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Cablegate: Thai Telecom Concessions On the Precipice

VZCZCXRO7637
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #2020/01 0970516
ZNR UUUUU ZZH
R 070516Z APR 07
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 6085
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHNY/AMEMBASSY OSLO 0940
RUCPDOC/USDOC WASHINGTON DC

UNCLAS SECTION 01 OF 03 BANGKOK 002020

SIPDIS

SENSITIVE

SIPDIS

STATE FOR EB/CIP, EAP/MLS
STATE PASS USTR FOR JMCHALE
USDOC FOR 4430/EAP/MAC/OKSA

E.O. 12958:N/A
TAGS: ECON ETRD ECPS TH
SUBJECT: THAI TELECOM CONCESSIONS ON THE PRECIPICE

REF: BANGKOK 1203

1. Summary: Thailand's Council of State is reviewing amendments
made over the years to the private telecom concessions and is likely
to conclude that the amendments were granted illegally. The
Ministry of Information Technology and Communication (MITC) could
use the Council's finding to move ahead with cancelling all
concessions and effectively nationalize the sector, but will more
likely use its strong position to renegotiate the contracts. MITC
and the coup-installed government in general claim to be using their
limited time in office to strip away the corruption of the Thaksin
years and level the playing field for the years ahead. They would
also like to see state-owned telcos strengthened. Inflicting pain
on Shin Corp, formerly owned by Thaksin, would be an added bonus,
exacting a measure of revenge for the alleged corruption the company
was involved in during the Thaksin years. The RTG's proposals may
be injurious to the investment environment, but serious action does
need to take place in Thailand on the status of the telecom sector.
However, in the end this government may not have the time to push
through radical changes. End Summary.

2. Thailand's private mobile and fixed telecommunications providers
have long operated under a Build-Transfer-Operate system, wherein
the private telcos build the infrastructure, transfer ownership to
state-owned telcos TOT or CAT, then operate their business under a
concession of limited duration. The original concessions were
scheduled to end between 2006 and 2013 for the three largest private
providers, but over the years they negotiated amendments that
extended those concession lives to up to 2018 and reduced regulatory
fees.

3. The MICT's own recent review of the concessions concluded that
the RTG Cabinet did not approve the amendments as required by law
and they are therefore invalid. They suspect as well that the
amendments were questionably obtained and may have involved
corruption on the part of senior executives from TOT and CAT. The
Council of State, the RTG's legal agency, is reviewing the legality
of the amendments and is expected to issue a recommendation for
remedy as well. Although the Council's opinion is non-binding, it
would guide the government in its attempts to seek redress through
the judicial system.

Is this the end for concessions?
--------------------------------

4. In a worst-case scenario for the private telcos, all non-Cabinet
approved amendments would be cancelled and concessions would revert
to their originally approved timeframes. For market leader AIS
(owned by Shin Corp, itself owned by Singapore's Temasek), their
concession would be cut from 2015 to 2010, and be required to share
30 percent of their revenues with TOT vice the current arrangement
of 20 percent plus a portion of the VAT tax. Analysts doubt AIS
could recoup their investment under these limitations.
Norwegian-owned DTAC would be hit even harder: their original
concession ended in 2006, and they essentially would be forced to
close their doors. In addition, a reduction in revenue sharing won
in the mid-1990s would be eliminated, and DTAC could be liable for
underpayment of revenue sharing over the past ten years. TRUE Move,
the third largest provider, operates under an amendment to DTAC's
concession, and would have to close shop as well. If courts rule
the telcos underpaid revenue sharing payments, they could also
impose substantial fines.

5. Although the worst-case scenario is a possibility, analysts
believe that outright cancellation would be tantamount to
nationalization and have a disastrous effect on the investment
climate. Rather, they believe the RTG would instead use its strong
position to renegotiate the concession contracts. One analyst
predicts the RTG would seek to level the playing field, and set the
same concession termination dates and revenue sharing arrangements
for each telco rather than the hodgepodge of individual agreements
that exists today. The RTG could choose to set termination dates at
2013, consistent with that of TRUE Move. This would trim AIS's
concession by two years and DTAC's by five. Revenue sharing would
be set at 25 percent, equal to DTAC and TRUE's current arrangement,
but a tad higher than what AIS currently pays. The telcos may also
be liable for fines for underpaying revenue sharing.

6. TOT Chairman General Saprang Kalayanamitr recently proposed that
all telecommunications assets be brought together in a "telecom
pool". After pulling back the private concessions, TOT would become
a national telecommunications company, managing the nation's assets
and leasing use of the networks to private companies. Critics
question the TOT's competency in managing the entire network, and
worry that consolidation will bring a return to government monopoly

BANGKOK 00002020 002 OF 003


of the industry. TOT would maintain sole control over expansion of
the network and leasing rates. MICT Minister Sittachai later took a
step back on the telecom pool idea, saying that only the two
state-owned providers would consolidate network management. The
telecom pool idea appears to be losing strength, but the idea still
has support within the coup leadership.

7. The private telcos are intimidated by the MICT Minister's and
TOT Chairman's comments regarding withdrawing the concessions, but
do not believe the worst will pass. And, as one operator told
Econoff, "If they do, we'll see them in court." From their
perspective, the responsibility to obtain Cabinet permission for the
amendments belonged to TOT and CAT, and if a court rules them
invalid the private companies will sue for damages. However, the
RTG suspects corruption played a hand in the approval of the
amendments. The telcos say they received the concession extensions
in a tradeoff for increased competition in the sector, but other
telecom analysts say the amendments were so one-sidedly in favor of
the telcos, particularly for Shin-owned AIS, that corruption almost
certainly was involved. Though difficult to prove, if the
amendments were obtained illegally the concessionaires will have no
legal recourse, even if the concessions are withdrawn completely.

Still gunning for Thaksin?
--------------------------

8. RTG officials say, and most analysts agree, that the
government's motivation in investigating the concessions is to clean
house in the telecom sector and eliminate the corruption and shady
deals that took place both before and during the previous
administration. MICT Minister Sittichai has said he wants to
rebuild the telecom industry on a foundation of "fairness, justice,
legitimacy, and transparency." Disturbed by the scope of the
revenue lost to the government from the amendments, he is determined
to guide the sector with a firmer hand. Punishing the telcos for
their illegal behavior not only levels the playing field, but sets a
precedent for future corruption, sending the message that corrupt
activities will be discovered, perhaps not soon but eventually, and
will be severely penalized.

9. Nevertheless, it is hardly coincidental to the investigation
that the former owner of the largest telecom provider was the
now-deposed PM Thaksin. Coup leaders justified the coup by claiming
a culture of corruption surrounding Thaksin and have launched
numerous investigations (mostly fruitless so far) to prove it so.
The RTG's vendetta against Thaksin has hit hardest on his former
company, Shin Corporation, and its current Singaporean owners
Temasek. As a holding company, Shin holds mobile provider AIS,
satellite company Shinsat, independent television station ITV, and
discount airline Thai Air Asia. Since Temasek made its bid for Shin
in January 2006, the stock price has dived by more than half.

Shin takes it on the chin
-------------------------

10. In December 2006, in a case similar to the current telecom
investigation, a court ruled that the Cabinet had not approved an
amendment to ITV's contract and was therefore invalid (reftel). The
government withdrew ITV's operating concession after it was unable
to pay 100 billion baht in fines (approx. USD 2.8 billion),
effectively eliminating the last non-state owned television station.
Although ITV was a minor possession of Shin Corp and had little
effect on its bottom line, the case set a disturbing precedent for
the telecom concessions and the investment environment at large.

11. In February, coup leader Sonthi Boonyaratkalin called for the
return of ShinSat's satellite assets, terming them "Thai national
assets", adding that as a soldier he would "not tolerate a loss of
territory, not even a square inch. It is the same with natural
resources." Sonthi also alleged that the Singaporean owners were
secretly bugging Thai telephones via the satellites. MICT officials

SIPDIS
examined ways to take possession of ShinSat and though ruled out an
outright nationalization of the assets, considered buying out
Temasek's stake in the company. The MICT also reviewed Shin
Satellite's concession, and while it found several discrepancies,
decided they were of a limited technical nature and took no action.
As quickly as it began, the RTG's quest for the return of the
satellites ended, as PM Surayud coolly announced that the government
would not be interfering in the matter and would leave it to the
private sector. Analysts surmised that the RTG leadership realized
either that its relations with Singapore were being unnecessarily
damaged, or that perhaps taking full ownership of the debt-laden
ShinSat was not such a good acquisition after all.

NTC on the ropes

BANGKOK 00002020 003 OF 003


----------------

12. Thailand's independent regulator, the National
Telecommunications Commission, confided their concerns in a meeting
with the European Commission, fearing that cancellation of the
concessions will preclude a power shift away from NTC and back to
the state. NTC accuses the state-owned telcos of routinely ignoring
NTC regulations, a situation that would only worsen if telecom
assets were concentrated under state control. The NTC believes that
if its regulatory powers shift to the state, Thailand will be out of
compliance with its WTO commitments to maintain an independent
regulator and separate regulatory and operational functions. The
NTC pleaded with the EU to inform RTG officials of the potential
impact concession cancellation could have on the investment
climate.

13. The National Legislative Assembly (NLA) has held two public
hearings on potential amendments to the Telecom Act and the
Frequencies Act. The key amendment would consolidate the NTC with
the yet-to-be-formed National Broadcasting Commission (NBC). The
years-long delay in creating the NBC has delayed the issuance of
licenses for 3G services as the technology crosses both areas.
Telecom providers are enthusiastic about the proposed amendment, as
is the NTC, but media groups oppose the proposition on the grounds
that a combined NTC/NBC would give broadcasting issues short
shrift.

14. Comment: The telecom sector is in a highly volatile state and
the high degree of uncertainty is affecting the investment climate
beyond just this sector. The constant pronouncements of plans for
radical changes in telecom by a diverse range of actors in the
government is raising blood pressures among telecom providers.
However, despite the volatility of the RTG's statements, it should
be noted that they have yet to follow through on the more radical
ideas. Time is also an issue. The current government plans to hold
elections by end of year and may find it difficult to complete what
would be drawn out negotiations with private telecom providers over
concessions, not to mention possible court actions. Current ideas
for telecom changes may have a negative impact on the sector, but
the silver lining is that serious discussions are now taking place
on the role of the regulators, the state-owned agencies and their
relationship with the private telcos. End comment.
ARVIZU

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