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“66999”,”6/7/2006 8:57″,”06BANGKOK3435″,

“Embassy Bangkok”,”UNCLASSIFIED”,





DE RUEHBK #3435/01 1580857


R 070857Z JUN 06












E.O. 12958: N/A




REF: A. 05 BANGKOK 6901 (Telenor Buys out UCOM and TAC)

B. 06 BANGKOK 583 (Deal of the Century)

C. 06 BANGKOK 1549 (Shin Corp Deal is Legal: So What?)

D. 05 BANGKOK 7124 (Court Suspends Privatization of EGAT)

E. 06 BANGKOK 115 (Licenses without Concession Conversion)


1. SUMMARY: The takeover of Thailand\’s two leading mobile phone

providers by foreign companies and the political crisis unleashed by

the prime minister\’s family\’s sale of its stake in Shin Corporation

to Temasek of Singapore has fundamentally altered the context of

both the telecom business and regulatory policy. The National

Telecommunications Commission faces political protest against the

sale of national assets to foreigners and consumer impatience with a

deterioration in the quality of mobile phone services. Prime

Minister Thaksin\’s policies of privatization of state-owned

enterprises (SOEs) and trade liberalization are stalled and the

government\’s \”caretaker\” status has led to a shift in power in favor

of SOEs TOT Plc and Cat Telecom Plc. Dashed expectations of

conversion of the concessions previously granted by the SOEs to

private companies, of the rollout of third-generation (3G) services,

and of allocation of new frequencies have forced a reassessment of

where the sector is headed. A leading telecom analyst offers a

solution in the form of merges between SOEs and listed companies

that is useful for identifying the issues at stake. In response to

the above environment, the regulator is drafting regulations on

foreign business control and interconnection, among others. While

unlikely to be of great consequence either to telecom companies or

the sector as a whole, the Embassy thinks that the regulations on

foreign business control will have a net negative effect on

shareholder rights and investment opportunity in Thailand\’s telecom






Shinawatra and Bencharonkul families from the Thai telecom sector

has fundamentally altered the context within which all players in

the industry now operate. As set out in REFs A and B, the two

largest mobile telecom services providers, Advanced Info Service Plc

(AIS) and DTAC, although still legally Thai-owned, are effectively

foreign-controlled entities as a result of the takeover of Shin

Corporation by Singapore\’s Temasek Holdings and the buyout of both

UCOM and Total Access Communications (TAC) by Norway\’s Telenor. The

takeover of Shin, the parent company of AIS and the larger of the

two, has sparked a political crisis in which economic nationalism

has flourished. Popular protest against both the foreign purchase

of Thai assets and Prime Minister Thaksin\’s policies of sectoral and

trade liberalization has become a staple of Thai political life (REF

C). Ironically, the self-proclaimed reformers such as Rosana

Tositrakul, now Bangkok senator-elect, who criticize Prime Minister

Thaksin and his \”cronies\” from reaping ill-gotten gain from RTG

policies, have emerged as defenders of Thailand\’s monopolistic and

inefficient SOEs.


3. PRIVATIZATION ON THE ROPES: The Thaksin government\’s own

missteps in privatizing SOEs in other sectors have spilled over into

the telecom arena. The March 2005 court-ordered annulment of the

RTG\’s corporatization of the Electric Generating Authority of

Thailand (EGAT), the principal state-owned electric power utility,

in conjunction with a November 2005 ruling suspending the initial

public offering of shares of the corporatized entity further reduce

the likelihood that the government will proceed with the

privatization of either TOT Plc or CAT Telecom Plc in the near

future (REF D).


4. RTG POLICY ON HOLD: Reinforcing this unexpected political

rehabilitation of Thailand\’s state-owned enterprises has been a

shift in bureaucratic power in favor of the TOT and CAT Telecom.

While the RTG is in \”caretaker\” status, policy initiatives have been

on hold because the bureaucrats are hesitant to act on anything

other than routine business. With no exit from the current

political crisis in view, private investors have likewise decided to

postpone major decisions. Additionally, the Ministry of Information

and Communications Technology (MICT) is headed by an acting

caretaker minister. Mr. Sora-at Klingpratoom, who had advocated

listing both TOT and CAT, has stepped down as minister in a move in

the factional politics within the ruling Thai Rak Thai Party.


5. CHANGING OF THE GUARD AT TOT: Within TOT, the old guard has

similarly rebounded. The TOT board of directors dismissed President

Teerawit Charuwat effective May 12, ostensibly for financial

underperformance and the failure to effect an initial public

offering of shares. Mr. Teerawit was formerly finance chief at the

state broadcaster MCOT Plc. He was chosen in 2005 over several

senior TOT executives for the position. In his defense, Mr.

Teerawit claimed that the extra expenditures of 1.14 billion baht

last year that cut into profitability were for one-off items such as

licenses. Without them, net profit would have risen 9.4 percent to

10.57 billion baht. He also attributed problems he experienced to

political interference and lack of cooperation from the senior

executives. Chamras Tantrisukorn, a senior executive, was named

acting president.




6. THE NTC IN THE SPOTLIGHT: With this shift in the balance of

power, the challenges facing the National Telecommunications

Commission (NTC), the sector\’s regulator, have changed. The exit of

the prime minister\’s family from the sector has removed an

incalculable political weight from the NTC\’s shoulders, and thereby

changed the dynamics of the interaction among the commissioners and

the private telecom companies. At the same time, the popular

political outcry over the foreign purchase of the Shinawatra

family\’s assets has put the NTC on the spot, particularly its

administration of the provisions of the 2001 Telecommunications

Business Act (TBA) concerning foreign ownership, which were recently

amended to lift the 25 percent cap on foreign ownership specified in

the original law to effectively 49.9 percent as provided by the

Foreign Business Act (FBA). Given recent calls by anti-Thaksin

activists to abolish independent bodies established by the 1997

Constitution that have \”failed to carry out their duty in providing

checks and balances,\” the commissioners must consider their actions

in terms of the NTC\’s own institutional position in the current

political environment.


7. UNHAPPY CONSUMERS: New practical and highly visible problems

also require attention, including especially interconnection and

number portability. Most important, the sharp increase in

subscribers resulting from a price war between AIS and DTAC this

year has forced the NTC to grapple with challenge of establishing

neutral interconnection charge rules for operators. During peak

hours, success rates in completing a connection have fallen to

single digits requiring users to make multiple attempts before they

can connect. Newspapers publish frequent stories about mobile phone

\”traffic jams\” and cite polls showing that the overwhelming majority

of mobile phone users are dissatisfied. A May ABAC poll of AIS,

DTAC, and TrueMove (formerly True) customers, for example, found

that 77 percent feel they are being \”treated shoddily by their

service provider.\” No provider fared particularly well, and 46

percent of respondents said they were dissatisfied with the role of

the NTC (38 percent were satisfied and the rest did not know).


8. THE INTERCONNECTION ISSUE AND TOT: Each major mobile phone

provider maintains its own network. In the absence of rules

obliging operators to accept incoming calls from other networks in

exchange for a portion of the revenue, operators have had limited

incentive to build out their switching capacity. Under the current

system, unlike in many other countries, the caller\’s cellular

service provider earns money when a call is made, but the receiving

network does not earn anything for taking the call. When call

volume exceeds interconnection capacity, the default response has

been for private operators, particularly the CAT Telecom

concessionaires DTAC, TrueMove, and Digital Phone Company (DPC), to

route calls through state-owned TOT, which collects monthly fees

from them (through CAT Telecom). The recent rise in number of

callers and call volume has overwhelmed existing interconnection

infrastructure and forced the regulator to act. While the private

operators will need to make significant investments to ensure

adequate coverage, the elephant in the room is TOT\’s dependence on

the revenue stream from the access fees paid by CAT concessionaires.

According to a Phatra Securities estimate, the net access charges

TOT received from DTAC and TrueMove alone made up 11 percent of its

2005 revenue of 60.2 billion baht.


9. MORE CONFUSION LIKELY: While the NTC is currently drafting

regulations to provide for a new interconnection regime, its

approach is to request that the operators prepare offers.

Contradictory language in the draft regulations raises the question

of whether just the SOEs or all players should prepare offers.

Embassy contacts familiar with the drafting process agree that the

regulations will allow for TOT to continue to receive the access

fees for calls routed through TOT by the private operators. They

also think that new regulations providing for revenue sharing should

eventually encourage buildout of the infrastructure to facilitate

interconnection, which promises to ease the traffic jam. But

introducing the new regulations will likely introduce a second

accounting system for tracking interconnection charges, thereby

adding to the complexity of the regulatory framework.




10. SHARE PRICE CHANGES: Investors have taken a hard look at their

holdings of listed company shares and adjusted accordingly. As of

June 7, Shin Corp had lost nearly 35 percent of its market

capitalization since January 23. Shares of AIS closed at 90 baht on

June 7, as against a 52-week high of 114 baht and a low of 85 baht.


11. CONCESSION NON-CONVERSION: Investors and industry players are

also casting aside the familiar conceptual frameworks for

understanding the development of the telecom sector going forward.

The reality that concession conversion is not on the horizon has

finally sunk in. As one foreign analyst expressed the point, \”the

concessions aren\’t going to go away until they get CAT and TOT to

agree to end them. Otherwise they\’ll have to wait for another seven

or eight years,\” at which point the SOEs will retain the network

assets. More players now expect that the TOT and CAT Telecom will

hold out until the concessions terminate. (Note: a list of the

principal concessions is set out in REF E. End note.)


12. 3G ON HOLD: Last year\’s hope that NTC-issued licenses for

third-generation (3G) technology services offer a regulatory

mechanism for the concessionaires to get out of the concession

agreements has faded. Service providers have hesitated to go

forward in face of the large amount of capital investment required

to roll out 3G services, particularly in view of uncertain consumer

demand for them, a concern we identified in REF E.


13. SPECTRUM NON-ALLOCATION: Although Thai Mobile, a TOT-CAT

Telecom joint venture has reportedly been allocated bandwidth in the

1900-2000 MHz range for 3G services under a 2004 (i.e., pre-NTC)

agreement with the then (i.e., pre-CAT Telecom) Communications

Authority of Thailand, the basic fact weighing on the sector is that

the regulatory structure required for allocation of spectrum is not

yet in place. Current law set forth in the Radio and Television

Frequency Allocation Act provides that both the NTC and the National

Broadcast Commission (NBC) must approve new allocation of spectrum,

including frequencies required for 3G. The NBC, however, has yet to

be formed. In November 2005 the Central Administrative Court ruled

to invalidate the final seven candidates named to the NBC when it

considered a petition by an unsuccessful candidate protesting

irregularities in the selection process. The candidates had been

approved by the Senate but had not yet received royal endorsement.

The Prime Minister\’s Office decided to challenge the decision rather

than push for amending the law to give the NTC full authority. The

case is pending before the Supreme Administrative Court (SAC). In

the unlikely event that the SAC reverses the lower court decision,

no one expects the NBC to form in the political environment.




14. MERGE OR DIE?: In a February 2006 research report entitled

\”Merge or Die,\” Richard Moe, the senior telecom analyst at Macquarie

Securities, advanced a new framework for the sector. He also

radically revised the firm\’s investment recommendations, identifying

TAC rather than AIS as the listed player with the greatest upside

potential. Moe is a longtime observer of the Thai telecom scene

whose views are widely read, so his change of mind merits attention.

His vision of a market duopoly organized around a TOT/AIS axis and

a CAT Telecom/DTAC/TrueMove axis has put the idea of mergers into

the public domain, where it is a subject of discussion, including at

the NTC. A full duopoly model along the lines set out below, he

contends, would create moderate competition and ensure strong cash

flows and balance sheets. Two strong telecom operators would be in

position to aggressively expand networks, increase quality and range

of services, and provide an economic return on investment.



assumption that the concessions will not be converted, Moe casts

aside the article of faith that the private operators will inherit

the SOEs telecom networks. Despite their technical and marketing

expertise, private telecom concessionaires enjoy limited upside

because the terminal values belong to TOT and CAT Telecom. With the

right to take over the networks, the SOEs possess assets with real

value that could be priced by the market in conjunction with public

offerings of TOT and CAT Telecom shares. In this context, mergers

of the listed telecom operators with the TOT and CAT Telecom

(subsequent to their IPOs) would resolve the concession issues and

provide the listed telcos with an indefinite operating life. The

problems of life after the concessions, interconnection charges, and

over-indebtedness all disappear.



configuration of mergers between the foreign-controlled private

operators and the SOEs would also re-establish bonafide Thai

majority ownership (he outlines several options), thereby

eliminating the political risk for AIS and DTAC stemming from the

perceived control of spectrum by foreign government entities, and

the foreign control of Thai assets more generally. Politically, he

emphasizes, it is difficult to imagine the RTG asking the TOT and

CAT Telecom to take a bullet for foreigners, which is the way any

effort to strip the SOEs of their revenue under the concessions

could be portrayed. Telenor and Temasek are in a weak position to

protest termination of the concessions because the contracts were 15

years old and known to them (lenders have always looked at the

letter of the contracts rather than assuming that the

concessionaires will inherit the assets) and they arguably violated

the spirit of the Thai Foreign Business Act. Additionally, the

point at which the NTC issues (or does not issue) licenses for 3G

services affords the RTG the opportunity to pose a choice between

merger and status quo with existing concessions.


17. ADDITIONAL BENEFITS: Moe adds that creation of two full-service

operators would also provide for more socially equitable

reallocation of frequencies. If TOT gave up fixed line concessions,

for example, and CAT Telecom gave up DPC and 25MHz of spectrum in an

effort to unwind the cross-holdings between the two groups, CAT

Telecom would be able to provide cellular service in rural areas and

facilitate greater competition there.


18. NOT UNPRECEDENTED: While radical in today\’s environment, Moe\’s

vision is not unprecedented. In 2004, Shin Corp CEO Boonklee

Plangsiri said that AIS is a takeover target and TOT is a potential

buyer, as Moe is the first to point out. While the idea may be

hypothetical for most industry players, for Mr. Boonklee a TOT/AIS

merger has an obvious practical value: it opens up the possibility

of a new job.


19. BUT NOT A SURE THING EITHER: Moe admits the obstacles:

distrust among the concerned parties, nationalism, risk of

bureaucratization of the private telcos, and stubborn investor hope

for a concession conversion windfall. It is widely known that TOT

and CAT Telecom–especially their employee unions–do not trust the

private companies, and do not have much use for each other either.

Particularly in the current political environment, it is reasonable

to expect opposition to the listing of the SOEs on the grounds that

they are \”national assets\”. While the unions may over-estimate the

long-term financial health of TOT and CAT Telecom, their thinking is

a political fact. Additionally, the market is still in denial.

Despite Cabinet and NTC statements that the RTG will not force

concession conversion, share prices of listed telcos still indicate

that some investors expect conversion. Moe readily admits that there

may be no mergers, particularly in the absence of someone within

government or one of the other entities who champions the idea. His

analytical point is that in the absence of mergers, the Thai telecom

market structure will remain sub-optimal, with too many players and

too much redundant network leading to lower returns on capital.

There also exists the temptation to resort to a premature rollout of

3G as a means of unwinding the concessions, which would be wasteful

of capital.




20. MAIN PROVISIONS: The issue of greatest interest to foreign

investors that the NTC is presently considering is the draft

regulations on foreign business control. First proposed in March,

they have undergone several revisions and are still pending. The

draft regulations ostensibly constitute the implementing regulations

for the revision in the TBA that raised the cap on foreign

investment in telecom firms from 25 percent limit in the original

TBA to the equivalent of 49.9 percent prescribed by the FBA. They

set out standards for what constitutes foreign business control or

tendency toward foreign business control and require holders of type

2 and type 3 licenses to report to the NTC. In the case of

violations, the telcos are to propose corrective measures. If there

is any question of \”national security\” (the example most commonly

discussed, for example, is where an entity owned by a foreign

government controls radio spectrum) then the NTC would refer the

issue to the competent agency. Sanctions in the case of violation go

as far as revocation of a license, but no draft to date has set out

a clear schedule of sanctions and in all drafts to date the NTC

reserves considerable discretion on how to handle cases of

violation. The Commissioners have said, and the Ministry of Foreign

Affairs has also confirmed, that the forthcoming draft will include

safe harbor provisions that ensure the regulations do not contradict

any international commitments undertaken by the RTG, including under

the World Trade Organization and in free trade agreements.


21. CLOSING A LOOPHOLE? In practice, the FBA has restricted foreign

ownership of firms in certain sectors to a minority share, but has

allowed foreign control (through such mechanisms as nominee

structures and preferential voting arrangements). Telenor and

Temasek structured their buyouts of UCOM/TAC and Shin Corp/AIS

respectively in such manner. By setting out criteria for what

constitutes control, the draft regulations propose to close a

loophole that has long existed in Thai business practice. NTC

commissioners emphasize that the purpose of the regulations is to

put in place a legal process whereby concerns about issues such as

\”national security\” may be evaluated rather than being left to the

political process.


22. OR SQUARING THE CIRCLE? Industry observers agree and RTG

officials privately admit that the regulations are a response to the

political furor over the Temasek buyout of Shin. On the one hand,

the NTC is responding to domestic political concern about foreign

control of what many Thais see as national assets. Hence the

specification of criteria for foreign control, and the visible

display that the NTC is doing its job. On the other hand, the

Commissioners wish to avoid discouraging foreign investment. Thus,

the letter of the draft regulations notwithstanding, Dr. Sudharma

Yoonaidharma, the Commissioner who drafted the regulations, told

foreign diplomats in April, \”the regulations seem to be

life-threatening things, but they are not. They just trigger

disclosure (i.e., to clarify ownership), and the disclosure is the

same as required by other agencies.\” Embassy contacts agree that

the reason why it has taken the NTC so long to draft the regulations

is the inherent conflict between these two objectives.


23. IMPACT UNCERTAIN: Industry observers are divided on the likely

impact of the proposed regulations, because it is unclear whether

their effect will be to calm the political firestorm over foreign

buyouts in the telecom sector without substantive change or to force

DTAC and AIS to become \”Thai\” companies again through divestiture or

other means. An attorney who has worked for both Temasek and

Telenor emphasized to econoff that the provisions of the

regulations, if enforced, would have a negative effect on basic

shareholder rights. Other attorneys, also with long experience in

Thailand, are more sanguine. If the RTG were seriously interested

in limiting foreign control of companies, one emphasized, the NTC

regulations would spell out specific thresholds for action on voting

rights. They do not. Parliament has had the opportunity to tighten

up the law on this issue, and has chosen not to act. The most

common opinion among knowledgeable observers expressed to econoffs

is that companies will turn to lawyers and advisors to devise new

legal solutions to ensure compliance with the letter but not the

spirit of the law (i.e., structures that are more sophisticated than

the now discredited nominee arrangements but achieve essentially the

same end). The Embassy has also confirmed that DTAC, for example,

is adjusting some of its positions in advance of the release of the



24. BROADER APPLICATION? A common question among non-Thais is

whether the regulations on foreign business control in the telecom

sector will set a precedent for similar restriction in other

sectors. Legal experts agree that because the telecom sector has

its own regulator, its own basic law, and industry and government

alike see the draft regulations as being limited in application

accordingly, that the direct effect on other sectors will be

negligible. Legally speaking, they do not expect any effect until

the regulations are tested in court. Several attorneys also

indicated to econoff that the RTG authorities can pursue action

against a foreign-dominated firm if they so desire under the

provisions of the FBA already. Equity analysts, however, see more

risk. As one Bangkok-based analyst explained, for investors the

problem is not the specific legal content or precedent of the

telecom regulations but the broader political environment that

prompted the NTC to draft the regulations on foreign control in the

first place.




25. The Embassy agrees that the political and regulatory environment

in the Thai telecom sector has changed fundamentally as a result of

the Shin deal, the political crisis it sparked, and the halt in

progress on the Thaksin government\’s policies of sectoral and trade

liberalization. While no one can predict whether the telecom sector

will adapt by way of mergers as suggested, we think that the major

players need to come to terms with the reality that concession

conversion is effectively dead, that the rollout of 3G will be

slower and more expensive than envisioned, and that the formation of

the NBC and allocation of new frequencies remain on hold.

Similarly, the ubiquity of mobile phones in Thailand ensures that

the NTC will remain in the political spotlight even in the absence

of controversy over deals involving foreign players.


26. We also think that, collectively, recent developments represent

a net deterioration in the investment and business climate in

Thailand\’s telecom sector. In attempting simultaneously to respond

to economic nationalists at home seeking to restrict foreign

business activity and to reassure foreign investors, the NTC\’s draft

regulations on foreign business control have rendered Thai policy

more, not less, ambiguous. At the very least they promise to have a

negative effect on basic shareholder rights. In the current context

of political crisis and policymaking paralysis, we expect the RTG to

reaffirm its WTO commitment to liberalize the Thai telecom market

this year, but to do so in a way that minimizes the change required,

most likely by asserting that mobile services are not covered.



Written by thaicables

July 12, 2011 at 4:49 am

Posted in Telecom, Unclassified

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