public debt crisis. Some of the regulations have affected local bond financing development under the fiscal decentralization.

Together with the establishment laws of each local government, there are certain central regulatory acts that effect potential local borrowings, they are:

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1. Government Budget Procedures Act of 1949, and amendment of 1950,

2. Bank of Thailand Act of 1942 3. Securities and Exchange Act of

1992,

The budget act authorizes what public agencies eligible to be issuer of public debt and controls ceiling of public borrowing that government can make for each fiscal year. To keep a good fiscal disciplinary the laws also indicates that every public entity must receive approval or endorsement from the Ministry of Finance who is responsible for oversee fiscal policy of which including maintaining national public debt level. Additionally, the Ministry of Finance and Bank of Thailand must coordinate in designing suitable public borrowing scheme of public agencies under certain macroeconomic conditions. However, local government entities are not among the eligible list of public agencies of both budgeting law and Bank of Thailand Act.

On other hand, under the Securities and Exchange Act, there have been establishments of many financial organizations to serve the growing domestic financial market. There are many establishing of banking and financial organizations that can provide services for both money and capital instruments. On capital market side, Stock Exchange of Thailand (SET) was established more than 20 years ago along with Security and Exchange Commission (SEC) the regulatory body of the stock market to enforce all securities trading rules and regulations. Additional to the stock market and SEC some other related institutes that established in conjunction to capital market development in Thailand can be listed here: 1) 51 registered financial advisors; 2) 33 registered property appraisal agencies; 3) 18 registered private auditors; 4) 7 registered trustees; 5) 35 independent property assessors; 6) 70 private auditors; and 7) 2 independent credit rating companies. Recent establishment for bond market transaction is Thailand Bond Market as an additional financial organization to serve as secondary market for bond transaction (See Box 4). Regulatory framework for financial operations is divided as followings. The Bank of Thailand (BOT) supervises the operation of banking and finance businesses while the SET and the SEC supervises the primary and secondary market for securities, bond issuance that governed by the Securities and Exchange Act of 1992. In 1998 the Thai BDC was granted license from the SEC. The Thai BDC goals are to provide an environment for facilitate trading, to monitor trade and to disseminate information on the secondary bond market. The Thai BDC functions also functions as a self-regulatory organization.

The blossom of domestic financial sector has provided an environment for greater resources mobilization and creates a necessary foundation for country economic growth. However, the benefit from expansions of financial sector is out of reach for local governments. The existing laws and regulations do not explicitly prohibit local government participating in the financial market. The only element prevents them from direct access financial market is to secure approval for the Ministry of Finance. So far government debt securities that can trade in the market are:

1. Treasury Bills (T-Bills) that are short-term debt instruments with maturity less than 1 year.

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2. Government Bonds are medium to long-term debt instruments issued by the Ministry of Finance.

3. Bank of Thailand Bonds are consists of Financial Institution Development Fund (FIDF) Bonds and Property Loan Management Organization (PLMO) bonds. However, these bonds are no longer issued.

4. State Owned Enterprises (SOEs) bonds are medium to long-term debt instruments issued by the SOEs. This can be categorized into 2 types; guaranteed and non-guaranteed by the Ministry of Finance of which the guaranteed bonds account for 86 percent of total issued bond value. However, there is restriction of budgeting regulation that the government to provide debt guarantee for not exceeding 10 percent of total budget expenditure.

In addition to government bonds the corporate sector began to issue bond and trade in the Thai BDC in 1992 after the eased of the SEC Act. The value of outstanding domestic bonds can see in Table 7. Earlier the state enterprise bonds were accounted for most of the outstanding value of domestic bonds but after the economic crisis in 1997 the government must issue bonds as measure to solve the country economic crisis.

Box. 4 Thailand Bond Market Development

Background The Thai Bond Dealing Centre (Thai BDC) was established in 1998 under the Securities and Exchange Commission (SEC) Act B.E. 2535 as Thailand's first and only organized secondary market for bonds. The primary roles of the Thai BDC are to facilitate the operation of the secondary market for bond trading and to be a forum for discussing issues on bond market development. While the Thai BDC officially opened on April 22, 1998 its formation can be traced back to 1994 when the SEC appointed the Association of Securities Companies (ASCO) to study the establishment of a secondary market for debt instruments. In September 1994, the Bond Dealers Club was formed within the organizational structure of ASCO and commenced trading on November 1, 1994. To create a more expansive bond market that caters to a full range of Thai debt instruments, the BDC was transformed to the full bond exchange and renamed the Thai Bond Dealing Center (Thai BDC) in April 1998.

The emergence of the Thai BDC led to a significant improvement in bond trading. The number and value of registered bonds increased from 29 issues, worth 32.5 billion baht in 1994 to 381 issues worth baht 1,084 billion at the end of 1999 and 470 issues worth 1,269 billion at the end of 2000. Average daily turnover rose from 209 million in 1995 to baht 1,760 million in 1999 and further to 5,494 million baht in 2000. Goals and Objective The Thai BDC goals are to provide an environment for fair and secure trading, to monitor trade, and to disseminate information on the secondary bond market.The specific objectives of the Thai BDC for bond trading are the following;1.To increase market transparency,2.To improve communication and trading facilities ,3.To improve data delivery, data accuracy, and data analysis,4.To strengthen the clearing and settlement process.

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The Financial Choice for Local Borrowing Scheme

Fundamental choice the local governments in Thailand face is optional choice of financial instrument. In Thailand financial market is at relatively well- developed stage. Despite all related organizations are established the most crucial elements in linking to financial markets of local government entities are financial disclosure and reporting.

Financing through bond/debt financing for Thailand local government must be obligated to standard practice of the market that are; general government obligation (general revenue supported); limited obligation (Bond Financing); project Financing.

Under general government obligation, the local government uses its revenues to support the debt services payments and owns and operates the project itself. The local government must pledge its own revenues. The project that the money is spent on is not specifically tied to the repayment of the debt. Important questions are the central government willingly to guarantee the borrowing of local government to ensure better term of borrowing. Without central government backing the creditworthiness of the local government wold diminish greatly. Secondly, Thailand local government is high level of dependence on intergovernmental fiscal assistance in form of shared taxes and grants that have great variation. These mask unsolved questions of ultimate security that what would be remedies to investor in case of the local government fail to pay the debt on time and in full.

Limited obligation (Bond financing) is another form of borrowing that the local government can choose. The nature of bond financing is that money from issuing bonds would produces revenue through charges and fees that are used to defray the costs of debt service. The debt is secured primarily or exclusively on the project earnings, general revenues are typically not pledged directly. The debt is issued either by the project itself or on behalf of the project by the general local revenue. The central government needs not to pledge it full support and credit to repay the debt.

Bonds are attractive because they potentially can provide greater diversification and liquidity to investors than can direct loans. That is, unless the bond is in some way restricted in secondary market trading, it can be put up for sale, thereby giving the holder liquidity before its maturity. There is existing market in Thailand that provides venue for developing local bond issuance. However, to get off ground in authorize bond financing procedure it needs to design conditions for controlling local borrowing otherwise it may lead to local financial bankruptcy. These pre-conditions include financial capacity building of the local government to be able to repay debt, credit analysis, etc. The system must look at both side of equations the demand and supply of funds. On the supply side as mentioned these have been well development financial institutions to support the demand. Perhaps more relevant question is how to improve local government to fit with the requirement conditions of the market. Some importance mandatory qualifications that every local government must observe before participating in financial market are listed below.

Financial Disclosure

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Fundamental to disclosure is the timely production of financial statement that follow consistent accounting standards and readily available to investors on a timely basis. Uniform accounting standards for Thailand local government is critical to disclosure. Present accounting systems are in transition and under review for improving. Accounting for local government in Thailand is form an orientation of controlling expenditures and revenues, stressing the legality of their actions and reporting performance to certain government standard. They use cash accounting techniques in the recognition of receipts and outlays and frequently obscured the economic purpose of the expenditures. Another concern with the cash accounting technique are with its focus on short-term assets and liabilities that may prohibit to observe accurate and actual financial performance of the local government in longer term.

The frequency and independence of auditors are also important issues. Thailand bureaucrats rely only on central auditing agency. Such audits check for compliance with various program requirements as opposed to reflecting financial condition or assigning costs to activities. This local government financial record is not publicly available. It poses an impediment to reporting fully the financial statement.

Creditworthiness, Credit Analysis and Credit Ratings

Credit analysis is a process where investors examine available information regarding issuers and their obligations and seek to make judgement regarding the rewards and risks those investments entail. Information used in credit analysis can be garnered from various sources such as central government statistical report, local government financial report to central government etc. Credit analysis demands resources and analytical skills that many investors, especially smaller institutions and individual investors do not have enough of to justify a particular bond issuance. Thus, they prefer to rely on the opinions of experts. The role of expert opinion is best reflected in the function of the commercial credit rating companies, or rating agencies as they are often called. In Thailand there are limited numbers of rating agencies of only two companies namely Thailand Rating and Information Services, and newly established the Fitch Rating Service. An independent, objective system of credit ratings of high quality is seen as an essential component to the development of a vibrant, private sector capital market. However, compare the number of credit rating agencies with number of local government units it seems to be impossible for them to handle the rating if all the local governments are allowed to issue bonds. The shortage of trained analytical staff and the existence of the rating agency can opine on the quality of the credit on behalf of all investors. On the other hand, the concentration of opinion in a few hands using methods that are proprietary and not fully disclosed can lead to a dangerous dependence on a handful of so called experts that influence the markets without an effective check. Thus, it is important to urge for a regulatory requirement that bonds must have a rating before they can list in the exchanges or sold to the general public.

Section 8: Impediments to Local Bond Market Development

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In addition to standard practices that mentioned above that mandate all players

in financial market transaction. Local governments in Thailand also face major constraints for issuing bonds to finance their capital investment. These constraints can be categorized into:

Regulatory Constraints:

The bond financing is never exploited as alternative revenue source for local government in Thailand. Though the laws provide venue for bond financing but it has never been used. Unlike other public agencies debt financing, the central government’s budget Act of 1949 does not specifically provide debt guarantee for local government bond issuance. This may be major impediment for development of local government bond at initial stage when the creditworthiness of local financial conditions still doubtful by general public and particularly the financial sector.

On financial market side, rules and regulations of related financial institutions such as Thai Bond Dealing Center, Stock Exchange of Thailand, etc. do not only provide clear guidelines of how to introduce local bonds to the markets but also not explicitly indicate eligibility of local government in participating in the market. Any attempt to introduce local government bond into the market must receive approval from both the Ministry of Finance and regulatory of Bank of Thailand.

Legislative Constraints:

Local budgeting is highly committed to current expenditure. Basically, all local government in Thailand must have surplus budget under the Ministry of Interior budget procedure ordinance. This regulation prohibits any deficit that might occur. It discourages local government to undertake capital intensive investment. Any project that requires high investment will be done with central subsidy. Thus, it is necessary to allow local government to have deficit budget first and designing suitable financial scheme that fit with local financial conditions.

Administrative Constraints:

Local government never expose to financial market directly, its’ staffs are inexperience on how to use benefit from the bond issuance. The elected executives are afraid of inherited indebtedness from previous administration. The financial report of local government is poorly developed. Available report is not met the general standards practice of private sector. The accounting system can not represent actual financial conditions and keep record of bond transaction.

Structural Constraints:

Though the Thai capital market has equipped with all related primary and secondary bond market trading, but comprehensive understanding about local financing conditions by the market players remain limited. Besides number of these institutions may have to be increased if they have to handle the bond transaction process. An option to enhance local bond market for Thailand is that it may necessary to establish or restructure the existing related agency to assist local bond

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issuance. Fundamentally, what need to be done are improving of internal auditing, preparing financial disclosure report that meet the standard practice, changing accounting system to capture all local activities and commitments.

Section 9: Roadmap to Develop Local Bond Financing in Thailand

To develop a successful local bond financing in Thailand many necessary supporting factors have to develop to reduce risks for local governments and investors. To issue bond to market local government must observe standard mandatory required from the capital market laws. Initially the local governments must create their creditworthiness from their fiscal management performance to ensure financial capability. Numbers of local capacity building measures have to implement to enhance local financial capability. Based on the analytical framework developed above, this section provides a framework for policy reform aimed at establishing the prerequisites for local bond financing scheme. They are:

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Box. 5 Background of Rating Company in Thailand

On July 27, 1993, Thai Rating and Information Services (TRIS), Thailand's first credit rating agency, was established by the initiative of the Bank of Thailand. TRIS originally received three years of technical assistance from Standard and Poor's Rating Group (S&P) in developing its credit rating methodology and administrative matters.

Rating Criteria

TRIS determines a rating after an in-depth analysis of quantitative and qualitative factors. TRIS's methodology for analyzing issues is divided into two sectors: financial institutions and general cooperates. The approach to each analysis is outlined in the analytical framework TRIS developed for each type of entity.To ensure all salient factors are considered, TRIS's analytical framework includes: industry, business and financial analyses. Each analysis (industry, business and financial) utilizes a format that divides the analysis into several key variables. Each variable is rated; however, there is no certain formula for combining these factors. The overall rating judgement is determined by the "rating committee".

Below are examples of the rating methodology profiles.1. Rating Profile for Corporate

Industry Analysis: Each rating analysis begins with an assessment of the company's operating environment. The analysis focuses on industry prospects, pattern of business cycles, nature of industry, regulatory restrictions and competitive factors that affect the industry.

Business Analysis: This area of assessment concentrates on: corporate strategy, management evaluation, market position, diversification and operating efficiency.

Financial Analysis: In assessing a financial position, TRIS reviews the company's financial policies, profitability and efficiency, capital structure, cash flow adequacy and financial flexibility. For instance, TRIS reviews a company's financial policies pertaining to leverage tolerance, dividends, acquisition and disposition strategies.

Additional Specific Analysis for Real Estate Companies: In assessing a real estate company, TRIS focuses on the quality of the real estate investment portfolio. Asset quality considerations encompass the age and physical conditions of the properties, the investment status of the particular properties and type of investment. Income recognition differentiation of financial statements needs to be adjusted for a clearer picture of the real estate firm's cash stream. All financial ratios are calculated on an adjusted cash flow basis.

2. Rating Profile for Financial Institutions Industry Analysis:

TRIS assesses the relationship of the industry to the economy and the possible impact of various economic scenarios, including changes of legislation or policies of the Bank of Thailand or the Ministry of Finance.

Business Analysis:Asset Quality: The area of analysis includes: the characteristics of basis receivables (consumer versus commercial, sub-portfolios, size, off-balance sheet risk) diversity (geographical, customer base, product type) lending criteria, audit procedures and controls, credit quality, reserve adequacy and liquidity. Asset and Liability Management: This area includes an examination of the company's philosophy and management of assets and liabilities with regard to maturity and interest rate sensitivity.Ownership/Affiliation: This area examines the degree of strength derived from the parent companies' support.Ownership/Affiliation: This area examines the degree of strength derived from the parent companies' support.Management: This area evaluates management's performance, policies, controls and planning.Financial Analysis: This area includes analysis of a company's performance based on profitability measures, capital leverage, liquidity, financial policy and flexibility.

Presented below are the key ratios used by TRIS in analyzing credit strength: liquidity ratio capital structure ratio profitability ratio cash flow adequacy ratio growth ratio efficiency/activity ratio industry specific ratio

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1. In the framework to develop local bond financing in Thailand it requires to design new accounting system to separate current and capital expenditures, establish a legislative framework clearly designating local assets, develop auditing of local government accounts and regulation procedures and formats for financial disclosure.

2. Promoting local revenue raising effort and revenue-base diversity. Improving financial planning. To improve fiscal capability, the local government needs a good but simple new budget system that can estimate future budget need. One option is medium term budget (financial plan). To forecast financial planning needs.

3. Improving the local budgetary system. Two things need to be done: first the budgeting process must allow for budget deficit to expose local budget for unconventional financing from borrowing instead of limited only on traditional revenue sources. Second, the budgeting system should be multi-year budgeting that plans for budget expenditure over certain period of time that longer than one year. The multi-year budgeting would give prospective of investment requirement in longer run than year-to-year basic.

4. Improving local accounting and financial practices that provide transparency financial report to public. A simple accrual financial accounting and a simple form of cost accounting must be introduced. In the long run, the accounting systems will provide local staffs with better information for financial planning, budgeting, and control to investors.

5. Improving the internal auditing system, The current system does not work because local staffs do not have skills and also do not realize its importance. In the meantime, the accounting reports and information needed for internal auditing system should also be improved. The new internal audit system should serve both financial and performance assessment, not just for money-counting matters.

6. Improving the external audit system, there should be two parallel systems; the professional system, and the popular auditing system. The first one is conducted by a professional auditing agency. The second is a process of community participation in local affairs. Local residents can audit their local administration through such activities as public hearings and consultation, meetings, etc.

7. Alter financial report system of the local government to be more transparent and meet standard practice that financial market required.

8. It may necessary to establish an intermediate institute to guarantee local government bonds in initial stage. The central government may reluctant to lend hand in provide guarantee the local government bonds due to the country economy has already faced major problem in public debt. To ease problem the local government may have rely on special kind of guarantee in floating its bond financing. One possibility is to broaden role of the trust fund to act as guarantor for the local government bond issuance.

9. The local authorities must be retrain in their financial management practice to be more cost concerns and effectiveness in asset management.

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Additionally, various regulatory and supervisory framework for local government bond financing needs to be addressed;

1. The basic regulation for local government bond issuance needs to be included

as part of the securities laws. All regulations pertaining to issuance, initial and continuing disclosure, etc that applicable to corporate securities should also apply to local bond issuance. Issuance regulations also contain special directives for the local financial information to be presented to the market, taking into account the specificity of the local government accounting and financial framework.

2. On the demand side, the government may have to establish a regulatory

environment where institutional investors have the freedom to invest across a broad range of financial instruments including local bonds.

3. The government may have to establish tax exemption for local bonds at initial stage of development to provide incentive for investors.

Section 10: Recommendations

One of the functions of intermediary financial institution is to raise “loanable funds” from the savers or from the capital market and lend to borrowers. Thailand local governments have been faced problem of inadequate of revenue and borrowing is mentioned as alternative source of revenue. However, impediments for using borrowing as revenue of local governments are numerous. From the pragmatic basic to build up sound policy for local governments before any actual borrowing there is need for set of applicable reforms. They are:

a. The local authorities must begin with businesslike in their own revenue collection of local taxes and non-taxes. It is prerequisite for true fiscal decentralization and local creditworthiness. With greater local revenue collection it shows potential of local capability of repayment.

b. There need to have reforms in local accounting system, auditing, and disclosure of local financial conditions. Central government should help by establish a clear, comprehensive accounting system across the local government entities. The results of the reform must available to general public in regular basis.

c. The local government must prepare strategic planning that lead to several years budgeting to provide detail of capital and infrastructure investment in future. This plan would indicate how the investment would be pay for.

d. On the central government side as well there is need to have a positive environment for local government in establishing stable and consistence revenue flow by stabilizing system of intergovernmental transfers revenue including grants to local government.

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e. The central government must give a clear policy of what type of investment that it will finance (or co-finance) through the transfer payment system. A clear policy statement help to identify limitation of obligation that central government has on financing the local project investment and revealing true credit need for the local governments.

f. Finally, there is need to broaden legal framework for credit market development to allow local governments have easier access to credit market. The legal should cover subjects such as the types of collateral that local governments can provide for loans and how to assess the collateral, the legal procedures in case of local insolvency etc.

Section 11: Possibility of Assistance Role of the ADB

The analysis in the previous sections provide background of issues that are significant to role of the Asian Developmen Bank to further her effective role in assisting promotion of local bond financing in Thailand. Basically, conditions for development of an orderly and efficient local government bond financing do not exist in Thailand. In this contends, market development is hampered by moral hazard, weak fiscal reliability, and poor financial management capacity by local governments.

Under these conditions, the areas of assistance for the Bank would cover the following issues:

1. On policy level, the ADB may provide policy advise for local government bond market development in form of technical assistance to strengthen the capacity of central government to design and implement reforms of legal, regulatory, and supervisory framework for the development of local bond financing.

2. To assist local government in revenue generating capacity and increase its own creditworthiness. The implementing of fiscal decentralization that are proceeding process require financial and technical resources that most of local government in Thailand presently do not have. The areas that need attention are numerous such as fiscal reform, tax reforms and reoriented of user charges toward market practice.

To catalyst a successful local fiscal reforms and modernizing fiscal management, assistance in developing a suitable intergovernmental transfer allocation formula is needed to cope with the fiscal capacity building objective.

3. Providing training for local authority and staffs on financial management and training on benefit of bond financing that accord to principle of financial market practices.

4. To assist local government to strengthen its accounting system from cash accounting basic to accrual accounting system, alter budgeting system to be multi-year budgeting, strengthen local financial management including area of asset- liability management techniques.

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5. To help in reforming trust funds role to become financial intermediate institute for local government bond issuance. The ADB may help in design the institute to be lending guarantee instruments with the objective to enhance private finance for investment by local government. Such design must be very careful in order to avoid moral hazard.

6. To provide technical support to strengthen the capacity of central agencies to design and implement reform of the legal, regulatory, and supervisory framework for the financial market in supporting of local government participation in the market. The area that requires assistance is to design regulatory framework to broaden local borrowing powers and bankruptcy. The introducing of such regulatory requires significant understanding about role of local government authorities in infrastructure development and building capacity activities of both central and local government, and including people in financial sector.

7. To strengthen private sector in providing basic public services such as water supply, sewerage and other infrastructure in local areas. This could be done by enable investment environment for would be private investors and provide clear legal and regulatory frameworks that support the objective. A possibility of allowing private sector joint in local capital investment support by the Plan and Procedure for Decentralization law by stated that local government authorities and private sector can syndicate in providing public services. But it still needs a clarification of procedures and regulatory support before the measure can be proceeded.

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References

1. Bahl, Roy, W, and Linn, Johannes (1992), Urban Finance in Developing Countries, (Washington D.C.: Oxford University Press).

2. Chayabutra, Choowong, (1997), Local Government in Thailand, (Bangkok: Local Affairs Department Press).

3. Dewartripont, Mathias, and Maskin E. (1995), “Credit and Efficiency in Centralized and Decentralized Economies”, Review of Economic Studies, 62.

4. KrongKaew, Methi, (1996), The Political Economy of Decentralization in Thailand, in Southeast Asian Affairs 1995, (Singapore: Intitute of Southeast Asian Studies).

5. Petersen, George, (April 2000), Building Local Credit Systems, Urban Institute mimeo, (Washington D.C.: The World Bank).

6. Petersen, John, and Crithfield, John B, (April 2000) Linkages Between Local Governments and Financial Markets: A Tool Kit to Developing Sub-Sovereign Credit Markets in Emerging Economies, Urban Institute mimeo, (Washington D.C.: The World Bank).

7. Spahn, Paul Bernd (1999), Decentralization, Local Government Capacity and Creditworthiness: Macroeconomic Aspects, ECSIN, World Bank Working Paper No. 6, (Washington D.C.: World Bank).

8. Suwanmala, Charas, (Autumn 1999) “Local Fiscal Capability, Thailand,” Regional Development Dialogue, vol 20, no 2.

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Government

Ministries

Provincial Executive Body

Districts & Sub-Districts

Local Government

CAO Municipaliti

esesTAO

BMA

Sanitary Districts

Pattaya City

Villages

Chart 1. Thailand Government StructureChart 1. Thailand Government Structure(Before the new Constitution)(Before the new Constitution)

44

Chart 2. Revenue Structure of Local Government

Notes : (1) Subsidy or Grants include (a) General Grant (b) Selective Grant. (2) Provident Fund. By law, local governments' expenditure can not be more than 97% of a three-year average of previous revenues plus central-government grants. Therefore this 3% of total revenues left for each year is called Trust fund.

Source: Derived from various establishment laws of Local government entites

Total Revenue

Regular RevenueSpecial Revenue

Tax Non TaxSubsidy1 Trust fund2 Borrowing

Locally LeviedTax

SurchargeTax

SharedTax

FeesAndFines

Income from Assets

Revenue from Public Utilities

45

Table 1. Total Local Government Revenue: 1996-2001

Unit:Million baht1996 1997 1998 1999 2000 2001

Amount % Amount % Amount % Amount % Amount % Amount %General Revenue

1 Building and Land Tax 5,563.37 7.99 7210.14 7.72 7,251.94 7.00 7,696.14 7.33 8,325.91 8.86 8,042.49 5.202 Land Development Tax 253.83 0.36 868.80 0.93 801.29 0.77 752.13 0.72 767.13 0.82 717.10 0.463 Signboard Tax 701.04 1.01 840.24 0.90 818.66 0.79 814.27 0.78 833.86 0.89 787.10 0.514 Animal Slaughter Duty 42.71 0.06 57.63 0.06 56.71 0.05 68.20 0.06 52.39 0.06 75.31 0.05

Total Locally Levied Taxes 6,560.95 9.42 8,976.81 9.62 8,928.60 8.62 9,330.74 8.88 9,979.29 10.63 9,622.00 6.225 VAT and Business Tax 16813.57 24.15 17,755.40 19.02 22,119.03 21.35 16,231.26 15.45 16,467.11 17.53 18,117.16 11.726 VAT and Business Tax (Under Decentralization Plan) -- -- -- -- -- -- 11,532.27 7.467 Liquor Tax 2158.55 3.10 3,505.91 3.76 3,544.03 3.42 3,895.17 3.71 3,186.93 3.39 2,719.60 1.768 Excise Tax 6,493.35 9.33 10,385.65 11.13 9,172.05 8.85 8,462.31 8.06 9,117.78 9.71 11,488.09 7.439 Gamble Tax 119.60 0.17 133.45 0.14 163.97 0.16 142.55 0.14 137.73 0.15 150.00 0.1010 Motor and Vehicle Tax 8,631.91 12.40 9,724.86 10.42 9,634.56 9.30 9,965.26 9.49 10,814.50 11.51 10,085.11 6.5212 Miscelleneous 425.11 0.41 585.56 0.56 95.80 0.10 630.00 0.4113 Tobacco, petroluem, Hotel receipts Taxes for CAO1 -- -- -- -- -- -- -- -- 1,309.18 1.39 1,250.00 0.81

Total Surcharge and Shared Taxes 34,216.98 49.15 41,505.27 44.46 45,058.75 43.49 39,282.11 37.40 41,129.03 43.79 55,972.23 36.2014 Bird Nest Tax N/A N/A 42.11 0.05 3.82 0.00 170.64 0.16 79.06 0.08 200.00 0.1315 Royalty Fees2 N/A N/A 150.65 0.16 535.30 0.52 621.12 0.59 1,187.64 1.26 1,482.99 0.9616 Fee from Transferring of Real Estates N/A N/A 5,782.76 6.19 3,451.65 3.33 2,814.04 2.68 3,726.48 3.97 7,000.00 4.53

Total Revenue from Natural Resources -- -- 5,975.52 6.40 3,990.77 3.85 3,605.80 3.43 4,993.18 5.32 8,682.99 5.62Total Revenue from Taxes and Duties 40,777.93 58.57 56,457.60 60.48 57,978.12 55.96 52,218.65 49.71 56,101.50 59.73 74,277.22 48.03

17 Fees, Fines and License Permit Fees 1,319.39 1.90 1,602.44 1.72 1,618.80 1.56 1,347.37 1.28 1,645.23 1.75 1,504.20 0.97 18 Revenue from Assets 3,751.17 5.39 4,559.74 4.88 5,242.57 5.06 4,472.11 4.26 2,222.52 2.37 3,566.60 2.31 19 Revenue from utilities 174.90 0.25 190.95 0.20 235.10 0.23 242.05 0.23 330.79 0.35 265.80 0.17 20 Miscellaneous 695.54 1.00 1,561.56 1.67 1,119.19 1.08 2,209.92 2.10 1,824.81 1.94 1,289.49 0.83

Total Non-Tax Revenue 5,941.00 8.53 7,914.69 8.48 8,215.66 7.93 8,271.45 7.87 6,023.35 6.41 6,626.09 4.29 Special Revenue

21 General Grants 8,452.70 12.14 13,493.47 14.45 16,844.97 16.26 14,514.77 13.82 13,140.67 13.99 41,390.20 26.77 22 Specific Grants 9,783.31 14.05 7,609.32 8.15 15,473.70 14.94 23,612.36 22.48 18,443.61 19.64 -- -- 23 Transferred Budget for Decentralized Functions -- -- -- -- -- -- -- -- -- -- 32,339.60 20.91

Total Transfer Revenue and Grant 18,236.01 26.19 21,102.79 22.61 32,318.67 31.19 38,127.13 36.30 31,584.28 33.63 73,729.80 47.68 30 Trust Fund 2,919.14 4.19 7,180.93 7.69 4,467.73 4.31 6,131.15 5.84 190.79 0.20 N/A N/A31 Loans 279.68 0.40 692.87 0.74 623.92 0.60 287.89 0.27 19.49 0.02 N/A N/A

Others 1,463.10 2.10 Total Others Revenue 4,661.92 6.70 7,873.80 8.43 5,091.65 4.91 6,419.04 6.11 210.28 0.22 -- -- Total Special Revenue 22,897.93 32.89 28,976.59 31.04 37,410.32 36.11 44,546.17 42.41 31,794.56 33.85 73,729.80 47.68 Grand Total Revenue 69,616.86 100.00 93,348.88 100.00 103,604.10 100.00 105,036.27 100.00 93,919.41 100.00 154,633.11 100.00 Source: Department of Local Administration, Ministry of InteriorNote: 1. These revenue are surcharge on petroluem sale, tabacco, and hotel rental revenue for CAO under new CAO Act of 1997. 2. Including royalty fee from fisheries, minings, petroluem welling, timber permit, and natural park permit fee.

46

Table 2. Local Government Revenue by Entities in Thailand

Unit: Million Baht

1994 1995 1996 1997 1998 1999 2000 2001 2002

CAO 11,283 10,175 8,158 6,496 5,510 5,549 6,256 11,589 13,231

19.72% 16.28% 11.72% 6.96% 5.32% 5.28% 6.66% 12.34% 14.09%

MA 14,223 17,478 21,139 22,689 35,069 33,487 30,100 38,109 40,702

24.85% 27.97% 30.36% 24.31% 33.85% 31.88% 32.05% 40.58% 43.34%

SDA* 5,671 6,591 7,615 9,295

9.91% 10.55% 10.94% 9.96%

TAO 27,051 27,827 31,069 27,472 40,292 40,188

28.98% 26.86% 29.58% 29.25% 42.90% 42.79%

BMA 25,506 27,920 32,353 27,530 34,906 34,585 29,783 31,606 36,522

44.57% 44.67% 46.47% 29.49% 33.69% 32.93% 31.71% 33.65% 38.89%

Pattaya 544 336 352 288 293 346 308 698 970

0.95% 0.54% 0.51% 0.31% 0.28% 0.33% 0.33% 0.74% 1.03%

Total 57,226 62,500 69,617 93,349 103,604 105,036 93,919 122,294 131,613

100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Source: Financial Statistic Book, Ministry of Finance.

Note: * after 1998 all sanitary districts were upgraded to be municipalities

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Table 3. Local Revenue from Trust Fund and Loan Fiscal Year 1999

Unit: Million bahtTrust Fund Loan Total

Amount % Amount % Amount %

CAO 219.4 3.58 19.5 6.78 238.9 3.72

Municipalities 1,835.6 29.94 267.9 93.09 2,103.5 32.77

TAO 2,395.2 39.07 - - 2,395.2 37.31

Pattaya City 40.0 0.65 0.4 0.14 40.4 0.63

BMA 1,641.0 26.76 - - 1,641.0 25.56

Total 6,131.2 100.0 287.8 100.0 6,419.0 100.0

Source: Department of Local Administration, Ministry of Interior

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Table 4. Total Local Expenditure: 1996-2000Unit:Million baht

  1996 1997 1998 1999 2000p

  Amount % Amount % Amount % Amount % Amount %

Debt Repayment and Interest Payment 123.46 0.25 331.91 0.42 341.55 0.43 358.11 0.38 364.70 0.36

Committed Expenditure 831.05 1.69 559.91 0.71 467.02 0.58 503.53 0.54 466.83 0.46

Specific Assistance Fund 52.81 0.11 130.94 0.17 139.50 0.17 150.98 0.16 114.54 0.11

Contingency Expenditure 1,800.18 3.67 1,761.68 2.23 304.73 0.38 571.96 0.61 1,633.46 1.61

Miscellenous     1,787.50 2.24 1,985.75 2.13 1,256.34 1.24

Total Central Fund 2,807.50 5.72 2,784.44 3.53 3,040.30 3.80 3,570.33 3.84 3,835.87 3.77Salary, Wages 9,411.97 19.17 8,939.37 11.32 9,823.76 12.29 9,655.59 10.37 11,794.94 11.60

Temporary Wages 2,712.68 5.53 3,184.22 4.03 3,530.83 4.42 3,527.28 3.79 4,053.05 3.98

Renumeration 8,083.86 16.47 11,083.86 14.04 11,638.15 14.56 13,192.98 14.17 14,549.38 14.30

Utilities Expenditure 549.68 1.12 667.91 0.85 820.56 1.03 1,388.97 1.49 2,283.94 2.25

Grant 460.56 0.94 771.62 0.98 1,478.61 1.85 3,592.46 3.86 3,039.54 2.99

Others Expenditure 1,489.36 3.03 1,510.29 1.91 1,748.74 2.19 2,542.19 2.73 0.00 0.00

Total Regular Fund 22,708.11 46.26 26,157.27 33.13 29,040.65 36.34 33,899.47 36.42 35,720.85 35.12Material, Construction, and Land 15,123.06 30.81 24,070.10 30.48 22,887.46 28.64 17,913.39 19.25 25,492.21 25.06

Investment Espenditure 15,123.06 30.81 24,070.10 30.48 22,887.46 28.64 17,913.39 19.25 25,492.21 25.06Total Regualr and Capital Investment 37,831.17 77.07 50,227.37 63.61 51,928.11 64.98 51,812.86 55.67 61,213.06 60.18Specific Grant Expenditure 8,133.43 16.57 18,768.27 23.77 18,099.52 22.65 18,406.98 19.78 18,579.11 18.27

Reserve Fund 68.57 0.14 6,534.45 8.28 4,181.12 5.23 10,287.14 11.05 16,229.49 15.96

Loans 54.66 0.11 647.38 0.82 577.06 0.72 1,318.70 1.42 1,784.20 1.75

Miscellanous 190.00 0.39 0.00 0.00 2,084.25 2.61 7,681.46 8.25 69.49 0.07

Total Sepcial Fund 8,446.66 17.21 25,950.10 32.86 24,941.95 31.21 37,694.28 40.50 36,662.29 36.05Total Expenditure 49,085.33 100.00 78,961.91 100.00 79,910.36 100.00 93,077.47 100.00 101,711.22 100.00

Total Central Expenditure 843,200.00 925,000.00 830,000.00 825,000.00 860,000.00Source: Department of Local Administration, Ministry of Interior

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Table 5. Local Government Expenditure by Entities in Thailand

Unit: Million Baht1994 1995 1996 1997 1998 1999 2000p

CAO 10,658 9,903 7,577 4,614 4,507 5,366 5,49022.22% 18.61% 15.43% 5.84% 5.64% 5.76% 5.40%

Municipalities 13,181 16,949 18,838 20,437 29,971 32,997 39,03827.48% 31.85% 38.37% 25.88% 37.51% 35.45% 38.38%

Sanitary Districts

5,078 5,893 4,378 7,588 -- -- --

10.59% 11.07% 8.92% 9.61%TAO -- -- -- 19,951 22,491 25,887 21,154

25.27% 28.15% 27.81% 20.80%Bangkok 18,519 20,157 17,970 26,093 22,661 28,482 35,703

38.61% 37.88% 36.60% 33.05% 28.36% 30.60% 35.10%Pattaya City 532 316 332 278 281 346 326

1.11% 0.59% 0.68% 0.35% 0.35% 0.37% 0.32%Total 47,968 53,218 49,095 78,961 79,910 93,077 101,711

100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Source: Financial Statistic Book, Ministry of Finance.

Note: * after 1998 all sanitary districts were upgraded to be municipalities

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Table 6. Size of Thai Financial MarketsUnit: Billion baht

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Bank Loans 1/ 2,669.1 3,430.5 4,230.5 4,825.1 6,037.5 5,372.3 5,119.0 4,585.9 4,298.9 4,359.7 (Feb)

Equities (SET mkt. cap) 3,325.4 3,300.8 3,564.6 2,559.6 1,133.3 1,268.2 2,193.1 1,279.2 1,607.31 1,814.01 (Sep)

Domestic Bond (at par) 262.0 339.0 424.4 519.3 546.8 941.3 1,388.6 1,634.8 1,882.9 1,970.1 (Sep)

GDP (current price) 2/ 3,170.3 3,634.5 4,192.7 4,622.8 4,740.3 4,628.4 4,615.4 4,900.3 5,057.1 5,259.4GDP Growth rate (at 1988 prices) 2/ n.a. 9.0 9.3 5.9 -1.4 -10.8 4.2 4.4 1.5% 2.0%

Source : Bank of Thailand, and National Economic and Social Development Board

Remark : 1/ Bills, Loans and Overdrafts, excluding inter-bank loans 2/ Forecasted by National Economic and Social Development Board (NESDB)

51

Table 7. Outstanding Value of Domestic Bonds

Unit: Billion baht

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002(Sep)

Government Bonds 100.7 62.5 43.0 18.0 13.8 426.9 587.1 658.7 706.4 786.4T-Bills - - - - - - 25.0 62.0 110 149State enterprise Bonds 135.0 190.4 238.3 278.4 293.8 300.6 356.4 408.8 416.1 400.6- Guaranteed 109.7 159.8 208.7 239.7 247.3 255.7 309.1 345.3 357.3 347.6- Non-guaranteed 25.3 30.6 29.6 38.7 46.5 44.9 47.3 63.5 58.8 53.0FIDF/PLMO Bonds - - 9.5 40.5 51.6 36.2 18.1 4.1 112.3 112.31/

Corporate Bonds 26.3 86.1 133.6 182.4 187.6 177.6 402.0 501.2 538.1 521.7Total 262.0 339.0 424.4 519.3 546.8 941.3 1,388.6 1,634.8 1,882.9 1,970.1

Source : Bank of Thailand

52

Laws and Regulations

1. Municipalities Act of 1953.

2. Amendment of Municipalities Act of 2000.

3. Municipal Revenue Act of 1954.

4. The Ministry of Interior Regulation on Municipal Revenue of 2000 issued under the Municipalities Act of 1954.

5. Changwat (Provincial) Administrative Organization Act of 1997.

6. The Ministry of Interior Regulation on Changwat Administrative Organization of 1998.

7. Tambon (District) Administrative Organization Act of 1994.

8. Securities and Exchange Act of 1992.

9. Bank of Thailand Act of 1942.

53

APPENDIX

54

Table A.1 Functions of Local Government After the Introduction of New Constitution

Municipalities, TAO, Pattaya CAO BMA

1. provide its local development plan

2. provide and maintain land way, waterway and drainage ditch

3. provide and control market, harbor, bridge and car park

4. a public utility and other construction

5. public support6. supporting, training and

doing job7. business and

investment supporting 8. tourism supporting9. education management10. social working and

developing life quality of child, woman, old man and poor man

11. maintain arts, custom, local innovation and good cultural

12. improve slum and manage resident

13. provide and maintain public park

14. sport supporting15. support democracy,

equality and rights of people

16. support people participation in local development

17. keep cleaning and neatness of local

18. eliminate garbage and polluted water

19. public health family’s sanitary and nursing

20. provide and control graveyard, crematorium

21. control breeding animal22. provide and control

1. provide its local development plan and coordinate with provincial development plan according to order of the cabinet.

2. support other local government in local development

3. link and collaborate in practicing duty of other local governments

4. provide subsidy to other local governments

5. protect, and maintenance of forest, land, natural resource

6. education management7. support democracy,

equality and rights of people

8. support people participation in local development

9. support appropriate technological development

10. build and control remedying total polluted water system

11. eliminate total garbage 12. environment and

pollution management13. manage and control

land, water transport station

14. support tourism 15. support business,

investment and operate local

enterprise, collaborate to others or syndication16. construction and

maintain road way and

BMA has authority in managing system to local peoples’ benefit according to the Plan and Procedure for Decentralization Law

55

animal slaughtering23. keep security, neatness

and sanitary in cinema, public place

24. manage, maintain and utilize forest, land, natural resource and environment

25. town planning26. transportation and

traffic engineering27. take care of public

place28. building control29. protect and relief public

danger30. support protection and

keeping safety in life, property

31. other enterprise which is local peoples’ benefit as committee determining

waterways that linked among other local government

17. construct and control central market

18. support sport, tradition, local culture

19. provide provincial hospital, nursing protecting and controlling infectious disease

20. provide museum 21. mass communication

and traffic engineering22. protect and relief public

danger23. provide security system

in province24. proceed enterprise

which is other local government being in area’s authority

25. support and help bureaucracy or other local government to develop local

26. provide service to private, bureaucracy, government’s organization, state enterprise or other local government

27. social working and developing life quality of child, woman, old man and poor man

28. operate enterprise according to determining in this acts or other law indicated to be local government’s authority

29. other function that is local peoples’ benefit according to the decentralization committee indicated

56

Table A.2 Revenue of Local Government After Introduction of the new Constitution

Municipalities, TAO, Pattaya

CAO BMA

1. Building and Land Tax

2. Land Development Tax

3. Signboard Tax4. VAT 5. Business Tax6. Excise Tax7. Motor and Vehicle

Tax8. Gamble Tax9. Education Tax10. Animal Slaughter

Duty11. Bird Nest Tax12. Royalty Fees from

Mining13. Royalty Fees from

Petroleum Welling14. Fee from

Transferring of Real Estates

15. Airport Fees16. Liquor License Fees

and Gamble License Fees

17. Other Fees, License Fees and Fines

18. Underground Water Fees

19. Fees from using or has benefit from public service

20. Other Revenue

1. Petroleum Tax for CAO

2. Tobacco Tax for CAO

3. VAT4. Business Tax5. Motor and Vehicle

Tax6. Education Tax7. Bird Nest Tax8. Royalty Fees from

Mining9. Royalty Fees from

Petroleum Welling10. Hotel Receipt Tax

for CAO11. Other Fees, License

Fees and Fines 12. Fees from using or

has benefit from public service

13. Other Revenue

1. Building and Land Tax

2. Land Development Tax

3. Signboard Tax4. Petroleum Tax for

BMA5. Tobacco Tax for

BMA6. VAT7. Business Tax8. Excise Tax9. Education Tax10. Motor and Vehicle

Tax11. Gamble Tax12. Royalty Fees from

Mining13. Royalty Fees from

Petroleum Welling14. Animal Slaughter

Duty15. Hotel Receipt Tax

for BMA16. Airport Fees17. Fee from

Transferring of Real Estates

18. Liquor License Fees and Gamble License Fees

19. Other Fees, License Fees and Fines

20. Fees from using or has benefit from public service

21. Other Revenue

57

Table.A.3 Types of grants allocated to Local Governments in Thailand

Types of grant Allocation Criterion Additional Payment

Gen

eral

Gra

nt

For Municipalities

150 baht per head for general purposes spending.

According to MA’s 5 level for general purposes spending for class of municipality.

(700,000 Baht, 800,000 Baht, 1,200,000 Baht, 1,300,000 Baht and 1,400,000 Baht)

For Sanitary Districts 100 baht per head for general purposes spending 300,000 Baht for any SDA whose

revenue(exclude grant) below 300,000 Baht

Spec

ific

Gra

nt

For specific municipalities and sanitary districts development projects

To receive the grant they must qualified the following criterion

1. Follow central policy 20%2. To fulfill local Needs 30%3. Geographical conditions, Population Number,

and local revenue 30%4. The Administrative compatibility and efficiency

20% For special areas who counter with pollution or development problems or the areas that have high capacity for tourism industry

For special municipalities and sanitary districts.The amount of grant depends on size of project central government discretion.

For water supply provision For municipalities and sanitary districts who having water supply shortage problem.

Municipalities office buildings For municipalities whom were just established in new emerging provinces and in border areas

50% of construction cost must be matched by municipal fund.

For garbage collection and disposal

For municipalities and sanitary districts who lack of such equipment and to replace the obsolete equipment.

For Pattaya City development project

For Pattaya City

58

Case Study of RUDF Loan 1: Investment on Extension of Public Water Supply Project of Phisanulok Municipality

Water supply in Phisanulok municipality is owned and operated by Water Department of the Municipality. The operation was transferred from Engineering Department of the Ministry of Interior in year 1930. Currently the municipality owns 2 water purification plants of which has 1,570 cubic meter per hour production capacity. During the previous operation the Water Department faced declining production efficiency because of obsolete machines and equipment, lack of proper maintenance, constrained in budget allocation. Most of all the supply can not catch up with the continuously increase in water demand due to rapid urbanization. With all factors the Phisanulok municipality has countered water shortage during certain period of the year.

Nature of the Project

The new water purification project will be expansion of the existing water plant to supplement present and future water consumption. The capacity of the new plant is 500 cubic meter per hour.

Plan and Operation Period

No moving plan because this construction have no effect to current water production system. Construction period is about 12 months.

Investment

Total project cost is 33.17 million baht which consisted of:

- RUDF loan is 20 million baht (60 percent of project value).- Municipality’s matching in 17 million baht building (40 percent of project value).

Expected Benefits from Project

- Water supply to people who live in municipal vicinity;- Having clean water supply for people’s utilizing; and- Water supply to protect flame hazard.

59

Case Study of RUDF Loan 2: Investment on Construction of Garbage Disintegration Plant

Garbage disposal is the main responsibility of Phuket municipality. It receives budget to construct garbage disintegration plant of which has capacity of 250 tons per day and invest in garbage burial system from Engineering Department of the Ministry of Interior. Currently garbage disposal system is integral system where there is no disintegration of waste which make it be more costly in every aspect. Therefore, the Phuket municipality has studied method to reduce waste and garbage recycling system. Result from study suggests that the Phuket municipality should have garbage disintegration before disposal.

Nature of the Project

- To construct garbage disintegration plant by adapting area inside garbage disposal site which is previously use burial method. Additionally, the municipality will provide public utility system to facilitate the system.

- The system uses both labor and machines in operational.

Plan and Operation Period

The construction period takes 480 days divided to 120 days for design, and additional 360 days for building.

Investment

The investment cost is 42.69 million baht which consists of:

- RUDF loan 33.69 million baht (79 percent of project value).- Municipal matching fund in 9 million baht (21 percent of project value).

Expected Benefits from Project

- Reduce unnecessary garbage before disposal and that can be recycled.- Reduce pollution that effect to environment from garbage burial process.- Expand local employment.

60