DEPUTY PM EXPLAINS FOREIGN BUSINESS ACT AMENDMENTS

UNCLAS SECTION 01 OF 03 BANGKOK 000261 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/MLS AND EB COMMERCE FOR EAP/MAC/OKSA TREASURY FOR OASIS STATE PASS TO USTR FOR WEISEL STATE PASS TO FEDERAL RESERVE SAN FRANCISCO FOR DAN FINEMAN STATE PASS TO FEDERAL RESERVE NEW YORK FOR MATT HILDEBRANDT E.O. 12958: N/A TAGS: ECON ETRD EINV PREL TH SUBJECT: DEPUTY PM EXPLAINS FOREIGN BUSINESS ACT AMENDMENTS REF: A. BANGKOK 152 ¶B. 06 BANGKOK 7650 ¶C. 06 BANGKOK 7435 ¶D. 06 BANGKOK 6363 BANGKOK 00000261 001.2 OF 003 ¶1. (SBU) Summary: The Thai Cabinet has approved important changes to the Foreign Business Act (FBA). The motivation for the changes is clear: the current government has a political imperative to find legal fault with the deposed PM Thaksin's ShinCorp transaction. The problem is that the ShinCorp deal apparently is broadly consistent with Thai law and practice at the time of the transaction, and is similar to thousands of other corporate structures of long standing in Thailand. The new law represents the government's best effort to establish a legal basis to go after ShinCorp while minimizing the collateral damage. ¶2. (SBU) In a January 9 meeting with Bangkok based foreign business reps and diplomats, Thai Deputy Prime Minister and Finance Minister MR Pridiyathorn Devakula largely failed to allay foreign investor concerns over the proposed changes. The DPM argued that a relatively small number (1,327) of foreign invested firms would be affected, and that these affected firms would be given time to reduce their equity to a minority holding. He insisted that these firms are illegal under the current law, so the new changes are a liberal concession that allows time for the firms to adopt a legal structure. Both the EU and Japan hinted at a WTO GATS challenge to the new law. Pridiyathorn stated his willingness to consider changes in the draft law over the next month. The DPM's claim that the affected firms are currently illegal is not accepted by many, so his upbeat characterization of the new law mostly fell on deaf ears. We think the RTG will try to head off a WTO challenge by making concessions on the sectoral scope of the new law. Because most U.S. services investment in Thailand falls under the U.S.-Thailand Treaty of Amity and Economic Relations and thus is exempt from most FBA restrictions, the impact of the new law on U.S. investors is likely to be confined to a few firms. End Summary. ¶3. (SBU) Thai Deputy Prime Minister and Finance Minister MR Pridiyathorn Devakula met on January 10 with Bangkok based representatives of the Joint Foreign Chambers of Commerce in Thailand (JFCCT) to explain recent changes to Thailand's Foreign Business Act (reftel). Many Bangkok based diplomats attended as well, including AmEmbassy Bangkok economic counselor. Deputy PM: "Only 1327 Companies Affected" -------------- ¶4. (SBU) Pridiyathorn said that he had called the meeting in reaction to statements made by the chairman of the JFCCT, Peter van Haren, that were highly critical of the RTG's proposed changes. Haren stated that the changes would force many foreign invested businesses to disinvest, creating a highly negative investment climate in Thailand. In response, Pridiyathorn said that the vast majority of foreign businesses, including all manufacturing and export industries, would be unaffected by the changes. The RTG's analysis, he said, indicated that 1,327 companies currently operating in Thailand would be affected in that they appear to be using an illegal (under current Thai law) nominee structure to satisfy Thai ownership requirements. (NOTE: While no one knows for certain the exact number of foreign invested firms currently operating in Thailand, it surely numbers in the tens of thousands, so if the RTG is correct it suggests that somewhat less than 10 percent of the foreign invested services companies might be affected. By definition, nominees are used to disguise actual underlying foreign ownership. How the DPM managed to arrive at such a precise number of companies that would be affected was not explained. End note.) ¶5. (SBU) Explaining the rationale for the changes, the DPM said that the controversy over the sale of ShinCorp had led BANGKOK 00000261 002.2 OF 003 to the investigation of an additional 16 firms, due to the machinations of former PM Thaksin, which created widespread investor anxiety. In a conversation with the Ambassador, PM Surayud confirmed that this was the motivation for changing the FBA and that the cabinet, after careful consideration of both the economic and political angles, concluded to go forward with this in the most transparent way available by not singling out one transaction but clarifying the entire law. This necessitated an urgent clarification of the law. According to Pridiyathorn, "We are late in consulting the private sector, I know. But we need to move quickly, because if the law isn't changed before the police investigation of ShinCorp is finalized, there is the chance that these 1,327 firms will become ensnared in the same police decision, which could require them to immediately sell down their interest to a minority holding. This would be a nightmare, but with the new law you can sleep easily because you have time (1-2 years) to make this adjustment." ¶6. (SBU) The Thai Cabinet approved the new FBA law January ¶9. The DPM said that the proposed law will now go to the Council of State for legal vetting, and will then be sent to the National Legislative Assembly for approval. Pridiyathorn thinks this process will take about a month. He stressed that he is willing to consider changes in the draft law during that period. Not Your Father's Grandfathering -------------- ¶7. (SBU) JFCCT Chairman Van Haren argued that the retroactive nature of the law is unfair to many well established firms in Thailand, and constitutes a form of forced divestiture. Pridiyathorn responded by stating that under the current FBA, the 1,327 firms using the nominee structure are illegal, so the new law is actually more liberal in that it provides a grace period for these firms to legalize their structures. He stressed that the law does not seek to change the structure of firms' management control or voting rights -- "these will be grandfathered." The only thing that will not be grandfathered is a nominee structure firm. He said that there are no large firms among the affected 1,327, and no well known brands. ¶8. (SBU) In response to the assertion by Van Haren that business confidence in Thailand had been adversely impacted by the FBA changes, Pridiyathorn readily conceded this. But, he argued, the problem is a lack of understanding among investors of the limited scope of the impact of the changes. He said, "Our PR team are novices, which is hurting business confidence. We need to get out the message that these changes are really meant to save you from a nightmare. We've been lax in enforcing the law up to now, and these changes are intended to buy you time." He defended Thailand's right to make these changes, stating "we are a sovereign country, we have a right to do this." ¶9. (SBU) The DPM insisted that Thailand has no intention of becoming more protectionist. He pledged to review the list of foreign-excluded services sectors on an annual basis, with a view to trimming the list. When asked why Thailand did not trim the list immediately, Pridiyathorn replied that while he personally favors such a move, the current legislative assembly would never approve the law if it included such liberalization. (Note. His pledge to review the changes on an annual basis is problematic since this government has pledged to turn power over to an elected government later this year. End note.) The WTO Angle -------------- ¶10. (SBU) Representatives from both the EU Mission and the Japanese Embassy pointedly asked the DPM about the WTO legality of the proposed changes. The EU representative argued that by introducing a new, third criteria for ownership -- majority of voting rights -- the new law is more BANGKOK 00000261 003.2 OF 003 restrictive and thus constitutes a prima facie impairment of the EU's rights under the GATS. In reply, Pridiyathorn said the RTG had checked with the relevant experts and was confident that the changes were WTO-consistent. In response to a question from the Swiss representative on what would happen if the police investigation against ShinCorp concluded that the transaction was in fact legal, Pridiyathorn replied, "We know what is going to happen." Comment -------------- ¶11. (SBU) The current government has a political imperative to find legal fault with the ShinCorp transaction. The problem is that the ShinCorp deal apparently is broadly consistent with Thai law and practice at the time of the transaction, and is similar to thousands of other corporate structures in Thailand. The new law represents the government's best efforts to establish a legal basis for going after ShinCorp while minimizing the collateral damage. To ensure that Shin Corp is ensnared, the draft FBA amendments include a clause exempting firms now under investigation or in court proceedings for current FBA violations from the grandfather provisions of the amendments. ¶12. (SBU) The scope of the RTG's proposed changes are narrower than some feared, so the worst case scenario has been avoided. But the still considerable economic impact of the changes has contributed to the deepening gloom among investors here already reeling from a military coup, the RTG's recent capital control measures, and the New Year bombings in Bangkok. Pridiyathorn's game attempt to win over the foreign business community largely failed, mainly because his argument started with the flat assertion that, under existing law, many foreign invested forms are illegally structured. Since this is precisely the point of disagreement (the supposedly illegal nominee structure has been around for thirty years, and has been upheld in at least one court decision),he failed to persuade his audience. A glaring weakness of the PM's argument is why, if under the current law the foreign firms are clearly illegal, it is necessary to have a heavily revamped, "clarified" new law. ¶13. (SBU) We think Pridiyathorn is serious about being receptive to suggested changes. For one thing, in spite of the DPM's insistence that the changes are fully WTO-consistent, we suspect that the RTG's WTO experts have provided him with very different counsel. The RTG, we think, will prove amenable to selectively exempting from the new law services sectors that are part of Thailand's GATS concessions, as a way of heading off a formal challenge within the WTO. ¶14. (SBU) There remain uncertainties over the new law and its effect. Analysts all over Bangkok are poring over the two-page summary of amendments (no additional details available) and trying to discern what it means for which companies. The lack of any additional definition of "nominee" makes things only more confusing. Since companies with nominee structures would have only 90 days to declare themselves to the Thai government or face large penalties accruing from the date of the law's enactment, a precise definition of nominee is vital as a first step. ¶15. (SBU) It is safe to say that compared to the EU or Japan, the proposed changes are likely to have much less effect on U.S. investors because a lot, albeit not all, U.S. services investments are covered by the U.S.-Thailand Treaty of Amity and Economic Relations (AER),not the FBA. Unfortunately, those sectors that are not covered under the FBA fall under FBA lists one and two, inland transportation and land trading - categories that have no grandfathering provision under the proposed amendments. We are working with the AmCham to obtain a more comprehensive understanding of the new law's effect on US investment in Thailand's services sectors. BOYCE