Download Local Government Finance and Bond Market Development in Thailand

Local Government Finance and Bond Market
Financing in Thailand
By
Sakon Varanyuwatana
Associate Professor of Faculty of Economics
Thammasat University
Bangkok, Thailand
i
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
3.1 Early Measures to Improve Local Financing
3.2 Thailand Local Government Reform Experiences under
the New Constitution
- Section 4: Structure of Present Local Finance System in Thailand
12
13
14
18
- Section 5: Impact of Decentralization Process on Local
Government Finance
- Section 6: Patterns of Thailand Local government Finance
6.1 Pattern of Thailand Local Government Revenue
6.2 Patterns of Thailand Local Government Expenditure
25
25
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
ii
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
iii
List of Charts
- Chart 1 Thailand Government Structure (Before the new Constitution)
43
- Chart 2 Revenue Structure of Local Government
44
iv
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
v
Abbreviations
BMA
CAO
MA
SDA
SEC
SET
TAO
Thai BDC
=
=
=
=
=
=
=
=
Bangkok Metropolitan Administrative
Changwat Administration Organization
Municipalities
Sanitary District
Security and Exchange Commission
Stock Exchange of Thailand
Tambon Administration Organization
Thai Bond Dealing Centre
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Map of Thailand
1
Local Government Finance and Bond Market Financing in Thailand
Sakon 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
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

Associate Professor of Faculty of Economics, Thammasat University, Bangkok, Thailand
2
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 longterm 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.
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
i n t ro d u ci n g t h e n ew c o n st i t ut i on a s l e ga l f r a m e w o r k f o r i ni t i a t i v e .
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
3
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.
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,
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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
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)
(2)
(3)
(4)
(5)
Taxes;
Fees and Fines;
Income from assets;
Public Services fees;
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;
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(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)
(2)
(3)
(4)
(5)
Business Tax
Gambling Tax
Liquor and Non-alcoholic Tax
Rice-export Tax
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 M u a n g M u n i c i p a l i t y N a k o r n M u n i c i p a l i t y
1. Law and order
maintenance
2. 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 fireextinguisher or fire
engine
6. Providing public
training and education
for local people
7. Promotion of
Performs the same duties
as Tambon municipality
and additional duties as
follows:
1. Provision of water
supply or clean water
2. Provision of abattoir or
slaughter house
3. 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,
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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
and building control
7. tourism promotion
2. Discretionary duties:
Tambon Municipality M u a n g M u n i c i p a l i t y N a k o r n M u n i c i p a l i t y
1. Provision of clean
water or water supply
2. Provision of abattoir
3. 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, Performs the same duties
port and ferriage
as Muang municipality as
2. Provision of tomb and
specified by law
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
Source: Municipal Act of 1953, Amendment of municipal Act of 1990
7
After 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
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;
8
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 Tax
2) Tobacco Tax
3) Value-added Tax
4) Specific Business Tax
5) Vehicle Tax
6) Education Tax
7) Bird-nest Tax
8) Mineral Tax
9) Hotel Receipts Tax
10) Fees, Fines, and License Permit Fees
11) 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
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(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
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)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Taxes;
Fees, fines, and permit fee;
Property income;
Pattaya social services;
Pattaya business income;
Issuing Pattaya City bonds;
Borrowing including borrowing from aboard;
Subsidy;
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
10
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:
(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,
11
timber, petroleum exploration, and National-Park fee from central government as
well.
Box. 1 Local Government Reform in 1994
A 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
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 the
12
same 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
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;
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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
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
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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
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 agencies 1, Representatives
of local organizations, and other experts on decentralization.
Box. 2 The Roles of the National Decentralization Committee
The 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:
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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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
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)
2)
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.
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.
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3)
4)
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.
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
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
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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
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
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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
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
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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 nonalcoholic beverage. The tax revenue from the excise tax is then distributed base on
share of population live in each local government.
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
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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
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
21
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
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 fomula
Biased 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
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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
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:
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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
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.
24
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 selfautonomy 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
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 19962001. 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
25
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.
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 predecentralization 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).
26
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
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.
27
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
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.
28
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
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 assetliability 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.
29
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)
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:
1.
2.
3.
4.
5.
6.
7.
The Municipal Act of 1953;
Amendment of the Municipal Act of 2000;
The Municipal Revenue Act of 1997;
The Changwat Administrative Organization Act of 1997;
The Bangkok Metropolitan Administrative Act of 1985;
Amendment of The Bangkok Metropolitan Administrative Act of
1999; and
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
30
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:
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
31
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.
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.
32
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.
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
33
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
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
34
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
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
35
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
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:
36
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
37
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.
38
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.
39
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 multiyear budgeting, strengthen local financial management including area of assetliability management techniques.
40
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.
41
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.
42
Chart 1. Thailand Government Structure
(Before the new Constitution)
Government
Ministries
Provincial Executive
Body
Districts & Sub-Districts
Local Government
CAO
TAO
Municipalities
es
Sanitary
Pattaya
Districts
City
BMA
Villages
43
Chart 2. Revenue Structure of Local Government
Total Revenue
Regular Revenue
Tax
Locally
Levied
Tax
Special Revenue
Non Tax
Surcharge
Tax
Shared
Tax
Fees
And
Fines
Subsidy1
Income from
Assets
Trust fund2
Borrowing
Revenue from
Public Utilities
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
44
Table 1. Total Local Government Revenue: 1996-2001
Unit:Million baht
1996
Amount
1
2
3
4
5
6
7
8
9
10
12
13
14
15
16
17
18
19
20
21
22
23
30
31
%
1997
Amount
%
1998
Amount
%
1999
Amount
%
General Revenue
Building and Land Tax
5,563.37
7.99
7210.14
7.72
7,251.94
7.00
7,696.14
7.33
Land Development Tax
253.83
0.36
868.80
0.93
801.29
0.77
752.13
0.72
Signboard Tax
701.04
1.01
840.24
0.90
818.66
0.79
814.27
0.78
Animal Slaughter Duty
42.71
0.06
57.63
0.06
56.71
0.05
68.20
0.06
Total Locally Levied Taxes
6,560.95
9.42 8,976.81
9.62
8,928.60
8.62
9,330.74
8.88
VAT and Business Tax
16813.57 24.15 17,755.40 19.02 22,119.03 21.35 16,231.26 15.45
VAT and Business Tax (Under Decentralization Plan)
----Liquor Tax
2158.55
3.10 3,505.91
3.76
3,544.03
3.42
3,895.17
3.71
Excise Tax
6,493.35
9.33 10,385.65 11.13
9,172.05
8.85
8,462.31
8.06
Gamble Tax
119.60
0.17
133.45
0.14
163.97
0.16
142.55
0.14
Motor and Vehicle Tax
8,631.91 12.40 9,724.86 10.42
9,634.56
9.30
9,965.26
9.49
Miscelleneous
425.11
0.41
585.56
0.56
Tobacco, petroluem, Hotel receipts Taxes for CAO1
--------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
Bird Nest Tax
N/A
N/A
42.11
0.05
3.82
0.00
170.64
0.16
Royalty Fees2
N/A
N/A
150.65
0.16
535.30
0.52
621.12
0.59
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
--- 5,975.52
Total Revenue from Natural Resources
6.40
3,990.77
3.85
3,605.80
3.43
Total 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
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
Revenue from Assets
3,751.17
5.39 4,559.74
4.88
5,242.57
5.06
4,472.11
4.26
Revenue from utilities
174.90
0.25
190.95
0.20
235.10
0.23
242.05
0.23
Miscellaneous
695.54
1.00 1,561.56
1.67
1,119.19
1.08
2,209.92
2.10
Total Non-Tax Revenue
5,941.00
8.53 7,914.69
8.48
8,215.66
7.93
8,271.45
7.87
Special Revenue
General Grants
8,452.70 12.14 13,493.47 14.45 16,844.97 16.26 14,514.77 13.82
Specific Grants
9,783.31 14.05 7,609.32
8.15 15,473.70 14.94 23,612.36 22.48
Transferred Budget for Decentralized Functions
--------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
Trust Fund
2,919.14
4.19 7,180.93
7.69
4,467.73
4.31
6,131.15
5.84
Loans
279.68
0.40
692.87
0.74
623.92
0.60
287.89
0.27
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
Total Special Revenue
22,897.93 32.89 28,976.59 31.04 37,410.32 36.11 44,546.17 42.41
Grand Total Revenue
69,616.86 100.00 93,348.88 100.00 103,604.10 100.00 105,036.27 100.00
Source: Department of Local Administration, Ministry of Interior
Note: 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.
2000
Amount
%
2001
Amount
8,325.91
767.13
833.86
52.39
9,979.29
16,467.11
-3,186.93
9,117.78
137.73
10,814.50
95.80
1,309.18
41,129.03
79.06
1,187.64
3,726.48
4,993.18
56,101.50
1,645.23
2,222.52
330.79
1,824.81
6,023.35
8.86
0.82
0.89
0.06
10.63
17.53
-3.39
9.71
0.15
11.51
0.10
1.39
43.79
0.08
1.26
3.97
5.32
59.73
1.75
2.37
0.35
1.94
6.41
8,042.49
717.10
787.10
75.31
9,622.00
18,117.16
11,532.27
2,719.60
11,488.09
150.00
10,085.11
630.00
1,250.00
55,972.23
200.00
1,482.99
7,000.00
8,682.99
74,277.22
1,504.20
3,566.60
265.80
1,289.49
6,626.09
5.20
0.46
0.51
0.05
6.22
11.72
7.46
1.76
7.43
0.10
6.52
0.41
0.81
36.20
0.13
0.96
4.53
5.62
48.03
0.97
2.31
0.17
0.83
4.29
13,140.67
18,443.61
-31,584.28
190.79
19.49
13.99
19.64
-33.63
0.20
0.02
41,390.20
-32,339.60
73,729.80
N/A
N/A
26.77
-20.91
47.68
N/A
N/A
%
--210.28
0.22
31,794.56 33.85 73,729.80 47.68
93,919.41 100.00 154,633.11 100.00
45
Table 2. Local Government Revenue by Entities in Thailand
Unit: Million Baht
1994
CAO
MA
SDA*
1995
1996
Pattaya
Total
1998
1999
2000
2001
2002
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%
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%
5,671
6,591
7,615
9,295
9.91%
10.55%
10.94%
9.96%
27,051
27,827
31,069
27,472
40,292
40,188
28.98%
26.86%
29.58%
29.25%
42.90%
42.79%
TAO
BMA
1997
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%
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%
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
46
Table 3. Local Revenue from Trust Fund and Loan Fiscal Year 1999
Trust Fund
Amount
Unit: Million baht
Total
Loan
%
Amount
%
Amount
%
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
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
CAO
Pattaya City
Source: Department of Local Administration, Ministry of Interior
47
Table 4. Total Local Expenditure: 1996-2000
Unit:Million baht
1
9
9
61
Amount %
9
9
71
9
9
Amount % A m o u n t
81
%
9
9
Amount
92
%
0
0
Amount
p
0
%
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
2.24 1,985.75
2.13
1,256.34
1.24
3.84 3,835.87
10.37 11,794.94
3.77
11.60
Miscellenous
1,787.50
Total Central Fund
Salary, Wages
2,807.50 5.72 2,784.44 3.53
9,411.97 19.17 8,939.37 11.32
3,040.30 3.80 3,570.33
9,823.76 12.29 9,655.59
Temporary Wages
2,712.68
3,530.83
Renumeration
8,083.86 16.47 11,083.86 14.04 11,638.15 14.56 13,192.98
5.53 3,184.22
4.03
4.42 3,527.28
3.79
4,053.05
3.98
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
3.03 1,510.29
1.91
1,748.74
2.19 2,542.19
2.73
0.00
0.00
Others Expenditure
1,489.36
Total Regular Fund
Material, Construction, and Land
22,708.11 46.26 26,157.27 33.13 29,040.65 36.34 33,899.47
15,123.06 30.81 24,070.10 30.48 22,887.46 28.64 17,913.39
36.42 35,720.85
19.25 25,492.21
35.12
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
25.06
Total Regualr and Capital Investment
Specific Grant Expenditure
37,831.17 77.07 50,227.37 63.61 51,928.11 64.98 51,812.86
8,133.43 16.57 18,768.27 23.77 18,099.52 22.65 18,406.98
55.67 61,213.06
19.78 18,579.11
60.18
18.27
11.05 16,229.49
15.96
Reserve Fund
68.57
0.14 6,534.45
8.28
4,181.12
5.23 10,287.14
Loans
54.66
0.11
647.38
0.82
577.06
0.72 1,318.70
1.42
1,784.20
1.75
190.00
0.39
0.00
0.00
2,084.25
2.61 7,681.46
8.25
69.49
0.07
40.50 36,662.29
36.05
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
Miscellanous
Total Sepcial Fund
Total Expenditure
8,446.66 17.21 25,950.10 32.86 24,941.95 31.21 37,694.28
Total Central Expenditure
843,200.00
925,000.00
Source: Department of Local Administration, Ministry of Interior
830,000.00
825,000.00
860,000.00
48
Table 5. Local Government Expenditure by Entities in Thailand
CAO
Municipalities
Sanitary
Districts
TAO
Bangkok
Pattaya City
Total
1994
10,658
22.22%
13,181
27.48%
5,078
1995
9,903
18.61%
16,949
31.85%
5,893
1996
7,577
15.43%
18,838
38.37%
4,378
1997
4,614
5.84%
20,437
25.88%
7,588
1998
4,507
5.64%
29,971
37.51%
--
10.59%
--
11.07%
--
8.92%
--
18,519
38.61%
532
1.11%
47,968
100.00%
20,157
37.88%
316
0.59%
53,218
100.00%
17,970
36.60%
332
0.68%
49,095
100.00%
9.61%
19,951
25.27%
26,093
33.05%
278
0.35%
78,961
100.00%
22,491
28.15%
22,661
28.36%
281
0.35%
79,910
100.00%
Unit: Million Baht
1999
2000p
5,366
5,490
5.76%
5.40%
32,997
39,038
35.45%
38.38%
---
25,887
27.81%
28,482
30.60%
346
0.37%
93,077
100.00%
21,154
20.80%
35,703
35.10%
326
0.32%
101,711
100.00%
Source: Financial Statistic Book, Ministry of Finance.
Note: * after 1998 all sanitary districts were upgraded to be municipalities
49
Table 6. Size of Thai Financial Markets
Unit: Billion baht
1993
1994
1995
1996
Bank Loans 1/
2,669.1
3,430.5
4,230.5
Equities (SET mkt. cap)
3,325.4
3,300.8
3,564.6
Domestic Bond (at par)
262.0
339.0
424.4
3,170.3
3,634.5
4,192.7
n.a.
9.0
9.3
GDP (current price) 2/
GDP Growth rate (at 1988
prices) 2/
1998
1999
2000
2001
4,825.1 6,037.5
5,372.3
5,119.0
4,585.9
4,298.9
2,559.6 1,133.3
1,268.2
2,193.1
1,279.2
1,607.31
546.8
941.3
1,388.6
1,634.8
1,882.9
4,622.8 4,740.3
4,628.4
4,615.4
4,900.3
5,057.1
4,359.7
(Feb)
1,814.01
(Sep)
1,970.1
(Sep)
5,259.4
-10.8
4.2
4.4
1.5%
2.0%
519.3
1997
5.9
-1.4
2002
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)
50
Table 7. Outstanding Value of Domestic Bonds
Unit: Billion baht
1993
Government Bonds
T-Bills
State enterprise Bonds
- Guaranteed
- Non-guaranteed
FIDF/PLMO Bonds
Corporate Bonds
Total
100.7
135.0
109.7
25.3
26.3
262.0
1994
62.5
190.4
159.8
30.6
86.1
339.0
1995
43.0
238.3
208.7
29.6
9.5
133.6
424.4
1996
18.0
278.4
239.7
38.7
40.5
182.4
519.3
1997
13.8
293.8
247.3
46.5
51.6
187.6
546.8
1998
426.9
300.6
255.7
44.9
36.2
177.6
941.3
1999
2000
2001
587.1
25.0
356.4
309.1
47.3
18.1
402.0
1,388.6
658.7
62.0
408.8
345.3
63.5
4.1
501.2
1,634.8
706.4
110
416.1
357.3
58.8
112.3
538.1
1,882.9
2002(Sep)
786.4
149
400.6
347.6
53.0
112.31/
521.7
1,970.1
Source : Bank of Thailand
51
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.
52
APPENDIX
53
Table A.1 Functions of Local Government After the Introduction of New Constitution
Municipalities, TAO, Pattaya
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 support
6. supporting, training and
doing job
7. business and
investment supporting
8. tourism supporting
9. education management
10. 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 supporting
15. 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 animal
22. provide and control
CAO
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 management
7. 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 management
13. manage and control
land, water transport
station
14. support tourism
15. support business,
investment and operate
local
enterprise, collaborate
to others or syndication
16. construction and
maintain road way and
BMA
BMA has authority in
managing system to local
peoples’ benefit according to
the Plan and Procedure for
Decentralization Law
54
animal slaughtering
23. keep security, neatness
and sanitary in cinema,
public place
24. manage, maintain and
utilize forest, land,
natural resource and
environment
25. town planning
26. transportation and
traffic engineering
27. take care of public
place
28. building control
29. protect and relief public
danger
30. 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 engineering
22. protect and relief public
danger
23. provide security system
in province
24. 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
55
Table A.2 Revenue of Local Government After Introduction of the new Constitution
Municipalities, TAO,
Pattaya
1. Building and Land
Tax
2. Land Development
Tax
3. Signboard Tax
4. VAT
5. Business Tax
6. Excise Tax
7. Motor and Vehicle
Tax
8. Gamble Tax
9. Education Tax
10. Animal Slaughter
Duty
11. Bird Nest Tax
12. Royalty Fees from
Mining
13. Royalty Fees from
Petroleum Welling
14. Fee from
Transferring of Real
Estates
15. Airport Fees
16. 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
CAO
1. Petroleum Tax for
CAO
2. Tobacco Tax for
CAO
3. VAT
4. Business Tax
5. Motor and Vehicle
Tax
6. Education Tax
7. Bird Nest Tax
8. Royalty Fees from
Mining
9. Royalty Fees from
Petroleum Welling
10. Hotel Receipt Tax
for CAO
11. Other Fees, License
Fees and Fines
12. Fees from using or
has benefit from
public service
13. Other Revenue
BMA
1. Building and Land
Tax
2. Land Development
Tax
3. Signboard Tax
4. Petroleum Tax for
BMA
5. Tobacco Tax for
BMA
6. VAT
7. Business Tax
8. Excise Tax
9. Education Tax
10. Motor and Vehicle
Tax
11. Gamble Tax
12. Royalty Fees from
Mining
13. Royalty Fees from
Petroleum Welling
14. Animal Slaughter
Duty
15. Hotel Receipt Tax
for BMA
16. Airport Fees
17. 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
56
Table.A.3 Types of grants allocated to Local Governments in Thailand
Types of grant
Allocation Criterion
General Grant

For Municipalities
For Sanitary Districts
Specific Grant
For specific municipalities and
sanitary districts development
projects
For special areas who counter
with pollution or development
problems or the areas that have
high capacity for tourism
industry
For water supply provision
Additional
Payment
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)
 100 baht per head for general purposes spending
 300,000 Baht for any SDA whose
revenue(exclude grant) below 300,000 Baht
 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 municipalities and sanitary districts.
The amount of grant depends on size of project
central government discretion.

Municipalities office buildings

For garbage collection and
disposal

For Pattaya City development
project

For municipalities and sanitary districts who
having water supply shortage problem.
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 municipalities and sanitary districts who lack
of such equipment and to replace the obsolete
equipment.
For Pattaya City
57
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.
58
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.
59