treaty obligations force a rethink of investment promotion
Challenge and response
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
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.
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
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
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
According of the Excise Department, the government lost about
eight billion baht in 1997 from tax exemptions.
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.
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
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
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.
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
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.
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
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.