EGAT privatization and privatizations in general

[Tettyan]

This page has been created to continue discussion of privatization issues originally brought up in the following forum: http://www.angkor.com/2bangkok/2bang...?t=1208&page=2

I'll start by quoting the post by GWR, who first brought this up. Those of you who also opined on this topic on that thread should repost here, if you think doing so would be useful.

And we have a fine example of promising folks they WILL make money, right now. EGAT employees were obviously told they couldn't fail but make money if they only took out a loan to pay for some EGAT shares. Now they are all up in arms. In fairness to the government, these 'skilled' workers can hardly be called alert, if they didn't realize that shit could happen.

Anyone happen to see that complete pillock, Khun Nattagorn (Central Bank Chairman's son) on Channel 11's evening Newsline using taxpayer's money to air his personal greivances over the EGAT Float issue? Talk about bias! The plonker never for one moment mentioned the fact that these floats are often loaded against the small investor. Calling folk 'uneducated' just because their temporary victory has upset his own personal piggy-bank issues is totally amateurish for a so-called media person (who probably studied Economics in a US University) It shows only too well what WE can continue to expect from THEM; Democrat, TRT or whatever!

We shouldn't forget that 'running water and a paved road' are transparency issues. All too frequently these things don't get done because the budget ran out out before anything constructive was done with it.

[Scuba22]

I had an interesting discussion this week with the Thai head of a respected international investment bank. He asked me what I thought of the EGAT IPO delay, and I told him that I had no idea what the issues are.

He launched into a tirade about how the issue is basically how lots of people are angry at Thaksin so they're using legal tactics to make him look bad and in the process they're doing terrible harm to the Thai economy. He felt the real problem was that the government was doing a bad job communicating with people to explain to them how this was a good thing for Thailand.

I told him that I had read that the issues were about irregularities in the previous privatizations of PTT and MCOT, where certain politicians and other well-connected individuals made a lot of money through advantaged positions that ordinary people did not have access to; and there was also a concern that the state (meaning the people of Thailand) did not get a fair value from the deals.

He bitterly contested those notions, daring me to point out who benefited and how the deal was unfairly valued. Of course I couldn't - I had already told him that I really didn't know much about it. He insisted that no one was treated unfairly. He said that some people did use "nominees" (family members, maids, drivers, and the like) to amass shares, but that anyone could have done the same so there was nothing "unfair" about it. He also claimed that the intial investors actually lost money.

He claimed that the only real problem in the earlier privatizations were that the company employees didn't get a taste, but that this had been solved in the EGAT case. In conclusion, the "issue" in EGAT is that lots of people don't like Thaksin.

Now - here's my question to anyone on this board: what ARE the issues in the EGAT case? What were the problems in the PTT situation? Is this investment banker correct? His view certainly serves his personal purposes - but what are the facts? Why are these privatizations seen as bad? Who gained and how?

Can we be specific about these questions, rather than make broad vague arguments like "it's just the politicians screwing the people again"? That's fine, but can people describe specifically who did the screwing and how?

I really would like not to be as ignorant as I am.

Thanks,

Scuba22

[Tettyan]

Scuba22,

Thanks for your post.

I used to work for a big energy company (won't say which one, or where - none of you would be able to guess anyway), so this issue is pretty close to my heart.

You can add the privatization of AOT (Airports of Thailand) to your list of sketchy IPOs. Of course, its no longer easy to get accurate information in Thailand, now that the media are kept on a short leash. But we do know that those who got the largest portion of shares were wives or relatives of cabinet ministers. We also know that those retail investors who waited outside the bank since six in the morning on the day of the IPOs - when the banks finally opened, were all told that the shares were already subscribed! Similar issues with the oil bonds. Why can't the little guy manage to buy in, and why are the lists of subscribers dominated by big names? Tell that investment banker to try to connect the dots behind that!

Now, let's talk about electricity. The electricity industry is a natural monopoly, therefore, electricity utilities must be carefully regulated. The electricity crisis in CA in 2000 only reminds us how important the government's role is in the electricity industry. The market can be regulated in a number of ways. In the UK, Japan and most of the US, electricity is provided by privately-owned utility companies. Before deregulation, these companies were recognized as monopolies by the government, which reserved the right to regulate rate prices. Deregulation has relaxed the government's hand somewhat, with other companies now free to enter the market to compete with incumbent utilities.

In Thailand, electricity has been a monopoly of government agencies. Thus, this obviated the need for a government regulatory agency. EGAT is responsible for generating electricity and long-disatance transmission, while the Provincial Electricy Authority and Metropolitan Electricity are responsible for retail distribution (they're the ones who send you the bills).

Now the government wants to turn EGAT into a private utility. Sounds fine, then, since it's done that way in other parts of the world. But the government has not yet established an independent electricity market regulator. Furthermore, EGAT retains its monopoly after it's privatized. The dams, resevoirs and transmission lines have been declared "national assets", and they're supposed to remain state-owned, with EGAT leasing them. But even the laws don't make this clear.

Now, the even bigger deal. EGAT's transmission network can do more than just generate electricity. It is also the largest fibre-optic network in the country. Which means in future, it can offer high-speed internet (several times faster than DSL), telephone service and cable television. This is a potential gold mine. Internet service through electric power networks is already very popular in Japan, with connection speeds of 100 Mbps and an IP phone line included for about $60 a month. Who wouldn't want to get their hands on that? Whichever telecoms company becomes lucky enough to form a joint-venture with them (which would be necessary given EGAT's lack of experience in the business) will dominate Thailand's telecoms and media industry for a generation. Gee, I wonder what company that may be...

For more on the possibilities for internet service using fibre-optic networks on power lines, check out : http://www.asiamedia.ucla.edu/article-southeastasia.asp?parentid=32633

I'll be happy to discuss any futher questions you may have.

[GWR]

I suppose we might also want to mention the fact that EGAT claims it will need to build something like 4 powerplants a year to keep up with projected electricity use. I keep hearing folk saying stuff like the govt alone won't be able to afford this; but I suspect the real issue is that govt planning & implementation is just too slow & contentious to keep up with this need.

[Tettyan]

GWR -

I'm a big believer in the power of the free market and support privatization in principle. If Thailand needs private investment to meet its power needs as EGAT claims, then fine - deregulate the industry and allow new market entrants to build new power plants, generate electricity and sell it to PEA and MEA at competitive prices. But this is not what's happening. EGAT still will continue to enjoy the priveleges of a state monopoly even when its no longer state-owned. Can anyone possibly see the logic in this?

[paxman]

Well there is a certain businessman who's success has relied almost completely on holding onto monopolys, maybe it's logical to him?

[Scuba22]

Dear Tettyan,

First, thanks for making this thread - I just realized I forgot to thank you earlier.

Now, let's get to the issues! I'd like to talk about the EGAT situation in particular, but also about the other privatizations - MCOT, PTT, AOT. I'm going to try to be a bit contentious, so excuse me if I come off as argumentative, it's nothing personal, I would just like to understand the situation and it's really not my area of expertise.

As I understand it, the energy industry has three component parts - power generation, the transmission grid, and the "last mile" to the user. Of the three, generation and last-mile make sense to open up to competition; whereas the grid enjoys a network effect and is therefore better as a regulated monopoly fairly shared by all users. The fairness is where the regulations come in.

From what you said about EGAT, it appears that it is to be both the grid and also operate some power plants, whereas the MEA and PEA would handle the last mile - is that correct? At the same time, the state would hold on to other generators such as dams, and there would also be various indpendent power producers (IPPs) as well as small power producers (SPPs) selling energy into the EGAT grid - am I getting this right? Yet there is no clarity on how the prices for these sales would be set, or for the MEA/PEA sales? Is the national grid being privatized under this EGAT IPO? Has that been done elsewhere?

In terms of these "new power plants", I don't quite understand why EGAT would need to build them at all. If there's sufficient demand, one would think that market forces would spur an investor to build a new plant. There certainly is infrastructure funding available from various private and public sources - why would EGAT need to raise money from the stock market to build new plants? If instead EGAT were to make an offer to guarantee purchase of X MW of electricity at a set price, one should be able to raise a bond issue to finance the plant - after all, the return is guaranteed, there's no risk. How could equity holding be a cheaper source of financing than essentially a government bond?

I read last week that the Energy Minister, Viset, has just accounced a regulatory commission for the sector. Shouldn't this have been done way before considering an EGAT IPO? How is it that they haven't gotten around to creating this? It's really incredible - unless you start with the premise that the real aim was to take over lucrative state assets - but I'm hesitant to make those kind of accusations without more specifics.

Getting back to the questions of share allocations in the PTT case (and others, I suppose, but this was the one under discussion). you mentioned that a lot of people waited on line to get shares but couldn't. This is not that unusual - generally an investment bank handles the share allocations, and reserves them for their best customers. This is part of their business - do you see something inherently wrong with that? Rather than attack preferential allocation itself, I would think that the real question is who was preferred - if the people who benefitted were guardians of the public trust, then this would create a clear conflict of interest because as investors they would want to set a low price whereas as public guardians they should try to raise the price as much as possible. That PTT shares increased 10x since the IPO raises serious questions about how that valuation was reached - has this been probed in any great detail? Do we know who got the allocations in the IPO and whether they were supposed to represent the public interest at any point? Some specific references would be helpful - my banker friend just tells me that people used lots of nominees, and then threw up his hands saying "what can we do?". It's a good question - what CAN we do?

And what were the issues in MCOT & AOT? Similar stuff?

Thanks,

Scuba 22

[ncr]

Dear Tettyan,
First, thanks for making this thread - I just realized I forgot to thank you earlier.Hi Scuba22,

You said elsewhere that you didn't know how to start a new thread....

Maybe for the future - if you go to any sub-forum page (table of contents, where threads are listed, e.g. Politics (http://www.angkor.com/2bangkok/2bangkok/forum/forumdisplay.php?f=59)), you'll find a button top left: "New Thread". Just click on it, specify the name that you want to give to the thread (compulsory), and type your message as usual. Nothing mysterious or particularly demanding about it, really.

Hope that helps. :)

[Scuba22]

Thanks ncr - appreciate the help! - Scuba22

[Tettyan]

Scuba22 -

First, about share allocations. Of course, you may be right that the share allocations were done fairly with banks reserving their shares for their best customers. But the fact that many interpret this as a government conspiracy is telling - the ways of this government are often so secretive and untransparent that many people arn't sure who to believe anymore. In any case, the government's way of pursuing privatization has given many the impression that politicians unfairly benefited from the IPOs.

Yes, you summed up the breakdown of the electricity industry in a less convoluted way than I did. MEA and PEA handle local grids and retail, while EGAT controls power generation and transmission. There are a handful of small IPPs in Thailand (regulated by EGAT), while EGAT itself holds a monopoly on transmission. EGAT is also a monopsony - it is the sole purchaser of all power generated in the country, including power from IPPs. MEA and PEA then must buy all their power from EGAT. As I understand it, the monopsony and monopoly positions of EGAT do not change as a result of privatization.

Who controls dams and transmission lines after privatization? As I understand it, this issue is one of the main reasons why the Supreme Administrative Court agreed to hear this case. The government claims that the state will continue to control the dams, which will be leased to EGAT. The opposition claims that the procedure for doing so is not transparent. Also, whether or not EGAT retains the right to expropriate land for transmission lines is also an issue.

In response to criticism, the government finally came out with plans to establish a new electricity market regulator next year. How the independence of this regulator will be ensured is still uncertain. Nevertheless, I have the same concern as you do - with so many issues unresolved, why is the government so impatient to go ahead with the IPO now? Certainly the government hasn't done itself any favors in the way it has handled the whole affair so far. They should understand that perhaps it's in their best interest to be more open with information, as it ultimately will make people less suspicious.

[Scuba22]

Dear Tettyan,

Regarding share allocations in the PTT case, my argument was for a private company going IPO, the owners may cede the allocation decision to an investment bank, but the situation is different for an SOE because the people own the company. The question comes down to who is making decisions on behalf of the people, and how are the people being informed of these decisions.

Is there some kind of transparent procedure for SOE IPOs, or does the government just make it up as it goes along? It seems to me that this is a bigger issue than just PTT, MCOT or EGAT - it goes to the root of how government represents the people. Has anyone moved for a transparent privatization procedure? Perhaps this should be a major policy initiative of the Democrats - basically saying that they agree with the stated rhetoric of TRT, but that they intend to implement it with thought and transparency rather than by fiat.

Now getting back to EGAT - has anyone suggested that perhaps EGAT should be "unbundled", and only the power generation portions privatized, leaving the national grid as an SOE? It can still be corporatized, with professional management and transparent operations. It can still raise cash on the open market, indeed raising cash as an SOE should be cheaper since they should be able to sell sovereign bonds, which should be priced at a substantial discount to equity. (I really don't understand this argument that if they don't IPO, their cost of borrowing will be higher - it's pretty basic corporate finance that equity costs more than debt!)

So, why not spin off EGAT's generation units in smaller IPOs?

Best regards,

Scuba22

[Tettyan]

Scuba22 -

Funny enough, the privatization law for state enterprises was written in 1999, under the Democrats! I'm not really familiar with the particulars with the law, but there is some concern that the spirit of the law has not really been followed. For instance, the law apparently requires public hearings before an SOE is privatized - which didn't happen in the case of Egat.

My understanding is that the government cedes much of the allocation of shares in an SOE IPO to state-controlled banks, such as Krung Thai or SCIB Securities. Private banks are also given a share to allocate as well. I'm not in the i-banking business, so someone let me know if I'm wrong here.

As for "unbundling" EGAT, a group of senators had suggested the idea, and the Democrats have also said that they would support it. But the government has firmly rejected this idea on numerous occasions. This is a really fascinating issue for me, since the future of the PEA and MEA is still uncertain. I think its important to resolve what will become of the PEA and MEA before EGAT is privatized. What will become of MEA's cross-subsidy it receives from PEA? There has been some suggestion that the two be merged so that an attractive IPO can be offered. But I havn't seen concrete information out there yet. Furthermore, will competitors be allowed the right to negotiate access to the PEA and MEA grids after their privatization?

The government's policymaking so far seems very ad hoc and rushed. Perhaps the government should draw up a comprehensive plan for the entire energy industry before it embarks on any rash decisions. That would only be in the best interest of investors.

[Scuba22]

Actually, my I-banker inquisitor mentioned to me that the earlier privatizations were made by "executive order" and not according to the written law. Do you know if that's correct? Were there public hearings before PTT, AOT, MCOT?

The funny thing was that this banker didn't see any problems with not following the law, despite his UK education and affiliation with an international i-bank. It bought home to me that international investors will never really push for modernization of Thai institutions - they can make money whichever way Thailand goes, and it's the money they're after.

But it sounds like no one else complained that the law wasn't being followed either, until this time. That does bring up the question of motive - why are people complaining now rather than before about legal issues? The I-banker blew it off saying that people are personally pissed at Thaksin, rather than having found a new respect for law. If so, this is a shame.

Did anyone complain that PTT, MCOT, AOT IPOs did not follow the law?

About i-banking, usually in a big IPO there will be two "lead bankers", one domestic for local distribution (e.g. SCB) and another multinational for international distribution (e.g. SCB couldn't distribute to US mutual funds). These lead bankers may well sub-contract distribution out to various other banks - this lays off risk and distributes the spoils to a bigger group, somewhat subverting competition in i-banking, but that's another matter.

Every one of these distributors uses their discretion regarding who to allocate shares to - their mandate is to distribute them all at the IPO price, which is determined by the bankers with the seller, in this case, the state. That's where it gets fishy. For a private company, the seller wants as much money as possible, but the buyers want to have a low price so they get more gain, so there's a healthy balance of interests for the bank to come up with a "fair value"

But in the SOE case, the seller is the state and is represented by parties who also may be buyers. This creates a conflict of interest - the same party should try to increase the IPO price as a representative of the state, but also wants to reduce the IPO price for his own interests. This is why more transparency is needed in SOE IPO's than in regular IPOs - i-banks don't really understand this, nor do they care. If there is only downward pressure on the IPO price, it's great for them since their buyers make a lot of money, and the sellers (the public) aren't their clients anyway - their representatives are and these guys are also buyers, so they're thrilled. Very cosy.

As a defense, the i-banker says that they can't be responsible for policing this situation, and besides, the state continues to hold most of the shares after the "privatization" (I mean, with the Finance Ministry holding 77% of MCOT, how can you call it "private"?); but that's sidestepping the public transparency issue entirely.

Getting back to EGAT, has the government explained why they refuse to "unbundle" the grid from the generation units?

Also, about MEA & PEA - does the PEA handle all provinces, and the MEA handle Bangkok? Are you saying that the PEA is profitable and the MEA is not? They both get their revenues from user fees right (my meter payments) - or are there government subsidies involved in that? It seems more sensible to privatize these entities than EGAT - has anyone suggested that, and what were the issues?

What you call "ad hoc" and "rushed", some are calling "dynamic" and "decisive" - most investors in these IPOs don't really care about the long-term; they're interested in a 1-2 year horizon at the most, and are willing to cut and run well before that if things don't look good. The whole point of a large IPO is to increase liquidity and trading, which allows them to cut and run on short notice - that's why they like the "ad hoc" and "rushed" processes.

Careful thought only slows things down!!!

Cheers,

Scuba22

[Tettyan]

Scuba22 -

Thanks for the quick summary of the problems inherent in state IPOs. Articulated more clearly than I ever could have.

MEA handles Bangkok, Samut Prakarn and Nonthaburi. PEA handles the rest of the country. The whole cross-subsidy thing is a bit unclear to me too. What I do know is that MEA had a pretty decent English-language website a couple months ago - it has since been taken down. If you want to learn more about PEA, check out http://www.pea.co.th/eweb/ .

I don't recall many of the legal particulars of the earlier privatizations. My guess is that there wasn't too much challenge at that time because not many people fully understood the implications of it back then. Now that people have heard rumours about the PTT privatization (and others), skepticism has grown. As for the people either having discovered a newfound respect for the law or simply being pissed with Thaksin, maybe its a little bit of both.


Getting back to EGAT, has the government explained why they refuse to "unbundle" the grid from the generation units?

This is pure speculation, but the government seems determined to create the largest IPO in Thai history with this EGAT listing. With the potential to increase the capitalization of the SET by up to 10 percent, it would definitely put the Thai bourse on the map as a significant regional player. This may be why the government and investment banks are not interested in seeing EGAT broken up.


Also, about MEA & PEA - does the PEA handle all provinces, and the MEA handle Bangkok? Are you saying that the PEA is profitable and the MEA is not? They both get their revenues from user fees right (my meter payments) - or are there government subsidies involved in that? It seems more sensible to privatize these entities than EGAT - has anyone suggested that, and what were the issues?

I answered the first part of this question above. As for the future of the two enterprises, the official government policy is that they will be privatized at some point. Beyond that, there isn't much other detail out there. The government is so determined to attract investors for the EGAT listing that they have basically outlined the terms of the relationship between EGAT and the local distributors in favor of EGAT. This makes PEA and MEA less attractive investments. It wouldn't be beyond the government to, come time to privatize PEA and MEA, try redrawing the terms of the relationship to appear to favor PEA and MEA, and then screwing over those who bought into EGAT!


What you call "ad hoc" and "rushed", some are calling "dynamic" and "decisive" - most investors in these IPOs don't really care about the long-term; they're interested in a 1-2 year horizon at the most, and are willing to cut and run well before that if things don't look good. The whole point of a large IPO is to increase liquidity and trading, which allows them to cut and run on short notice - that's why they like the "ad hoc" and "rushed" processes.

Which brings me to my last point. Who in their right mind wants to buy into an industry whose regulatory framework is so uncertain? I think buying into EGAT involves significant political risk, since its supposed regulator hasn't even been created yet! We have no idea what kind of rules will be drawn up in the future that will constrain EGAT's ability to do business. Will it still be able to expropriate land to build new transmission lines? What percentage of shares does the gov't ultimately plan to retain? What if in future the gov't decides to make the terms of the IPOs for PEA and MEA more attractive at the expense of EGAT? Will the gov't impose rate caps if there are sudden surges in the cost of generating electricity? Try asking those who bought into PG&E and SoCal Edison just before California's botched deregulation of its electricity market!

Best,

Tettyan

[Scuba22]

Dear Mr Tettyan:

You ask a very interesting question about why investors would be willing to buy into an uncertain regulatory situation. Though I don't know the specific EGAT situation, there are several scenarios where investors would be very interested in this.

Usually, uncertainty is factored into the price of the IPO. The more uncertain, the lower the price, since you wouldn't pay top dollar for a questionable investment. As the uncertainty lifts, the price goes up because the investment gets more stable - so long as the substance of the clarity is in your favor. As a quick numerical example - consider an uncertain investment that can pay you back between 10-100 B each year, or a probability-adjusted average of 30 B and you are looking to make a return of 10%. You would be willing to pay at most 300 B. However, suppose the uncertainty lifted and it was pretty clear that you would be making 80 B per year. At the same rate of return (10%), you could pay 800 B for it. Voila - your uncertain 300 B investment is now worth 800 B.

This is normal and fair when the uncertainty is truly uncertain - that is, the clarity could go against you and wind up giving you 10 B, in which case you would lose money. The big upside is the reward for taking that risk.

Where it gets fishy is if the future upside is known beforehand but the uncertainty is created deliberately to lower the price so that initial investors can get rewarded without taking any risk. This then gets into the question of how the initial price is set, or the "valuation methodology".

The IPO price, like any valuation, is supposed to be a reflection of future profitability. As we discussed earlier, usually there is a balance between the sellers (company owners pre-IPO) who want a higher price, and the buyers who want a lower price. The investment bank is supposed to be an honest broker between the two and establish the "market price" where the transaction can take place.

But as we also discussed, in an SOE privatization, the sellers are broadly "the people", represented by various government trustees. If these trustees or their nominees are on the buy side as well, big conflicts of interest arise. This is exactly where, as I see it, the PTT process breaks down - no one knows whether this conflict really existed because the ties between the gainers and the people supposedly representing the state are totally intransparent. As is the valuation methodology.

The other thing to consider is that in energy especially, being able to "work" the confusion in the rules can provide substantial profits. Your example of California is totally appropriate here. The deregulation rules were a convoluted and complex compromise between the private sector and politicians. Loopholes in that compromise allowed companies like Enron to "game" the system - shutting down power plants and overbooking transmission lines to create artificial shortages in high demand situations that made prices skyrocket so they could make a killing in futures markets while people suffered through rolling blackouts. Energy being the life-blood of so much else, this can cause havoc in an entire economy, and therefore the social and political structure.

It's worthwhile to note that in California, the sitting Democratic Governor (Gray Davis) was ultimately ousted in favor a Republican (Arnold) who was close to Enron's Ken Lay, as a result of the chaos - all while George Bush (another Ken Lay buddy) refused to get the Federal Energy Regulation Committee (whose job it was to referee these situations) involved (and we wont' even mention that the FERC chairman was selected by Enron's Ken Lay!). Does the Bush-Thaksin analogy start looking more substantial? :-)

In this regulatory confusion, Enron made billions.

I wish people understood these issues and the real history better. There are plenty of very good legitimate reasons for questioning the EGAT IPO, it's a pity if unthinking criticism allows people to paint the critics as simply malcontents and Thaksin-haters.

I'll address your comments about the increasing market cap of SET in another post.

Cheers!

Scuba22

[Wisarut]

Now, the Leader's governemnt is in Financial Trouble ... he has to ask for 70 billon baht loan to cover the deficit of 100 billion baht after the faiolture to privatize EGAT ...

This is the leak from the former Duputy Minister of Finance [Phichet Phanwichartkul] .... Ther will be a Great Depression in 2006 .... now the govnemrn has to borrow to payu for the governemnt salary ....

Well, this is due to the profrigacies on spending .... to gain more voters ...
Better prepare to raise the tax even though thosewhocome up with Suvannabhum City (the vested interests aroudn the Leadeer) want to pay
NO tax to the localgovenremnt (BMA and Samut Prakarn) ....

[2 Cents]

I just want to say Thank You all for all the dicussions and info. I have learned a lot from this thread.
:D

[Scuba22]

Yeah, it's great to find signs of intelligent life on the web, especially concernin thai politics in english. I hope others start getting involved here, I certainly hope the number of people interested in civil discussion isn't as small as the regular posters here!

Cheers,

scuba22