The goal and purpose of the Master Plan for State Enterprise sector reform is to provide guidelines, principles and practices for increasing effective private sector participation in the economy. The Master Plan will serve as the basic guideline for these reforms, and as a reference document for the government, ministries, enterprises, investors, employees and the general public as privatisation plans and legal, regulatory and institutional reforms are prepared, approved and implemented in the years ahead. The Master Plan is a strategic document, giving the government flexibility in implementation but setting clear objectives and goals. The Master Plan highlights the government’s commitment to improve the efficiency of the economy and increase the welfare of all Thai citizens. The government will publish an annual Action Plan and Program Report based on this Master Plan.

Thailand has a long history of privatisation and private sector participation in the economy, with privatisation efforts dating back to 1961. The current program, supported by the World Bank and IMF, accelerates activities and reforms the government has contemplated for some time. In pursuing this program, the government has established a State Enterprise Policy Committee (SEPC); identified and begun divestiture of fast-track enterprises; appointed privatisation advisors; and prepared this Master Plan to ensure that reform efforts have a solid foundation and framework in the months and years ahead.

The Master Plan comprises an action plan for the reform or privatisation of 59 state enterprises. These enterprises are an integral part of economic activity in key sectors of the economy and can be broadly categorised into the following five major sectors: telecommunications, water, energy, transport, and others (including industrial, social and technology, commercial and services, agriculture, and financial sectors). While some are profitable, increased private sector participation will improve economic efficiencies, reduce the government burden, and improve service quality, coverage and reliability. The total number of state owned enterprise employees currently stands at approximately 320,000, with the top ten largest entities employing over 226,000 individuals.

Privatisation is defined as all measures that increase private sector participation in sectors where government enterprises presently operate. The privatisation program is part of an overall economic reform program being undertaken by the government. The goal of the program is to increase the efficiency of the economy, to provide a basis from which Thai companies can compete internationally, and to ensure quality goods and services are available to the Thai public at the least cost.

The program has specific and identifiable objectives and expected benefits. These include structural reform objectives and benefits; financial objectives and benefits; and social objectives and benefits. These objectives and benefits are clearly outlined in Appendix 1. The privatisation program’s ultimate success will be measured by its ability to meet these diverse objectives and deliver these benefits.

In order to be effective, the program must have clear and transparent procedures, in addition to well-defined roles and responsibilities for all participants. A new committee is proposed, the State Enterprise Reform Committee or SERC, combining the future corporatisation committee with the current State Enterprise Policy Committee (SEPC). The SERC will have as its secretariat the Office of State Enterprises at the Ministry of Finance and NESDB. The SERC will review and approve all privatisation, private sector participation and regulatory reform initiatives before forwarding them to the Cabinet for approval. The roles and responsibilities of all relevant parties in the privatisation process are provided in Appendix 2.

The state will have a significantly reduced role in the future economy. The state’s role will primarily be as policy maker and regulator- ensuring public goods and services are properly delivered and protecting citizens/consumers, but providing a level playing field for active competition between private sector entities. The state will look to exit from enterprise operations which can be more efficiently and effectively performed by the private sector. The state will maintain an operating role only in specific enterprises whose operations are strategic, socially obligatory or non-commercial in nature, yet are considered necessary for the quality of life of Thai citizens.

In order for the privatisation program to be successful, a number of changes to existing laws will be required. Foremost is the need to create or improve the legal basis for independent regulatory bodies in each of the critical infrastructure sectors, namely telecommunications, water, transport and energy. A number of other legal changes will be required as well. These regard the Land Law, the Alien Business Law, Competition Laws, Taxation Laws, Intellectual Property Laws, the Employment Law, the Private Sector Participation Law, the Company Law, and Securities Laws. A single “State Owned Enterprise Reform Act” is proposed to incorporate most of these changes and to provide the framework legislation for creation of regulatory bodies.

Currently, the roles of policy making, regulation and operation overlap in many sectors and many state enterprises. Clear separation of policy making, regulation and operation is an essential component of the reform program and a requirement for the development of transparent, competitive markets. A program of regulatory reform is proposed which includes the specification of individual regulatory bodies in each of the infrastructure sectors of telecommunications, water, transport and energy, and the definition of roles and responsibilities of those authorities. A detailed assessment of the organisational structure of those bodies and their reporting, funding and staffing arrangements will be conducted. This will ensure that regulators operate on the basis of consumer protection, promotion of competition, and promotion of efficiency.

A wide variety of methods of privatisation may be used by enterprises and the state to accomplish the reform objectives. This includes divestiture, deregulation, and licensing of private sector participants. Privatisation plans may be submitted by both state enterprises and private entities, and will be considered and selected based upon stated criteria and appropriateness to a given SOE and the sector reform objectives. While a clear objective of privatisation is to raise needed capital at the maximum value, the government will seek to balance this objective with other objectives, such as: privatising rapidly, reducing financial burdens on the state, securing technical or managerial expertise, recapitalising an SOE, or other stated objectives.

The primary forms and methods of privatisation are listed below:

Public Offerings Private Placements and Joint Ventures with Strategic Partners (trade sales) Management Buy Outs (MBOs) Asset Liquidation Debt for Equity Swaps and Debt Buy Backs Convertible Bond Offerings Coupons/Options

Competition, Regulation, Deregulation Management Contracts Leasing Concession Contracts - Build, Operate, Transfer (BOT) - Build, Own, Operate, Transfer (BOOT) - Build, Own, Operate (BOO) - Build, Transfer, Operate (BTO)

The SERC will have the responsibility to approve plans and to oversee transparent and timely privatisation.

Privatisation proceeds will be used by the government for reinvestment in the economy and for social, health and welfare benefits for the Thai people. Where proceeds are earned directly by the government they will be used in accordance with the cabinet resolution of May 19, 1998 which stipulates that 50% will be used to fund needed social services such as education, public health, labour welfare and agriculture, and another 50% will be allocated to the Financial Institutions Development Fund (FIDF).

In the case where an SOE sells shares, assets or an operational unit in one of its subsidiaries, the proceeds derived from the sale of these shares or assets will be used in the following manner:

	establishing a reserve fund for the expansion of the SOE’s services or an employee assistance fund for SOE employees affected by this divestiture
	of the remaining proceeds, 50% will be allocated to the government and used to fund needed social services such as education, public health, labour welfare and agriculture, and another 50% will be allocated to the FIDF.
	if the SOE in question awards a concession in any form to the private sector, with a concessionaire fee being provided, these proceeds will be distributed according to the aforementioned scenario.

11.Corporate Governance and Performance Monitoring

The existing system of corporate governance of SOEs does not provide sufficient accountability and enterprise control. With corporatisation this will change, but for those enterprises that remain majority state-owned, a similar board structure as that mandated under the Public Companies Act is proposed.

At the moment, two performance evaluation systems are used for state owned enterprises: the Good Enterprise System (GES) and the Performance Agreement System (PAS). Performance measurement of SOEs will be improved through the

adoption of a balanced scorecard system, which uses comparative performance indicators for key enterprise stakeholders and operations and is common in many commercial enterprises worldwide. The MOF’s Office of State Enterprises (OSE) is proposed as the central manager of this system.

To permit more effective supervision and regular monitoring of enterprise performance, an improved Management Information System will be established. The system will effectively standardise reporting formats, data inputs and timing from SOEs.

The government recognises the social and labour issues associated with privatisation. As a result, all privatisation proposals must include a discussion regarding treatment of social obligations after privatisation, and a discussion of the employment impacts of privatisation. The government will also evaluate the tariff and other social aspects of greater private sector participation and seek to balance these with the privatisation program. Programs which benefit state employees in the transition to privatisation and afterwards will be encouraged. These include stock distribution schemes, early retirement packages and retraining efforts. The government intends to pursue the plan that minimises the overall impact on social, labour and environmental issues while still meeting the reform objectives of the program. The privatisation program will address these concerns in the following manner:

Privatisation plans- all enterprise privatisation plans will be required to include measures of their social (tariff rates), labour (employment) and environmental (pollution) impacts.

Enforcement of existing measures- programs currently exist to provide employees with specific benefits if they are terminated due to privatisation. The government intends to ensure that such benefits are paid and received by employees.

Adoption of additional measures- the government will establish an employee fund based on the following key dynamics and objectives: to ensure that severance pay will be provided to employees; to make certain that SOEs are ‘first in line’ in terms of their responsibility in providing severance pay; the fund will pay only when it becomes evident that the individual SOE is incapable of delivering the severance pay; a Committee will be established comprising the government, private sector and SOE representatives. This Committee will oversee management of the fund, effective distribution, and evaluate the necessity of the fund and ability of the SOE to make severance payments.

Public information- the government recognises that employees require regular, reliable information on the objectives, benefits and timetables of privatisation. The following section outlines the actions to be taken.

The privatisation program will be accompanied by a dedicated public awareness campaign that addresses key audiences and stakeholders in the process and responds to their particular concerns. Key audiences include the SOE employees, investors, the media, and the public at large. Immediate efforts to be pursued include the establishment of an interactive SERC website, the publishing of a bi-monthly newsletter, and the holding of public seminars and forums. These channels will seek to disseminate both general information on privatisation and sector-specific details to the identified audiences.

Sector-Specific Plans

The communications sector comprises telecommunications, postal and broadcasting activities. It is presently structured as a duopoly (TOT, CAT) in both fixed line and wireless networks. Effectively, competition exists at a service provision level among the two government-owned enterprises and their associated concessionaires. The proposed reforms in this sector, based on the Ministry of Transport and Communications Master Plan, are at a very advanced stage of development, envisaging greater private sector participation in an open competition framework.

Key Elements

Telecommunications: the proposed market structure is based on a three-tier model comprising a primary market, a resale market and retail market. This market structure will allow industry participants a broad range of market entry strategies and business opportunities based on free market competition. The end result will be an industry that offers greater consumer choice, quality and level of service.

Broadcasting: the global convergence and consolidation of communications markets may see the Thai broadcasting sector fast track its privatisation and market liberalisation plans. In the short to medium term the legal and regulatory reforms envisaged for the subsector can be seen as positive initial steps towards a more complete industry restructuring.

Post: legal/regulatory postal reform is necessary to ensure the long term commercial viability of postal operators. The existing MOTC Plan proposes the creation of a new Postal Act and the formation of a new public enterprise out of the current post division of CAT.

Regulation: the creation of an independent regulator in the communications sector is critical to the promotion of competition and consumer benefit. The proposed independent regulatory body coupled with a new Telecommunications Act should provide the necessary framework on which competition, consumer, technical and legal safeguards will be based. Similar individual subsector regulators or agencies are envisaged for both post and broadcasting.

Structural reform: a holding company structure may be temporarily used to facilitate deregulation. It is suggested that the holding company structure be used only on a temporary basis, and additional studies must be conducted to fully define the roles, responsibilities and timeframe prior to opening the sector to free market competition.

Timeframe: this sector plan envisages a transitional market structure with restricted competition of 2-5 years, while the open competition regime with greater product and functional market competition will commence in 2002 to 2005.

Water supply and distribution systems in Thailand are primarily covered by three state owned enterprises. The Metropolitan Waterworks Authority (MWA) deals with the production and distribution of tap water for urban areas, while the Provincial Waterworks Authority (PWA) treats and distributes tap water for regions outside of urban areas. Municipal and private water companies also exist. The Waste Water Management Organisation (WWMO) treats wastewater and was created just over two years ago.

Ongoing demand on both the MWA and the PWA to upgrade and strengthen their systems across the full range of the supply chain is creating a driving force for change within Thailand’s water industry. To meet this significant challenge, the industry will need to enhance performance and attract capital inflows.

Key Elements

MWA: two private sector participation options exist for MWA. The first option is horizontal separation, creating East Bangkok Co. and West Bangkok Co. Under this option, each company will be responsible for the range of activities, from bulk water supply to distribution, billing and metering. The second option involves the corporatisation of MWA to form MWA Co., which in turn will take on a strategic partner that will undertake operation and management of the utility through a management contract.

PWA: it is proposed that a process of horizontal unbundling be executed, with the possibility of PWA acting as a contract manager in the future, overseeing concession arrangements for the different regions/divisions. The precise nature of this unbundling exercise and PWA’s role will be defined following a detailed sector analysis.

Wastewater treatment facilities and underlying environmental performance standards are largely the responsibility of individual municipalities, however water and wastewater reforms must be linked to ensure environmental quality and effective private sector participation in each sector.

Regulation: this model of private sector participation will be balanced by an independent regulator established to provide oversight of the water industry. In particular, this regulator will provide certainty to private sector participants with regard to the interpretation of contracts or concession agreements and ensure customer safeguards in the areas of tariffs, quality of service and dispute resolution.

Timeframe: action will be taken in three core areas and according to the following target timeframe:

	Legal and regulatory reforms to be in place by the end of 1999
	Sector specific actions to be implemented by 2nd half of 1999/1st half of 2000
	Enterprise specific actions to be taken by 2nd half of 1999

The transportation sector comprises 14 SOEs which are categorised in three major transportation modes or subsectors: land (road, rail and mass transit), water and air transportation. The sector as a whole will benefit from a clear transportation master plan, endorsed by the government, which identifies sector investment priorities and private sector opportunities. Overall, private sector participation can be substantially increased where the public sector is providing services which compete with or operate alongside predominantly private sector operators. These are primarily in the transportation services businesses.

Key Elements

Policy-Making & Planning: the MOTC will bear primary responsibility for transportation policy. The MOTC will formulate and determine policy, with input from and in coordination with other ministries.

Regulation: independent regulators will be established in accordance with the guidelines of the Master Plan, drawing on existing government departments, agencies and SOEs. This separation of regulatory functions from policy responsibilities will effectively serve to restrict potential conflicts of interest. Several options exist and will be analysed with respect to the regulatory framework in the sector. Regulatory bodies may be created at the subsector level (land, water and air) or within subsectors.

Transportation Authorities: evaluation will be made of transformation of certain SOEs into more formal transit authorities. The authorities would be administrative units with to manage and administer private contractors and concessionaires. These may be legally established by transforming SOEs that match the authorities’ mandates. Existing overlapping responsibilities of SOEs would be eliminated. Infrastructure development will be shared between the MOTC, transportation authorities and the private sector

Operations: the provision of services will be predominantly the responsibility of the private sector. This will be accomplished as existing entities and services are privatised and new service providers enter the various markets. A system will be established in which private sector operators would compete for providing subsidised services. This will assure the government of the lowest subsidy cost while maintaining or improving service levels and quality.

Action Plan: an immediate priority will be for the government to undertake two detailed analyses. The first is an institutional and regulatory analysis, which will more specifically define the policy, regulatory and agency structure and provide detailed recommendations on enterprise restructuring. The second is a review and analysis of the existing concessioning and licensing process across the sector. This study will result in proposals to improve the concession and licensing process and framework and provide the basis for regulation of future concessions in the entire sector. Based on these analyses, legislation will be drafted and submitted to parliament to implement recommended institutional reforms and support the creation of efficient regulatory systems.

A significant program of private sector participation has already been undertaken in the Thai energy sector, primarily based on extensive use of Independent Power Producers (IPPs) and facilitation of privately owned distributed generation facilities under the Small Power Producer (SPP) program. The next stage of industry transformation is seen as building on this model by creating competitive markets across all stages of the energy supply chain.

The Thai energy sector can be segmented into the power, natural gas and oil subsectors. The following entities and their respective roles provide an overview of the power subsector: EGAT (Electric Generation and Transmission), MEA (Electric Distribution in greater Bangkok and suburban areas), PEA (Electric Distribution in the rest of Thailand), IPPs (Electric Generation) and SPPs (Electric Generation).

The natural gas subsector is comprised of PTT Gas (Gas Exploration and Development through PTTEP, Transmission and Trading) and Private Gas Entities (Gas Exploration and Production).

Finally, the oil subsector includes PTT Oil (Oil Import and Refining through its affiliate and investments, and Distribution) and numerous Private Petroleum Companies (Petroleum Refining and Distribution).

Power Subsector

The power subsector will undergo a three-stage transition. Stage I will see EGAT retain its position as the primary power purchaser and provider in the country. In this stage, EGAT is corporatised as a whole, with autonomous business units operating as profit centres; Ratchaburi power plants are privatised; and regulatory controls established to ensure non-discriminatory treatment of generators by transmission. In Stage II, EGAT will continue to retain its position as the central supplier of power, however third party access will gradually be introduced to allow power producers to sell directly to users. EGAT’s new power plants are privatised and privatisation of existing plants commences. Finally, Stage III will see a competitive wholesale power pool and the introduction of retail competition. This final stage is envisaged from the year 2002 to 2004 onwards.

Key Power Sector Recommendations and Issues

Three key issues must be addressed in restructuring the Electricity Supply Industry (ESI) and moving it to a competitive, privately owned sector:

1. Restructuring Authority: the restructuring of the electricity supply industry (ESI) involves broad policy and industry-wide issues. Effective restructuring best practices as experienced by many countries has shown the need for a front-end, industry-wide restructuring plan implemented by a central authority. NEPO will continue the implementation of the reform program started in the early 1990’s through ongoing co-ordination with EGAT, MEA, PEA, and other agencies.

2. National Tariffs in a Competitive Market: currently, EGAT bulk power charges for MEA are higher than those for PEA. This cross-subsidy is the means in which PEA is able to provide power to their customers at a price uniform with MEA customers.

Though not ideal, the continuation of national tariffs within customer classes can be accommodated within a competitive market. However, a framework for provision of the national tariff will need to be developed to ensure “competitive neutrality” among the various market participants.

3.  PPAs in a Competitive Market: the model of IPPs selling power under PPAs is based on EGAT’s role as the predominant power purchaser /provider. If full competition is to be realised at the generation and retail level, certain adjustments will have to be made in existing PPA’s in a manner that is mutually agreeable to all parties concerned.

Natural Gas Subsector

The natural gas subsector requires that two key issues be addressed:

1. Separation of PTT’s Gas Transportation and Trading Functions: the primary objective of this separation is to promote competition. The optimal manner in which to execute this separation will be determined following extensive studies on appropriate strategies.

2.Third Party Access: the establishment of third party access to gas transmission pipelines is a means of facilitating the development of competition in gas supply. This will increase industry efficiency and in turn yield benefits to end users in the form of lower prices and improved service.

Oil Subsector

PTT is presently one of the key players in oil refinery and trading, which consist of refining, retail distribution and international oil procurement. PTT’s passive investments in these areas indicate that an ‘exit’ strategy is required. These proceeds will then be re-deployed into identified value drivers for the company,

principally in gas exploration and transportation. In exiting the various passive investments, a careful analysis will be made concerning the most suitable exit strategy.

PTT Structural Alternatives

The selection of the structure of PTT is the most critical decision for the future of Thailand’s oil and gas industry, as it relates to PTT ownership. Two structural options exist:

1. The IPO of PTT at the holding company level
2. The IPO of PTT gas with or without PTTEP

The PTT committee, following the recommendation of the company’s appointed advisors, has approved privatisation at the holding company level (option 1). This strategic initiative is currently awaiting Cabinet approval.

Key Energy Sector Recommendations and Issues

Regulation: in restructuring the energy sector and moving it to a competitive market, there is a need for orienting the regulatory framework to a more commercial and independent sector structure. As mentioned, the independence of the regulator is an important feature in fostering an environment of “competitive neutrality” between public and private sector enterprises. This is accomplished by separating the functions of public policy from regulation by establishing a regulator responsible for regulation of the electricity and gas industries, independent from NEPO.

Action Plan: the nature and timing of the decisions to restructure and open the energy markets to further competition will require extensive studies and action from both NEPO and related state enterprises. The necessary actions and targeted timeline include both significant market and legal and regulatory reforms.

Background

The state enterprises in Other Sectors were set up with the purpose of either discharging the government’s role of providing basic services to the public or creating and promoting new industries where there is a lack of private sector participation. The forty-two enterprises concerned encompass the following sectors: banking, industrial, commercial and services, agricultural, and social and technology.

Sector Objectives

The government’s position is that state enterprises which are not engaged in core government functions will be privatised. The government will then focus on policy making and planning for these sectors; regulation of monopolies (where necessary); and operation of state enterprises or government bodies with core government functions.

Key Recommendations

Given these objectives, the government will review the enterprises in the aforementioned sectors for their establishment rationale, and then distinguish core governmental functions from non-core ones. The degree of core governmental function is determined by the extent to which state enterprise responsibilities are related to discharging social and/or non-commercial functions.

Once this assessment has been made, the government will pursue one of four identified strategies in initiating greater private sector participation in these sectors: full exit of government ownership, rationalising the SOE for possible future divestiture, separating governmental functions and divesting non-core functions and operations, or remaining as a government entity (as an SOE or government body) and adopting best practices.

Goal

Privatisation

Objectives of the Program

Benefits Expected

The specific objectives of the privatisation program are as follow:   Structural Stimulate and provide a basis for renewed economic growth of the country by attracting needed investment and know-how (foreign and domestic) Improve economic efficiencies of underlying sectors of the economy Improve the quality and availability of services for Thai people at reasonable prices   Financial Reduce the financial burden on government resources (subsidies, loan guarantees, etc.) Provide capital for needed infrastructure investments Stimulate, broaden and deepen Thai capital markets     Social Facilitate the creation of new and better job opportunities for the Thai people Provide resources for needed social services, retraining, and education Ensure expanded provision of quality services at reasonable prices to the public

The government expects specific benefits to result from the privatisation program and will monitor the program and program results for these benefits. These include: Structural Benefits Improvements in economic efficiency of sectors as measured by comparative decrease in costs of production and/or price of services; Improvements in quality of service, including choice of services for consumers; Completion of needed infrastructure investment projects Attraction of higher value-added services to Thailand, and attraction of needed technology and management systems Financial Benefits Reduction in subsidies to enterprises Reduction in loan guarantees to enterprises Private rather than government financing of needed infrastructure services Proceeds from sales of enterprises for reinvestment in the economy and social sector Strengthening of the capital markets in Thailand Contribution to confidence in Thailand, Thai financial sector and the Thai economy as a whole Social Benefits Improved or expanded services New employment opportunities Greater ability of the government to invest in social and public services

Methods of Reform

The privatisation program is designed to strengthen the Thai economy and provide a basis for Thailand’s continued growth in the coming age of global knowledge-based businesses. There are six key aspects to implementing the program. Legal reform: providing the legal basis for reform including revisions to laws to enable private enterprises to effectively compete in sectors formerly dominated by state enterprises; creating new needed regulatory structures and provisions; and creating more transparent and efficient means for private sector participation in the economy. Regulatory reform: creation, where necessary, of independent regulatory bodies which can help ensure fair and open competition in sectors, limit the powers of monopolies, enforce transparency in pricing and enterprise operations, and be accountable to the public for their actions. Divestiture: transparent and open transfer through sale, lease or other means of state operations/assets which may be more efficiently managed in the private sector. New entry: ensuring transparent and efficient means for greater private sector participation in sectors of the economy previously dominated by the state. Introduction of international best practices: for those enterprises, which will remain in state hands, the introduction of international best practices in enterprise management and accountability. Performance monitoring/measurement: for both the reform program as a whole and for the performance of state and private enterprises. Performance monitoring and measurement systems for SOEs will be enhanced, and greater information provided to the public.

01-08-98