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“43769”,”10/27/2005 9:15″,”05BANGKOK6761″,

“Embassy Bangkok”,”UNCLASSIFIED”,


“This record is a partial extract of the original cable.

The full text of the original cable is not available.










E.O. 12958: N/A





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


——————————————— –


——————————————— –


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



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.


——————————————— ————


——————————————— ————


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.


——————————————— ————


——————————————— ————


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



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







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





Written by thaicables

July 7, 2011 at 6:09 am

Posted in Economy, Unclassified

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