THAILAND: SUPREME ADMINISTRATIVE COURT QUASHES

C O N F I D E N T I A L SECTION 01 OF 03 BANGKOK 001861 SIPDIS SIPDIS STATE FOR EAP/MLS, EB, AND EB/ESC/IEC/ENR STATE PLEASE PASS TO USTR BWEISEL ENERGY FOR IN AND PI COMMERCE FOR JKELLY E.O. 12958: DECL: 03/28/2016 TAGS: EINV EPWR ENRG KPRV TH SUBJECT: THAILAND: SUPREME ADMINISTRATIVE COURT QUASHES POWER PRODUCER EGAT LISTING REF: A. 05 BANGKOK 7124 ¶B. 06 BANGKOK 538 ¶C. 05 BANGKOK 6761 BANGKOK 00001861 001.2 OF 003 Classified By: Ambassador Ralph L. Boyce. Reasons 1.4 (b) and (d). ¶1. (U) SUMMARY: On March 23, the Supreme Administrative Court (SAC) ruled that the procedure by which the Royal Thai Government (RTG) privatized state power producer EGAT Plc was illegitimate. This ruling quashes plans for an initial public offering of shares anytime soon. One of the few institutions that has demonstrated independence from the government of Prime Minister Thaksin Shinawatra, the SAC issued the decision after considering a petition against privatization and listing filed by consumer advocacy groups. Petitioners argued that privatization benefits a few close to the PM rather than the nation as a whole, a message that resonates with consumers facing rising electricity bills resulting from high fuel prices. ¶2. (U) While the court's decision was worded to reflect specific problems with the EGAT privatization process, the decision is a blow to the RTG,s plans for privatization in general. Due to the opposition's using privatization and other market liberalizing policies of the PM as additional tools with which to attack Thaksin has turned these issues into highly-charged political questions. The ability of any government to pursue privatization is doubtful until sufficient time passes to let the heat out and people regain confidence in the ability of independent institutions to protect the interests of the general public. END SUMMARY. THE RULING ¶3. (U) On March 23 the Supreme Administrative Court (SAC) ruled in favor of petitioners seeking to block the partial privatization of state-owned electric power producer EGAT Plc (EGAT). The SAC annulled the two royal decrees that transformed the state agency into a public company. The ruling is retroactive to June 24, 2005, when the two decrees came into effect. ¶4. (U) The most important issue was the transfer of state assets to a public company. In its prior status as the Electricity Generating Authority of Thailand, EGAT had expropriated large tracts of villagers, lands, for example, to build dams and other facilities. The SAC ruled that the two royal decrees facilitating the corporatization process were &illegitimate8 because they transferred public assets into the hands of a private company. Even though the Royal Thai Government (RTG) planned to sell only a 25-percent stake in EGAT, partial privatization of a public company that held public assets as a state enterprise was nevertheless ruled inappropriate because the RTG's majority share could be diluted should more shares be sold in the future. ¶5. (U) Other aspects of the decision announced pointed to conflicts of interest and missteps in preparing for privatization: --A board member of Shin Corporation and member of the RTG privatization committee was not suitable to sit on the committee because EGAT had plans to expand into telecom services. Note: Shin Corporation subsidiary AIS is the leading provider of mobile phone services in Thailand. End note. --The chair of the public hearing panel on the EGAT listing is also assistant to the Minister of Natural Resources and Environment. --The public hearing procedure was incomplete because the RTG announced the venue, date, and time in the newspapers for fewer than the three days required by law. Details of the decrees were not disclosed and the hearing involved only 3.87 percent of EGAT employees. --Consolidation of EGAT assets required for the privatization was not completed before the decrees went into effect. ¶6. (U) The SAC, which has made previous rulings contrary to BANGKOK 00001861 002.2 OF 003 Thaksin administration policies, had ordered the suspension of EGAT,s initial public offering (IPO) on November 15, 2005, the day before the IPO subscription began (REF A). The purpose was to consider the petition filed by the Federation of Consumer Organizations (FCO) and other representatives of consumer groups. That suspension is now final until such time as the government devises a plan that takes into account the substance of the court decision. CRITICISMS OF EGAT PRIVATIZATION PLANS ¶7. (U) The FCO and other opponents of the EGAT IPO have raised several concerns in what has been a highly public campaign against a basic policy of the Thaksin government. Their general argument is that privatization of state-owned enterprises (SOEs) is not in the national interest because it benefits PM Thaksin and those connected to him rather than the Thai people as a whole. They point to the huge profits made by investors who received share allotments of previous IPOs of former SOEs such as the petroleum company PTT Plc. Critics have also raised questions about national security and pricing policies for key public services. In February, after the Temasek buyout of Shin Corporation (REF B), Chai-anan Samudavanija resigned as the chairman of the EGAT board, citing fears that "EGAT could fall under foreign control" in the future. Note: Chai-anan is closely associated with media tycoon Sondhi Limthongkul, a leader of the current campaign to oust PM Thaksin. End note. ¶8. (U) Public interest in plans for EGAT privatization has been particularly pronounced in part because rising fuel prices have recently led to increases in retail electricity prices (tariffs). There is widespread suspicion that a private entity seeking to maximize shareholder value would boost tariff rates. Arguments that privatization amounts to the sale of national assets for the benefit of a few thus carry special weight. ¶9. (U) Experts such as Dr. Deunden Nikomborirak, Research Director for Economic Governance, Sectoral Economics Program, at the Thailand Development Research Institute (TDRI),have also emphasized that a critical weakness of RTG plans for EGAT privatization is the failure to establish an independent regulator beforehand (REF C). The power sector is currently regulated by the National Energy Policy Committee, officially chaired by the Prime Minister and delegated to a Deputy PM. Its two component bodies are the Power Generation Commission and the Electricity Review Board (ERB). Parliamentary passage of a basic law establishing a regulator for the sector is not imminent. Dr. Vichit Lorchirachoonkul, head of the ERB, told Econoff that he expects a wait of 2-3 years. In the interim, there is no entity separate from the government with the authority to regulate the sector. A BLOW TO THE GOVERNMENT ¶10. (U) The Thai press immediately billed the EGAT ruling &a blow to the government8 at a time full of setbacks for PM Thaksin. The EGAT IPO would have been the largest in Thai history*1.245 billion shares floated at 25 to 28 baht each, expected to boost the overall capitalization of the Stock Exchange of Thailand (SET) by 300 billion baht (US$7.7 billion). Much of the proceeds were to be used by EGAT to build new power generating facilities and invest in nearby countries. ¶11. (U) Government Spokesman Surapong Suebwonglee accurately responded that &the court,s ruling did not say that privatization was illegal, only that in EGAT,s case it was done improperly.8 Other RTG officials noted that the EGAT privatization process was overseen by former Chairman (lately Thaksin foe) Chai-anan. He reaffirmed the RTG,s basic policy of pursuing privatization of SOEs and cited the postal service as a successful example. PM Thaksin said that his government respected the court ruling but shrugged off the setback as a &technical blunder.8 The PM charged the Ministry of Energy with considering next steps, but said that he had not yet decided whether to press on with EGAT privatization if re-elected in the election scheduled for April 2. BANGKOK 00001861 003.2 OF 003 ¶12. (U) In the context of the ongoing standoff between the PM and his opponents led by Maj. Gen. Chamlong Srimuang and the People,s Alliance for Democracy (PAD),the EGAT ruling provided another issue for PAD and others to bash the PM. Unsurprisingly, Chamlong called for Thaksin to resign, an appeal which the PM promptly rebuffed. IMPACT ON PRIVATIZATION ¶13. (U) Potentially more significant than the momentary impact on the immediate political climate, the SAC ruling has influenced the thinking of SOE union leaders, some of whom see in the decision an opportunity to resist other plans for privatization of state enterprises. The Port Authority of Thailand union's leader, for example, has called for the review of all previous privatizations of state enterprises, including Thai Airways and PTT Plc. The union leader at the state-owned Metropolitan Electricity Authority (MEA) -- who is also President of the Anti-Privatization Network -- has likewise called for reassessing previous privatizations. ¶14. (U) The likely impact on future privatization of SOEs is difficult to assess at this point, but outside of the energy area it is likely to depend on the overall political strength of the Thaksin government. Industry observers expect delay in privatizing EGAT,s sister organizations ) The Provincial Electricity Authority (PEA) and the MEA*because the issues are similar to those that tripped up the EGAT privatization. The caretaker status of the Thaksin government has itself put all major policy initiatives on hold, thereby delaying the IPOs of other SOEs, particularly the state-owned telecom firms TOT Plc and CAT Telecom Plc. COMMENT: ¶15. (C) The SAC decision is a setback for EGAT privatization, forcing the RTG to go back and put the IPO preparations on firmer legal ground. At the same time, it provides an opportunity to address concerns that have fueled popular opposition to privatization, including the creation of an independent regulator and transparency regarding the issuance of shares. The delay also provides the opportunity for the RTG and others to make the case for how efficient management offers a way to keep a lid on prices, points conspicuous for their absence in recent debate. One of the ironies of the current situation is the spectacle of popular reform groups lobbying for maintaining the status quo of EGAT, widely viewed here as being among the most corrupt and inefficient of Thailand's large number of SOEs which have traditionally provided cushy sinecures for the politically well-connected. Whether any government in the near term will be willing or able to press for privatization of EGAT or any other SOE remains an open question. Privatization of other non-energy SOEs is not necessarily on hold, but owing to RTG weakness it is likely that sectoral liberalization has hit a rough patch that will last for a while, with all of the implications that has for the stock market, competitiveness of certain economic sectors, and the opportunities for foreign companies to invest in Thailand. BOYCE