This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 BANGKOK 007043 
 
SIPDIS 
 
STATE FOR EB/CIP, EAP/MLS 
USTR FOR BWEISEL, JMCHALE 
COMMERCE FOR JKELLY, JBENDER, AND EHOLLOWAY 
JUSTICE FOR CHEMTOB 
TREASURY FOR OASIA 
STATE PLEASE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ETRD ECPS EINV ECON TH
SUBJECT: THAI TELECOM SECTOR REFORM:PROSPECTS FOR 
PRIVATIZATION OF STATE-OWNED TELCOS TOT AND CAT 
 
REF: A. A. 01 BANGKOK 5186 
     ¶B. B. 04 BANGKOK 2189 
     ¶C. C. 05 BANGKOK 6901 
     ¶D. D. 05 BANGKOK 6761 
 
¶1.  (U) SUMMARY:  Royal Thai Government (RTG) plans to 
privatize the telecom operators TOT PCL (TOT) and CAT Telecom 
PCL (CAT) are finally moving forward.  Several practical 
problems require resolution, however, before either 
enterprise will be able to effect an initial public offering 
(IPO) of shares, now scheduled for 2006.  Specifically, only 
with greater clarity on the outcome of legal disputes with 
private operators and the costs associated with the emerging 
regulatory regime will investors be able to determine the 
value of either entity.  While the RTG appears serious in its 
attempt to partially privatize both entities in some form, 
the risk of failure is substantial, particularly for CAT. 
The November 2005 IPO of the state-owned electric power 
producer EGAT may affect the immediate prospects for both TOT 
and CAT.  Since neither TOT nor CAT has demonstrated that it 
has a viable business model for operating in the increasingly 
competitive telecommunications sector, however, either or 
both entities will likely combine in some manner with one or 
more other players as the sector consolidates.  END SUMMARY 
 
--------------------------------------------- - 
THE SLOW PROGRESS OF TELECOM REFORM SINCE 1997 
--------------------------------------------- - 
 
¶2.  (U) Initially approved in 1997, the RTG,s 
Telecommunications Master Plan calls for privatization of its 
two state-owned enterprises (SOEs) TOT and CAT as part of a 
broad policy of liberalizing the sector as set out in REF A. 
Privatizing TOT and CAT is also consistent with the RTG's 
plans for SOE reform.  As a precursor to privatization, TOT 
was corporatized in July 2002; that is, shares still owned by 
the RTG were issued.  Effective August 14, 2003 the 
Communications Authority of Thailand was corporatized into 
two separate entitites:  CAT Telecom PCL and Thailand Post 
Company Limited (REF B). 
 
¶3.  (U) Deadlines for privatization of TOT and CAT have come 
and gone for many reasons, the most basic being the absence 
of an independent regulator for the industry.  Only with the 
formation of the National Telecommunications Commission in 
November 2004 has the framework within which privatization 
can realistically occur begun to emerge. 
 
¶4.  (U) Notwithstanding the failure of the RTG to privatize 
TOT and CAT, Thailand,s telecom sector has substantially 
liberalized. Private operators have long been permitted to 
enter the fixed-line and mobile services markets by way of 
concession agreements.  TOT and CAT have concluded more than 
thirty build-transfer-operate (BTO) concession agreements, 
whereby private companies build telecom networks and transfer 
the assets to the SOE, which then offers long-term 
concessions to the private operators (or concessionaires) in 
exchange for a share of the revenues going forward.  The 
legacy of this liberalization without privatization is that 
the Thailand,s telecommunications sector is relatively 
competitive, particularly in the market for mobile services 
as set out in REF C. 
 
¶5.  (U) The BTO concessions, detailed in septel, have 
distorted the Thai telecom market.  In effect, TOT and CAT 
have served as both operators and regulators.  The terms of 
the concessions have been more favorable to some 
concessionaires (such as AIS) over others (such as TAC).  The 
concessions have also served to sustain both SOEs by 
guaranteeing flows of revenue that constitute rents pure and 
simple.  For this reason, reformers have called for 
conversion of the concessions to licenses in order to create 
a level playing field that fosters free and fair competition. 
 
--------------------------------------------- - 
NEW LICENSES RATHER THAN CONCESSION CONVERSION 
--------------------------------------------- - 
 
¶6.  (U) The NTC celebrated its one-year anniversary on 
November 1, 2005.  As set out in REF D/septel, the regulator 
has made substantial progress toward establishing its 
position as the industry regulator and moving forward with 
the decisions required to define the new regulatory 
environment.  The most significant of these was the decision 
to issue new licenses rather than to force concession 
conversion directly.  In order to avoid the legal challenge 
that would certainly have resulted from any direct attempt to 
intervene in the relations between the SOEs and their 
concessionaires, the Commissioners chose to issue new 
licenses to the SOEs and private operators alike, thereby 
clearly establishing the NTC,s authority over their 
operations.  Additionally, licenses about to be issued for 
third-generation (3G) services will provide an incentive for 
private operators to migrate their subscribers from the 
current second-generation (2G) services regulated by the 
concessions with their heavy revenue-sharing payments to 3G 
services regulated by the NTC and requiring payment of less 
burdensome license fees to the NTC.  Such migration will thus 
unwind the concessions over a multi-year period.  The obvious 
downside for potential investors, however, is that both TOT 
and CAT stand to lose their rent revenue in about five years. 
 (Note:  most of the concessions currently in effect end 
2015-2017. End note.) 
 
--------------------------------- 
INITIAL PUBLIC OFFERINGS IN 2006? 
--------------------------------- 
 
¶7.  (U) TOT has fixed its IPO date for May 11, 2006, but many 
such dates have come and gone before.  The prospects for a 
November 2005 IPO faded when the Ministry of Information and 
Communication Technology rejected TOT's business plan as 
&unrealistic.8 The plan,s projected revenues from 
non-voice services, which require a large capital investment 
for 3G services, was overly optimistic, according to MICT. 
 
¶8.  (U) TOT has nevertheless taken concrete steps in 
preparation for the IPO.  It has retained Phatra Securities 
and Credit Suisse as underwriters, and reportedly seeks to 
float 180 million out of its total 600 million shares.  TOT's 
auditor-general is finishing an audit of the enterprises's 
finances by February, at which point the investor road show 
and IPO process is expected to begin.  One incentive for 
listing in 2006 is a tax break due to expire this year that 
gives newly listed companies on the Stock Exchange of 
Thailand the right to use a tax rate of 25 percent tax rather 
than the normal rate of 30 percent. 
 
¶9.  (U) TOT is also working to resolve the issues that 
complicate efforts to value the company, namely its disputes 
with True Corp, a concessionaire, over license fees, with the 
NTC over license fees, and with the Ministry of Finance (MOF) 
over exemption from excise taxes.  At stake in the dispute 
with True Corp are lawsuits for damages of several billion 
baht against TOT over access fees charged.  With the MOF, the 
issue is whether TOT may continue to enjoy the exemption from 
excise taxes that it enjoyed when it was an SOE (before 
becoming an NTC license holder). 
 
¶10.  (U) CAT faces a much rockier road to a successful IPO. 
No date has been set, and, owing to serious doubts about the 
value of its business going forward, the SOE appears to be 
having difficulty finding underwriters.  Thus far, CAT has 
retained Finansa and Kim Eng Securities.  A leading Thai 
securities firm that has underwritten other IPOs of SOEs has 
privately confirmed that it passed on the opportunity to 
underwrite CAT's IPO.    CAT's relatively disadvantageous 
position vis-a-vis its concessionaires under the NTC's 
licensing fee regime as noted in paragraph no. 13 below adds 
to the uncertainty. 
 
------------------------------------- 
PROBLEMS DETERMINING ENTERPRISE VALUE 
------------------------------------- 
 
¶11.  (U) Regulatory uncertainty has, from the beginning, been 
at the heart of the problem of valuing the state-owned 
telcos.  The issuance of Type III licenses (for operators 
with network providing public telecommunications services) to 
TOT and CAT on August 4, 2005 marks the emergence of a new 
regulatory regime going forward.  Several issues affecting 
the revenue and profitability of the two SOEs nevertheless 
remain outstanding.  These include the unwinding of the 
concessions, interconnection charges, license fees, and 
universal service obligation (USO) fees. 
 
¶12.  (U) TOT's dispute with the NTC over licensing and other 
fees illustrate the extent of the problem.  With the issuance 
of the August 4 licenses, TOT became liable for regulatory 
fees.  According to TOT, these fees will total five billion 
baht per year.  They include a fixed USO fee of 4 percent of 
the company's operating revenue (2.5 billion baht), a license 
fee of 3 percent of revenue (1.9 billion baht), 12 baht per 
subscriber telephone number per year (490 million baht), and 
a spectrum fee still to be determined.  TOT has asked the NTC 
to reduce the fees to one billion baht, but the NTC insists 
that the charges are fair. TOT is seeking especially to 
secure a waiver of the USO fee.  It argues that as a state 
agency, it has spent tens of billions of baht over the years 
to build out the network and to extend it even to areas that 
private operators would deem uneconomical. 
 
¶13.  (U)  CAT's problem with licensing fees is inseparable 
from its concessions with private operators, namely, TAC, TA 
Orange, and DPC (a subsidiary of market leader Advanced Info 
Service (AIS)).  The fees are the same as those listed in 
paragraph 12, plus an interconnection rate set at 1.07 baht 
per minute.  CAT executives claim that, just the burden of 
one operator, TA Orange, will place CAT in the red by almost 
three billion baht per year.  CAT seeks accordingly to scrap 
the agreements.  Having paid the burdensome revenue sharing 
obligations under the concessions for years, the three 
private operators have suddenly found themselves in an 
advantageous position now that CAT is seeking their revision. 
 Whether the concessionaires agree to new terms will depend 
on the new terms offered. 
 
¶14.  (U) The NTC clearly has no desire to crush either TOT or 
CAT with its fee regime, it is highly unlikely that the NTC 
will reduce or waive any charge whereby TOT enjoys special 
treatment because it would be so difficult to justify such 
decision in public.  Thus, while the NTC may reduce the 
percentage of fees applied to all licensees so as to lighten 
the fee burden, the question of how the issue will be 
resolved remains open. 
 
¶15.  (U) For CAT, the impending liberalization of the 
international gateway raises the most fundamental question of 
all:  what will be its source of revenue going forward?  CAT 
executives claim that the company will generate revenue in 
three ways:  international calls; data communications and 
related services, and CDMA mobile services.  Its 2007 target, 
for example, is to retain 50 percent of the international 
call market and to serve 10 percent of the CDMA market. 
Competition is likely to drive long distance revenue down, 
however, and the rollout of CDMA has been fraught with 
unexpected delays that raise questions about CAT,s ability 
to execute. 
 
---------------------------- 
HOW ATTRACTIVE TO INVESTORS? 
---------------------------- 
 
¶16.  (U) While the mention of SOE privatization generally 
carries with it the expectation of success in view of the 
many successful share issued privatizations worldwide the 
past 25 years, Thailand's state-owned telcos are problematic 
as investments.  Neither enjoys a monopoly position 
comparable to Japan's NTT.  The advantages flowing from 
incumbency are less evident than in other sectors such as 
energy, because of the fast pace of technological change and 
the potential disruptiveness of new technologies such as 
voice over internet protocol (VOIP).  Fixed-line and 
long-distance services are yesterday's businesses, under 
threat from several directions.  The private operators have 
the lead in these other segments of the market, such as 
mobile and satellite services, and their shares are already 
on offer to investors. 
 
¶17.  (U) The RTG,s preference for partial privatization, 
where the RTG remains the majority shareholder, is also 
problematic.  As shown by the American Chamber of Commerce in 
Japan Privatization Task Force,s 2004 study of 
privatization, such structure of ownership encourages quid 
pro quo deals between the government and the former SOE, a 
point applying especially evident in the experience of 
Japan,s telecom giant NTT. 
See: h t t t 
p:www.accj.or.jp/document library/Privatization/PTFgeneral.pdf 
The RTG,s own record to date of tinkering with markets by 
forcing former SOEs to assist in implementation of policy 
suggests that the Thai experience will more likely than not 
track that of Japan in this regard (REF D). 
¶18.  (U) The most basic question of all is whether either TOT 
or CAT has what it takes to compete in the market.  The 
experience of other partially privatized companies such as 
Thai Airways is not encouraging because they have not 
produced the results expected.  Neither TOT nor CAT has 
impressed the Embassy as having made the transition from 
being a state-owned enterprise flush with concession revenue 
to profit-seeking business.  In June, the State Enterprise 
and Government Securities Office of the Ministry of Finance 
gave TOT and four other SOEs failing grades in its annual 
review.   The evaluations are carried out by Thai Rating and 
Information Services, and are based on factors such as 
operational and financial performance, compliance with 
government policy, and management efficiency. Securities 
analysts have also voiced concerns about the reserve of 
engineering talent at the state-owned telcos.  Owing to the 
private sector's dynamism for the past decade, engineers 
wanting a piece of the action have jumped ship, leaving both 
TOT and CAT at an obvious technological disadvantage.  In 
short, in order to succeed with their IPOs, both entities 
must overcome the sense that &they have no hope and no core 
business,8 in the words of one long-time financial analyst. 
 
--------------------- 
POSSIBLE COMBINATIONS 
--------------------- 
 
¶19.  (U) Industry observers have long considered various 
scenarios of consolidation within the Thai telecom market. 
One of the most perceptive analysts following the market 
favors the Indonesian full duopoly model because it balances 
the interests of the public for more and reasonably priced 
telecom services with the needs of the telcos for good 
margins necessary for them to provide additional services 
over the short- and long-term.  Such duopoly reduces the 
duplication of infrastructure, thereby easing demand for 
foreign exchange (as much of the equipment is imported).  TOT 
and AIS make natural partners, in this view.  Such a 
combination (in any number of forms) would potentially spark 
consolidation among the other industry players.  If CAT, TAC, 
True Corp (and its mobile operator TA Orange) and the 
provincial provider of fixed-line service TT&T merged, the 
result would produce a second nation-wide full-service 
operator sufficiently large to be a serious competitor to 
TOT/AIS. 
 
¶20.  (U)  A TOT-CAT merger is highly unlikely.  Different 
institutional cultures, employee hostility to the prospect, 
and an absence of obvious synergies has frustrated 
consolidation efforts to date as set out in REF B.  Prime 
Minister Thaksin Shinawatra himself has pushed the idea, but 
it went nowhere and now appears to be dead.  Current RTG 
policy calls for two separate IPOs. 
 
¶21.  (U) The flurry of interest in foreign tie-ups following 
Telenor's buyout of mobile operator TAC in October 2005 
introduces new possibilities for alliances and acquisitions. 
Singapore Telecom already owns a 20.5 percent stake in AIS, 
and is reportedly pursuing other deals, including increasing 
its stake in AIS.  The NTC reports that several European and 
Asian telcos have inquired about investing in Thailand.  TT&T 
has also announced that it is looking for a foreign partner 
to help pay for its rollout of 3G. 
 
------- 
COMMENT 
------- 
 
¶22.  (U) We think that the RTG will continue to press for the 
share-issued privatization of both TOT and CAT in a manner 
similar to other privatizations where the RTG has remained 
the majority shareholder.  The imminent partial privatization 
of EGAT may add to the momentum behind both IPOs. Pushing for 
privatization has the favorable effect of encouraging 
resolution of various regulatory disputes over issues such as 
access fees, which will further define the playing field and 
expedite unwinding of the concessions.  While it is 
impossible to predict either the timing or success of either 
IPO, we think that TOT has the better chance of launching a 
successful IPO on time because it possesses real assets and 
has a core business.  Should either or both SOEs encounter 
difficulty with the IPO process, the RTG would likely resort 
to continued delay.   Since all plans presently on the table 
call for the MOF to remain the majority shareholder, however, 
both entities will remain SOEs for the purposes of 
negotiating the competition, government procurement, and 
investment chapters of the pending Thai-US Free Trade 
Agreement. 
 
¶23.  (U) Longer-term, even assuming the successful IPO of 
both TOT and CAT, we do not think that either will 
necessarily remain independent entities.  We think that in 
view of the strong pressures encouraging consolidation of the 
telecom sector, should either TOT or CAT be able to compete 
effectively, it may find itself pursuing a tie-up with 
another industry player.  Failure on the part of either TOT 
or CAT to compete effectively after the concessions unwind, 
by contrast, may leave the former SOE with no choice but to 
be merged with another company.  Since the real measure of 
successful privatization as a reform measure is the effect on 
the market, even failure (whether at the IPO stage or later) 
that leads to industry reorganization would be a success if 
it encourages the introduction of new and better 
telecommunications services by providing for market 
competition and enhanced transparency in the regulatory 
environment and investment climate. 
 
BOYCE