Investor Spotlight: A frontier market too far?

A foreign investor looking in, Jeremy O'Friel ponders Thailand's fortunes

"The currency crisis of 12 years ago does not feel long enough ago to be forgotten."

Of all the lessons learned from the credit crisis of 2008 and beyond, perhaps the starkest was that liquidity remains king. As Benjamin Franklin once noted – the only thing more important than return on capital is return of capital. It is within this mindset that one tends to examine the potentially lucrative markets of Southeast Asia from a hedge fund manager’s point of view, namely with one beady eye on liquidity, or rather lack of it.

Clearly, there are tempting reasons to be involved in Asia. The region seems, through a combination of solid oversight and historically high savings rates, to have avoided the banking crisis suffered in the supposedly more sophisticated parts of the financial world, leading bourses in such cities as Kuala Lumpur and Bangkok to within spitting distance of new highs. But fears linger and many in the investing community remain psychologically scarred by the ‘Asian flu’ of the 90s. Given the complexity of the instruments employed therein, the masters of the hedge fund universe remain even more reticent, and are unlikely to plunder countries such as Indonesia, Thailand or Vietnam until they see clear and sustained evidence of higher levels of liquidity and freedom from state intervention in currency and other markets. Looking specifically at the Thai situation, one must examine all three of the currency, fixed income and equity markets to ascertain what the prospects are for a further development of the market and what needs to happen in order to entice more foreign investors.

Clearly, Thai equities are on the rise, with inflows next year poised to hit THB100m and the SET having recorded again of a shade under 26% through time of writing, making it one of the best performers worldwide. Yet the concerns centre around three important features – concentration, size and political backdrop. With banks making up 5 of the top 10 issues by market capitalisation (Thanachart, Bangkok, TMB, Siam Commercial and Kasikorn), hedge fund managers perhaps feel that they would be better off looking elsewhere for diversification, whilst it is only thirty five years ago that the liquidity fell to sufficiently low levels that the Bangkok Stock Exchange - the predecessor to the Stock Exchange of Thailand – ceased operations. It was no surprise that Thailand failed to make the grade in being included in Goldman Sachs’ Next-Eleven (N11) list of countries to follow the BRIC nations into the big-time, even though Asian neighbours Vietnam, Indonesia, South Korea and the Philippines did. Finally, the riots of earlier in the year are still the first thing that observers from outside of the country think of when Thailand comes under discussion. One is bound to recall the civil unrest disruption was deemed sufficiently serious for the SET to temporarily close.

The currency markets are similarly viewed with distrust. Again, the currency crisis of 12 years ago does not feel long enough ago to be forgotten. The Thai (and indeed Malaysian) central bank have two clear goals – stability of exchange rates and low inflation – and are not averse to direct intervention and even the implementation of currency controls to achieve the former. As has been learned by many other countries such as the United Kingdom, providing artificial support or resistance for any particular currency can be an expensive and ultimately fruitless exercise. Yet in the absence of such intervention, the presumed march upwards of the Baht could damage Thailand’s export-led economy. The absence of such upside potential in the currency is another reason for hedge fund managers to look elsewhere for a bit of free carry whilst holding equity positions.

Bond markets are perhaps the most attractive place of the three to dabble. Ironically, the success of domestic fixed income securities sector owes much to the same crisis that scarred so many others. In the aftermath of 1997, the Thai banks were reluctant to lend to local industry and so companies turned to the bond market. The inevitable forces of competition over the next 10 years led to lower borrowing costs, longer-dated maturities and fixed rates to such an extent that local banks now find it difficult to compete. Unfortunately though, bonds will always play second fiddle to equities in terms of where hedge fund managers place their assets and so again, international speculative appeal is probably limited.

In summary then, it is fair to conclude that unfortunately Thailand is a country that is still viewed with a certain amount of scepticism. Until the international investor sees a lower concentration and higher volume in equities, coupled with more freedom of exchange rate, Thailand is likely to remain peripheral in the opportunity set of even the most daring emerging markets hedge fund manager.

Jeremy O’Friel is the Managing Director of Belmont Investments, founded in 2009 with offices in Dublin and New York. Registered with the CFTC and NFA as a CTA and CPO, it has entered into an exclusive agreement with Altegris Portfolio Management (APM) to distribute all funds originated by the firm to investors outside of the US. Jeremy regularly visits clients in Thailand including MBMG Group and can be contacted through the MBMG Group on info AT mbmg-international.com

APM, a Registered Investment Advisor with client assets of roughly $2.75bn, is based in California. Formerly part of the Man Group, independent since 2002, APM specialises in managed futures and hedge fund strategies, with links to managers such as William Eckhardt and John Paulson. 

MBMG Group is a personal and corporate advisory and research practice with offices in Bangkok and throughout Thailand. MBMG Group was a pioneer of hedge fund research and recommendation within Thailand, and advises clients on assets of over $165 million, invested in a diversified range of assets managed by leading global experts.

This article was first published in Business Report Thailand, Issue 1, October 2010.

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Marketing Spotlight: We love Ratchaprasong?

We love Ratchaprasong?

If you Google ‘we love ratchaprasong’ you can see over 7,500 results with links to news sites, blogs, video’s, rant’s and so on. Whilst not all are about ‘we love ratchaprasong’ many are, but does that mean the campaign is successful or even appropriate?

Following the street protests and violence of April and May 2010 it was very surprising how quickly posters and other signs began appearing everywhere even when the smell of burning rubber was still hanging in the air and clinging to parts of the BTS system. It was not just the ‘We love Ratchaprasong’ banners, but T-shirts with ‘Together We Can’, hoardings with ‘Come Together’ and countless other variations on the theme. Whilst many were probably very well intentioned a number of commercial enterprises just seemed to be hijacking the sentiment to such an extent it actually looks like cynical marketing. New incidences of this are still appearing on billboards, in stores and television every month. 

‘We love Ratchaprasong’ is unfortunately the most prominent of the campaigns particularly in the Ratchaprasong area which makes it look very much like a ‘Mai Pen Rai’ or ‘Nothing Happened’ campaign especially after the massive Red Shirt Rally of 19th September – the ‘Nothing Happened’ happened again albeit it only for one day.

The campaign kind of reminds us of ‘Green-washing’, a phrase which is being used time and time again to describe company marketing campaign’s that paint a thin veneer of being environmentally friendly over something that is quite clearly not. Unfortunately, as David Ogilvy (of the Ogilvy and Mather, Advertising Agency) once said, ”the customer isn’t a moron, she is your wife.” Consumers are getting more and more cynical about any marketing message that has an element of fabrication, under the carpet sweeping or just downright lies. Anything in your communication message that does not ring true or just feels wrong either makes the consumer ignore you or even worse get angry and tell all of their friends; or even worse tell all of their Facebook friends or Twitter followers – social media amplification of colossal proportions!!

So if ‘We love Ratchaprasong’ is well intentioned and is really about rallying support for retailers in the area and secondly trying to bring people together what could the protagonists have done a little better? Given what happened in Ratchaprasong in April and May and the fact the memory isn’t going to fade very quickly, why not stick to something that both Thai’s and visitors love doing in Bangkok and in particularly in the Ratchaprasong area? How about ‘We love Shopping’? A campaign that is focused around the Ratchaprasong area stating what most people in Bangkok do anyway avoids any hidden or misunderstood messages and still helps drive people to shop, which in turn supports the retailers who are paying for the campaign

We fully recognize that conducting any marketing or publicity for an area that has been damaged physically or by reputation because of disturbances of any kind is never going to be easy, but couldn’t this have been done with a little more finesse? BRT

This article was first published in Business Report Thailand, Issue 1, October 2010.

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Why Thailand needs market reform: Khun Smith Jingkaojai

An insider gives the Thai economy a health check and sees the need for treatment

Smith Jingkaojai is a senior member of the international business community who has the ear of the Thai government. In a career stretching over 15 years he has worked across the globe for Morgan Stanley, Bankers Trust and Credit Suisse First Boston. Currently head of Corporate Finance at Asia Plus Securities, he serves as an honorary advisor to the Thai parliament’s financing and banking committee, the only member from the financial services sector. He is also an advisor to the Board of Trade, the Thai Chamber of Commerce and the Federation of Thai Industries.

Khun Smith is a free market capitalist in a country that he feels has yet to fully embrace the rigours and benefits of a free market economy. Meeting with Business Report Thailand at the Sukhothai Hotel in the heart of Bangkok’s financial district he is keen to share his analysis of the Thai economy. In a wide-ranging conversation he touches on topics as diverse as the legislative framework under which businesses operate here and how it can drive away foreign capital. He also looks at the surge of the baht against the dollar and what that means for exporters and questions why there is THB1.7 trillion languishing in Thai bank vaults. 

All views expressed herein are his own and do not necessarily represent those held by affiliated companies or institutions. 

Business Report Thailand (BRT)

Despite widespread and almost unprecedented political unrest this spring, Thailand’s economy continues to prosper. Some call it the Teflon economy – how do you account for it?

Khun Smith

It shows the resilience and strength of the Thai private sector. Capitalism is often at its best when sailing amid stormy waters.

 We inhabit a country of 65 million people many of whom are very well educated and who fully understand that we are part of the international, global community. In many ways the people are ahead of the politicians - many see the need to engage with the markets and for reform. The weaknesses of our legal framework are constantly being exposed.  Two areas are of particular concern to me – the legal framework under which business is conducted and the enforcement of the rule of law. Where things are not up to par, changes must be made.

We have to maximise our potential. We live in turbulent times yet our economy grows so we are forced to ask ‘what could our full potential be?’ At this time our glass is partially full, yet the potential of the empty half is huge. This has been recognized by foreigners and now ever more so by many Thai people. This potential can only be realized if, and only if, we live by the rule of law, democracy and the drive of capitalism.

BRT

And what about the political strife?

Khun Smith

That’s been a real wake up call and clearly the issues involved are not easy to solve. Don’t forget foreign business is always very well informed and in tune with what’s taking place. The worry for them is the situation has not been resolved and there is little light at the end of the tunnel. The government has done as much as it perceives it can to deliver and clarify concerns. Whether or not that is enough remains to be seen. In many ways the main problem is beyond government. In financial terms it is the systemic risk we are facing, but business will tackle the issues and take strategic decisions. Capitalism, the ultimate example of ‘the survival of the fittest’, will prevail. The only sadness is the lost opportunities and the feeling that we are doing well, but that we could be doing so much better.

BRT

How can Thailand best compete with its neighbours and against giants like China?

Khun Smith

We need to get back in the game – the international game. This involves trade obviously, but also, and most importantly for me, the capital markets and the financial service sector. By that I’m really talking Wall Street – the equity and fixed income markets. We need to get back into that international circle. If you’re not a member of that club you can’t compete. A case in point - when was the last time you saw the SET mentioned on CNBC? It never is.

The cost of capital is reflected right the way down to the cost of goods and services. We need legal reform that opens up Thailand to the global business community. Business hates uncertainty and tries to price the cost of risk. The existing legal environment poses and reveals uncertainty, which I believe deters new business, particularly from overseas. 

BRT

The Stock Exchange of Thailand (SET) has been criticised for not helping capital markets achieve their full potential. Do you share that view?

Khun Smith

The SET is an essential part of the capital market, but accessing this market needs to be made quicker and easier, without compromising the integrity of the system. The new administration is well aware of this and has a very hands-on attitude. 

You have two main markets in the financial world – the bank and capital markets. As Thailand’s economy started to grow the bank market was invaluable at accessing capital from savers and, bridging the gap between saver and investor - becoming in effect an intermediary. The banks have performed well, are generally of a recognised international standard and hopefully, as time goes on, their transaction costs should fall.

The capital markets both equity and fixed income are a different story. The fixed income market consists of the debt market, the foreign exchange and commodity markets and is way larger than the equity market – perhaps by 20 or 30 times. In Thailand we have an active and successful equity market, but the fixed income market is yet to mature.

In theory, both markets - the equity and the fixed income markets - run parallel, in tandem. In a mature and efficient capital market like Wall Street, when one is up, the other is down. If the equity market is up, capital will move from fixed income to stocks and the fixed market will decline. And of course when equities are down money will race back to the fixed income market. 

The problem for Thailand is that our markets are not balanced. 

When equities are down the money has no place to go other than back to the banks. The result is we now have THB 1.7 trillion sitting in cash doing very little. Like everybody else money needs to work for a living and not take an extended holiday in a bank vault!

BRT

The baht has continued to climb steadily against the dollar much to the alarm of exporters. Is the currency overvalued?

Khun Smith

It’s not for me to say what the appropriate level of the baht should be. What I will say is that the true cost of goods and services in any country will ultimately be reflected in its currency. It’s like being at school. If a student is working hard and passing exams with good grades then that will be reflected in their scorecard. The currency is Thailand’s scorecard.

But that’s not the whole story. The relevant authority here is the Bank of Thailand (BOT) and they have taken what they believe to be the correct course of action in respect of the currency. But is the authority in step with the markets and the private sector? This then raises the issue of accountability. Ultimately the result of all this is felt by you and me, the private citizen and consumer – we suffer or prosper and who is responsible for that? Never underestimate the importance of accountability in the capitalist system.

BRT

Inflation is above 3%. Are you happy with that figure?

Khun Smith

Well the short answer is no. The saving rate is currently 1% and if as you say inflation is at 3% then we are all poorer by 2% year on year. One of the problems, as I mentioned earlier, is that we are out of touch with the international markets and often don’t price things fairly here. The result being that some goods and services don’t reflect their real worth when set in the context of the wider world.

BRT

Looking ahead to 2015 and the start of the ASEAN Economic Community, do you expect there to be free trade and free movement of labour in the region, or will countries resort to protectionism?

Khun Smith

The movement of labour is already happening. The ASEAN EC will give it a legal stamp. Look at workers in the fishing sector here; some say that up to 98 per cent are not Thai. Whatever the true figure, that is the reality on the ground. It’s nothing new. As a country’s labour force moves up the salary ladder a vacuum is created and then filled by people from elsewhere. We just need to recognise this issue formally - whether we like it or not. Systemise the way the labour market works, tax it and then it can contribute to the economy. For me it’s capitalism at its best. Market forces will dictate and prices fall.

BRT

What are the prospects for the Thai economy in the coming year? Where do the greatest challenges lie?

Khun Smith

Capitalism, which is sometimes called the ‘least worst economic system,’ tends to thrive in a true democratic environment. The implementation and respect for the rule of law is the most critical issue for this country. 

When a country is at risk of defaulting on interest and principal payments it’s know as ‘Sovereign Risk’ in the fixed income markets. In some circles this term has already been applied to Thailand because of its political-economic circumstances and that is clearly a worrying development. As it happens, a government seminar will be held on this matter shortly.

In many ways this is a young country, with an energetic young population who are keen to take the country to the next level. Older generations need to understand that it’s time for them to move on and let market forces take their course. Democracy and capitalism working together can steer this country to a bright future. But if the country forsakes these ideals, a swift punishment will ensue and I would genuinely fear for my children’s future and that of my beloved country.

This interview was first published in Business Report Thailand, Issue 1, October 2010.

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ASEAN’s Lost Leader

A regional leader four years ago, Thailand’s ranking has slipped, but investors seem unperturbed

"As the Thai military engaged in sporadic armed clashes across Bangkok in May, business at Thailand’s large industrial estates on the eastern seaboard surged."  

Since the September 19, 2006 coup that ousted then-Prime Minister Thaksin Shinawatra, the perception of Thailand as a regional leader has deteriorated, helped in no small part by a string of domestic debacles including Suvarnabhumi, Pattaya, and Bangkok’s recent demonstrations.  Thailand, domestically-occupied, has appeared less internationally assertive since these crises began. 

At a time when the Obama administration has sought to rebuild US relations in South East Asia, PM Abhisit skipped a recent Nuclear Security Summit in Washington, DC as the conflict intensification in Bangkok.  Instead, Foreign Minister Kasit attended, staying long enough to make controversial off-the-record comments regarding the monarchy during a speech at Johns Hopkins SAIS.  Other initiatives launched by Bangkok stalled under the previous military administration.  A regional grouping of Thailand’s neighbors intended to boost development in Cambodia and Laos stagnated.  

Thailand’s loss can be seen as other South East Asian states’ gain.  Indonesia’s thriving democracy is attracting ever-increasing attention from the United States.  Just five years ago Thailand’s clout in ASEAN allowed it to persuade Burma to pass on its ASEAN Chairmanship, currently held by Vietnam. Today, its ranking in the regional hierarchy has slipped. 

The effect of domestic political instability and a foundering international perception of Thailand’s economy is not always clear.  As the Thai military engaged in sporadic armed clashes across Bangkok in May, business at Thailand’s large industrial estates on the eastern seaboard surged.  

Car sales increased 60 percent over the previous year as fires coursed through Bangkok’s banks and shopping centers.  External demand for Thai exports supported over six percent economic growth throughout the crisis and the first half of the year.  Despite tumbling numbers of foreign visitors to Thailand, growth held steady.  Investors bullish on the Thai economy have helped the Baht perform among the best of all Asian currencies.  

Not all indicators of Thailand’s political and economic health have been quite as upbeat.   

Thailand has fallen ten places in the World Economic Forum’s Global Competitiveness Index since the 2006 coup, mainly due to declining ratings of social unrest and political stability.  While the absolute fall may not seem extreme, Thailand, now 38th, has certainly lost relative standing compared to regional neighbors like Vietnam, which surged from 75th to 59th in the last year, following Indonesia’s leap from 54 to 44th.

Political crisis has undoubtedly hurt Thailand economically;  the 2008 airport closure shaved three percent off nominal GDP alone.  The country also suffers from suppressed levels of consumer and business confidence.  Yet the level of foreign direct investment (FDI) into the country has remained steady at between US$7-9bn annually since Thaksin’s military ouster.

Thailand’s political neuroses can seem to have little impact on economic indicators.  Examining the time horizon of investments and long-term sensitivity to risk may help to reconcile the yawning gap between Thailand’s politics and economy. 

Supply chains which incorporate Thailand’s industrial and automotive manufacturing sector were established during times of political stability and are difficult to alter in the short term.  Investors with a low appetite for risk halted construction of new facilities following the 2006 coup and 2010 protests, but a developed sector remained in place.   So far, firms have seemed willing to endure occasional crises and increasing political risk. Violence by protestors has also been directed at banks and commercial retail destinations far removed from export production centers.  Should the level of political risk continue to rise, or should damage occur to facilities which operate as part of supply chains, investors would certainly reassess their positions in Thailand and would likely alter physical capital investment to other locations.  The effect of that slow draw down on export growth, coupled with weak domestic demand and a lack of other competitive industries with growth potential, would result in anemic future growth.  

A government preoccupied with domestic instability runs the risk of distraction, but also has the potential to undermine future growth.  The 2007 constitution, written under military administration, outlined new benchmarks for businesses operating in the country.   

In December 2009 Thailand’s Supreme Administrative Court upheld a ruling suspending industrial projects at the Map Ta Phut industrial zone for failing to comply with environmental and health impact assessments – affecting both PTT Group and Siam Cement, the country’s largest energy and industrial conglomerates respectively.  It is such incidences, alongside the unfolding constitutional dispute over 3G licensing that has undermined the ‘security of expectations’ that Thailand can offer investors. 

The current administration’s continued preoccupation with Thaksin has lead to a deterioration of investments across borders as well.  In a move seen by many as a rejection of Thaksinite policies, Foreign Minister Kasit announced last year the termination of a Memorandum of Understanding between Thailand and Cambodia.  The agreement authorized joint oil and gas exploration and development in a section of the Gulf of Thailand disputed by both states.   Clearly, past domestic spats are having international consequences.

Thailand’s economy, ultimately, is operating on borrowed time.  Political stability and a booming economy in the early 1990s and the first half of this decade were central to long-term investment projects that continue to buoy Thailand’s economic growth.  This sector has also paradoxically been one of the least-affected by the recurrent and often-violent political strife which has continued to play out in Bangkok.  

The World Bank recently noted that the Thai economy runs on one engine: exports driven by external demand.  This engine thus has two characteristics.  It is detached from domestic political affairs, and it has a long-term investment horizon.   Because of this disconnect, Thailand’s beleaguered political system seems to have surprisingly little effect on macroeconomic indicators.  The question though, is how long Thailand can continue to operate with ever-increasing levels of political risk and continue to attract renewed investment based on manufacturing for export?  If firms decide that regional players with more stable political conditions—such as Vietnam—are safer investment destinations, then Thailand will be left with sagging domestic demand and a battered tourism industry. As regional economies become more robust, Thailand may also miss out on a rising tide of intra-ASEAN investment. It is always difficult to estimate just how long the short-term is, and how soon investors will decide to seek greener pastures or avoid initial investments entirely.  

For Thailand’s current administration, this pressing question takes precedence. BRT

This article first appeared in Business Report Thailand, Issue 1, special focus report on 'Thailand's ASEAN Economy', October 2010.

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Powering Up - Industry and communities go head to head

Round one to industry at Map Ta Phut, but Thailand takes note 

"Whilst the government is investigating and evaluating the effects on local communities, attention is also beginning to turn to 1,700 factories outside the industrial estates."

After a year long suspension, hundreds of billions baht and tens of thousands of jobs lost, 74 projects in Map Ta Phut got the green light from the Central Administrative Court in September to resume operations. Two petrochemical projects have been included in the list of 11 harmful activities, which means the companies can only regain their operating licenses once they pass new Environment and Health Impact Assessments (EIA/HIA). The court verdict and new environment guidelines, whilst offering businesses clarification after a long dispute, leaves government agencies to try and regain investors’ confidence in Thailand once again.

There is likely to be a positive legislative ending to the Map Ta Phut impasse, but local residents and activists are still voicing their opposition. They consider the list of 11 harmful activities endorsed by the government, reduced from 18, as based on the best interests of the businesses and not the communities who have fought to improve the environmental health and living conditions in the local area. Today, they continue to fight, requesting a revision of the list, and say that they will appeal to the Supreme Court unless the government agrees to their proposals.
Prime Minister Abhisit Vejjajiva has called for local residents to await the study on Map Ta Phut’s capacity that will focus on buffer zones and green areas between industry and the communities. Yet Abhisit and other government ministers concede that poor law enforcement in the past has been and may yet remain a root problem of the current dispute. 

Map Ta Phut is said to have already exceeded its capacity limit. However, the Board of Investment (BoI), which governs the numerous projects applying for BoI promotions and privileges, expects operations to expand following the government’s clarifications. 

As might be expected, community representatives have demanded no further increases in Map Ta Phut operations and assert that petitions for acceptable public hearings be held on the resumption of all halted operations. They underline, however, that they have no problem with industrial developments, but the environmental costs borne by the communities. 

NGOs and a four-party panel (comprised of academics, government, private sector and public representatives) have stressed the importance of implementing new environment regulations and town plans to include green buffers and the proper delineation of industrial zones. Enforcing stricter construction and environmental codes has also been touted in order to prevent any future incidences, including excavating 100,000 cubic metres of silt from the Charkmark River estuary, the building of a dyke to block contaminated silt and enforcing a 2km distance between petrochemical factories and residential areas. 

Government agencies and business representatives, however, firmly insist that construction and environmental codes in Map Ta Phut are already on a par with international standards.

But whilst the government is investigating and evaluating the effects on local communities, attention is also beginning to turn to 1,700 factories outside the industrial estates in line with the Federation of Thai Industries (FTI) plan to promote the development of eco-friendly industry nationwide.
Looking at the history of industrial development, Thailand could take lessons, anti-pollution measures and technology from Japan's city of Kawasaki, once polluted by heavy chemical industries. After an almost-two-decade legal battle, investors acknowledged their responsibility for any 'leakage or accident.’ Petitions were dropped and Japanese investors kept their word. Could Thailand do the same? Indicators, though preliminary, are yes.
Five Tigers of Map Ta Phut’s big investors - PTT Group, SCG, Dow Chemicals, Glow and Banpu - recently set up a community partnership centre with the budget of THB 100 mn for an initial 3-year operation to address critical issues and share information between industry and local communities. Although academics agree with the initiative, they note it needs to be more that just corporate social responsibility or a public relations phenomena.
Following the court ruling, government agencies and related organisations are all gearing up to support investors, and to ensure the country's and future economic growth and competitiveness. 

Kasikorn Research Centre (KRC) has forecast that the end of the Map Ta Phut conflict will be a factor buoying domestic investment in the years to come, with Thailand's investment growth at 8.1 to 8.8 per cent this year, and 7.5 to 9.3 in 2011. Impressive economic growth it may be, but decisions concerning the environment and public health are no longer in the hands of a few. 

Transparency remains the key to sustainable investment in Thailand. No one can claim that industry or the Thai government are not cognizant of the matter, but both need to prove they have turned away from past trends of concealing information until a problem arises. In parallel, investors are demanding clear policy and less corruption, and they will certainly look very closely at the issues before taking the future investment plunge into Thailand. 

August’s protests on the tropical island of Samui, long famed for its five and six star luxury resorts popular with foreign and domestic tourists, against offshore adjacent oil platforms are symptomatic of a far more assertive Thai society that has emerged in the last ten years. One which will continue to fight industry to protect its resources and communities.  BRT

This article was first published in Business Report Thailand, Issue 1, October 2010

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ASEAN's Automotive Affair

Thailand, ASEAN, +3 and the future – The automotive industry sits this one out

"It has long baffled observers that Bangkok has no overt desire for unique models, brands or 100 per cent IP ownership a la Malaysia or China"

The auto industry invented globalisation and is bigger and more powerful than FTAs. It also doesn't conform to the norms of market drift. So the auto industry in Thailand remains relatively unaffected  by the knockabout of Thai politics and views ASEAN+3 with equanimity or even indifference.
Few vehicles exported from Thailand find their way to Japan, Korea or China anyway – or Thailand's other major export markets, Europe and the US, for that matter (although Thailand remains the world's second largest pickup market, its taste is for one-tonners, considerably smaller than those sold in the US). Some 95 percent of total exports go to Africa, Middle East and Oceania, in addition to other ASEAN nations, which also import into Thailand. Indonesia, Malaysia – and to a lesser extent Philippines and Vietnam – also have local production or assembly and have benefited tremendously from AFTA, although the implementation of the agreement has been generally and sometimes infamously inconsistent. Kuala Lumpur and Bangkok remain hardly on speaking terms over the former's protracted delay in allowing Thai-built vehicles into Malaysia at the agreed rates of duty in order to 'protect' its national carmaker Proton and its other local brand Perodua (owned by Daihatsu and thus a subsidiary of Toyota), although Protons are now on sale in Thailand. (Also starting to be seen on Thai roads are Chinese brands – Chery and Geely.)
The vogue is for individual FTAs, often prompted by automakers seeking outlets for production at viable rates of duty (eg the one between Thailand and Australia). Most ASEAN nations are developing individual agreements with outside countries as they try to reduce their dependence on trade with China, Japan and the EU.
Senior industry executives privately voice great fears about India (more than China because of the high probability of oversupply in India, while China has struggled to keep pace with demand) and its auto industry's eastward expansion following its FTA with Thailand. Tata has pulled out of the Thai eco-car project, which mandates the use of 1.4-litre or smaller engines that deliver at least 5L/100km economy and comply with Euro IV emission standards. But its bargain-basement pickups are finding favour with the large Indian diaspora there at the expense of more established brands, while the Nano was shown at the Thailand auto show in Bangkok last December and has been tested in local consumer clinics (with less than stunning results, according to insiders). The car debuted in India with a base price below USD2,500.
Observers believe Tata baulked at the eco-car programme requirements: an immediate USD215 million investment and annual production of at least 100,000 units within five years. Instead, Tata is moving forward with plans to launch its Xenon luxury pickup truck in Thailand. It plans to produce up to 20,000 of the vehicles per year at a new plant in Bangkok, and capture 5 percent of the market by 2014.
Japan-based OEMs account for four in five vehicle sales in ASEAN and there is little likelihood of change. Hence more than five years of wrangling over Thailand’s eco-car programme: the Japanese 'big two', for so long now cosy with the Bangkok ruling elite, got their way as the rules were framed to enable Nissan and Toyota to produce versions of existing Japanese or European minicars. European carmakers have no use for yet another plant to build their own minicars and no market to speak of locally.
However, Mitsubishi, which plans to make about 50,000 of the vehicles in the first year of production, is expected to be partnered by either VW or Peugeot. But time is running short (insiders claim PSA* will make an announcement at the Paris Salon at the end of September, while VW is set to tie up with Suzuki instead). The plant’s annual output is expected to eventually reach 200,000 units, thus doubling the company’s existing capacity in Thailand.
Toyota et al use countries like Thailand to source parts. One example is Japan’s U-Shin, which makes air-con and electrical system parts and will open a new USD21 million components factory in Thailand near its existing facility in Rayong within the next two years. Initially it will supply Suzuki's new assembly plant but it is also designed to supplant two existing factories in Japan which will be closed down.
Mark Apfel, president of GM Thailand and GM Southeast Asia Operations, says GM plans to increase annual purchases from suppliers in southeast Asia to as much as USD1.6 billion within three years; the bulk of the increase will be in Thailand. The parts will be used in Chevrolet trucks and cars produced in Rayong and at a new diesel engine plant being built there.
One pointer to a stable local auto industry is R&D. Thailand has hitherto lacked significant local expertise in developing new and, in particular unique products, although the next-generation Isuzu D-Max pickup will be engineered and designed in Thailand. It has long baffled observers that Bangkok has no overt desire for unique models, brands or 100 per cent IP ownership a la Malaysia or China, but this seems unlikely to change and Isuzu will be an exception to the rule unless Bangkok promotes R&D in a manner similar to the state authorities in Australia (Victoria and SA).
Some analysts had speculated that two months of anti-government protests in Bangkok might deter foreign investment in Thailand. But others say that Thailand, with its developed infrastructure, of which the most important element is a sufficient supply chain for JIT production, remains attractive to manufacturers – especially now factory workers in China are clamouring for higher wages.
Undeterred, carmakers are quietly interested in outcome of elections in Burma (a tasty potential market once unlocked, with Thailand in a good position to compete with another neighbour, China, because the latter doesn't produce pickups, which will be vital to recovery in Burma's agricultural and construction sectors) and even more interested in matters like the EIA situation around Rayong which looked likely until very recently to deter Ford from its USD425 million expansion.  BRT

*PSA Peugeot-Citroen

This article first appeared in Business Report Thailand, Issue 1, special focus report on 'Thailand's ASEAN Economy', October 2010.

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China On Track

Proposed Chinese investments in the Thai rail network offer lucrative returns, but can Thailand get on board? 

"Moving things forward, as Korn conferred when speaking at Bangkok’s FCCT in August, means taking SRT out of the equation." 

Thailand’s recent decision to proceed with a rail connection to China shows a firming of its logistics and hub ambitions, but some all too enduring problems remain.
The Thailand-China negotiation framework will be submitted for consideration by Parliament, Thai Prime Minister Abhisit Vejjajiva said in early September. Neither he nor government websites have elaborated much on details leading to very different accounts circulating about what the deal actually entails.
Discrepancies that get noticed are money – from how much it will actually cost (somewhere between THB 300 and 350bn), the controversial role of Chinese labour in building it, how a decision will eventually be made and the timetable for it being built.
A proposed MoU is set to be signed by year’s end and Beijing believes construction can be done within three years.
Thailand’s track record might suggest that this is a tad ambitious.
The crux issue of whether it is conventional, bullet or high-speed, in this case 200 kmph, is also unresolved. But this is perhaps moot point given an average speed of 60kmph on Thailand’s railways today.
The general assumption is that three dual-track lines will be developed, with China principally interested in routes running from  Nong-Khai - Bangkok (624 km on the current State Railway of Thailand map), and Bangkok to Padang Besar (which according to the SRT is 874 km south of Bangkok although the Southern border with Malaysia is further still at 1143 km). A third line connecting Bangkok to Rayong on the Eastern Seaboard has also been touted, though China’s involvement in this line is not yet certain, despite its engagement with the SRT and Bangkok’s skytrain and metro systems. China’s offer to share technological expertise does however make it a attractive partner and Bangkok Mass Transit System (BTSC) is already pondering linkages with China’s Changchun Railway Vehicles Co (CRC), to develop projects outside Thailand.
The returns for China though far exceed contracts for its own businesses and industry. Once connected at Nong Khai to a conventional railway China is building from Kunming in South Western Yunnan province across Vietnam and Laos, once these ‘missing links’ are in place, China opens up industry in its western provinces long isolated from its eastern ports.
Don’t doubt that this is a major piece of infrastructure, one with big strategic implications in a way that has never been done before.
It’s the first major infrastructure project in recent memory proposed outside the golden arc of Bangkok and the Eastern Seaboard. It not only binds Thailand to China and both of them to South East Asia, but connects Thailand’s hinterland to the heart of its modern industry. The project is tacit recognition of the country’s long neglected need for stronger internal links as well as a future strongly tied to the Chinese market.
But if ever there is a symbol of China’s reach and the hegemony it is building within Southeast Asia, this is but one. China is touting direct rail links from its borders to warm sea ports in Pakistan, Bangladesh and Myanmar.
But once connected, if built, what will it move? Projections abound, each revealing contradictions and raising more questions, but leaving the big one – how and where will money be made – unanswered.
Thailand is said to be focused in the preliminary stages on passenger traffic, but is there the traffic and enough people to pay modern fares? Thailand’s migrant labour travels on the cheap. Tourists and business travelers want speed, which, in the context of a two-week holiday or business meetings and golf, currently means flying.
The government’s own Office of Transport and Traffic Policy and Planning (OTTPP), in its own planning of upgrades and development of the SRT’s four main lines (north, north-east, east and southern) thinks so, projecting growth in passenger traffic from 128,000 in 2019 to 192,000 by 2031. Two-thirds of this, incidentally, travels on the Nong-Khai to Bangkok and Bangkok to the Deep South route – whichever way it goes.
One of the biggest problems here well might be consumer resistance. State Railways of Thailand which runs the country's existing rail network at a massive loss, is highly politicized, prone to strikes, historically opposed to any attempts at privatization and changing their monopoly isn’t going to go down well.
Thai finance minister Korn Chatikavanich said recently on negotiations with China, “If there is any delay, I suspect it will be at our end, not theirs.”
Moving things forward, as Korn conferred when speaking at Bangkok’s FCCT in August, means taking SRT out of the equation. This does indeed seem to be the government’s plan.
As for cargo, OTTPP doesn’t even mention it. Yet in planning vernacular this is a project ultimately justified by freight and cargo needs reliability over high speeds, unless its value added. Sorting out what exactly the line will move whilst trying to connect realistically to the current and future needs of Thailand’s industries remains an onerous task.
Another headache is financing. The Thai Cabinet has rejected purchasing Chinese Export Credits worth THB 12.47bn, usually conditional on accepting Chinese labour, but it seems China is still keen to provide support in manpower, training and technology transfer, building on existing SRT relations.
Then there is the vexed issue of Private-Public Partnerships (PPPs). The government, aware of a flaky record, has been keen to promote the fact that it is actively looking for private sector buy-in on its national infrastructure blueprints.  Yet they also admit that in order to be truly effective reform is also needed. Explaining Thailand’s mixed record, Pradit Phataraprasit, the Deputy Finance Minister acknowledges that success has been held back by, “the current PPP law of 1992, and the absence of a champion within government to drive PPP projects.”
The government has sought to bridge this gap by proposing a variety of PPP arrangements, including Build-Own-Operate-Transfer, Build-Own-Operate, Build-Transfer-Operate and Build-Operate-Transfer. But with feasibility studies pending and agency jurisdictions yet to defined, the private sector remains deservedly cautious.
Whether Thailand utilizes the proposed railway for passengers, its own industries or serves as a transit point for Chinese goods, the returns are lucrative enough for Thailand to push forward in its reforms. Getting to the point when there will be smooth train services between key points in Thailand, the rest of the region and China looks to be a long, bumpy but necessary journey.
The hardest task of all might be starting the project. BRT

This article was first published in Business Report Thailand, Issue 1, October 2010

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Potash Politics

The valuable mineral could be a game-changer for Thailand but disputes over whether to mine it have become a test for the industry in the kingdom

"The northeast of the country is sitting on a fortune in potash, catapulting Thailand from nowhere in the potash reserves world league to number three behind Canada and Russia."

News that Anglo-Australian mining giant BHP Billiton is prepared to pay north of US$40 billion for control of Canada’s Potash Corp has thrust the unexciting but profitable mineral back into the limelight in Thailand.
The northeast of the country is sitting on a fortune in potash. Lying (not far) beneath the surface of the Korat plateau, the Udon potash deposit has some 1.4 billion metric tons - at today’s prices worth US$525 billion - catapulting Thailand from nowhere in the potash reserves world league to number three behind Canada and Russia
Everyone has known it was there for a generation but getting it out and to market has proven one of those Thai stories that so frustrate foreign moneymen with their Harvard business school cash flow models. Thailand maybe different, of course, although the potash saga is depressingly same-same - a familiar mix of politics and local interest (and even a whiff of sabotage) that has ensured that not one bag of the stuff has ever reached the market, despite tight global supply and soaring demand, particularly from nearby China.
Potash is the catch-all term for salts of potassium. The most useful compound, potassium chloride, or sylvinite, makes up the most part of the Udon deposit. Meanwhile another potassium salt, carnallite, is found both in Udon and to the west under Chaiyaphum.
Potash has a range of traditional uses from the manufacture of soaps, glass, ceramics and dyes, but its most common function is as a fertilizer - one of the three major plant and crop nutrients after nitrogen and phosphate. About 95 per cent of all potash production goes to agriculture.
Demand has risen sharply in recent years with China a big and important market. It is no less important to the Thai farmer but, despite sitting on tons of the stuff, all is currently imported.
There have been two major projects attempted. The first, the ASEAN Potash Mining Company, established by the 21st meeting of ASEAN economic ministers in 1989, holds the concession to mine the largely carnallite deposits of Chaiyaphum. The original idea was that all ASEAN nations of the time would chip in for developments costs for the benefit of farmers across the region. After a year and small pilot mine, as well as widespread community support, interest seems to have dwindled and funding dried up. It remains to this day on hold.
To the east, the Udon deposit - which is in fact two deposits: one to the south in the Korat basin and the Sakhon Nakhon basin to the north - is commercially much more attractive but has proved more difficult to access.

Which is frustrating for those involved as, in global mining terms, the higher grade sylvinite is all but lying on the surface. The deposit is about 350 metres underground, about a third of the average 1,000 metres of deposits in other countries such as Canada.

The world class Udon deposits first came to the attention of Asia Pacific Potash Corporation, then a subsidiary of Canada-based Asia Pacific Resources, in 1993 when it signed a survey and production agreement with the Department of Mineral Resources for what would have been the first large-scale underground mine in Thailand.
While exploration was promising, the project ground to a halt around 2003 as the company sought to test Thailand’s new Minerals Act that allowed mining below 100 metres without surface property owner’s consent - up from 350 metres laid down by the 1967 Act. To this day, a production licence has never been issued in the face of opposition from NGOs and local farmers.
By 2006, the Canadians, facing funding pressures, had had enough and sold out to Italian-Thai Development chairman Premchai Karnasutha for US$80 million. News of progress since then has been sparse and Khun Premchai tight-lipped, although industry insiders say work continues on the project.
But hostility to the project by NGOs remains formidable and the activists have made sure farmers have also remained vocal in their opposition to the project, leaving many in the mining industry bewildered.
“There are a range of technological solutions to rehabilitation,” says one. “The opposition just doesn’t make any sense. It is a perfect solution to providing funding for the northeast, the poorest part of the country, and benefits to farmers across Thailand who would not have to rely on imported fertilizer.”
The apparently inexplicable opposition to the project has led many in the industry to suspect spoiling tactics by competitors. Several senior Thai mining company executives pointed to the vast commercial advantages the Udon deposit would have to the more expensive to obtain and further to travel Canadian deposits.
“With our potash so near the surface and so close to China, there would be enormous price advantages,” said one who believes the NGOs were set up, if not funded, by competitors.
While none can provide a shred of evidence to support their suspicions, that such conspiracy theories have become so widespread across the industry, speaks to the level of bewilderment that such a valuable resources that would benefit the whole country can remain unutilised.
Some point to the ASEAN Potash project and the widespread support it receives from locals. This has played to the cynic many miners reveal when they view the inevitable opposition to their plans. “How can one area fully support the project while next door there is opposition. But then one is government-run with little money available for compensation and the other is a private concern and a big fat cow to be milked,” one suggests.
For its part, the anti-potash camp claims that the mine will cause salination on the surface and a range of other problems that must be addressed in a new Environmental Impact Assessment (EIA) that is now needed. The industry claims to have met all concerns and the area will be entirely rehabilitated. APPC says that salt emissions will be less than half Canadian standards
And so that is where the matter now stands.
But the implications for the project go far beyond the potash itself. The world’s greatest mining companies are watching the Udon potash project closely as a test case for whether there is a future in Thailand for international standard mining projects.
Whether one accepts skulduggery among the NGOs and commercial opponents of the Udon potash project or not, Thai politics has unquestionably not helped matters. Since ITD took over APPC in 2006, the political landscape in Thailand has not been what anyone would suggest as stable. Nor has there been a surfeit of politicians in that time willing to put the national interest first.
What is needed is perhaps suggested by the currently defunct Chaiyaphum project, which shows that local consensus and support can be reached if there is a will and national government backing. Set against that, only a satirist likely to suggest a visit by Prime Minister Abhisit Vejjajiva to Isaan, the heart of red-shirt country, to persuade north-easterners that the government was acting in their interests would go anything but badly.
So, until such time as a leader does emerge who can convince the protesters that they will not be disadvantaged, Thailand looks set to miss out on the billions in exports revenue while continuing to import 500,000 tons of potash a year at a cost of US$175 million. BRT

This article was first published in Business Report Thailand, Issue 1, October 2010

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Terrorism, Strike, Riot or Civil Commotion?

Terrorism prosecutions have left businesses without insurance and the government scrambling for a compromise

Photo: Siam Square retailers salvage goods from their shop adjacent to the
Siam Theatre gutted by fire on May 19, 2010 (Business Report Thailand)

"Proposed test cases for affected businesses outside the ‘red zone’ may yet provide precedents, but liability remains contentious." 

Following events leading up to the military crack down of May 19 that left 38 buildings damaged or gutted  across Bangkok’s central business districts, the government has become embroiled in a legal dispute with insurance companies, international re-insurers and unrest-affected businesses. A dispute that has made little progress in four months and seems unlikely to be resolved in the coming year, or years.

With acts or incidents of terrorism specifically excluded from standard insurance policies in Thailand without the purchase of additional coverage, businesses have found their claims for compensation denied by insurance companies on the instruction of their international re-insurers - backers of over 90 per cent of the Thai insurance industry.

This has thrown the government into a protracted fight to try and win, or force, insurance companies to pay compensation to businesses. Sympathetic, but citing Thai law, the insurance market is standing firm.

Stemming from Abhisit’s first reference to terrorism two days after armed ‘black shirts’ confronted Thai troops on April 10th, public disputes have arisen on whether the incidences should in fact be defined as terrorism at all.

Without the government’s cry, incidences would have been narrowed down to standard definitions of strike, riot or civil commotion. Under standard Industrial All Risks (IAR) policy, incidences of strike and riot are covered, while civil commotion is excluded. However, many policies have a civil commotion extension, which means they might also be covered. Yet, in a further twist, this can also exclude ‘uprisings against government.’ 

Not all companies would have IAR policies, but with Thai insurance companies reined in by their international backers, the chance of a negotiated settlement remains remote and insurers say they are still facing pressure by the government to pay. 

Chairing a panel to provide assistance to unrest-hit businesses and individuals, Prime Minister’s Secretary General Korbsak Sabhavasu accused insurance companies in July of exploiting the ambiguity of the term terrorism to avoid payments. Sentiments that Secretary-General Komkai Busaranot of the Office of the Insurance Commission (OIC), the state regulatory body under the Ministry of Finance, seemed to support when prompting businesses to seek compensation from insurance companies through the Right and Freedom Protection Department. Industry insiders also speak of being called to meetings at the OIC - whose stated priority is to compensate unrest hit businesses - with discussions left off the record.

Resolute, Thai insurance companies say they are merely obeying the law and section 33.10 of the Thai Insurance Act 2535 BE (1992 CE) forbids the payment of any benefits outside of a policy. 

The deadlock has left even partially state-backed insurers hanging. Dhipaya Insurance, which insures state enterprises, has reportedly been unable to meet claims by the Metropolitan Electricity Authority, following objections by its re-insurers. In contrast to Central Pattana’s terrorism-insured Central World complex that is currently being rebuilt, the MEA building on Rama IV remains a charred shell.

The cabinet, in an effort to break the deadlock, has proposed tax breaks for the insurance companies, enabling them to write off payments that they make to claimants. Sound in theory, but the precedent in future liabilities leaves the industry wary of such an initiative and though ongoing, the cabinet has yet to pass the necessary resolution.

Against this, Thailand’s insurance industry is projected to grow 18 per cent this year. Within the industry, companies paint a different picture with domestic and foreign re-insurers creating cash reserves in case of future court rulings against them. 

The nature of the incidents can now only be decided by the Thai courts, but faced with damage to its credibility and the ongoing prosecution of red shirt leaders arrested in May, an about face by the government on the incidents’ definitions looks unlikely and the time line of such a ruling is hotly disputed. 

Government officials say that Administrative and Consumer Courts can rule on a case-by-case basis, which could then be settled within a year. The insurance industry, however, speaks only of the Supreme Court with a timeframe of seven years or more speculated in conversations with Business Report Thailand. How this process may be affected by the progress of ongoing separate criminal trials, or indeed a change in administration that might seek to quash or overturn charges of terrorism, remains a wildcard factor.

Proposed test cases for affected businesses outside the ‘red zone’ may yet provide precedents, but liability remains contentious. Though some facilities such as Central World were deliberately targeted - whether by angry protesters or on specific instructions remains uncertain - others may yet have been caught up in opportunistic destruction.  Moreover, in the final military assault, was all damage to buildings caused by red shirts or their sympathizers?  

Four months after the incidents government officials admit, “All the facts are not yet clear.”

Though larger businesses and corporations whose properties were damaged or destroyed on May 19th, accounting for approximately THB 12bn of the THB 15bn (USD 1.2bn) in estimated damages, have terrorism or all risks insurance, the current impasse has predictably hit smaller tenant businesses hardest. The government reported 403 insurances of THB 500,000 or less not covered for terrorism in June and the its committees have approved funds worth THB 8.6 bn to compensate businesses affected by the attacks in May. 

Whilst the government has appealed to insurers’ sense of national reconciliation to expedite payments, many smaller insurance firms cannot afford the outlays without government or re-insurance backing. Larger Thai firms, faced with the prospect of potentially losing large premiums and clients, may yet decide to cover some of the claims. Legally, however, these could not be disbursed under existing policies and the firms would need to absorb the loss.

That these incidents are largely unprecedented in Thailand and that terrorism insurance only debuted on the market six years ago goes some way to revealing the legal issues behind the impasse. The ramifications are not just immediate. Insurance premiums for terrorism coverage in Thailand is now reportedly two to three percent of the insured properties’ value. Globally, the market average is 0.5 per cent. Other international re-insurers are refusing to back new policies until the current issue and legal definition is resolved.  

This poses its own problems. 

Quizzed whether insurers are expecting further violence and claims, one country manager’s response - “Definitely" - was unequivocal.  Yet it seems unlikely that this will be on a par with May’s events. 

Sworn off large scale confrontations, the Red Shirts’ demonstration on September 19th, marking four years since the coup and four months since the crackdown, though large and noisy, was over by 8pm. 

But as explosions continue across Bangkok, the government has little cause to change its views leaving smaller unrest-affected businesses dependent on government hand outs and loans. BRT

This article was first published in Business Report Thailand, Issue 1, October 2010

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Thailand's 3G Debacle

Thailand does not have commercially available 3G right now and nor does the foreseeable future portend a good 3G service. 

"At the same time that the NTC was conducting an international roadshow to attract interest, it was also proposing foreign dominance regulations which would restrict investors’ ability to put its own people into the management of their investment."

3G enters markets with much hype at the best of times. The subsequent reality is usually sobering, but it is nevertheless a technology (although expensive and now with successor technologies which do more) which works.

Thailand does not have commercially available 3G right now and nor does the foreseeable future portend a good 3G service. Don’t believe the claims you read to the contrary!  Unless the appeal decision is somehow overturned, Thai Courts have ruled that the current regulator, the NTC, does not have power to issue new spectrum which would support 3G. Accordingly, the country is left to use 3G on existing, issued spectrum or wait for the new regulator. This is a long way off. 

Some say the whole situation in Thailand is a widely orchestrated conspiracy; others that it is the product of many vested interests acting for their own ends with no overriding, co-ordinating vision or the political will to underpin it. 

What is clear from the debacle is that critical steps were missed in the industry’s development and in the lead up to the auction.

First, Thailand didn’t do its homework and did not implement the essential and planned changes that were staring us in the face. Directly, this has less to do with 3G at all.  

Telecoms started in most countries with government departments managing networks and providing telephony services.  The sector reformed, moving into more competitive structures. In Thailand we started to do that, but did not get far. Various vested interests blocked the way.  In the 1990’s and early in the new millennium, mobile services in Thailand were started by concessions. These were issued to retail providers on different terms. As technology, access to information, society and expectations evolved, it was clear that the unequal and rent-seeking nature of concessions locked in value and also needed to evolve. Thailand had to move to a level playing field, but, today, ‘free and fair competition’ is still an unachieved constitutional requirement. What happened? – As part of the industry’s evolution, the SOEs (CAT and TOT) were allowed to develop the mindset that concession revenue (the income stream moving the enterprises into overall profitability) was some kind of right, and a right which is fiercely clung to under the mantra of acting in the best interests of the enterprise.  

In a globalised industry, we cannot avoid looking at experience elsewhere. Such experience tells us that SOEs need government leaders (not management or other vested interests) to set policy direction, and the government leaders should feel the pressure of user groups wanting better and more cost effective services. Over many years, Thai telecom SOEs have built up a network of supplier and other relationships such that they appear to be locked in at individual levels. How can a state-owned enterprise act to upset the policy direction of the government, which is charged with managing and developing the organs of the state? Unless directed otherwise, the enterprise will surely act in its own selfish best interest and that of its management, and that is precisely what has happened.

Second, for an industry that works in layers, its development has been hampered in terms of both access and culture. There should be cost-based ways in which infrastructure layers are accessible to others who do not want to build their own physical networks. But the push to make this happen has always been weak, and the resistance strong. Furthermore, change of this scale requires the acceptance that not everyone will agree with every move or get a seat at the front table in negotiations. In a society in which the overriding and commanding interests should be those of the economy and the country as a whole, protecting the management interests of some SOEs does not make sense.

Thirdly, Thailand rushed it. Its telecoms sector was nowhere near ready structurally for 3G and there was policy confusion. Was it rushed because some NTC commissioners were due to retire at the end of September and the spectrum needed to be issued while there was still a full deck, were there other intentions

or was it because of the imminent passage of the new frequency legislation (which would establish a merged regulator, the NBTC, and require the regulator to follow policy)? Who knows exactly. The situation was, however, rife with confusing and conflicting policy messages. At the same time that the NTC was conducting an international roadshow to attract interest, it was also proposing foreign dominance regulations which would restrict investors’ ability to put its own people into the management of their investment.

Fourthly, there has been a dearth of investment in the people, businesses and organs of state to fulfill the roles under new terms. Rushed, tick-in-the-box, compliance mentality approach to public hearings does not cut it. Ad hoc and token public hearings are no way to get the kind of industry and citizen education needed to understand and support new systems.  

And finally, there was no-one demonstrably in charge of, and who understood, the whole game. The Prime Minister acknowledged the NTC’s independence (it reports to the Senate), and no-one in cabinet ensured that the necessary steps were taken. The NTC and the SOEs played their own game. The private operators had to do as they were told, within set constraints. 

Yet for all the hype, 3G, a data-based mobile broadband technology and the next evolutionary step from 2G, is not the answer to the nation’s broadband requirements. It is just one technology. The answer lies in a combination of wireline and wireless technologies, with a fixed backbone, and future planning. 

3G does allow greater bandwidth usage, greater interactivity and is in some cases a broadband solution for its areas of coverage. 

In the 3G grouping there are enhancements, such as those dubbed 3.5G. These are an industry standard, and with a base station’s downlink (download if you like) rated at 42 Mbps, effective user rate might be around 4-5 Mbps. However, coverage is generally a subset of 2G and ‘3.9G’ looks like a marketing gimmick to make Thailand look more advanced than it is. 

And whilst Thailand dithers with 3G, many are moving to 4G. Yet the proposed 3G spectrum issuance here does not provide an evolutionary path to 4G. Should we forget about 3G and skip straight to 4G? The answer is about development relativities – will Thailand be able to get ready, turn all the stakeholders around, will handsets be available, will other countries with 3G and 4G support Thai out-roamers? Overall, skipping 3G is not the best solution. Thailand should now be focused, as the overriding priority, on structural changes such as concession conversion, and in making sure that there is a firm path to the development of 4G in parallel with other fixed line and nomadic wireless service technologies, such as WiFi.

Thailand seems to be rushing to enable TOT to provide 3G via some virtual mobile network operators (MVNOs) and locking in the powerful positions of both SOEs. TOT has no 2G service of its own, no 2G roaming agreement and no usable interconnect. Thus its users do not currently have any means to do what is generally expected of a mobile service. Will TOT be allowed to do all this? And largely outside any regulatory environment?  As the Thai parliament continues to argue over the revised frequency bill, (where China was able to wrest something similar from its military and implement over ten years ago), moves to create new monopolistic broadband structures, ostensibly relying on trends toward government largesse, are, it seems, still being pursued.

Unfortunately, the vision of a competitive telecoms sector, providing useful and advanced services for business, individuals, government and most importantly, for a more meaningful role in the economy, is far from being realized. As is a good 3G service. BRT

This article was first published in Business Report Thailand, Issue 1, October 2010

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