INVESTMENT International treaty obligations force a rethink of investment promotion strategies

Challenge and response

Chatrudee Theparat

Thailand's investment promotion policy is likely to face significant challenges in 2000 to comply with obligations Thailand has made under the World Trade Organisation, and the country's efforts to remain the most attractive investment option in the region for foreign investors in the year to come.

That means the government and private sector have to take a greater role to help rebuild the Thai economy and strengthen local investors.

The government needs to work out more measures to cut the costs of private operators, while the Board of Investment is to come up with flexible promotional privileges to attract investment.

''Next year, there will be big changes in investment policy, as Thailand, through the Board of Investment, needs to improve management and corporate policies to conform with global changes,'' said deputy secretary-general Chakramon Phasukvanich.

Under the World Trade Organisation regulations, members will be allowed to offer investment incentives only in poverty-stricken areas.

Adding incentive

In its best attempt to promote domestic investment, the Board of Investment recently revealed its latest investment promotion package which, for the first time, attaches investment incentives to research and development, staff training, and compliance with international quality standards.

The new investment package, being finalised by the investment agency and now pending public hearings, will also include a revamp of promotional zones, and a plan to allow more foreign-owned companies access to investment incentives.

Under the new proposal, companies that are majority-owned or wholly-owned by foreign investors will be allowed to enjoy the same investment incentives as Thai companies.

Foreign-owned companies now have to meet certain requirements, including a provision to export at least 80% of total production, to be eligible for the agency's business breaks.

The new investment package, partly based on a study by a unit of the World Bank, was provisionally planned for introduction in April 2000.

The package has been designed to further decentralise investment areas outside Greater Bangkok and other wealthier provinces amid a declining flow of foreign direct investment to Asean countries. The new investment incentives are more generous than the existing ones. They offer a machinery tax exemption and a longer period of corporate income tax exemption for the new Zones A and B.

Zone to zone

The board is considering two options for promotional packages. The first requires eligible projects to invest in research and development and/or staff training. The other requirement is that investors obtain International Standard Organisation (ISO) certifications, or achieve similar international standards, within a certain period after commencing operations.

Under the new criteria, the existing 18 provinces in BoI Zone I and Zone II will be combined into a single zone, to be called Zone A, which will offer the least investment privileges among the three new zones.

Factories in Zone A will be required to win an ISO industrial standard or other world standard within two years of the date they register a profit, and invest at least 1% of the total investment excluding their investment in land and cash flow in staff training. Factories will enjoy corporate tax exemption on no more than 50% of their investment costs and investment projects in this zone will enjoy no tax on raw materials for one year.

Zone B will comprise 40 provinces which are currently classified as BoI Zone III. These provinces include Nakhon Ratchasima, Khon Kaen, Prachuap Khiri Khan, Prachin Buri, Songkhla, Lampoon, and Chiang Mai.

Factories in Zone B will be exempted from import duties on machinery, and have tax free status for five years on raw material imports and free of corporate tax for up to seven years if they achieve the BoI conditions.

The third, Zone C, will comprise 18 provinces which have the lowest per capita income and are the least appealing to investors. Most of these provinces are located in border areas. To qualify, these provinces must have an average per capita income of not higher than 85% of the national's average during the past three years.

In Zone C, factories will be eligible for incentives including a tax exemption for machinery imports, corporate tax exemption for up to eight years, and raw material imports will be tax free for five years.

Mr Chakramon said the new BoI policy will lower the rate of lost revenue for the government as a result of the tax exemptions, as the new policy will attract a larger number of investors to Thailand.

According of the Excise Department, the government lost about eight billion baht in 1997 from tax exemptions.

Recovering investment

After a year of suspension of investment in 1998, applications for BoI privileges in the first ten months showed positive signs of a return of investors.

Applications for the period rose by 22.2% to 708 projects with registered capital totalling 26.8 billion baht compared with 571 projects with 173 billion baht in registered capital in the ten months of last year.

Japanese investors remained the leading investors in Thailand, owning 189 investment projects, a rise from 142 projects applied for last year.

European investors ranked second with 102 projects compared with 129 projects last year, followed by Taiwanese investors who submitted 87 projects, up from 74 applications last year.

Then came US investors who applied with 54 projects, a slight drop from 56 applications in the same period last year. The Board of Investment secretary general Staporn Kavitanond said the increased investment applications in the first ten months of this year showed a revival of investment.

According to the BoI's survey, production and export of the country's major industries such as electronics, automobiles, rubber gloves, construction material and toys experienced strong growth. Expanded production will lead to economic recovery.

Electronics and electrical appliances over the first nine months of 1999 accounted for one-third of total exports amounting to $14.075 billion, a 5% rise from the same period last year.

Though main industries are seeing promising prospects, the root of the problems in five industries remains unsettled. These sectors are steel, petrochemicals, ceramics, pulp and paper, and textiles, most of which are owned by local investors with investment capital totalling over 630 billion baht in all. These industries are highly likely to be taken over by foreign creditors and foreign investors, if the government takes no corrective action.

To curb this possibility, the Board of Investment has worked together with other economic agencies to cooperate in measures to sort out the difficulties in those industries. Debt restructuring alone was insufficient to help those industries survive if the country's export and consumption demand did not revive, Mr Staporn said.

The Board of Investment has recently finalised guidelines for the measures to help those industries. High import tariffs on raw materials and equipment are the main problem for the five sectors.

For pulp and paper, the industry will be relaxed and allowed by the Board of Investment to establish factories without zoning restrictions. At the same time, the board will ask the government to come up with a clear policy to support raw materials for pulp and paper industries and for the Finance Ministry to cut import duties on raw materials.

The Board has also proposed that the relevant government agencies work out measures to crack down on problems in the ceramics industry which is now shouldering high production and marketing costs as well as import duties as high as 10-20%, compared with 0-5% levied by neighbouring countries such as Malaysia and Indonesia. High energy and power costs are also other key problems for Thai industries.

Rough ride

Hardest hit is the petrochemical industry which has massive accumulated debt totalling 200 billion baht as a result of the economic crisis.

Encouraging signs are visible for those industries mainly because of the world economic recovery and reviving global demand which is helping manufacturers to resume their production lines.

So far, 64% of petrochemical producers have undergone debt restructuring schemes.

Thailand is uncompetitive in terms of high utility and energy costs and complicated taxation laws. The country is likely to remain uncompetitive against Singapore which has much lower financial and transport costs though Thailand and Singapore are both committed to lower tariff structures under Asean Free Trade Area rules due to take effect in January 2000.

Meanwhile, the Board of Investment has encouraged 16 steel bar producers to merge or consolidate operations. Mr Staporn said some debt-ridden steel factories might be forced to shut if they fail to merge their operations to reduce costs, as the industry is far from showing any signs of revival. He attributed the problems of the industry to sluggish domestic demand.

The steel industry is running at a production capacity of only 30% compared to a full capacity of nine million tons. The crisis whittled away sharply at the capacity of the steel industry _ 4.8 million tons in 1998 compared with 7.6 million tons in 1997. The BoI forecast demand will recover slightly to 5.3 million tons by the end of 1999.

Like other local industries, the steel industry now owes a total of 178 billion baht, 63.3 billion baht of which is owed by factory owners for steel bars.

Concrete measures to help the five troubled industries are urgent, as they play a significant role ensuring the survival of small and medium-sized industry and the overall economic recovery.

Confidence campaign

The BoI has scheduled February 3-17 at Muang Thong Thani, Nonthaburi province, to hold the country's grandiose BoI Fair 2000 as a campaign to boost investment in Thailand and to encourage local confidence in Thailand's economic resurgence. The BoI, which was successful in restoring the confidence of the people after the bloodshed of May 1992, will handle the grand fair, Mr Staporn said.

He said that the economic situation has significantly improved as evidenced by several clear economic indicators. ''While many foreign investors agree that the Thai economy has been on the path to recovery, many Thais are still dithering.''

He cited several positive indicators such as a stabilised baht, increased foreign reserves, an improved industrial manufacturing index, lower inflation and interest rates, and increased exports over the past ten months.

The BoI campaign will focus on informing people, both local and foreign, of recent developments in the economic situation. ''The confidence of customers, manufacturers and investors plays a significant role in the free market economy, so encouraging confidence among investors is essential, because once the recovery occurs, demand will follow,'' Mr Staporn said.

At least 500 companies from local industries including the agro-industry, metals, light industry, electronics, automobiles and parts, petrochemicals and plastics, and service industries, will participate in the fair and between 3-5 million people are expected to visit. Around one billion baht is expected to be spent during the fifteen days of the fair.

The board itself will invest about 70-80 million baht to build indoor and outdoor pavilions and other facilities. The BoI will spend over 12 million baht to build and decorate a pavilion designated to showcase the role of the BoI as the leader in providing information and strengthening the competitiveness of Thai industry.

The BoI Fair is also expected to attract about 3,500 delegates who are scheduled to arrive in Thailand during February to attend a meeting of the United Nations Conference on Trade and Development (UNCTAD).

However, Mr Staporn admitted that recovery and the improvements are still unclear in some areas such as the financial sector, privatisation and the reform of bureaucracy, the government's economic stimulus package as well as industrial restructuring.

 

 

 

 

 

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