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Power Politics Trump Reform

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By Shawn W. Crispin

Far Eastern Economic Review
September 27, 2001

The Thaksin government's much-heralded privatization programme is more likely to maintain the status quo at the peril of the country's future economic prospects


Back in the days when central planning was in vogue, so too were public-utility monopolies like the Electricity Generating Authority of Thailand, or Egat. Established as the country's first state enterprise in 1968, Egat dutifully expanded the national grid in line with government economic-development directives. With barely a glitch, Egat powered Thailand's breakneck charge towards industrialization while almost miraculously electrifying nearly 95% of the countryside.

But with greater economic and financial liberalization, Egat's powers of prediction waned. Chasing giddy private-sector growth forecasts, Egat built the electricity-generating capacity for an economic boom that never materialized. When the Asian Crisis broke in 1997, supply wildly overshot demand--today overcapacity stands at over 40% of the country's present needs.

The Thai National Energy Policy Office, or Nepo, estimates the accumulated cost of the glut as high as 500 billion baht ($11.2 billion). Meanwhile, Egat's financial liabilities account for nearly 40% of all state-enterprise debt. As the public-debt burden pushes close to 60% of GDP and with recession looming, Egat's financial woes are an increasingly perilous drain on national coffers. Previously the engine, since the crisis Egat has become a drag on the country's overall economic growth.

"Overcapacity is the root of all Thailand's economic problems," says former Egat governor and founder Kasame Chatikavanij. "Unfortunately Egat made the same investment mistakes as everyone else," he adds. The outgoing government led by Prime Minister Chuan Leekpai had initiated an ambitious power-sector reform programme. Egat would be fully privatized, broken into eight mutually competitive generation companies. Transmission and system operations would be unbundled. A new independent regulatory commission would have the muscle and charge to guard against collusive-pricing behaviour. In crisis mode, Egat agreed that hard structural change was necessary and good.

But with the new government led by Prime Minister Thaksin Shinawatra in charge, Egat is backtracking. Rather than break up, Egat now prefers to stay whole. Rather than facing the splash of retail competition in a power pool, management now prefers to gently wade into a "third-party access" scheme. Such an arrangement would only allow large industrial consumers freedom of electricity choice, leaving small consumers and entrepreneurs beholden to Egat's pricing discretion. Egat also wants to maintain its monopoly hold on transmission and distribution.

"For competency and security, Egat should own no less than 60% of the market share," insists Egat governor Vitaya Kotcharug in a recent interview with the REVIEW. "Its important that Egat is responsible for the reserve power of the nation," he adds.

As a monopoly for over three decades, Egat is one of Thailand's most powerful vested interest groups. Years of technocratic accomplishment have bred a deep sense of entitlement over national resources. Perks proliferated, including free electricity for all Egat's over 29,000 staff. Insulated by its technical expertise, management usually handed the government its investment plans as a done deal, often designing power plants and negotiating financing with the World Bank or other aid agencies independently.

On the campaign trail, full-blown privatization of state enterprises was a central plank of Thaksin's economic-reform programme. In theory, listing state concerns would give the moribund Stock Exchange of Thailand a much-needed bounce while providing public-debt relief. In sum, captive markets would be freed to greater competition, opening new opportunities for Thailand's crisis-starved entrepreneurs.

Now in power, that doesn't seem to be what Thaksin has in mind. New competition-promoting laws are being changed to allow incumbents to maintain 50% market share, an upward revision of the previous 33% limit. Redefining monopoly will benefit nearly 100 Thai companies, according to the Department of Internal Trade.

Similarly, plans to privatize Egat and establish an electricity-power pool by the end of 2003 are also being delayed and may be dropped altogether, say government consultants. Chaturon Chaisaeng, the minister in charge of energy deregulation, recently returned the original reform blueprint to Nepo, requesting hard quantitative proof that a power pool won't bog down in collusive behaviour.

Earlier Nepo submitted a 111-page compendium of rules and regulations that would govern the power pool, including harsh, licence-revoking measures to guard against collusion. Merrill Lynch, which holds financial-advisory contracts for the energy sector, says the government has already decided to adopt a third-party access scheme instead of a power pool. Increasingly, privatization in Thailand seems set to be decided more on political rather than economic terms.

"The Thaksin government is more sympathetic to vested interests," says Praipol Koomsup, a professor of economics at Thammasat University and a member of the subcommittee that designed the previous master plan. "That will inevitably slow down reform," he adds. "Third-party access will greatly limit the scope of retail competition," says Piyasavat Amranand, secretary-general of Nepo. "We want to see everybody able to choose, not just large users," he adds.

International experience suggests the success of electricity privatization depends largely on the extent to which governments ensure fair competition between newly independent power suppliers. In Argentina, for example, the government prohibited any one power company from controlling more than a 10% share of total supply. As a result, analysts note, operating efficiencies improved across the board, electricity rates fell and power outages became a relic of the state-owned past. In contrast, Mexico's privatization of utilities significantly reduced the government's foreign-debt burden but, without competition-ensuring safeguards, public service remained poor and prices high, while a few politically connected families benefited most from the share float.

In Thailand, previous renditions of partial privatization mirror the Mexican model. Power-generation assets were spun off to senior-level Egat retirees to manage as independent power producers throughout the 1990s. Generous 25-year contracts obliged Egat to pay for 80% of each IPP's overall capacity regardless of demand. When the economy sagged after the crisis, Egat was left holding the bag.

Nepo estimates of the 500 billion baht of stranded cost in the electricity generating system, 70% is a result of such contracts. Because Egat maintains hefty shareholdings in the two largest private generators, the Electricity Generating Company Limited and the Ratchaburi Electricity Generating Holding, those profits stay in the Egat family. "They call it privatization but it is still a monopoly system," says Witoon Permpongsacharoen, director of the Bangkok-based environmental watchdog Terra. "Investors have no risk while consumers absorb all the burden," he adds.

In 1992, the government introduced a variable-pricing mechanism, known as the fuel tariff, so that domestic electricity prices would better reflect fluctuating world fuel prices. Since then the fuel tariff has morphed into a receptacle for all Egat's inefficiencies including overstaffing, overcapacity, take-or-pay contracts and excessive employee perks, including the 1.5 billion baht a year in free electricity for all Egat staff, according to Deunden Nikomborirak, an economist at Thailand's Development Research Institute.

While world fuel prices ebb and flow, Thailand's electricity prices only flow. Though baseline inflation was less than 2%, power prices rose nearly 12% in 2000. In April, when Egat tried to lift rates another 11%, citing a demand surge due to hot weather, the public baulked. After a government probe, Egat backed down citing clerical errors. Even so, Egat tallied a 20 billion baht profit in 2000.

"With 40% nonperforming assets, if Egat were a private business it would be bankrupt," says Terra's Witoon. "We need a regulatory body that doesn't allow Egat to push the cost of their mistakes onto the pubic." Indeed, independent regulation and full-blown market competition would lay bare those hard facts. That's why management has taken to spinning its own doomsday scenarios. "Thailand has the most secure power system in the region. If it is cut to pieces, every plant will compete to produce to 100% capacity," says governor Vitaya. "Nobody will think about reserve power--we may have to face a blackout as a result," he adds, invoking California's tumultuous attempt at electricity deregulation.

Economists say the comparison is invalid. Unlike California, Thailand faces a massive glut of electricity-generation facilities, diminishing the prospect of a repeat of California's blackouts. "What's behind all the rhetoric is Egat's desire to maintain monopoly control," says Praipol of Thammasat University. "California is Egat's way of trying to wriggle out of their earlier commitments."

Unfortunately the status quo is risky to Thailand's future economic health. "If power is not competitive, then the country will not be competitive," says Jayasankar Shivakumar, outgoing country director of the World Bank in Thailand. "If the aim is to reduce tariffs, improve efficiencies and alleviate government debts, then there really is no other option than privatization," he adds. The Federation of Thai Industries says the recent price hikes have increased the total cost of manufacturing by as much as 6%.

Privatization of Thailand's rigid state enterprises was always going to be a tricky business, requiring hard-nosed political choices. And with the economy slipping again, those choices have become ever more urgent. Unfortunately, the efforts so far resemble nothing so much as business as usual.


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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C ß 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.