US embassy cable - 05BANGKOK6761

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) 
--------------------------------------------- - 
 
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 
--------------------------------------------- ------------ 
 
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 
--------------------------------------------- ------------ 
 
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