US embassy cable - 05TAIPEI2822

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 002822 
 
SIPDIS 
 
STATE FOR EAP/RSP/TC, STATE PASS USTR FOR WINELAND, WINTERS 
AND FREEMAN, USDOC FOR 4431/ITA/MAC/AP/OBP/TAIWAN/MBMORGAN 
 
E.O. 12958: DECL: 06/27/2015 
TAGS: ECON, ETRD, ECPS, ELAB, TW 
SUBJECT: CHUNGHWA TELECOM POSTPONES PRIVATIZATION PLANS 
 
REF: TAIPEI 2084 
 
Classified By: AIT Director Douglas Paal, Reason 1.4 (b) 
 
1.  (U) Summary:  Chairman Ho-chen Tan told a Chunghwa 
Telecom (CHT) shareholders meeting on June 21 that continued 
concerns over employee benefits would delay until August the 
planned privatization of CHT through the sale of 17% of CHT 
shares.  However, Ho-chen insisted that CHT remains committed 
to privatization, in spite of the Legislative Yuan's (LY) 
passage of a resolution calling on the government to suspend 
the share sale.  CHT union leaders are planning a general 
strike on July 1 across Taiwan and have been preparing to 
travel to the U.S. to protest during Chairman Ho-chen's 
upcoming roadshow.  Industry insiders agree that the sale 
will go forward despite the union's protests.  End Summary. 
 
=========================================== 
CHT's Halting March Toward Privatization... 
=========================================== 
 
2.  (U) The Taiwan government announced in January that it 
would once again try to sell 15% of its shares of CHT as 
American Depository Receipts (ADRs) on the New York Stock 
Exchange (NYSE) in the second quarter of 2005 and a further 
2% on the Taiwan Stock Exchange (TAIEX).  A similar plan in 
2004 was postponed when CHT union members protested.  This 
year, CHT has pressed forward with the plan, in spite of 
labor union protests.  On May 24, CHT announced it had chosen 
Goldman Sachs, UBS, and Morgan-Stanley to jointly manage the 
ADR issuance.  A few days later (5/27), the Legislative Yuan 
passed an opposition-sponsored resolution calling on the 
government to suspend the privatization of CHT due to 
concerns that the sale would benefit "certain conglomorates" 
allied with the government, generally assumed to be CHTs 
competitors in the telecom business.  Opposition lawmakers 
also complained that the timing of the sale would not 
maximize revenues for the government. 
 
3.. (U) In spite of opposition from the LY, the CHT Board of 
Directors approved the ADR sales plan in a private meeting 
June 15.  This prompted union members to clash with police 
outside the CHT shareholders meeting June 21.  CHT Chairman 
Ho-chen said after the meeting that CHT needed to fulfill 
local and U.S. regulatory requirements before the share sale 
could proceed and that the process could take several weeks. 
However, most analysts believe the delay was a direct result 
of the union protests.  Ho-chen vowed to take care of the 
issue of employee benefits before the ADRs were released for 
sale. 
 
====================== 
...Still Going Forward 
====================== 
 
4.  (C) Analysts and government insiders agree that the CHT's 
privatization plan will go forward this time, even if delayed 
by several weeks.  CHT's Senior Director of Planning Mark Lee 
told AIT that the LY resolution, while influential, was not 
binding and that the government was not likely to 
significantly alter its plans as a result.  He noted that the 
LY had approved CHT's broad privatization plan in 2001 and 
that the market for telecom shares appears to be as strong as 
it has been for several years, potentially maximizing income 
for the government.  CHT management continues to discuss 
labor concerns about job losses and changes to the pension 
plan, but there are some issues that are best resolved by 
government agencies, including the Council of Labor Affairs, 
and the union. 
 
5.  (C) Kao Kai-sheng, Deputy Director General of the 
Directorate General of Telecoms (DGT), agreed with Lee that 
CHT privatization would move ahead this summer.  Kao 
confirmed that the LY resolution was advisory in nature and 
not legally binding, but said that the Executive Yuan (EY) 
was actively considering how best to respond to the LY's 
decision.  In an unusual move, the EY announced June 23 that 
the LY resolution was not legally binding and that the sale 
of ADRs should continue.  This is the first time we have seen 
the EY issue such a statement in response to an LY 
resolution.  Kao also confirmed that CHT Chairman Ho-chen 
would travel to the U.S. as scheduled in the first week of 
July for a "roadshow." 
 
6.  (C) Industry analysts from financial management firms 
CLSA and PriceWaterhouseCoopers are confident that the 
privatization plan will move forward, in spite of the LY 
announcement.  PWC's Jason Wang noted that the shareholders 
meeting had postponed the dividend issuance date from July to 
mid-August, presumably to allow privatization to occur 
before the dividend was issued.  Democratic Progressive Party 
legislator Phoenix Cheng agreed that CHT would go forward 
soon, noting that privatization was already too far along to 
be stopped.  Cheng suggested that the LY resolution was just 
another example of the opposition parties strategy of seeking 
headlines and political advantage by opposing any government 
supported initiative. 
 
============================= 
But CHT's Union not Giving Up 
============================= 
 
7.  (C) Union officials, however, are not going along 
quietly.  Following a small demonstration in May and the 
clash between union members and police outside the CHT 
shareholders meeting on June 21, union officials announced 
they would file a lawsuit against CHT management and the 
Ministry of Transportation and Communications (MOTC), 
accusing the defendants of breaching the trust of the 
shareholders.  The head of CHT's union, Simon Chang, said he 
hopes the lawsuit will raise concerns among potential buyers 
about CHT's corporate governance and labor relations.  Chang 
told AIT that the union believes CHT should fix corporate 
governance problems and guarentee worker rights before 
selling shares.  The union has announced plans for a July 1 
strike. 
 
8.  (C) AIT's NIV section also reports several CHT union 
leaders, including Simon Chang, have recently applied for 
U.S. visas, citing plans to go to New York for "tourism" at 
the same time CHT Chairman Ho-chen is expected in New York. 
Chang denied reports that union leadership was planning 
protests in the U.S. to coincide with the CHT roadshow. 
However, he told AIT that the union, with assistance from the 
US Telecommunication Workers Union, will hold at least one 
anti-privatization themed press conference in New York while 
CHT Chairman Ho-chen is there.  According to Chang, if the 
union can force CHT to delay until the next session of the LY 
(scheduled to begin September 1) political pressure could 
prevent CHT from issuing ADRs. 
 
9.  (C) Comment: With the sale of these shares, CHT will 
finally be privatized, fulfilling a commitment the Taiwan 
government made prior to WTO accession.  The union knows this 
will be their last chance to negotiate with the government 
over CHT's labor package and doesn't want to let the 
opportunity slip by without extracting the best possible 
deal.  Union members are undoubtedly inspired by the recent 
failure to privatize Changhwa Bank after a series of 
management concessions on pay, job security and retirement 
drove the share price down so low that the share issuance 
became economically unsound. 
 
10 (C) Comment Continued: Despite the CHT union's opposition, 
most analysts agree the ADR issuance will take place, albeit 
slightly delayed.  The practical impact on CHT operations of 
privatization is likely to be small.  The government, through 
MOTC, will still retain control of CHT's Board of Directors. 
The Public Construction Commission and CHT assure us that CHT 
procurement will still be subject to the requirements of 
Taiwan's Government Procurement regulations.  Analysts and 
CHT management believe CHT is unlikely to radically alter its 
business practices.  Although CHT employees will no longer be 
considered civil servants, CHT spokesmen have insisted there 
will be no layoffs or pay cuts.  The question of retirement 
benefits remains to be settled, but the new national pension 
law going into effect July 1 and CHT's desire to see 
privatization completed before the next LY session should 
inspire both sides to reach agreement.  End Comment. 
PAAL