Dismantling Thailand's Shin Corp
Dismantling Thailand's Shin Corp
By Shawn W Crispin
BANGKOK - With this week's takeover of iTV, Thailand's new military rulers have made their first move toward dismantling the telecommunication and media empires that once provided the behind-the-scenes financial firepower for ousted prime minister Thaksin Shinawatra's once powerful, now diminished, political juggernaut.
iTV represented a small part of the Shin Corp's corporate expanse, which currently includes major holdings in telecoms, satellites, aviation, property development, consumer finance and the Internet. Its mobile telecoms subsidiary, Advanced Info Services (AIS), provides the lion's share of the conglomerate's profits and catapulted Thaksin to billionaire status before he divested his shares to family members when he took up the premiership in 2001.
The company's profits soared during Thaksin's political tenure, padded by his government's policies aimed at pumping up domestic consumption through aggressive state-bank lending and assorted cheap-credit schemes. With Shin Corp's share price near a record high, and popular political pressure mounting against Thaksin, in January 2006 his family sold the company to Singapore's state-run Temasek Holdings in a controversial US$1.9 billion transaction.
The company has been under political assault ever since the military seized power from Thaksin in a bloodless putsch last September. A Thai court last year ruled that iTV had breached the terms of its original 1995 build-transfer-operate concession with the Prime Minister's Office and imposed more than $2.2 billion in fines, fees and owed interest payments. The station failed to meet a recent payment deadline and the military junta rescinded its operating concession and is in the process of determining which assets it can legally repossess.
To some market watchers, the highly anticipated move represents a form of forced nationalization of a foreign-held asset. Shin Corp's shares fell 2.6% the day after iTV's closure and so far Temasek has remained mum about the losses it will incur because of the station's demise. In part, that's because iTV was the only perennial loss-maker among the Shin Corp's otherwise profitable stable of companies.
But iTV's nationalization likely represents the first of a series of controversial moves to dismantle and then redistribute to politically preferred players the Shin Corp's various communications assets operated under state concessions. Coup leader General Sonthi Boonyaratklin has in recent weeks stated the junta's intention for national-security interests to seize three communications satellites that Temasek now majority-owns through Shin Corp subsidiary Shin Satellite.
The potentially bigger blow will come if and when the junta follows through on its apparent plans to rescind AIS's operating concession. Pridiyathorn Devakula, the interim military government's finance minister and deputy prime minister for economic affairs until last week, in January told a private meeting of foreign analysts gathered to discuss amendments to the Foreign Business Act that it was "only a matter of time" before they rescinded AIS's build-operate-transfer concession, according to an analyst who was in attendance and who spoke to Asia Times Online on condition of anonymity.
The Council of State is now reviewing legal matters surrounding a possible concession rescission, which reportedly could be justified by alleged irregularities in the manner in which AIS received its concession from the state-owned Telephone Organization of Thailand (TOT) back in 1992. If so, it's unclear whether the council's legal interpretation would allow for the government to make retroactive demands - as it did in the iTV case - that would require AIS to pay the state potentially billions of dollars' worth of penalties on previous profits and revenues.
Money in the bank
Those penalties could potentially be seized from the $1.9 billion the Shinawatra family received in the Temasek transaction and now reportedly holds in interest-bearing accounts at Siam Commercial Bank, which is controlled by the royal family's Crown Property Bureau. Arguably, financial markets have not fully priced this risk into the Shin Corp's share price, which has fallen from 31 baht per share on the day of last year's coup to 24.6 at Thursday's close of trading.
Large foreign hedge funds, including the United States' Farallon Capital, at least into February held AIS's liquid shares in some of their emerging-markets portfolios. Fitch Ratings recently placed AIS on a rating negative watch because of what it referred to as "heightening policy, regulatory, and legal risks that could substantially affect the major telecom operators in Thailand" and that "rising policy uncertainties may lead to a review of concessions".
HSBC has recently warned its clients about the possibility of a nationalization of Shin Satellite's assets, but one of its senior analysts who spoke on condition of anonymity to Asia Times Online said that its telecommunications department had not yet issued a similar downgrade warning on AIS because of a lack of evidence about the government's plans. Shin Corp chief executive officer Boonklee Plangsiri failed to reply to e-mailed questions from Asia Times Online about reports that AIS is poised to lose its operating concession.
Certain hedge-fund managers and investment bankers who have recently visited Thailand and met with Asia Times Online have universally asserted that if the government moves on AIS on perceived flimsy legal grounds it will further undermine broad investor confidence, not only in its economic management but, more crucially, in its ability to protect foreign investments legally.
"It would represent the last straw," said one senior hedge-fund manager, who, like many foreign portfolio investors, ill-received the junta's December 19 surprise move to impose capital controls on certain types of short-term foreign investments as well as its planned nationalistic amendments to the Foreign Business Act, which are scheduled to take effect this month.
Dampened foreign sentiment is arguably already taking an adverse toll on the Thai economy. Some foreign investment banks have recently downgraded their economic-growth forecasts below 4% for this year, because of stagnant new private investment, declining domestic consumption, and signs that the bureaucracy has been slow to disperse fiscal stimulus measures. According to Phatra Securities, a local investment bank, nearly $1 billion worth of capital flowed out of Thailand in January because of the 30% non-interest-bearing reserve requirement on foreign investments included in the capital controls.
That increasingly puts the junta between a rock and a hard economic place in its apparent pursuit of dismantling Thaksin's commercial legacy. Yet there are a number of other legal avenues the junta could pursue against Shin Corp, including possible charges of tax evasion, subversion of the judicial process, and constitutional transgressions, that would present a more genuine veneer of legal impartiality - while allowing the junta to accomplish the same political ends.
Never tried charges
Shin Corp and its subsidiaries were widely recognized throughout their corporate histories as some of Thailand's best-managed companies. Yet there are a handful of controversial episodes that under Thaksin's political tenure were arguably under-investigated, but through new independent probes might cast the company's tightly managed image of good governance into doubt - or worse.
One strongly alleged - but never investigated nor tried in court - tax-evasion case stands out in particular. A lightly circulated October 2003 research report by Pyramid Research, a US-based consulting firm, raises hard questions about possible tax evasion related to AIS's use of the 1800 bandwidth frequency acquired in its purchase of the Digital Phone Company (DPC) in 2000 from Samart PCL and Telekom Malaysia.
The well-reasoned report contends that AIS, then facing a serious capacity crunch, was systematically underreporting the number of post-paid customers it was roaming on to DPC's network, in effect allowing AIS to avoid paying the higher concession fees DPC contractually owed the state. Under the DPC's operating concession, it was required to pay 32% of its revenues to the state-owned operator-cum-regulator TOT; AIS's concession, on the other hand, only required it to pay 24%.
Moreover, the report made compelling thitherto-unexplored allegations that under Thaksin's government the TOT and AIS had entered into a de facto "strategic partnership" that gave AIS an edge over its local competitors. The report noted one particular example of AIS selling its loss-making pager company in 2002 to TOT for 255.78 million baht (about $7.75 million at the current exchange rate), a generous amount considering the state agency already legally owned the assets and previously had not paid anything for other decommissioned pager companies. [1]
There are also the unresolved tax-evasion allegations lodged against Shin Satellite by an opposition politician, who based his charges on information he had received from a former company customs employee who apparently had access to documents related to the import of expensive capital equipment. That case's proceedings were thrown into a tailspin when the witness was shot and killed in 2003 by masked assassins while he was riding on his motorcycle in the northern province of Chiang Rai.
There has arguably never been a proper official investigation into the circumstances surrounding the former Shin Satellite employee's death. When this correspondent inquired about the situation in an interview with Shin Satellite CEO Dumrong Kasemset in January 2006, he immediately broke off the one-on-one interview.
At the very least, there is a compelling case for the military government to open an independent probe into both the mysterious murder and the original tax-evasion charges - neither of which has ever been given proper official treatment. It could also look into the circumstances behind the eight-year tax holiday worth $400 million the Prime Minister's Office-run Board of Investment granted Shin Satellite in 2003, representing the first, and apparently only, time the foreign-investment promotion agency made such an award to a Thai-owned company.
The government could also have pursued a more damning case involving iTV on charges that Thaksin violated constitutional press-freedom guarantees through his government's alleged manipulation of the station's news coverage to his political party's advantage. Unfortunately, the junta is in no position to take the moral high ground on press-freedom issues because of its abolition of the 1997 constitution and its own heavy-handed policies and overt censorship of the broadcast media.
Instead, the junta's handling of Shin Corp seems set to mirror its stumbling ways in prosecuting the other charges it has leveled against Thaksin and his associates to justify last year's coup. The government's enduring failure to nail down with hard corroborating evidence the corruption and political crimes Thaksin allegedly committed risks losing the support of the Bangkok elite and middle class that initially strongly backed the military intervention.
Should the junta similarly be perceived to mishandle its pursuit of charges against the Shin Corp, perhaps even more dangerously, it risks further undermining already waning foreign-investor confidence in its leadership, bringing on a destabilizing economic meltdown.
Note
1. See John Barrett's "AIS: De Facto Dual-Band Network", Pyramid Research, Asia Pacific Perspective, October 3, 2002.
Shawn W Crispin is Asia Times Online's Southeast Asia editor.
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