THAI TELECOM SECTOR REFORM:PROSPECTS FOR

UNCLAS SECTION 01 OF 05 BANGKOK 007043 SIPDIS STATE FOR EB/CIP, EAP/MLS USTR FOR BWEISEL, JMCHALE COMMERCE FOR JKELLY, JBENDER, AND EHOLLOWAY JUSTICE FOR CHEMTOB TREASURY FOR OASIA STATE PLEASE PASS TO USTR E.O. 12958: N/A TAGS: ETRD ECPS EINV ECON TH SUBJECT: THAI TELECOM SECTOR REFORM:PROSPECTS FOR PRIVATIZATION OF STATE-OWNED TELCOS TOT AND CAT REF: A. A. 01 BANGKOK 5186 ¶B. B. 04 BANGKOK 2189 ¶C. C. 05 BANGKOK 6901 ¶D. D. 05 BANGKOK 6761 ¶1. (U) SUMMARY: Royal Thai Government (RTG) plans to privatize the telecom operators TOT PCL (TOT) and CAT Telecom PCL (CAT) are finally moving forward. Several practical problems require resolution, however, before either enterprise will be able to effect an initial public offering (IPO) of shares, now scheduled for 2006. Specifically, only with greater clarity on the outcome of legal disputes with private operators and the costs associated with the emerging regulatory regime will investors be able to determine the value of either entity. While the RTG appears serious in its attempt to partially privatize both entities in some form, the risk of failure is substantial, particularly for CAT. The November 2005 IPO of the state-owned electric power producer EGAT may affect the immediate prospects for both TOT and CAT. Since neither TOT nor CAT has demonstrated that it has a viable business model for operating in the increasingly competitive telecommunications sector, however, either or both entities will likely combine in some manner with one or more other players as the sector consolidates. END SUMMARY -------------- - THE SLOW PROGRESS OF TELECOM REFORM SINCE 1997 -------------- - ¶2. (U) Initially approved in 1997, the RTG,s Telecommunications Master Plan calls for privatization of its two state-owned enterprises (SOEs) TOT and CAT as part of a broad policy of liberalizing the sector as set out in REF A. Privatizing TOT and CAT is also consistent with the RTG's plans for SOE reform. As a precursor to privatization, TOT was corporatized in July 2002; that is, shares still owned by the RTG were issued. Effective August 14, 2003 the Communications Authority of Thailand was corporatized into two separate entitites: CAT Telecom PCL and Thailand Post Company Limited (REF B). ¶3. (U) Deadlines for privatization of TOT and CAT have come and gone for many reasons, the most basic being the absence of an independent regulator for the industry. Only with the formation of the National Telecommunications Commission in November 2004 has the framework within which privatization can realistically occur begun to emerge. ¶4. (U) Notwithstanding the failure of the RTG to privatize TOT and CAT, Thailand,s telecom sector has substantially liberalized. Private operators have long been permitted to enter the fixed-line and mobile services markets by way of concession agreements. TOT and CAT have concluded more than thirty build-transfer-operate (BTO) concession agreements, whereby private companies build telecom networks and transfer the assets to the SOE, which then offers long-term concessions to the private operators (or concessionaires) in exchange for a share of the revenues going forward. The legacy of this liberalization without privatization is that the Thailand,s telecommunications sector is relatively competitive, particularly in the market for mobile services as set out in REF C. ¶5. (U) The BTO concessions, detailed in septel, have distorted the Thai telecom market. In effect, TOT and CAT have served as both operators and regulators. The terms of the concessions have been more favorable to some concessionaires (such as AIS) over others (such as TAC). The concessions have also served to sustain both SOEs by guaranteeing flows of revenue that constitute rents pure and simple. For this reason, reformers have called for conversion of the concessions to licenses in order to create a level playing field that fosters free and fair competition. -------------- - NEW LICENSES RATHER THAN CONCESSION CONVERSION -------------- - ¶6. (U) The NTC celebrated its one-year anniversary on November 1, 2005. As set out in REF D/septel, the regulator has made substantial progress toward establishing its position as the industry regulator and moving forward with the decisions required to define the new regulatory environment. The most significant of these was the decision to issue new licenses rather than to force concession conversion directly. In order to avoid the legal challenge that would certainly have resulted from any direct attempt to intervene in the relations between the SOEs and their concessionaires, the Commissioners chose to issue new licenses to the SOEs and private operators alike, thereby clearly establishing the NTC,s authority over their operations. Additionally, licenses about to be issued for third-generation (3G) services will provide an incentive for private operators to migrate their subscribers from the current second-generation (2G) services regulated by the concessions with their heavy revenue-sharing payments to 3G services regulated by the NTC and requiring payment of less burdensome license fees to the NTC. Such migration will thus unwind the concessions over a multi-year period. The obvious downside for potential investors, however, is that both TOT and CAT stand to lose their rent revenue in about five years. (Note: most of the concessions currently in effect end 2015-2017. End note.) -------------- INITIAL PUBLIC OFFERINGS IN 2006? -------------- ¶7. (U) TOT has fixed its IPO date for May 11, 2006, but many such dates have come and gone before. The prospects for a November 2005 IPO faded when the Ministry of Information and Communication Technology rejected TOT's business plan as &unrealistic.8 The plan,s projected revenues from non-voice services, which require a large capital investment for 3G services, was overly optimistic, according to MICT. ¶8. (U) TOT has nevertheless taken concrete steps in preparation for the IPO. It has retained Phatra Securities and Credit Suisse as underwriters, and reportedly seeks to float 180 million out of its total 600 million shares. TOT's auditor-general is finishing an audit of the enterprises's finances by February, at which point the investor road show and IPO process is expected to begin. One incentive for listing in 2006 is a tax break due to expire this year that gives newly listed companies on the Stock Exchange of Thailand the right to use a tax rate of 25 percent tax rather than the normal rate of 30 percent. ¶9. (U) TOT is also working to resolve the issues that complicate efforts to value the company, namely its disputes with True Corp, a concessionaire, over license fees, with the NTC over license fees, and with the Ministry of Finance (MOF) over exemption from excise taxes. At stake in the dispute with True Corp are lawsuits for damages of several billion baht against TOT over access fees charged. With the MOF, the issue is whether TOT may continue to enjoy the exemption from excise taxes that it enjoyed when it was an SOE (before becoming an NTC license holder). ¶10. (U) CAT faces a much rockier road to a successful IPO. No date has been set, and, owing to serious doubts about the value of its business going forward, the SOE appears to be having difficulty finding underwriters. Thus far, CAT has retained Finansa and Kim Eng Securities. A leading Thai securities firm that has underwritten other IPOs of SOEs has privately confirmed that it passed on the opportunity to underwrite CAT's IPO. CAT's relatively disadvantageous position vis-a-vis its concessionaires under the NTC's licensing fee regime as noted in paragraph no. 13 below adds to the uncertainty. -------------- PROBLEMS DETERMINING ENTERPRISE VALUE -------------- ¶11. (U) Regulatory uncertainty has, from the beginning, been at the heart of the problem of valuing the state-owned telcos. The issuance of Type III licenses (for operators with network providing public telecommunications services) to TOT and CAT on August 4, 2005 marks the emergence of a new regulatory regime going forward. Several issues affecting the revenue and profitability of the two SOEs nevertheless remain outstanding. These include the unwinding of the concessions, interconnection charges, license fees, and universal service obligation (USO) fees. ¶12. (U) TOT's dispute with the NTC over licensing and other fees illustrate the extent of the problem. With the issuance of the August 4 licenses, TOT became liable for regulatory fees. According to TOT, these fees will total five billion baht per year. They include a fixed USO fee of 4 percent of the company's operating revenue (2.5 billion baht),a license fee of 3 percent of revenue (1.9 billion baht),12 baht per subscriber telephone number per year (490 million baht),and a spectrum fee still to be determined. TOT has asked the NTC to reduce the fees to one billion baht, but the NTC insists that the charges are fair. TOT is seeking especially to secure a waiver of the USO fee. It argues that as a state agency, it has spent tens of billions of baht over the years to build out the network and to extend it even to areas that private operators would deem uneconomical. ¶13. (U) CAT's problem with licensing fees is inseparable from its concessions with private operators, namely, TAC, TA Orange, and DPC (a subsidiary of market leader Advanced Info Service (AIS)). The fees are the same as those listed in paragraph 12, plus an interconnection rate set at 1.07 baht per minute. CAT executives claim that, just the burden of one operator, TA Orange, will place CAT in the red by almost three billion baht per year. CAT seeks accordingly to scrap the agreements. Having paid the burdensome revenue sharing obligations under the concessions for years, the three private operators have suddenly found themselves in an advantageous position now that CAT is seeking their revision. Whether the concessionaires agree to new terms will depend on the new terms offered. ¶14. (U) The NTC clearly has no desire to crush either TOT or CAT with its fee regime, it is highly unlikely that the NTC will reduce or waive any charge whereby TOT enjoys special treatment because it would be so difficult to justify such decision in public. Thus, while the NTC may reduce the percentage of fees applied to all licensees so as to lighten the fee burden, the question of how the issue will be resolved remains open. ¶15. (U) For CAT, the impending liberalization of the international gateway raises the most fundamental question of all: what will be its source of revenue going forward? CAT executives claim that the company will generate revenue in three ways: international calls; data communications and related services, and CDMA mobile services. Its 2007 target, for example, is to retain 50 percent of the international call market and to serve 10 percent of the CDMA market. Competition is likely to drive long distance revenue down, however, and the rollout of CDMA has been fraught with unexpected delays that raise questions about CAT,s ability to execute. -------------- HOW ATTRACTIVE TO INVESTORS? -------------- ¶16. (U) While the mention of SOE privatization generally carries with it the expectation of success in view of the many successful share issued privatizations worldwide the past 25 years, Thailand's state-owned telcos are problematic as investments. Neither enjoys a monopoly position comparable to Japan's NTT. The advantages flowing from incumbency are less evident than in other sectors such as energy, because of the fast pace of technological change and the potential disruptiveness of new technologies such as voice over internet protocol (VOIP). Fixed-line and long-distance services are yesterday's businesses, under threat from several directions. The private operators have the lead in these other segments of the market, such as mobile and satellite services, and their shares are already on offer to investors. ¶17. (U) The RTG,s preference for partial privatization, where the RTG remains the majority shareholder, is also problematic. As shown by the American Chamber of Commerce in Japan Privatization Task Force,s 2004 study of privatization, such structure of ownership encourages quid pro quo deals between the government and the former SOE, a point applying especially evident in the experience of Japan,s telecom giant NTT. See: h t t t p:www.accj.or.jp/document library/Privatization/PTFgeneral.pdf The RTG,s own record to date of tinkering with markets by forcing former SOEs to assist in implementation of policy suggests that the Thai experience will more likely than not track that of Japan in this regard (REF D). ¶18. (U) The most basic question of all is whether either TOT or CAT has what it takes to compete in the market. The experience of other partially privatized companies such as Thai Airways is not encouraging because they have not produced the results expected. Neither TOT nor CAT has impressed the Embassy as having made the transition from being a state-owned enterprise flush with concession revenue to profit-seeking business. In June, the State Enterprise and Government Securities Office of the Ministry of Finance gave TOT and four other SOEs failing grades in its annual review. The evaluations are carried out by Thai Rating and Information Services, and are based on factors such as operational and financial performance, compliance with government policy, and management efficiency. Securities analysts have also voiced concerns about the reserve of engineering talent at the state-owned telcos. Owing to the private sector's dynamism for the past decade, engineers wanting a piece of the action have jumped ship, leaving both TOT and CAT at an obvious technological disadvantage. In short, in order to succeed with their IPOs, both entities must overcome the sense that &they have no hope and no core business,8 in the words of one long-time financial analyst. -------------- POSSIBLE COMBINATIONS -------------- ¶19. (U) Industry observers have long considered various scenarios of consolidation within the Thai telecom market. One of the most perceptive analysts following the market favors the Indonesian full duopoly model because it balances the interests of the public for more and reasonably priced telecom services with the needs of the telcos for good margins necessary for them to provide additional services over the short- and long-term. Such duopoly reduces the duplication of infrastructure, thereby easing demand for foreign exchange (as much of the equipment is imported). TOT and AIS make natural partners, in this view. Such a combination (in any number of forms) would potentially spark consolidation among the other industry players. If CAT, TAC, True Corp (and its mobile operator TA Orange) and the provincial provider of fixed-line service TT&T merged, the result would produce a second nation-wide full-service operator sufficiently large to be a serious competitor to TOT/AIS. ¶20. (U) A TOT-CAT merger is highly unlikely. Different institutional cultures, employee hostility to the prospect, and an absence of obvious synergies has frustrated consolidation efforts to date as set out in REF B. Prime Minister Thaksin Shinawatra himself has pushed the idea, but it went nowhere and now appears to be dead. Current RTG policy calls for two separate IPOs. ¶21. (U) The flurry of interest in foreign tie-ups following Telenor's buyout of mobile operator TAC in October 2005 introduces new possibilities for alliances and acquisitions. Singapore Telecom already owns a 20.5 percent stake in AIS, and is reportedly pursuing other deals, including increasing its stake in AIS. The NTC reports that several European and Asian telcos have inquired about investing in Thailand. TT&T has also announced that it is looking for a foreign partner to help pay for its rollout of 3G. -------------- COMMENT -------------- ¶22. (U) We think that the RTG will continue to press for the share-issued privatization of both TOT and CAT in a manner similar to other privatizations where the RTG has remained the majority shareholder. The imminent partial privatization of EGAT may add to the momentum behind both IPOs. Pushing for privatization has the favorable effect of encouraging resolution of various regulatory disputes over issues such as access fees, which will further define the playing field and expedite unwinding of the concessions. While it is impossible to predict either the timing or success of either IPO, we think that TOT has the better chance of launching a successful IPO on time because it possesses real assets and has a core business. Should either or both SOEs encounter difficulty with the IPO process, the RTG would likely resort to continued delay. Since all plans presently on the table call for the MOF to remain the majority shareholder, however, both entities will remain SOEs for the purposes of negotiating the competition, government procurement, and investment chapters of the pending Thai-US Free Trade Agreement. ¶23. (U) Longer-term, even assuming the successful IPO of both TOT and CAT, we do not think that either will necessarily remain independent entities. We think that in view of the strong pressures encouraging consolidation of the telecom sector, should either TOT or CAT be able to compete effectively, it may find itself pursuing a tie-up with another industry player. Failure on the part of either TOT or CAT to compete effectively after the concessions unwind, by contrast, may leave the former SOE with no choice but to be merged with another company. Since the real measure of successful privatization as a reform measure is the effect on the market, even failure (whether at the IPO stage or later) that leads to industry reorganization would be a success if it encourages the introduction of new and better telecommunications services by providing for market competition and enhanced transparency in the regulatory environment and investment climate. BOYCE