INURD WP#SS-2

URBAN DEVELOPMENT DIVIS ----~ --·-:-:----~-- ---:---,·-. -~l\: ··~-r-c.._ -"~. "~~ J-\ , . ·~· POLICY, PLANNING AND RESEARC ST'A'f:,'F i (:(', C4 '-' ' ' .. , Public Disclosure Authorized J'. P ::M\ ~J "~J(. ~:~:,,~~

~\!E'.J~i DELt~~ l ____ . L------· ..... ----- I I I . ., ____ .,_.j __ INFRASTRUCTURE CONSTRAINTS .... - .. - ··'·-·' 1 ON INDUSTRIAL GROWTH IN ' .. TH-:AfLAND I

I Public Disclosure Authorized

by

Kyu Sik Lee Public Disclosure Authorized

september l988

Working Paper

•:) The INURD Working Papers present prelimtnary research findings and are

Public Disclosure Authorized intended for internal review and discussion. The views and interpretations in these Working Papers are those of the author(s) and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. '\ I Kyu Sik Lee is a Senior Economist, Infrastructure and Urban Development Department, The World Bank, Washington, D.C. He would like to thank Kenichi Ohashi, Sudhir Shetti, Per Ljung, Gregory Ingram, and ~ichael Garn for their comments and suggestions on the earlier draft.

This p~p~r w~~ prP~~red a~ ~n inp11t ~o the Country Ec0nomic ~emorandum based on the findings during the CEM mission led by Kenichi Ohashi in April 1988. The author is grateful for the support given b~ Khun Suchart Thada-Thamrongvoch, Khun K. Angkana Ratchtorn and other staff members of the World Bank Regional ~ission in .

INFRASTRUCTURE CONSTRAINTS ON INDUSTRIAL GROWTH IN THAILAND

Table of Contents

Page No.

lio The Primacy of BangkoK and Government Policies

Decentralization Trends- of Manufacturing Activity...... 2 Alternatives to Spatial P~licies ••••••••..••.•••••••••••••.•••... 5

B. Infrastructure Conscraints on the Growth of Industries ······~ .... 6

Concentration of Small firms in Bangkok .....•.•..•...... •...... • 6 Infrastructure Needs of Small firms ...... •.....••...•.•.... 7 Site Constraints for ~edium Size 2irms .. : ...•...... •.... : .... ~:j 1 1 Costs of.Infrastruciure Deficienciis .•...... •.••...... • .l. Upgrading Existing :~dustrial Areas . .•..... ~ ... ~ ••...... : .• : .... Overall Location Patterns of Industrial Growth ...... ••......

C. Inefficiencies in Managing the Growth of Bangkok ..•..••..•.•. ·.... 16

Extent of Undeveloped Land ...... 16 Inappropriate Infrastructure Planning ••••••••••••.•.•••.•••.•...• 17 Decentralization of Population and Employment within Bangkok and Implications for Infrastructure Planning ..•...... •...... l9

D. Constraints on the Industrial Growth in Regional Cities .•••••.••• 21

E. Conclusions and Policy Recommendations ••••••••••••••••.•••.•.•••• 23

ANNEX ...... " ...... 28

INFRASTRUCTURE CONSTRAINTS ON INDUSTRIAL GROWTH IN THAILAND

A. The Primacy of Bangkok and Government ?olicies

~ith almost s1x million people, Bangkok 1s almost thirty times

larger than the second Largest city, . The secondary cities in

Thailand have stayed small and have not shared proportionately in industrial growth. There is a strong perception within and outside the Government that

5evere con~estion ~roblems becau~e L~e ctty -" gec::.ng " CJO bl.g. " • The fact that as many as 35,000 cars are added to the city each year accentuates such a perception. The traffic congestion in Bangkok 1s now so extreme that the high travel density and low average traffic speed remain almost unchanged 1n a wide area of the city throughout the day. Out of

700,000 water ~onnections tn Bangkok, only 150 are for manufacturing ·firms.

All other firms use ground water, which contribuces to the subsidence problem.. Although electric power supply is available, outages and voltage drops oc:cur. These strains on the basic infrastructure facilities 1n Bangkok affect business operations, imply additional costs to firms there and reduce the overall efficiency of the urban area.

As in other developing countries such as Indonesia, Korea, Nigeria,

India, and Mexico, the Government of Thaildnd is concerned with the inc~easing concentration of economic activity in the primate city. 'riith the objectives of reducing congestion in Bangkok and mitigating regional disparities in industrial development, the Government has pursued explicit spatial policies intended to decentralize industries from Bangkok to outlying areas and regional cities. In the past, t~is effort concentrated on improving the basic transport and communication infrastructure. Moree recently, 1n addition to - L - vartous tax incentive schemes offered to firms locating tn designated areas outside 0 ~ngkok, the Government has attempted to induce industries to Locate in regional cities by establishing industrial estates there, for exampl.e, the

Northern Region Industrial Estate near Chiang Hai. Despite such policies, congestion in Bangkok has been ~orsening.

The urgency of the Government concerns on these issues is reflected

1n the.Board of Investment (BOI) policy changes introduced in September 1987 spec1Ii~ally a1m1ng at dispers1ng manufacturing industr:es :~om :he 3acgka~

Metropolitan Region (3MR)l/ to other regions. Under the new scheme (~Jtnex), the BOI promoted projects locatin~ in Bangkok or , adjacent to the south of Bangkok, ~ill be excluded from various tax exemptions and also from tax reductions allowed for both installation and operating costs ,.,, of ip.£rast.ructure facilities such as transport, water, and .electricity., ~nose projects locating in one of the four other provinces surrounding Bangkok ~ill receive reduced benefits. All provinces other than Bangkok (BMA) and the five surrounding provinces are designated as an Investment Promotion Zone.

However, BOI makes exceptions for export-oriented large scale firms with at least 200 or more employees even if they Locate in Bangkok or Samut Prakan, and for those Locating in industrial estates. (This point 1s further analyzed below.)

Decentralization Trends of Manufacturing ActivitY

According to the Ministry of Industry factory registracion data, during the pase two years, a period of rapid growth with rising exports,

..1 ,I The Bangkok ~etropolitan Region (BMR) includes the city of Bangkok, officially called Bangkok ~etropolitan Administration (BMA), and five surrouna1ng provinces, Samut Prakan, , Pathum Thani, , and . (See che attached map of BMR.) - 3 -

Bangkok has been losing its share of manufacturing establishments relative to other regions of the country (Table 1). The Central Region excluding BMR, and all other regions had a net gain of establishments with a growth rate higher than the national average of 3.6 %, while Bangkok experienced a nee loss. BMR excluding Bangkok (SMA), and the Northern and the North Eastern

Regions attracted manufacturing establishments at a race twice the national average. This general trend of countrywide decentralization of manufacturing industries, however, was already occurring with little influe~ce of :~e 30I policies. During the first three months of 1988, for instance, only ll of c~e

271 BOI approved projects located 1n the Northern and the Northeastern

Regions. Actually, these t~o regions' share of approved projects declined from 8% in 1987 to 4% in 1988 (Table 3).

Although the BMR was gaining manufacturing ~stablishments at an annual rate of only 1.7% (Table 2), less than half of the national average, manufacturing activity 1n non-B~~ part of BMR, i.e., the five provinces surrounding Bangkok, had the highest annual growth rate 1n the country at 9.7%

(Table 1). This trend of manufacturing employment decentralization from the central city to surrounding regions is similar to what has occurred in large cities in other countries such as Seoul, Sao Paulo, Bombay, and Bogota.

Within the BMR, the growth of manufacturing establishments was highest in

Samut Prakan and Pathum Thani provinces (see the map). As discussed further below, these trends are the aggregate outcome of location decisions of individual firms in response to operations of the land and other markets

- rather than.to the explicit spatial policies such as the BOI incentive schemes. Given these existing decentralization trends in the location of manufacturing activity 1n Thailand, excess1ve spatial policies would induce - L&. - low density development patterns and would ra1se the costs of providing infrastructure services.

Table 1: CHANGES IN REGIONAL DISTRIBUTION OF MANUFACTURING ESTABLISHMENTS IN THAILAND

1985 1987 Annual Average Region Number Percent Number Percent Growt:h R.ate (%)

I ~ ,.. t"\ 3)-(..A ( 3ang~ok) l7.G22 ~5.02 ~6 ,no .-_..L.O';I _,..)' ~ _;~ 3MR excluding BMA Ia 4' 136 10.94 4,974 L2.26 9. 7 Central- exc!..uding BMR 3' 728 9.86 4,033 9.94 4.0 Eastern 2,438 6.45 2,625 6.47 3.3 Northern 3,280 8.68 3,795 9.JS 7.6 Northeastern 4,48L. 11.86 5,230 12.89 8.0 Southern 2,722 7.20 3,007 7.41 5 .1

Total 37,810 100.00 40.5 84 100.00 3.6

Ia The Bangkok Metropolir.an Region (BMR) incl.udes Bangkok (BMA) and the five surrounding prov1nces.

Source: Factory Registration Files, Ministry of Industry. - 5 -

Table 2: CH&~GES IN DISTRIBUTION OF MANUFACTURING ESTABLISHMENTS BY PROVINCE IN BANGKOK METROPOLITAN REGION (BMR),

1985 1987 Annual Average Province Number Percent Number Percent Growth Rate un

BMA (Bangkok) 17,022 80.45 16,920 77.28 -0.3 Samut Prakan 2,086 9.86 2,526 11.54 10.0 Samut Sakhon 658 3.11 767 3.50 3.0 Pathum Thani 358 l.69 462 2.11 l3. 6 Nonthaburi 518 2.45 609 2.78 8.4 Nakhon Pathom 516 2.44 610 2.79 8.7

Total 21.158 100.00 21.894 100.00 -. 7'

Source: Factory Registration Files, Ministry of Industry.

Table 3: REGIONAL DISTRIBUTION OF BOI APPROVED PROJECTS

Jan - Mar 1987 Jan - Mar 1988 Region Number Percent ~l'umber Percent

Bangkok (BMA) and 42 40.78 111 40.96 Samut Prakan BMR excluding Bangkok 18 17.48 68 25.09 and Samut Prakan Central excluding 3MR 24 23.30 70 25.83 Northern 2 1. 94 7 2.58 Northeastern 6 5.83 4 1.48 Southern 10 9. 7l 10 3.69 Not specified l 0.97 1 0.37

Total 103 :oo.oo 271 100.00

Source: Board of Investment.

Alternatives to Soatial Policies

Spatial policies intended to reduce negative externalities such as congestion and pollution in a large city by reducing the size of population - s - and employment have been found to be ineffective and costly in other coun- tries. For a city the size of Bang~o~, even a substantial rPduction of its population will have negligible impact on the present level of congestion.~/

What is needed is better internal management of city growth with more appro- priate infrastructure investment strategy and programs. The current traffic congestion problem, for example, mainly stems from the poor in-city road networ~ that lac~s sufficient access roads, inefficient public transit and traffi~ control syscems, and c~e lack of efficient outlets to main hig~ways.

Changing location patterns of cesidential housing and workplaces and subsequent changes in commuting patterns should be reflected in transport and other infrastructure investment programs. However, oang~ok's physical. infrastructure programs in the past have not been sufficiently sensitive co the.location dynamics of servi~e demand.

B. Infrastructure Constraints on the Growth of Industries

Concentration of Small Firms in Bang~ok

Manufacturing firms tend to locate wh~re th~y can easily meet their needs tor infrastructure and other factors of production. The particular infrastructure requirements of individual firms will depend on the types of product and the s1ze of their operations. More chan 40% of the country's

40,000 manufacturing establisb.ments (excluding rice miLls) are Located 1.n

Bangkok (Table 1). Three quarters of them had less than 10 employees, 95% had less t~an 50 employees, and there were only 368 establishments with 100 or ~

2/ A study conducted by George Tolley, Urban Growth Policy in A Market Economy, Academic Press, 1979, showed that halving Chicago s population would reduce negative externalities such as congestion and pollution by Less than 5%. - 7 - more employees in Bangkok according to the Ministry of Industry's 1984 industrial census results. The size distribution of manufacturing establishments is thus skewed toward small firms. Well established old industrial areas with large factories that exist in large cities tn other countries are absent in Bangkok. It is not surprising then that manufacturing activities are rather unnoticeable inside Bangkok.

Infrastructure Needs of Small firms

Small firms ~hich account for 95% of all firms in Bangkok operate ~-' the high density areas in the central city where, despite the higher rencs, they benefit from readily available externalities such as the availability ot skilled labor, easy access to various infrastructure, business and government servtces and markets, and shared repair and deli-very services. The efficient: land market without much land use control enables small entrepreneurs to locate thetr factories almost anywhere in the city, often in the same dwelling units where they live. Since there are plenty of residential or commercial structures that can be easily converted to factory use, these small firms do not suffer from the lack of adequate infrastructure services such as electric power, road access, and telecommunications. As is the case with large cities in other countries, these central areas of Bangkok serve a special function in promoting the birth of small new firms that is so vital to the economy and not easily transferable to outlying areas. Evidence from large cities in both developed and developing countries such as Seoul, 3ogota, and large U.S. - 8 - cities shows that from 60 to 80% of new jobs are created by newly established small firms that tend to locate in the central city.l/

As these small firms grow and expand, space and infrastructure constraints become more sign{ficant for them, and they tend to move outward Ln the city where more space LS available. This pattern in Bangkok Ls clearly shown in Table 5. The proportion of the smallest category of firms decLines from 82% in Ring 1 (Old Business Area) to 46% in Ring 4 (Outer Area) while the proportion uf the Larger size fir~s (50-199 persons) r1ses from 6% co 19% as che distance from the center tncreases (see ~age 19 for definition of

Rings). Evidence from other countries shows that small firms do not move Long distances. When they move, they tend to avoid 1ncreases 1n their delivery and employees' commuting distances and set.up costs at the new Locat ton.-. 4/

J/ K.S. Lee, "Intra-urban Location of Manufacturing Employment in CoLombia," Journal of Urban Economics 9, 1981; "An Evaluation of Decentralization Policies in Light of Changing Location Patterns of •2mployment in the Seoul ~egion," Ur~an Development Discussion ·Paper UDD-60, T~e World Bank, 1985; D.L. 3i:cch, "The Job Generac.ion Process," :-tiT Program on ~eighborhood and Regional Change. Prepared for U.S. Department of Commerce, Economic Development Administration, 1979.

4/ See Lee, op. cit., 1981, 1985. - 9 -

Table 4: DISTRIBUTION OF NEWLY REGISTERED MANUFACTURING ESTABLISa~ENTS BY PROVINCE AND EMPLOYMENT SIZE IN BMR, 1987

Emoloyment Size in Percent Total Number of

"~nee 1-19 20-49 50-199 200-299 300 or more Total Establishments

(Bangkok) 69.35 20.06 8.52 0.96 1.11 100.00 ( 871) (252) (107) (12) (14) (1,256) ut Prak..an 43.79 22.88 25.82 4.25 3.27 100.00 ( 134) (70) (79) (13) ( 10) (306) ut Sakhon 43.86 21.93 26.J2 6.14 l. 75 100.00 / ., , I, ') (50) (25) (30) (7) ( 2) \ .... -~.I hum Thani 61.54 14.10 17.9 5 L 23· 5.13 100.00 (48) (ll) (14) (l) . (4) (78) thaburi 79.b3 7.41 . 7. 41 l. 85 3.70 100.00 (43) (4) (4) (l) (2) (54) hon Fathom 56.72 16.42 22.39 l. 49 2.99 100". 00 (38) (11) (.15) (l) ( 2) ( 67)

Total 63.15 19.89 13.28 l. 87 1.81 100.00 (1,184) ("373) (249) -m) (34) (1,875) e: The values tn parentheses represent the number of establishments tn individual categories •

.rce: Factory Registration Files, Ministry of Industry. - :o -

Table 5: DISTRIBUTION OF NEWLY REGISTERED MANUFACTURING ESTABLISHMENTS BY CONCENTRIC RING AND EMPLOYMENT SIZE IN BMA, 1987 ---- Emolovment Size tn Percent Total Number o Ring 1-19 20-49 50-199 200-299 300 or more Total E:stablisb.ment

Old business 81.82 9.09 6.06 0.00 3.03 100.00 area ( 27) (3) (2) {0) (1) (33)

New business 68.13 22.50 7.50 0.83 1.04 100.00 area (327) (108) (36) (4) (5) (480)

0 c: /, Rapid.:.j growing 71..35 18.S2 I...J•.J ... 0.87 C.72 100.0() ' \ suburbs (!.o.93) (l28) (59) ( 0 J ( 5 ) (S9:)

Outer area 46.15 2S.OO 19.23 3.85 5. 77 100.00 (24) ( l3) (10) (2) (3) (52)

Total 69.35 20.06 8.52 0.96 1.11 100.00 ( 871) (252) (107) (12) (14) (1,2S6)

- Note: The values tn parentheses represent the number of establishments 1n individual categories.

Source: Factory Registration Files, Ministry of Industry.

Site Constraints for Medium Size Firms

~hen firms grow to medium size (50 to 200 employees) and want to

relocate, the five existing industrial estates in BMR are a poor alternative

even though they are intended to provide sites for small and medium size

firms. For these firm3 they are too far (more than 30 to SO kilometers from

the city center) and too expensive. The pr1ce of a completely developed site

in the estates is SO to 100% higher than a comparable site nearby. Since

firms make site selections 1n response to land price differences and other • market signals, successful infrastructure planning for industries must: be

consistent with the locational needs of individual firms of different types.

Otherwise, the facilities in place will be underutilized or unoccupied fot an -.~ 1 i - indefinite period of time. Indeed, the occupancy rate of the existing industrial estares in BMR remained low until 1987 when all available sites were sold out to new foreign (mostly Japanese and Taiwanese) firms. The privately developed Nava Nakor~ Industrial Estate located about SO kilometers north of the city center holds a waiting list for new applicants, but mostly from foreign countries. This rising demand for industrial sites by foreign firms pushes up the price and will adversely affect Thai firms by worsen1ng the site constraints for them.

For these growing Thai firms, alternative Locations for ?Lane expan- s1on seem limited. They could locate on undeveloped private Land, but setup costs would be high there. The initial capital investment would include access roads, electric power generators and transmission equipment, boreholes and water treatment facilities, and the drainage system. These costs would be prohibitively h1gh for small firms. The generators and boreholes alone could require 10 to 20% of the initial investment. Such capital and subsequent operating costs will affect the competitiveness of Thai industries. The extensive private provision of basic infrastructure serv1ces by individual firms also means unnecessary duplication of the existing facilities 1n the public sector.

Costs of Infrastructure Deficiencies

The infrastructure conditions even 1n established industrial areas including the industrial estates are inadequate. Power outages and 'lOl:age fluctuations occur frequently and firms typically experience such interruptions at least once a week. Most large firms have standby generators for essential operations during the disruption to avoid damages to their machinery and·materials. As mentioned earlier, almost all manufacturing establishments in BMR use ground water as it is available at a pr~ce (one baht per cubic meter) that i~ ~~e-seventh the price of surface water. This prtce incentive to use ground water contributes to the city's subsidence and flooding problems. The absence of surface water supply for industries could be a critical constraint for industrial growth~ Because of the heavy traffic congestion, the firms typically provide bus services for employees' commuting and often housing for workers. Congestion plagues much of Bangkok for long periods throughout the day. The average traffic speed varies from 13 ~o 16 kilometers per hour, which is close to the lowest level found in other maJor cities. Even the main roads to industrial areas such as Sang ?oo, 3ang ?hli, and Samut Sak.hon rr:ma~n congested thereby· raising delivery time.

Ungra9ing Existing Industrial Areas

Certain areas with concentration of industries 1n surrounding prov1nces may offer alternative locations for expanding small fir:ns. ?hra

Pradaeng in Samut Prakan Province 1s such an area. But the familiar pattern of congestion prevai~s there too. Phra Pradaeng, located only 10 kilometers away from the city center on the other side of the Bangkok port, was developed in the early 1960s with industries locating there. Factories are clustered along the two lane road stretching about one mile from to the rtver. Beyond the rows of factories on both sides of the road are vast unused land areas that are "landlocked" without access roads and therefore unavailable for development despite the fact that agglomeration econom1es of industrial c;1ncentration have existed there for-at least two decades. The maJOr problem of the Land market tn Bangkok has been the difficulty of acquiring road access and the fragmented land ownership. Land prices tn a place like Phra Pradaeng tend to be high because of the difficulty of developing the landlocked areas. ' ~ 1 -

:::a: :::e :::.~::es:

of :nanuiac:uri::g esr::aolis!-•.:nencs i.:1 3MR has been r;.si:J.g ·..;nile :j,ac o::: 3ang·:<.c:<.

declining, indicacing a s::rong decentralizat:ion of rnanuiact:uring employmen:

from 3angkok :o t:~e surrounding ~rovlnces. Also, ~n ~987 Samuc ?~akan and

Samut: Sakhon had ~he Largest proportion of newly estaoLished mediums·-~ =~r~s

(50-199 ~ersons); aoouc 25: of newly established ::r~s ~ere ~~ ::::s s~:e

category ior t::J.ese cwo provinces ~hile t:~e propor:ion ~as Less :j,an ~0: :or

I' \ 3angkok (Table r... /.

?rakan as ~ei~ as 3HA from :j,e orornoced :one.

·.;i:h 200 or :nore em:ployees· :o ~.ocate i.n t:~ese cent:rai areas, e·,en :~cug:1. :.::ey

oucer areas. 7h:s ~s :~earLy a misguided policy.

·..;i:Zl. an a.verage empLoyment: sJ.ze or: 269 ;:ersons.

:able~· JECE~TRALIZAT:ON OF ~ruFAC7~~:~G ~S7ABL:SE~E~7S 3'1 ??.OVniCZ ::r 3A...'fG:<:OK :•!!::::?.OPOL.::.!...'i ?..EC:::ON (3:19.), ~937

~Ie~,.,.. ~.s:a.bL.:.s~~~e~:.5 ?~evince :Iumoer( i.) ?ercent: ~lumber( 2) ?ercenc

" ~ ' 3HA (3angkok) .::J ,920 77 .23 - •-JO S6 .99 1 ,,., ,., Sa.mu c ?~Etkan 2 ,525 -- . 54 306 .::J . ·"- -;, .. :: ("\ -' - ..J - :3 -- . ~- :::> . -... • ' I • /, . acnwn ..1ar.'- .:.oz .:...... J. 73 -. .:.0 ~5 .30 ~ionc:ha:,uri 609 2.. 73 54 2.88 3 • 3 7 . .., :-lakhon ?at:hom 610 2.79 67 3 • J I ~0 .93

,.... ,-., ~" ~-. ~ - . 2 -g.::. ...,....JI.. ) .'JO ~ ""' ... J --1..! .. ~c ~ - .. - - ' -

a ::-:.e :!umber oi ::e•...- estabLishments at: :j,e am?hoe (disc:-icc) ~evel. :n ~987 -~·e=-~ -:a.::~a-:eS. :y :::e '~ar~d 3ar:K ?.. es:.::.enc ~ission. - 14 -

Table 7: DECENTRALIZATION OF MANUFACTU?;NG ESTABLISHMENTS BY CONCENTRIC RING IN B&~GKOK (B~~), 1984- 1987

All Establishments /a New Establishments /b Birth Rate /c 1984 '198 7 (2)/(l) Ring Number Percent Number Percent Percent ( 1) ( 2 ),

Old business 1,710 8.24 33 2.63 l. 93 area New business 9,522 45.90 480 38.22 5.04 area Rapidly growing 9,033 43.53 691 55.02 7.65 suburbs Outer area 487 2.33 52 4.14 10.68

Total 20.752 100.00 1,256 100.00 6.05

/a rhe numbers at the (district) level for 1984 were ~abulated by the City Planning Division of BMA. /b The number of new establishments at the amphoe level r..;ere ta"bulate(i by ::he. world Bank Resident Mission. /c 1984 as base year.

Source: Factory Registration Files, Ministry of Industry.

Overall Location Patterns of Industrial Growth

The development of the Eastern Seaboard 1s intended to establish an

industrial area around and Map Ta Phut, which are located 130 and

200 kilometers away from Bangkok respectively. Since there 1s a high demand

for plant sites by foreign firms, it is plausible to expect that industrial enclave type development could occur mainly for export process1ng Led by

foreign investment. However, exper1ences of other countries such as Korea,

India, and Ghana, indicate that developing a new industrial tor,.;n in

undeveloped areas tends to be extremely costly and the probability of success

is low. A distance of 100 to 200 kilometers from the main urban center is too

far for small and medium s1ze firms. - 15 -

There are a number of newly established large scale operations along

the eastern highway toward Chonburi. This development represents a more

natural pattern of industrial expansion and would be encouraged. If this

trend continues, a major industrial corridor would eventually emerge connect-

ing Bangkok and Chonburi, and possibly leading to the Eastern Seaboard.

However, Government planners seem to favor a very different pattern of

industrial development in the region. They envision a totally separate

industrial area emerging in the Eastern Seaboard with the area between Bangkok

:; / and Eastern Seaboard remaining undeveloped. The Bangkok General ?lan .:::.. under

the auspices of the Ministry of Interior seems to be designed to arrest the

industrial expansion to the east by establishing a "greenbelt" cutting across

this growth corridor in Samut_Prakan. The main elements of the industrial location strategy 1n the Pl~n include, (a)" not allbwing manufacturing establishments to locate outside industrial estates; (b) establishing a

"buffer zone" between a residential area and an industrial area to rn1n1m1ze the effects of industrial pollution; and (c) not allowing industries to locate along major roads to prevent traffic congestion. As the Eastern Seaboard development proceeds, the industrial concentration in Samut Prakan Province would increase and extend toward Chonburi. A policy attempt to thwart such development would be costly and unnecessary. Such a policy may also adversely affect the formation of backward linkages in production, since small firms (as they grow) tend to follow their "parent" industries so as to benefit ::-om agglomeration economies for particular types of production activities. The

5/ An attempt at establishing an integrated urban plan for Bangkok is not new. The past attempts, however, have not had much success because of strong community oppositions on various proposed plans and regulations. - 16 -

Government should instead be encouraging the growth of such development

because market forces are signaling the desirability of this area for

industrial growth. At the same time, the Government should nurture the!

"incubator" function of the central city for providing a good "hatching" ground for young industries. The new BOI policies are biased against small and medium size firms which locate in BMA and Samut Prakan. But these areas are precisely where these small firms would be trying to locate, while large firms move to outer areas where land 1s available at lower prlces.

Extent of Undevelooed Land

The lack qf industrial sites 1n Bangkok is not due to the shortage of land itself. to the contrary~ according to the National Hodsing

Authority's Bangk6k Land Management Scudv (1987), the ring between 6 and 10 kilometers from the city center still rema1ns hal£ vacant with 39 square kilometers of undeveloped land and two thirds of the ring between 11 and 20 kilometers undeveloped. The study further indicates that if a policy of

"infill" Land development were adopted, developing infi 11 plots alone 1·70uld accomodate Bangkok' housing needs until the year 2000 without the need to convert outlying agricultural land. This abundance of available land in the city again implies that what. is needed for reducing the existing congestion of infrastructure faciiicies Ln Bangkok is not a spatial policy intended to decentralize economic activity but instead the more efficient internal management of city growth. - 17 - Weakness in Infrastructure Planning

It has been accepted within the NESDB that Bangkok will continue to

grow and that a more appropriate urban development strategy is to manage the

growth efficiently rather than attempt to slow the growth.~/ Nevertheless,

the government infrastructure investment programs have not fully reflected the

urban growth patterns that result from the operations of land and other

markets, partly due to the lack of inter-agency coordination. This in turn

has resulted in mismatches between infrastructure investment and the

increasing ser·;ice demand in the rapidly growing areas. As a result, traffic

aqd other congestion has worsened 1n the city, inducing inefficiency 1n

resource use.

Public agenc1es providing infrastructure serv1ces rely on the basic

data supplied by the Town and Country Planning Department of the Ministry of

Interior in making location specific demand projections and physical invest­

ment pLanning. The Town and Country Planning Department is however respon­

sible for the general land use plan of all 130 municipalities in the country

and it lacks resources to make detailed plans and monitor them on a short term

basis. Also, its physical planning does not seem to take market signals into

account. For instance, the Metropolitan Waterworks Authority (MWA) is an

efficient and well managed agency. Nevertheless, its plan for water distribution network is based on an outdated general land use plan provided by

the Town and Country Planning Department. Because of this, ~A will have to

undertake a major modification of the capital investment plan for the water • distribution network in order to serve the new ~esidential areas to the west

6/ See NESDB, Bangkok Metropolitan Regional Development Proposals, 1986. - ~8 - of the central city. In these areas that are still designated as "greEm areas" 1n che land use plan, new resident:ial development 1s taking plac:e rapidly. The ToWn and Country Planning Department should develop new approaches to be able to adjust its physical planning to the location dynamics of service demand and to 1ncrease its coordination with the SMA and specialized agencies that provide var1ous infrast:ructure serv1ces.

The difficulty of inter-agency coordination also constrains t:he efficient management of the growth of 3angkok. cor the transpurt sector alone, there are almost: a dozen agencies and committees involved in infrastructure investment planning and implementation - Bangkok Mass Transit

Authority (BHTA), E~pressway and Rapid Transit Authority (ETA), Department of

Highways, Deoartment of .PubLic Works, Department of Land T~ansport, State

Railway of Thailand, Traffic Engineering Division of SMA, Department of Town and Country FLanning, Office of che Committee for :he ::1anagement: cf Rod.a

Traffic, among others. Under the auspices of the Bangkok Metropolis a:nd its

Environs Development Committee, investment plans have been prepared for implementing the above mentioned Bangkok Metropolitan Regional Development

Proposals for the Sixth Plan period in three key areas: traffic an~ transportation, flood controL and waterworks, and housing and land development. Although the individual plan ducuments have identified a long list of specific projects with financial analyses, the lack of close inter­ agency coordination ra1ses questions about (a) the efficiency with which =hese projects can be implemented, and (b) the extent to which these projects will collectively be consistent: with the rapid changes in spatial development patterns and the corresponding demand for var1ous infrastructure serv1ces. - 19 -

Decentralization of Pooulation and Emoloyment within Bangkok and Imolications

for LL[rastructure Planning

Preparing and implementing more appropriate infrastructure

investment programs requires information on where growth is taking place and

on the overall trend 1n location patterns of population and employment. ~·.~..ne

growth of Bangkok's population as a whole declined from 4.3% per year 1n the

1970s to 3% in the 1980s (Table 9). The analysis of the population data for

Bangkok shows chat its population has been decentralizing as in most other

large cities worldwide.

E'or more detailed analysis, Bangkok (BMA) has been divided into four

concentric rings by aggregating (districts) as shown on the map. Ring

1 is the old business area in the center; Ring 2 includes recently develoDed

business areas; Ring 3 has rapidly growing suburbs; and Ring 4 is the outer

area. Table 9 ~ shows that during the 15 year period, bach Ring l and Ring 2

lost their share of population while Ring 3 gained its share substantially.

More recently, the level of population 1n the old business area (Ring 1) has

actually declined while that of Ring 3 increased rapidly, indicating a strong

decentralization trend of population. The analysis of the factory

registration data noted before shows that manufacturing activity in Bangkok

has also been decentralizing. Ring 3 is attracting more new firms than both

Ring 1 and Ring 2 and its share of new firms 1s larger than its share of all

firms 1n 1984 (Table 7). The "birth rate" of manufacturing establishments

r1ses rapidly as the distance from the center increase~; it was five times higher 1n the outer area than in the old business area. The birth rate or 6%

for Bangkok as a whole is comparable to that of cities such as Seoul and

Bogota. - 20 -

These findings indicate that in Bangkok both residential housing and

workplaces have ~--~n decentralizing rapidly from the city center to suburban

areas. The National Housing Authority confirms that most residential

development is now taking place away from the city center. This pattern

should be an important factor for planning future transport and other

infrastructure investment. In the case of the transit system, since travel

directed to the city center 1s expected to decline as a share of total travel,

the existing radially oriented system will become Less important and a more

circumferential nec.;ork (such as the Middle Ring Road which is yet co oe

completed) will be needed. Therefore, there is a need for oew approaches co

urban development that accomodate the rapidly changing location patterns of

economic activity in Bangkok.

-Table 8: CH.A..'iGES IN DISTRIBUTION C~ POPULATION BY PROVINCE I~ BANGKOK METROPOLIT~'i REGION (BMR), 1970- 1985 ( 1, 000 Persons)-

Annual Averag 1970 1980 1985~ Growth Rate ( Province Persons Percent Persons Percent Persons Percent 1970-80 1980-

SMA (Bangkok) 3,185 67.94 4,852 70.62 5,626 70.59 L.,JO 3~00 Samut Prakan 341 7.27 503 7.32 603 7.57 4.00 3. 70 Samut Sakhon 208 4.44 256 3. 73 287 3.60 2.10 2.31 Pathum Thani 242 5.16 332 4.83 393 4.93 3.21 3.43 l ~r Nonthaburi 278 5.93 383 5.57 458 5. 7 5 ...... ~o 3.64 Nakhon Pat hom 434 9.26 545 7.93 603 7.57 2.30 2.04

TotaL 4,688 100.00 6,871 100.00 7,970 100.00 3.90 3.JO

I 1 a NESDB estimates.

Sources: ?opuLation Census 1970, ~980; NESDB. - 21 -

Table 9: CHANGES IN DISTRIBUTION OF POPULATION BY CONCENTRIC RING IN BANGKOK (BMA), 1970 - 1985 (1,000 Persons)

Annual Average 1970 1980 1985~ Growth Rate ( ~~) g Persons Percent Persons Percent Persons Percent 1970-80 1980-35

business 300 9.43 365 7.52 341 6.06 l. 98 -l. 3 5 rea business 1,733 54.45 2,461 50.71 2,682 47.68 3.57 l. 74 rea idly growing 1,013 31.98 1,345 38.02 2,386 42.42 6.13 5.28 uburbs er area 132 4.15 182 3.75 216 3.84 3.26 J . .:. ;,

Total 3,183 100.00 4,853 100.00 5,625 100.00 4. 31 J.OO

NESDB estimates. rces: Population Census 1970, 1980; NESDB.

D. Constraints o~ Industrial Growth in Regional Cities

Regional cities have stayed small in Thailand. In these cities,

wages are lower, land is cheaper, and workers who can be easily trained are

available. The main constraints are the lack of efficient governmen4 and

business services, information flows for marketing and technology, and trans-

port access. Chiang Mai's recent experience is a case in point. During the

past two year::;, Chiang Mai has begun to attract foreign investment mostly

because it is the only city outside Bangkok which has a customs office and

direct airline connections to foreign countries through Hong Kong. 7he

availability of government and business services in addition to the locational • attributes mentioned above seems critical in atttacting industriei to these

cities. The roLe of the municipal governme~cs could increase substantially co

promote industrial and commercial activities. Expanding the "incubator" - 22 - function (discussed above) of regional urban centers could· expedite industrial growth.

The rapid growth in the number of manufacturing industries (not including r~ce mills) in the north and the northeastern regions (Table 1)

1s probably more due to the recent political stability there and past · government efforts 1n improving transport and communication net'"orks t:,.an because of explicit spatial policies. For example, the Government's attempt to develop industries through the establisnment of the Northern Re~ion

Industrial Estate in has not been successful. This industrial estate with a land area of.l,760 rai opened ~n 1983. As of February 1988, an area or only 35 ra~ has been occupied by thre.e establishments with 480 employee~s.

::.ampang is only 23 kiLometers from c:::iang :-iai. It is striking that eve~n such a short distance 1s considered too fa~ by local entrepreneurs and has thwarted the development of the industrial estate. This experience, as well as similar experiences in other countries, shows that the Government's efforts' to promote regional industrial development should focus on improving and strengthening local market functions that reflect the needs of individual entrepreneurs.

The Secondary Cities Project supported by the Bank has been a leading element in the Government's strategy to strengthen the municipal government management and operations. In addition to infrastructure investment programs, the project focuses on the financial and investment planning and management. Chiang Hai, Khan Kaen, , and

Songkhla, which are four of the five cities identified for development under the Fifth Five Year Plan, are included 1n the project. The Government 1s prepartng the second project which will include eight other secondary cities - 23 - identified for development under the Sixth Five Year Plan. This approach to the development of regional cities through strengthening the financial and investment management capability of municipal governments is more suitable for achieving the Government's objective of reduc{ng regional econom1c dispariti~s than are explicit spatial policies intended to decentralize industries away from Bangkok. Better management capability r..rithin Local governments would also reduce the probabiliti of making the wrong physical investments. It should be empl1asiz.~d aga1n that infrastructure investments alone will not induce econom1c activity unless they reflect the market demand for these serv1ces.

Decentralizing certain Central Government administrative functions, such as customs clearance and issuing passports, will also expedite the indus- trial development process 1n regional cities. The Government has already tak'en this policy directiun by allo~o;ing provincial governments to 1ssue factory permits to new establisr...ments. Such delegation of administrati?e functions should be extended to the level of municipal governments.

E. Conclusions and Policy Recommendations

Bangkok will continue to grow but at a slower rate. The current decentralization of both population aud employment will continue. Therefore, the Government should not pursue spatial policies that are inconsistent with market forces and intended solely at dispersing econom1c activity from Bangkok to outlying areas and other reg1ons. What is needed for reducing traffic and • other congestion in Bangkok 1s a more approprLate infrastru~ture ~nvestment- strategy that can respond to the location dynamics of serv1ce demand in

Bangkok and surrounding provinces. Fifty percent or more of the land area - 24 -

beyond s1x kilometers from the center of Bangkok still remains undeveloped.

Bangkok can accomodate further growth with new approaches to urban

development. Excessive decentralization measures will reinforce the current

low density development patterns and result in unnecessarily high costs of

providing infrastructure services.

The cur-rent spatial poLicies intended to decentralize manufacturing

activities from Bangkok will have a significant negative impact on t~e grow<:~

of industries, since these policies neglect the infrastructure and locacional

needs of different types of firms, particularly those of small but grow1ng

firms. Historically, the role of the Thai Government Ln providing infrastruc­

ture serv1ces for. manufacturing industries has been limited rr: the provision of general services such as major roads or electric power ge~eration acd has neglected more location specific needs of industries. More recently, :he

NESDB's Bangkok Metrocolitan Regional Develocment Procosals (1986) designated

75 square kilomet:ers of land area (but: located outside BMA) as industrial areas out of the total BMR land area of 7,639 square kilometers. But that

study stopped short of presenting appropriate strategies and programs for relieving the shortage of industrial sites faced by new and expanding

industries in Thailand today. There is a view that the infrastructure services required by new and expanding manufacturing establishments will be the most crucial constraint on the future growth of Thai industries. ~t 1s clear that: there LS an increasing demand for industrial sites and complementary services. Nava ~akorn, the private ·industrial estate, has a waiting List of applicants and is planning to expand its development.

Toshiba's development of 1,000 rai area in Samut Sakhon was quickly soLd out to about 20 establishments. A Large number of Korean firms 1s now negotiating - 25 - with the Government for ~errnission to develop a large industrial estate in the

Bangkok area. During the first three months of 1988 there were about 30

Japanese firms applying each month for factory permits.

The Government can play an important role in generating positive externalities for industrial growth with a relatively small capital investment in key ~treas and by taking more aggressive measures to provide incentives for the private sector to engage 1n land development and irtfrastructure provision fo~ industrial use. This could include s new approach to acqu1r1ng ~ccess t~

"landlocked" areas and regulatory reforms to allow private enterprises to invest 1n the production and delivery of certain types of infrastructure serv1ces.•

For more efficient management of Bangkok's growth, better inter- agency coordination is crucial. Moreover, there is a need to ~onitor the rapidl.y chacging p-.ltterns ·of ur!nn. devel.opment in the B~.R on a continuous basis and use chis information to review infrastructure investment programs at regular intervals of six months or a year. In fact, the Government is concerned about these problems. The Investment Plan for the transport subsectori/ sets out guidelines for urban development, which include the need for (a) "better coordination of town planning measures and road net"..mrks under the maste~ town plan," (b) "correspondence (of transport projects) with the investment plans for other public serv1vce networks,'' such as flood control plan, and (c) "correspondence (of transport projects) '..tith land utilization plan in the master town plan." These functions of interagency coordination and monitoring can best be carried out at the lo~al level. Therefore, it

7/ ~ESDB, Investment Plan to Solve the Traffic and Transportation Problems in the Bangkok Metrooolis and its Environs during the Sixth National Economic and Social Develooment Plan Period (1987-1991), August !987. - 26 - seems desirable for the BMA to play a much greater role in planning and implementing major infrastructure investments in all subsectors.

The following specific policy measures are recommended:

(a) Allow the private sector to develop industrial areas for smaLl and

medium s·cale industries within SMA (beyond s1x kilometers) either on

its own or jointly with the Industrial Estate Authority of Thailand

(IEAT). In these areas, ?Clluting industries should n~t b~ :!llo~~d

and water intensive industries should be discouraged. 3y increasi2g

private sector involvement in industrial site development, the

Government can expect.that the selection cf the l~nd area and

provision of infrastr~cture and other services for development ~ill

be more responsive to the demand for such industrial sites and

~· . consist~r.t ·,.;ith the operations of the land ::::Jarket :.n 3angl~oK...... ,)

would lead to a natural deconcentration of economic activity within

BMA, relieve the congestion 1n the center by changing commuting

patterns, induce more efficient land use, and most importantly

reduce the costs of expansion for small and medium size firms.

(b) Upgrade traditional industrial areas, such as Phra Pradaeng in Samut

Prakan Province, which have been developed by individual fir~s that

have located there. ~ith a small amount of additional invest~ent,

such areas could accomodate a large number of medium s1ze firms that

move out of Bangkok.

(c) Reduce regulatory, bureaucratic, and institutio~al constraints on

private sector invol,ement 1n developing industrial sites and - 27 -

providing complementary infrastructure services such as electricity,

water supply, access roads, and waste collection. While the

Industrial Estate Authority of Thailand enjoys the full support of

the Government 1n the acquisition of land, development of

infrastructure facilities, and in dealing with regulatory and

bureaucratic procedures, private developers have to operate on their

own. The Government should provide much greater support to the

private sector 1n these areas.

(d) Give BMA more reponsibility to carry out the inter-agency

coordination function and to play a more Qctive role in planr.ing and

implementating major infrastrucure investments in all sectors.

(e) In the regional cities, identify basic infrast=ucture and serv1ce

constraints that currently raise the costs of existing firms and

newly established small firms and upgrade conditions 1n regional

urban centers so as to enhance their "incubator" function. Increa!::e

the financial and administrative autonomy of municipal governments

so that they can respond to the demand for local services by small

entrepreneurs, and collaborate with local bus1ness organizations and

universities in carrying out business promotion activities and

extension services.~/

8/ Regional community develonment schemes are already under way in the Northern Region led by Chiang Mai University in collaboration with foreign agencies. - 28 - ""l- .... ~~ ...... ~~-, .. ,.:._(.

BOARD OF ervEST~E)TT POLICY CH.ANGES - 1983 to 1937

1983 Privele~es and 1987 Priveleges a~d Tvne of Incentive Criteria Criteria

(i) Corporate Income Tax· 3 to 5 years depending on Exemption period depends Exemption investment scale or on location as fo::o~s: number of employees; ~o exemption for pro~ec:s exemption period in Bangkok and Samut increases for larger Prakarn, except if projects; extension of located on an i~dustrial exemption pcssibl~ (~pta osta~e. or unlc:..s.s :.t-J.e a maximum of 8 vears) if project satisfies : of project satisfies one of the following: net annual (in ~hich case exespcion

. foreign exchange savings for 3 ~lear s ) : ::.. :: ? rod 1,_;. \2 e s from it exceeds $500,000 primarily for exports. in first 3 ye3rs cf that by the third year operation; it uses 80% of output is indigenous agricultural expor::ed; it sa·;es or produce, processed agricultural products or foreign exchange other domestic raw annually; emplovs ~­ ma t e r i a l s : i t is l o c a t e d least 200 ~~rsons full in an industrial estate time; or outside Bangkok, Samuc For projects ·- the ~ Prakarn and the 4 other provinc·es neighbouring provinces; neighboring Bangkok it has special (Nakhon Pathom. ~onca importance; Buri, Pathum Thani a:1C. Samut Sakhon) or in indus~rial es~a~es 1n Bangkok and Samuc ?rakarn, exemption years which can be extended to 5 vaars if the project meets one of the follo•,.;ing: i:: sa•:es

~ . . or earns :ore~gn excnan;e of at leas:: s:.~ . ' annually:. it ~s an agro- based acti~_,.. i.:::·: i: ·_;_ses agric~lt:ural ?rod~c:s a~ ra ....J ma:er·ia~s or C:or:-,-t:s :-·:.: supplies for a: _eas: :. · of :he value of 1:s ra~ :r.ateria.l: least 200 full-:i~e persons; it is located · ~ . , ... an lnaust~lal es:c:2: - 29 -

For projects in the other 67 provinces, exemption period depends on whether they are engaged in target activities I (export-oriented,! engineering or agro-based products). For targ;et activities, exemption for 4 years, renewable upto a maximum of 8 years if the project meets one of the following: it saves/earns foreign exchange of at least $1m. annually·; i. ~ is an agro-based activity; it uses agricultural products as raw materials or domestic supplies for .at least 6G~ of the value of its =aw material; it employs at least 200 full-time person~; it i~ loca~ed i~ an industrial estate: For general (non-target) activities, the basic exemption period is the same except that it is renewable only upto 7 years if the project satisfies one of the five criteria noted above. - 30 -

(ii) Exemption from/ If thc. project is located If the project is located reduction of import duty in Bangkok or Samut in Bangkok or Samut and business taxes on Prakarn, exemption of Prakarn but not on an machinery import duties and industrial estate, no business taxes only if at exemption or reduction least 80% of the ; unless it is export­ 2 production is for export­ oriented, in which case or 50% tax reduction if tax exemption mav je the project is an granted; expansion of an existing If located in one of t~e operation. 4 other provinces For projects outside neighboring Bangkok or on Bangkok and Samut an industrial estate in Prakarn, tax exemption/ Bangkok and Samuc· reduction granted on a P~a~arn, 50% tax case by case basis ~hen reduction except for machinery is not locally export-oriented projects produced or assembled and or those in indu~triai cannot be substituted estates for which tax with manual labor. exemption may be grantee: For projects in the remaining 67 provinces, tax exemption:

(iii) Exemption from/ Consideration on a case ~o reJ~ction/axem?tion ~eduction of import duty by case basis using the foi projects located in and business taxes on raw fdllowing factors: Bangkok, Samut Prakarn or materials · ability to compete with the 4 neighboring imported products, tax provinces, including and duty rates for the those on industrial project's raw materials estates; compared with those for In the remaining 57 its finished products. provinces, for target benefits to the national activities, exemption for economy 5 years on raw materia:s used in the manufacture

reduction for l year on materials used in producing for t~e domestic market: no :ax reduction for non-target activities in these provinces; - 31 -

(iv) Additional tax and Reductions in business All provinces other tnan duty reductions for tax on sales of products Bangkok and its 5 projects in Investment from project depending on neighboring provinces are Promotion Zones its location: in Zones 3 Investment Promotion and 4, 90% for the first Zones; within these Zones 3 years and 75% for the all promoted activities next 2 years, beginning can receive 90% reduction from when income is first in business tax on sales earned; in Zones 1 and 2, for 5 years from when the corresponding income is first earned; reductions are 75% and 50% reduction in 50%; in industrial corporate income tax for estates, the reductions 5 years following any are 50% for the first 3 exemption ?eriod: ~nd, ~M years; a case by case basis. Reduction in corporate double deduction of income tax by 50% water, electricity and following any exemption transportation costs from period for a project taxable in~ome for 10 located in Zones 1, 2, 3 years and deduction from or 4 or in a~ industrial profits of 25% of t~e estate outside Sangkok installation and and the 5 neighbouring construction costs of provinces if it satisfies infrastructure one of the following facilities; conditions: investment size (excluding land and working capital) exceeds B 300m.; has at least 200 full-time employees; its net annual foreign exchange earnings exceed $1 m. in the first 3 years; it uses agricultural produce or processed agricultural products as raw materials and at least 50% of its output value is exported; it is of special importance; Double deduction of transportation costs from taxable profits for 8 years (10 years) for projects located in Zone l or 2 ( Zone 3 or 4); deduction from profits of 10% (20%) of installation and construction costs of infrastructural facilities for projects in Zone 1 or 2 (Zone 3 or ~) - 32 ~

(v) Additional tax and Exemptions of import duty Same as in 1983: duty reductions for and business tax on raw export-oriented projects materials for l year for projects exporting at least 30% of total output and only for that part of imports that is used in producing for expor~. This exemption can be extended by the Board on a case by case basis and additional exemptions on imported goods for re­ export and from export duty and business tax on exports may also be granted. A deduction from taxable income of 5% of the increase in earnings over the preceding year may also be granted

Notes: l/ An export oriented activity is one that exports at least 50% of the value of its output in the first 2 years after commencing production and at least 80% thereafter.

2/ This requirement was modified in 1985 when it was relaxed for projects located on industrial estates in Bangkok and Sa~ut Prakan. - 33 -

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