THAILAND GOVERNMENT PROCUREMENT: RICE FOR ROLLING

UNCLAS SECTION 01 OF 02 BANGKOK 007040

SIPDIS

STATE FOR EAP/MLS, EB/TPP/BTA. PM/RSAT
COMMERCE FOR JKELLY AND JBENDER
TREASURY FOR OASIA
STATE PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: ETRD EAGR ELTN MASS TH
SUBJECT: THAILAND GOVERNMENT PROCUREMENT: RICE FOR ROLLING
STOCK?


1. (U) SUMMARY: The Royal Thai Government (RTG) has floated
the idea of paying for four mass transit lines in the Bangkok
metro area at a cost of about $5 billion with cash and
agricultural products through barter deals negotiated with
other governments. Agricultural commodities, however, are
exported by the Thai private sector, and the leading products
are already produced for export to commercial markets
overseas, with few carry-over stocks. The purposes of
announcing any barter initiative seem to be to insulate the
RTG from corruption charges and to shore up support for RTG
policies among farmers, a critical element in the political
base of Prime Minister Thaksin Shinawatra and his Thai Rak
Thai Party. END SUMMARY


2. (U) On October 17, Minister of Transport Pongsak
Ruktapongpaisal convened a meeting with diplomats of China,
France, Germany, Japan, Russia, the United Kingdom, and the
United States to explain the RTG,s plans to build four
subways and an elevated electric train in and around Bangkok
at a cost of approximately 200 billion baht (US$ 5 billion)
and to solicit reactions and questions. The RTG,s
"megaprojects" program of public works is expected to total
about $42 billion.


3. (U) Prime Minister Thaksin has reportedly tasked the
Ministry with finding "a macro approach to financing the
megaprojects." Transport Minister Pongsak announced that the
RTG envisioned contracting for construction of the four lines
on a design and build basis according to agreements
negotiated government-to-government. The foreign governments
would select contractors and submit bids. The RTG would make
payment in cash and some portion of the purchase price in
agricultural products (the specific amount to be negotiated).
Ministry officials specifically mentioned rice and chickens.
They also stated explicitly the desire of the government to
find an approach that benefits the agricultural sector.


4. (U) Diplomats at the meeting voiced their skepticism
about the proposed procurement arrangement, particularly the
government-to-government aspect. Other questions concerned
whether the barter deal had to be bilateral (as opposed to
arranged on a global basis as is the case with many
counter-trade agreements),whether the RTG would be able to
contract with a consortium including companies from several
different countries, and how risk would be apportioned.
Since the meeting, the RTG has said that it is discussing the
matter further with China, France, and Russia. According to
one securities analyst familiar with RTG policy, China has
significant spare capacity that its government wishes to put
to use.


5. (U) With the exception of rice, the RTG does not hold or
maintain stockpiles of agricultural commodities. Thai
agricultural production has been flat for several years, and,
in view of lack of investment in the sector, it is unlikely
to increase. Additionally, leading agricultural products that
are geared toward exports (rice, rubber, chicken meat,
shrimp) are produced and marketed by the private sector
without intervention by the RTG. Incentives to create barter
supplies are not known to be in the works. According to the
securities analyst noted above, the government is considering
how to raise farm incomes rather than increasing exports, but
that it has not thought out what actually will be required to
increase production.


6. (U) This effort to exchange rice for rolling stock
compares to the RTG,s attempts to procure military hardware
by way of barter or counter-trade deals. In one pending
transaction, a major American manufacturer was asked to
accept up to 100 percent of payment in agricultural products.
When the company,s financial consultants examined
Thailand,s agricultural production, however, they determined
that there is not, nor is there likely to be, nearly enough
surplus production for the RTG to buy and use as payment for
such multi-million dollar purchases. The company accordingly
concluded that the actual likelihood of having to accept a
significant percentage of payment in agricultural production
is quite low.


7. (U) In practice, the above deal with the US company is
designed to act as a safety net, to sponge up any surplus
agricultural commodity that may arise over the ten-year span
of the contract. The price of purchase would be "the
prevailing market price." It affords a way for the RTG to
offload excess purchased farm products, should the need
arise, and not dump them onto the domestic market. Thus, the
barter is not being used to increase exports or to conserve
foreign exchange so much as to put a floor under agricultural
prices. The risk of applying this model more broadly by
involving the government would be to increase competition
with domestic traders, with the effect being an increase in
the price of exportable supplies that renders Thai products
commercially less competitive abroad.


8. (U) Prime Minister Thaksin has recently highlighted the
idea of using agricultural goods as currency in international
transactions. At the annual meeting of the Thai Chamber of
Commerce in Phitsanulok on October 30, Thaksin said that the
RTG has drawn up a three-year plan providing for a
substantial increase in barter trade so as to protect the
nation,s trade balance.

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COMMENT
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9. (U) Given the several hundred million dollar value of the
RTG,s weapons procurement deal, it is doubtful that an
additional $5 billion would provide further security to Thai
farmers. This is a deal designed for the optics not the
economics. It enables the Prime Minister to speak to his
political base in the farming communities of rural Thailand,
a constituency particularly visible as a result of a recent
four-day rally at Government House by over 2,000 farmers
calling for debt relief. By connecting farmers, livelihood
to the massive government spending programs that will benefit
Bangkok commuters, the Thaksin government positions itself as
standing up for the interests of all Thai citizens, rather
than just the minority of the population that lives in the
Bangkok metropolitan area. Whether the RTG intends to
propose some sort of loan program to encourage more farm
production in the future, or whether such barter deals are
simply an insurance program in case surpluses accumulate, it
is too soon to know.


10. (U) The Embassy also thinks that one motive for the
government-to-government approach is to insulate the RTG from
charges of involvement in any impropriety. Several recent
scandals, particularly those associated with construction of
the new Bangkok airport at Suvarnabhumi, still loom very
large in the minds of Thais, both inside and outside of the
RTG.
BOYCE