THAILAND: PRIVATIZING EGAT UNLIKELY TO REFORM THE

UNCLAS SECTION 01 OF 04 BANGKOK 006761

SIPDIS

STATE FOR EAP/MLS, EB, AND EB/ESC/IEC/ENR
STATE PLEASE PASS TO USTR
ENERGY FOR IN AND PI, COMMERCE FOR JKELLY

E.O. 12958: N/A
TAGS: ENRG EINV EPET KPRV TH
SUBJECT: THAILAND: PRIVATIZING EGAT UNLIKELY TO REFORM THE
POWER SECTOR

REF: A) 04 BANGKOK 2189 B) BANGKOK 1004 C) 04 BANGKOK 1504


1. (SBU) SUMMARY: Shares of the Electricity Generating
Authority of Thailand (EGAT) are to be sold in an initial
public offering in November 2005. Partial privatization of
this high-profile state-owned enterprise (SOE) enables the
Royal Thai Government (RTG) a way to maintain momentum in
implementing its plans for the energy sector and SOE reform.
According to industry observers the real measure of
privatization's success will be the degree to which it
introduces competition into Thailand's electric power
sector. By this standard, the privatization of EGAT will
not transform the sector, because the government will
continue to own 75 percent of EGAT, and EGAT's near-monopoly
on the dispatch of power will likely remain in place for the
foreseeable future. Uncertainty regarding both the
electricity price-setting mechanism and regulation may also
deter investment. Such hurried implementation of a major
economic policy in a way that raises as many questions as it
answers reflects the operating style of the government of
Prime Minister Thaksin Shinawatra. Clarification of EGAT's
status after the IPO will be of interest to agencies
involved in negotiating the competition, government
procurement, and investment chapters of the Thai-US Free
Trade Agreement. END SUMMARY

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EGAT'S IMMINENT INITIAL PUBLIC OFFERING (IPO)
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2. (U) Pursuant to its master plans for the energy sector
and SOE reform, the RTG has considered privatizing EGAT in
some form since the late 1990s (Refs A and B). Aims of
privatization include increasing competition so as to boost
efficiency of the power industry, reducing public sector
debt, ensuring quality service, and encouraging private
participation in the industry through development of the
capital market. Critics contend that the IPO as planned will
accomplish none of these goals. Following an abortive
attempt to list the shares that foundered on employee
opposition in early 2004 (Ref C),Prime Minister Thaksin
temporarily put the initiative aside.


3. (U) Following the electoral victory of Prime Minister
Thaksin's Thai Rak Thai party in February's parliamentary
elections, the Royal Thai Government has renewed its
commitment to implementing the Prime Minister's economic
policies. With respect to EGAT, the RTG corporatized the
state-owned enterprise. On June 24, 2005, EGAT filed for
company registration following EGAT's conversion from a
state enterprise into a public limited company named EGAT
Plc.


4. (U) Although EGAT's own financial advisors reportedly
preferred launching an IPO of shares in 2006, Finance
Minister Thanong Bidaya announced on October 5 that this
year is the appropriate time to carry out the IPO, which
will in practice partially privatize (25 percent) the
entity. The IPO of EGAT is scheduled to open for
subscription on November 16-17 and start trading on the
Stock Exchange of Thailand (SET) on November 30. Buyers may
subscribe to EGAT's initial offering through agent banks
during said period. If demand exceeds the volume of the
IPO, then the company may introduce a greenshoe option on
November 22, according to Finance Minister Thanong. The
greenshoe option would allow the unerrwiter to sell
additional shares to the public. The Finance Minister says
that the IPO of two billion shares be priced between 25 and
30 baht per share, raising 40 to 45 billion baht.


5. (U) EGAT has a total paid-up capital of 60 billion baht.
After the IPO, EGAT's total registered capital is expected
to rise to over 80 billion baht. Of the total capital
increase effected by the IPO, only a portion of the shares
would be sold to investors, with the government retaining a
75-percent stake in the company. Of the total shares to be
sold (1.54 million shares),460 million will be distributed
among EGAT's 25,000 employees at 10 baht per share.


6. (U) Some equity analysts have publicly questioned the 25-
30 baht per share price range, because the basis for
valuation is not entirely clear. Specifically, the method by
which the electricity tariff is calculated is not fully
transparent. The tariff consists of two components, the
base rate and the so-called fuel tariff (Ft) rate, which is
adjusted to reflect changes in world fuel prices. Earlier
this year, the RTG capped the Ft to maintain a lid on
electricity prices, but the effect was to cause EGAT to post
a net loss of nearly 9 billion baht through the first five
months of the year. Additionally, an independent regulator
for the power sector does not yet exist, and many observers
suggest that EGAT will continue to act essentially as a
government entity.


7. (U) Analysts nevertheless expect EGAT to become an
instant blue-chip and to attract foreign investors to the
SET. Toward this end, the Ministry of Finance has engaged
Citibank, among others, to underwrite the IPO. Based on the
success of the petroleum company PTT's shares since
privatization of that SOE, analysts and industry observers
expect that EGAT shares will sell well, and that the company
will be a winner, particularly if it is able to increase the
Ft rate in response to rising petroleum prices. Consistent
with its broad policy objectives, the obvious benefits for
the RTG in the short-term are to boost both the liquidity
and market capitalization of the SET.


8. (U) Indications are that the price-setting mechanism will
allow for flexibility. On October 17, the National Energy
Policy Council decided to fix the base rate of the
electricity tariff at 2.25 baht (about 5.6 cents) per unit
(kilowatt hour) for three years. The Ft rate will be
adjusted every four months, said Energy Minister Viset
Choopiban. He projected that the increase in Ft for the next
four-month period would be less than 20 satang (Note: 1 baht
is divided into 100 satang. End note.) On October 18,
however, Ministry of Energy Permanent Secretary Cherdpong
Sriwit surprised observers by announcing that the increase
would be only about 10 satang, owing to a deal arranged with
the state-owned energy producer PTT to provide natural gas
at a discount to the market for the four-month period.
Without such assistance from PTT, the increase would have
been 26 satang, according to Permanent Secretary Cherdpong.

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INDUSTRY OBSERVERS: COMPETITION IS THE MEASURE OF SUCCESS
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9. (U) At the Energy for Environment Foundation's annual
seminar held in Bangkok on October 17, participants agreed
that the issue of broad interest in EGAT's privatization is
the role of competition in the power sector going forward.
The event brings together who's who in energy, and this
year's topic was "Thailand's Electricity Sector in
Transition." Dr. Piyasvasti Amranand, Energy for Environment
Chairman and a pioneering engineer in the power industry,
set the tone of discussion by noting that if the objectives
of EGAT privatization are to increase efficiency, decrease
price, and increase quality, then it will be good. Pointing
to deregulation in the electric power industry abroad, he
emphasized that introducing competition into the power
sector and giving consumers better choice are the most
important aspects of policy and that they should be the
heart of the privatization process.


10. (U) Because energy costs comprise a key factor of
production, industrial consumers of electricity are
particularly interested that RTG policy encourage
competition. Mr. Chen Namchaisiri, a consumer
representative from the Federation of Thai Industries,
explained: "The consumer needs more competition. Why?
Without competition there will still be monopoly rather than
choice. Without many suppliers, it is simply not possible
for consumers to compare." Experts also stressed the
importance of competition rather than privatization had
increased efficiency in other sectors of the Thai aeconomy.
The Communications Authority of Thailand (CAT) and the
Telephone Organization of Thailand (TOT) are state-owned,
but permitting competition in the telecommunications
business has led to substantial reductions in the price of
long distance calls, for example, whereas corporatizing the
state-owned airline and floating its shares on the SET have
not led to similar efficiencies in the airline business.


11. (U) The same observers are accordingly unenthusiastic
about privatization without competition. In their view,
privatization of EGAT as envisioned will do little to
introduce competition into the power sector. Many
speculated that the reason for launching the IPO at this
time is to raise as much money as possible. The RTG has
moved away from the "power pool" model of the late 1990s,
which would have encouraged a reduced role for EGAT and
greater competition from independent power producers. The
more limited shift envisioned is from EGAT as the single
buyer to one where it will be an "enhanced single buyer"
(i.e., where it will be both producer and buyer).


12. (U) The evidence supporting doubts about the extent of
competition likely to emerge is the allocation of 50 percent
of new electric power production capacity on a no-bid basis
to EGAT for the period 2011-215. Electricity usage in
Thailand is projected to expand about 7 percent per year,
and four power plants with a capacity of 2,800 megawatts are
already under development for the 2007-2010 period without
any independent power producer (IPP) bids. It is not clear,
however, how the power from these plants will be priced.
According to Dr. Bart Lucarelli, President, LP Power
Consultants Ltd., the likely result of such near-monopoly
for EGAT will be to dampen the interest of new players in
IPP bid solicitation for the 2011-2015 period. He suggested
instead that, in order to introduce competitive forces into
the sector in a meaningful way, 15 percent rather than 50
percent would be a more appropriate allocation to EGAT, that
this 15 percent should be used for peak needs not baseline
capacity, and that the timeframe be 2014-2015.

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UNANSWERED QUESTIONS ABOUT PRICE AND REGULATORY FRAMEWORK
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16. (U) Despite the RTG's clarity on how the price (the base
rate and the Ft) will be set in the immediate future,
questions remain about how the price will be determined over
the long-term, which may deter investment in the sector.
All observers agree that prices will not be lower under a
private entity, and for this reason privatization is not
popular with the wider Thai public, notwithstanding the
advantage of pricing electric power at market-clearing and
sustainable levels. The concern is that electricity pricing
will continue to be subject to political interference,
whether to achieve social policy goals, to provide low-cost
inputs to industry, or for some other reason. Past Ft
accruals have not been passed on to consumers. EGAT carries
these liabilities from the past, and it is not clear how
future Ft adjustments will be passed through. The deal with
PTT to limit the Ft increase at the outset, industry
observers indicate, confirms rather than allays such
suspicions. In summary, from an investor's standpoint,
explained Dr. Lucarelli, "there is neither transparency nor
certainty. The concern is that prices may be adjusted in a
politically expedient manner. Investors fear that they would
lose."


17. (U) The most immediately pressing question concerns
regulation of the power sector. The commission responsible
for regulating a privatized EGAT has yet to come into being.
The Ministry of Energy is currently reviewing a draft bill
to establish a new regulatory body for the industry so as to
clarify the regulatory framework. While the review is
expected to be complete in December, there are no answers to
numerous specific questions about its provisions. How will
the regulator be separate from the industry? How will the
law ensure transparency in the work of the regulatory
commission and public disclosure of data about EGAT
operations? Will a privatized EGAT enjoy special privileges
that it has known as an SOE? If the RTG is the majority
shareholder, how will that affect government procurement
practices?

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COMMENT
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18. (SBU) The proposed privatization of EGAT reflects both
the forward-looking promise of Prime Minister Thaksin's
economic policies and their often rushed and haphazard
implementation to date. The RTG understands the need to
develop Thailand's infrastructure, and its willingness to
partially privatize EGAT shows a desire to make visible
progress toward major policy goals. We think that the IPO
will succeed in achieving its immediate objectives. Over the
long-term, we think that the introduction of competitive
forces in the electric power sector would benefit Thailand
by ensuring the supply of electric power that the economy
will need to sustain its growth by putting prices on a
market-clearing basis at sustainable levels. Given the
specific terms of the RTG plan for EGAT privatization,
however, especially the pre-emptive allocation of 50 percent
of capacity to EGAT for the 2011-2015 period, we do not
expect privatization to disrupt EGAT's near monopoly anytime
soon. The fact that EGAT will both produce and buy
electricity, raising the question of whose power will be
dispatched first, may further deter competition and investor
interest in the power sector. We also agree with industry
observers that the RTG record of intervening in electricity
price-setting and the lack of clarity regarding the
regulatory environment generally raise questions regarding
the transparency of RTG policy.


19. (SBU) The issues of the status of a privatized EGAT and
its regulatory environment have special relevance for the
Thai-US Free Trade Agreement (FTA) negotiations underway.
Owing to their substantial share of gross domestic product
(39.5 percent, according to the Ministry of Finance),the
Embassy considers it important to specify the treatment of
state-owned enterprises under the FTA, particularly the
chapters on competition, government procurement, and
investment. EGAT has long been one of the most visible SOEs
in Thailand, and its privatization will likely shape RTG
policy regarding the privatization of other SOEs in the
future.


KEUR