1

Thailand's Troubled Privatization of EGAT

The attempted privatization and initial public offering of the Electricity Generating

Authority of Thailand has come to a complete halt, with opposition from consumer

groups forcing the Supreme Administrative Court to launch an inquiry into the

constitutional validity of the privatization. Darrell Wright reports on the case which

could have wide-reaching repercussions for the Thai government's economic

programme.

Date: February 2006

On November 16 2005, the state owned and operated Electricity Generating Authority of

Thailand (EGAT) was due to float on the Stock Exchange of Thailand (SET), with up to

Bt34.86 billion (US$874 million) of capital expected to be raised. The initial public offering

(IPO), the largest in Thai history, was thwarted just 24 hours prior to the launch by order of

the Supreme Administrative Court, which suspended the listing pending an inquiry into the

constitutional validity of the privatization.

The court ordered the government to stop the IPO proceedings in light of concerns raised by

various consumer groups in Thailand that the sale of shares in EGAT is disadvantageous to

the people of Thailand, the end users of EGAT's electricity. In order to realise these concerns,

the groups lodged a compliant that two royal decrees issued to enable the privatization of

EGAT were unconstitutional.

The suspension of the listing and privatization of EGAT has (albeit temporarily) derailed the

Thai government's plans to raise capital for a string of investments in new power generating

facilities to meet burgeoning electricity demand. In addition, the injunction has raised doubts

about the legality of its other previous privatizations which followed the same set of rules.

Furthermore, important questions regarding the lack of a permanent regulatory body to

oversee electricity generation and supply have been forced to the forefront, along with

growing concerns over the government's motives for attempting to privatize EGAT with so

many issues remaining unresolved.

The Supreme Administrative Court has yet to make a decision on the case. The court

announced on November 18 2005 that it would make a final and definitive ruling on the case

in January 2006. In January, no ruling was received and EGAT's chief administrative officer

Pichai Chulpongstorn said he expected the court to make a ruling by April 2006 which, if in

EGAT's favour, would enable it to proceed with the IPO. The court's ruling will be pivotal in

deciding EGAT's future, as well as possibly the future of the Thai government's entire

privatization scheme and economic programme.

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Privatization: misunderstood?

On November 1 2005, 11 members of the Confederation of Consumer Organizations, a lobby

group in Thailand, filed a petition with the Supreme Administrative Court to halt EGAT's

privatization and IPO. The petition contained 12 complaints and observations on the

proposed privatization and IPO and claimed that the two new supporting royal decrees are

illegal because they infringe on the rights of Thai people, as protected under the constitution.

The decrees stipulate that EGAT should be dissolved as a state-owned enterprise (SOE) and

that its rights, powers and privileges under current law should be transferred to a listed

company.

A spokesperson for the Confederation of Consumer Organizations said on November 15

2005: "We believe we have enough data to demonstrate that the two decrees clearly go

against people's rights".

Defending the use of the royal decrees, EGAT advisor Phatra Securities said recently in Thai

newspaper The Nation: "Royal decrees are executive orders issued under the State Enterprise

Privatization Act, which allow the government to quickly privatize a state enterprise into a

public company without having to undergo the normal parliamentary process".

Many politicians and EGAT senior executives strongly refute the claim that the listing

is illegal. Finance Minister Thanong Bidaya said in November 2005: "We will list

EGAT on the SET as part of the government's policy to raise the efficiency of state

enterprises. If the court sees that the current laws are unsuitable, we will amend the laws.

This is in the best interests of the country."

It is widely acknowledged in Thailand that one of the main concerns over the privatization of

EGAT is a lack of understanding of the benefits of this process. Energy Minister Viset

Choopiban said in a press conference that he believed that these benefits, once clearly

explained to the public, would help push through the sale of EGAT shares.

Thailand's pre-eminent supplier of natural gas and oil, PTT, has already born witness to the

benefits of going public. The company successfully listed on the SET in 2001 and has since

seen net profits increase from around Bt20 billion to Bt60 billion.

Comments Anon Sirisaengtaksin, senior executive vice president of PTT: "Privatization has

brought more autonomy. Pre-privatization, PTT was subject to government mandates and we

didn't have the flexibility to restructure. We have also cleaned up our balance sheet

considerably and used the money raised in privatizing to expand our subsidiary companies

and increase their performance."

The process of privatizing PTT (and several other SOEs) was completed using the same set

of laws as those used for EGAT's privatization, namely the State Enterprise Corporatization

Act. However, no other SOE privatization has failed or encountered any of the problems now

dogging EGAT.

Anon is convinced that the critical factor is EGAT's position as a public service provider.

"EGAT's operations are very much those of a public service provider whilst PTT's are not...

This difference is one of the major reasons why the opposition was aroused. It is much easier

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for consumers to see the potential for significant change with EGAT than with PTT or other

services," he said.

In addition, Anon explains that PTT was initially de-regulated in 1992 and the market was

opened up to competition. "Oil refineries and gas installations have been open to foreign

investment for a long time now. These industrial reforms enabled PTT to privatize with ease.

EGAT did not complete the planned industrial reforms which may have added to the

problems it has experienced," he says.

Privatization problems

In 1995, as part of an initiative to secure financial assistance from the International Monetary

Fund (IMF), EGAT sold two major power plants to a newly formed public company, the

Electricity Generating (Public) Company (EGCO). This action instigated reform in the

energy sector and was the first step in privatizing Thailand's energy producers. The sale

provided enough capital for EGAT to invest in a new power project in Ratchaburi province,

consisting of two plants generating 3,200 megawatts.

The partial privatization of EGAT at this stage was, according to Anon, supposed to

demonstrate the nature and potential benefits of privatization. The IMF initiative also

included plans to separate the generation of electricity and the transmission grid in Thailand.

However, these plans have not been completed and EGAT retains control over both at

present. The protection of the transmission grid in Thailand is a major concern for the

Confederation of Consumer Organizations; it argues that the privatization of EGAT's

transmission system would compromise national security.

However, EGAT's president, Kraisi Kanasuta, has said that the transmission system will

remain under the ownership of the Ministry of Finance, referring to the government's

stipulation that the ministry will retain a 75% stake in EGAT after its privatization. The

Supreme Administrative Court will have to decide whether the transmission grid in Thailand

is indeed a 'national treasure' and must remain under state control in the interest of upholding

the constitution and maintaining national security.

When privatizing state enterprises, the responsibility to protect consumer interests

usually falls to an independent regulatory body. At the time of EGAT's IPO, a new

electricity law designed to provide a legal framework for a new independent regulatory body

had only reached the drafting stage. This left a vacuum with no regulator in place to oversee

EGAT's operations in the wake of its IPO. As a result, the Thai cabinet hastily passed a

resolution giving Energy Minister Viset Choopiban the power to establish a temporary body.

But, by that time, it was too late and the consumer groups had already lodged their petition

and the IPO had failed.

The new regulatory body is expected to determine electricity tariffs, allocate compensation

among electricity authorities and set the conditions for power generation, in order to protect

consumer interests. EGCO's general counsel, Arthnaporn Vatanasuti, told Asialaw that the

lack of a regulatory body prior to the listing, the failure to inform the public of the potential

benefits of privatizing and the ambiguities in the royal decrees are all part of the

government's failure to conduct correct due diligence on the matter. "The government

proceeded too early," says Arthnaporn, "these problems could have been avoided if more

time and more thought were put into EGAT's privatization".

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The need for privatization

The privatization of SOEs has been high on successive Thai government agendas since 1961,

culminating in the September 1998 government mandate: 'Master Plan for State Enterprise

Sector Reform'. The directive forms part of Thailand's concerted effort to regain economic

buoyancy following the Asian financial crisis of the late 1990s and has enabled the

government to privatize, either fully or partially, more than 40 SOEs so far. Arthnaporn

relates that the government is anxious to decrease sovereign debt levels, increase the stock

exchange's market capitalization and raise money to develop new power-producing projects.

The privatization of EGAT is an integral part of the government's economic programme and

is regarded as being crucial to achieving Thailand's full economic recovery. The threat of this

programme not being realized is proving to be a worry for the current government.

Meanwhile, Prime Minister Thaksin Shinawatra is suffering from "dipping popularity" due to

the failed EGAT listing and other challenges to his administration, according to The Nation.

Kitipong Urapeepatanapong of Baker & McKenzie in Thailand suggests that the privatization

of EGAT will have little impact on its daily management or electricity charges, given that the

Thai government will retain a 75% shareholding in the company. "Electricity supply in

Thailand is already one of the lowest tariffs in the region and is run as an efficient enterprise

already, plus there is a regulatory body to watch over it. I don't think electricity bills will

increase because of privatization. The only reason to privatize is to raise funds for new

projects."

EGAT's president Kraisi has implied that electricity charges are more likely to increase

if the Supreme Administrative Court prevents the listing than if it allows the listing. "If

we fail to raise funds from the shares offering, we will have to rely on more loans, resulting

in higher financial costs for the company", he told the Bangkok Post in November 2005.

EGAT is committed to developing four new power plants in the coming years to cater to

Thailand's increasing electricity consumption. Energy Minister Viset Choopidan said recently

that the new plants will go ahead, despite the court injunction. "We have to see which source

of money we will use to finance the plants," he said.

Following increased concerns about higher electricity charges if the IPO does not proceed,

EGAT's chief administrative officer Pichai said in January 2006 that the company will have

no difficulty funding its investments with current cashflow if it is unable to launch its IPO in

2006.

While the injunction will undoubtedly be a costly delay for EGAT, it could have the ancillary

benefit of instilling foreign investor confidence in Thailand's high level of governance,

suggests SET president Vijit Supinit.

Krasi compares the Thai court injunction with the suspension of the Hong Kong

government's Link real estate investment trust (REIT), which was also served with an

injunction to its IPO at the eleventh hour. "I believe that foreign investors will understand

because the legal suspension of the EGAT IPO is not the first time this situation has

occurred," he says. The Link REIT was delayed by a year but finally launched in November

2005 as the largest REIT in the world to date.

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One lawyer suggests that the suspension of EGAT's privatization indicates serious concerns

at the Supreme Administrative Court over the legality of this process, which may ultimately

prevent EGAT's listing. "The fact remains that if the Supreme Administrative Court upheld a

complaint from the public and brought a late injunction against EGAT, there must be

ambiguities in the law or some serious reservations about the listing itself that is cause for

concern. This is no small matter and it may not be resolved to EGAT's satisfaction," he says.

EGAT has one year from November 2005 to list on the SET before its application is revoked

and it has to start the IPO process again.

Far-reaching repercussions

This is not the first time that EGAT has been in trouble over its privatization plans. In 2004,

Prime Minister Thaksin put forward his plans to do so, which were met with as many as

50,000 protesting EGAT employees. The employees vehemently disagreed to the

privatization plan, forcing Thaksin to shelf it until 2005.

The protest was the largest to affect Thaksin's administration since he took office in

2000. During his election campaign, Thaksin had promised union leaders that he would

not privatize state enterprises. Many of the disgruntled workers were therefore dismayed at

Thaksin's apparent u-turn on his policy.

Somsak Kosaisook, general secretary of the State Enterprise Labour Association of Thailand,

recently suggested that the government has failed to listen to the people. "Clearly the

government is not listening to the will of the majority, but only to a powerful few. If the

government does not listen to the voice of the people, the government does not belong to the

people. By not listening to the people, and by not following through with its promises to the

people, the government is undermining the very foundations of the democratic system," he

told Thailabour.org.

With the Thai government facing numerous difficulties over EGAT's privatization, it remains

to be seen if the process will be completed at all. With negative public sentiment a clear and

present danger to the plan, added to uncertainty about the court's decision over the legality of

the privatization, there is a strong possibility that the IPO will not proceed as planned. This

may in turn encourage the IMF to re-evaluate Thailand's status and future loan decisions may

be affected.

However, if the privatization law is amended to force through the IPO before the cut-off date

set by the SET, there will inevitably be repercussions for those SOEs that have already been

privatized and at least 12 others which are slated for privatization in the near future. The issue

is far from resolved and the future course of privatization in Thailand lies in the hands of the

Supreme Administrative Court judges.

6

White & Case powers on in Thailand's project finance

market

Date: February 2005

The December 2004 closing for the US$663 million project financing of a 1,468 MW

combined-cycle gas-turbine power plant to be constructed at Kaeng Khoi in Saraburi

province marked an important milestone in the development of Thailand's power sector.

White & Case represented the project borrower, Gulf Power Generation Company, and its

parent company, Gulf Electric Public Company, in the deal.

"With the timely closing of financing for the Kaeng Khoi 2 project, Gulf Power will be able

to bring critically needed generating capacity on line in early 2007," commented lead partner

on the deal Brian Miller. "We are grateful to have had the opportunity to assist Gulf and its

sponsors in this project, beginning with its bid in the 1994 Independent Power Producer

Programme and culminating with this financial close."

Participants in both the US dollar and Thai baht tranches of the financing were led by Siam

City Bank and Thai Military Bank. Next year, Gulf Power will seek to close the second phase

of the financing, which is a planned refinancing of the US dollar tranche, with the Japan Bank

for International Cooperation, and one or more commercial banks. Mizuho Corporate Bank

has been appointed the structuring coordinator for the second phase of the financing.

The success of the project, which has overcome a number of obstacles over the past nine

years, including changes in the project's fuel type from coal to natural gas and relocation

from Prachuab Khiri Khan province to Saraburi province, is widely seen by industry

observers as strong sign of confidence in Thailand's long-term strategy for expanding

electricity generation. The 1,468 MW power plant will play a vital role in meeting Thailand's

future electricity demand, which is expected to reach approximately 41,000MW in 2015,

based on forecast annual growth of 6-7%. Energy consumption in Thailand is currently

around 19,300MW.

The Kaeng Khoi 2 Power Project is a combined-cycle gas-turbine power plant project with

two 734 MW generating blocks, each of which will have two gas-turbine generator units

capable of operating on natural gas and liquid fuel, two associated heat recovery steam

generator units, and one steam-turbine generator unit. White & Case's role both as Thai and

international legal counsel involved the negotiation of a 25-year power purchase agreement

with the Electricity Generating Authority of Thailand (EGAT); natural gas and diesel fuel

supply agreements with PTT Public Company; construction and supply contracts with Mitsui

& Co. and a long-term capital equipment supply contract with gas turbine supplier Alstom.

Aside from Brian Miller, White & Case lawyers advising on the transaction include partners

Daniel Chung, Chinnavat Chinsangaram, and Pakdee Paknara; as well as associates Mark

Moody, Gareth Eagles, Troy Schooneman, Somphop Thamprida, Tavorn Leelaporn, Kudun

Sukhumananda, Areeya Asvanund, Winyu Arayakul and Tipsiri Tivutanond.

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Power Sector Round-up

With many western power companies having retreated from the Asia-Pacific,

localization is the major trend in the electricity industry. Local power companies are

now looking for opportunities elsewhere in the region.

Date: July 2004

Before the 1997 financial crisis the power industry was one of the most active in Asia-

Pacific's project finance market. Not so today. Indeed, the number of power project

financings in the region has fallen to just a handful even when including Australia and

mergers and acquisition financings. Nevertheless, opportunities are emerging, including in

India, Thailand, and, on a more limited scale, Singapore.

In key markets, the problem is not the demand outlook for the power industry, which is the

highest it has been since the Asian crisis, but rather the retreat of major western power

companies, like Edison Mission or InterGen, from the international sector. With a more

favourable regional debt market, localization is the major trend in the Asian power business,

as home-grown electricity companies fill the gap left by international sponsors. "Domestic

power companies often resort to corporate style funding arrangements, typically involving

domestic banks who are willing to provide funds on less stringent terms than international

banks," notes one banker.

The Thai market epitomizes the shift towards greater local control. Over the last two years,

Thai power companies have acquired stakes in independent power producers (IPPs)

previously held by foreign electricity firms. The trend is likely to continue with Edison

Mission considering the sale of its assets in Thailand. In addition, there are indications that

the Electricity Generating Authority of Thailand (EGAT) wants to bring two major private

power generation companies (EGCO and RGCO), which are part-owned by foreign investors,

back into the EGAT fold. The government had previously had EGAT spin off these

companies as part of its planned reform of the local power market.

International players

Almost all the companies still looking at overseas opportunities in the electricity industry are

Asian players. CLP Power Asia, for instance, is considering greenfield power projects in

mainland China, Thailand and India.

"We are involved in the construction of the BLCP facility in Thailand and in other Thai

projects through our 23% stake in EGCO," says Richard McIndoe, managing director of CLP

Power Asia. The official reveals that CLP is looking

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at expanding its existing power station in Southern Thailand and building a new

greenfield power station in Laos, which will sell electricity to EGAT.

Not to be outdone by its Hong Kong rival, Singapore Power is also expanding abroad.

Recently, the firm acquired TXU Australia from its US parent for $3.75 billion, adding to its

already substantial business in the country. Four years ago, Singapore Power paid $2.1 billion

for the same electricity transmission grid located in Victoria.

Similarly, Japan's Mitsubishi Corporation is considering both greenfield power stations and

acquisitions in Asia ex-Japan. Yu Saito, general manager of the Power Generation and

Marketing, International unit at Mitsubishi Corporation says, as a rule of thumb, Mitsubishi

aims to grow a portfolio which has roughly 30% to 40% of its assets (on a net equity basis) in

the United States, another 30% to 40% in Mexico and the remaining 20% to 40% in Asia and

the Middle East. Mitsubishi may invest in Indonesia again when the time is right, according

to Saito, despite having invested in the Cilacap IPP, which ran into serious financial difficulty

during the Asian crisis.. "That means when non-recourse financing is again available for

Indonesian power projects," he says.

These electricity companies, however, are major exceptions to the rule. Few others are

looking at investing outside their home markets. In China, CLP is the only foreign firm with

plans to build new power stations. This despite forecasts that China will account for half the

world's new IPP projects between now and 2020.

China

Even if western power companies were still pursuing international expansion, they would

probably avoid the Chinese market. "The conditions for foreign investors in the PRC market

are much less attractive than they were 10 years ago," says Jean-Christophe Delvallet, CEO

China for Electricité de France (EDF). Chinese authorities are now drawing up plans for a

power pool system and long-term power purchase agreements are no longer available,

creating considerably more risk for sponsors of mainland IPPs.

Then there is the issue of electricity tariff revisions. In order to improve margins for the cash-

strapped transmission and distribution segment of the electricity industry, central and local

governments have sought to lower the price per kilowatt-hour paid to generating companies.

They are also seeking to raise average rates for industrial customers, passing the difference

on to transmission and distribution.

These revisions have been sought from IPPs across China, including from both locally and

foreign-sponsored schemes. This despite contractual agreements aimed at limiting tariff

alterations to changes in IPPs' cost base alone.

Lack of clarity on the future power pool, concerns over reducing tariffs and the prospect of

oversupply of electricity from 2006, have made foreign investors very cautious about the

Chinese power market. "Almost all the new capacity being built at the moment is sponsored

by Chinese power companies and financed with local Chinese bank debt," says a Hong

Kong banker."

The Philippines

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Unlike China, the Philippines' electricity industry is clearly in need of capital. According to

Alix Burrell, a director in BNP Paribas' project finance team, the country will face a looming

shortfall in electricity by 2008 with limited scope for new IPPs to meet the gap. There are few

counterparties in a strong enough financial position to guarantee offtake, while a wholesale

market is not yet in place.

A year ago tremendous opportunities seemed to be beckoning in the country. At the start of

2003, the government said it was aiming to sell both the transmission assets of the

Philippines' National Transmission Corp (Transco) as well as all but a handful of state power

company Napocor (NPC)'s power stations. But not one of these assets has been sold since the

disposal plans were revealed.

There are several reasons for the failure of the planned sell-off. On the one hand, the

withdrawal of US companies from the international market combined with generally poor

returns on Asian electricity investments has meant fewer potential buyers. On the other, a

major reform plan for a wholesale electricity market has been drawn up, but key issues have

still to be resolved. "Potential investors therefore remain unsure of how the future electricity

market will operate," says Burrell. The problems are compounded by the Philippines'

economic outlook, highlighted by the country's credit downgrade from ratings agency

Standard & Poors.

Due to the change of status planned for NPC, the company is no longer permitted to sign

power purchase agreements with new greenfield power stations. "Any power station sponsor

therefore has to try and set up a direct sales contract with electricity offtakers or get approval

for a vesting contract arrangement," says Burrell. Unfortunately, the only entity capable of

buying substantial volumes of electricity is the Manila Electric Company (Meralco). But even

Meralco is now in financial trouble thanks to adverse government rulings concerning the

historic price Meralco charged for electricity. Meralco has been forced to reschedule its

finances as a result.

Despite these problems, Burrell notes that there are two greenfield IPP projects on the

drawing board. One project (the Sucat project) is a gas-fired scheme to be built on the site of

a decommissioned power plant. However, this power project requires a 100km pipeline to be

built for the gas supply to reach the north of Luzon, which may have associated rights of way

and permitting issues.

The other greenfield scheme is GN Power, a liquefied natural gas-fired 2 x 600MW venture.

"The development process is advanced," says Burrell, "a contractor has already been found to

build the LNG terminal and almost everything else has been arranged except for offtake

arrangements."

Australia

The relative maturity of Australia's electricity market implies less new power plant

opportunities than elsewhere in the Asia-Pacific. Chris Yencken, a director at ANZ

Investment Bank, says only one or two new power stations are needed in New South

Wales or Victoria, the two most important states in economic terms. "There is still excess

capacity in New South Wales, Victoria and South Australia and therefore no requirement for

new base load power plants," he says.

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An interconnect which will link Tasmania's electricity sector to Victoria is also due to come

online in late 2005, providing Victoria access to Tasmania's hydroelectric power stations.

This will further limit the need for base load or peaking power plants. Yet, Yencken says one

new peaking plant will be needed in the next few years.

Western Australia, which has no interconnect with the other states, is seeking bids for a new

power plant, but the coal - or gas-fired plant will be small, just 300MW to 330MW. A

mandate announcement detailing the winning bidder will not be made in September next

year.

Numerous wind farm projects are also being planned, says Yencken. "In terms of dollar

value, most of these projects are even smaller, less than $100 million in value," he adds.

India

India, like China is a market with huge potential. Analysts suggest the country needs to add

100,000MW to its present generation capacity in the next 10 years to satisfy existing and

match new demand.

Foreign power players have experienced severe difficulties in the Indian market because of

the poor creditworthiness of the State Electricity Boards (SEBs), to whom IPPs have had to

sell electricity. "Enron's Dabhol Power Corporation (DPC) was a well known case," says a

financier. "The Maharashtra State Electricity Board was constantly late meeting its financial

obligations to DPC. Maharashtra State had to step in to pay off arrears but then forced a

renegotiation of the tariff paid to DPC." Any foreign investor which does enter the Indian

power market will aim to sell directly to distribution rather than the SEBs, says the source.

However, according to McIndoe at CLP, the new Electricity Act in India (which was enacted

in 2003) will likely encourage new foreign investment in the Indian market.

The Act aims to stimulate competition by making it easier to establish a power station. From

now on such plants will not require specific technical and economic clearance. In rural India,

investors will be able to build stand-alone systems including both generation and distribution

infrastructure.

Under the Act, the SEBs will be reorganized. Their functions will be disaggregated in terms

of generation, transmission and distribution. According to the finance source, many areas

such as Andhra, Haryana, Rajasthan and Delhi have already begun this process.

Encouraged by the Act, CLP is once again looking at new investments in India. "We already

have one power station in Gujarat," says McIndoe, "and we are looking at an expansion of

that project. We will also look selectively at other greenfield opportunities."

"Banks would be happy to follow CLP into the Indian market," adds the McIndoe, "provided

that the offtaker is not one of the electricity boards."

Singapore

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In terms of scale and growth potential, Singapore's electricity sector is a world away from its

Indian counterpart. But given the bankability of Singaporean power projects, financiers have

expressed keen interest in new power developments.

The Singaporean authorities have given approvals for two new merchant power plants to be

built. One is an IPP to be owned by the Keppel Group. A roadshow for this project is

scheduled to take place in the next few months. The other is Island Power, which is

sponsored by InterGen and Sime Darby. This 720MW natural gas-fired power plant is

expected to be completed by 2006 and will be situated on Jurong Island. To fund the S$900

million ($526.4 million) facility, Island Power is seeking to raise S$600 million ($353

million) in debt from local and international banks. Remaining funding, to be finalized by the

end of the year, will come in the form of equity from InterGen and Sime Darby.

Power Sector Development Strategy in Thailand Goes

Local

Several key power projects in Thailand that were delayed by the Asian financial crisis

now appear to be back on track. Investor sentiment is mixed, but with further reforms

in the electricity sector unlikely in the foreseeable future, these projects may offer what

are likely to become increasingly rare opportunities for foreign involvement in

Thailand's power industry.

Date: January 2004

Foreign lenders are once again gearing up to participate in Thailand's electricity market. Four

major projects put on hold following the Asian financial crisis are now back in business. At

the same time, existing plants are examining expansion schemes to meet burgeoning demand

for power. International banks are all the more eager to participate in upcoming projects as

restricted opportunities for foreign investment threaten to eventually make the market a

purely Thai affair.

The underlying dynamics for Thailand's electricity market have not looked this good since

before the 1997/98 regional crisis. Mark Hutchinson, head of research at Mullis Capital, an

investment bank headquartered in Bangkok, says that demand for electricity surged in the

reporting year to the end of September 2003. "Demand grew by 8.1% over the previous year

on the back of strong economic growth," he says.

Reigniting activity

For the calendar year, most analysts expect Thailand's economy to grow between 5.5% and

6%. This suggests a multiple of electricity demand to economic growth of over 1.3 times,

which is fairly consistent with what one would expect in a developing economy, says

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Hutchinson. Demand growth should rise higher still in 2004 and 2005, as the Thai

government is predicting economic growth of 8% and 10%, respectively. "Those figures

make economists a little nervous," comments another banker, "as there is a danger of the

economy overheating. The predictions may well hold true, but they imply double digit

demand growth for electricity."

Three large power projects, backed by both local and foreign sponsors, are to be built in the

next few years in Thailand and will likely benefit from these fundamentals. The three projects

are: BLCP Power, a joint venture between CLP International and Banpu; Union Power (now

to be called Ratchaburi Power, reflecting a change of location), whose investors currently

include Hong Kong Electric and Chubu Electric; and Gulf Power, backed by Gulf Electric.

A fourth facility which is also being built to supply electricity to Thailand is the 1070MW

Nam Theun 2 hydroelectric scheme in Laos. While the project is not physically located in

Thailand, the country will buy about 95% of the power generated by the dam, says

Hutchinson.

The four projects are the last of seven independent power producer (IPP) contracts awarded

by the Thai authorities before the Asian financial crisis. The crisis triggered a deep recession

in Thailand and, in turn, a slump in demand for electricity. The four projects were therefore

put on hold for several years. Both Ratchaburi Power and Gulf Power have been delayed still

further because of opposition on environmental grounds that eventually forced the sponsors

to switch from coal-fired to gas-fired power plants.

Vijay Sethu, head of power, Asia for ANZ Investment Bank's project finance department,

suggests these remaining IPPs, combined with new power projects and expansion of existing

plants planned by state-owned Electricity Generating Authority of Thailand (EGAT), should

take care of the country's energy needs until 2010.

Deregulation on hold

Investors in the Thai power market have had to cope with an uncertain market outlook over

the last few years, thanks to market deregulation proposals. These proposals included the

creation of a power pool system and an independent regulator, and the privatization and break

up of EGAT, by far the most important player in the electricity industry. EGAT controls the

country's transmission grid, is the largest generator of electricity, and the offtaker for all the

IPPs.

However, almost all of these reform plans, except for the partial privatization of EGAT, have

now been shelved. "The reforms were scrapped partly because of opposition from labour

unions who are afraid that reform would mean extensive job losses at EGAT, and partly

because a liberalized electricity market no longer looks so appealing in the light of the

California energy crisis," comments a lawyer who has worked on several project finance

transactions in the Thai power sector.

Hutchinson still expects that the government will sell a minority stake (perhaps around 20%)

in EGAT in the near future, possibly in the first quarter of 2004. "It doesn't look like union

opposition will derail this plan. But the main reason the government is pursuing the policy is

to raise capital, not because of a great philosophical commitment to privatization. Investors

shouldn't read too much into this move," he says. Other market observers agree it is unlikely

13

that the government will sell a majority of EGAT's shares to the private sector any time in the

foreseeable future. "The government is clearly unwilling to loosen its grip on the electricity

market," says one financier.

The cancellation of the reform agenda is mixed news for foreign investors. "What concerns

investors is that EGAT and the government appear eager to restrict the presence of other

players, particularly foreign companies, in the electricity market," says the lawyer.

Going local

Neither EGAT nor the government wants any more IPP projects granted in the near future.

EGAT is therefore pushing ahead with its own power schemes to reduce the need for

additional private generating capacity while the government is likely to grant permission for

new power projects to EGAT itself or the Ratchaburi Electricity Generating Co (RGCO), in

which EGAT has a 45% stake. As EGAT is both cash rich and can access local bank debt for

all its external financing needs, the company's strategy will probably reduce opportunities in

Thailand's electricity market for both foreign sponsors and lenders.

David Gore, director, project finance & advisory at SG Asia, points out that this shift towards

greater local control is clearly visible in the existing IPP projects with recent acquisition of

stakes in Union Power by PTT, Thailand's state-owned oil and gas company, and RGCO. The

trend is expected to continue with Edison Mission understood to be considering the sale of its

assets in Thailand. "It would be highly likely that the buyer of these assets would be Thai,"

says the banker.

There are even indications, says Hutchinson, that some in EGAT would like to bring two

major private power generation companies, EGCO and RGCO, back into the EGAT fold,

although it is not clear how EGAT might achieve that aim. EGAT established EGCO in 1994

and RGCO in 2000 and sold a majority share in both companies via public issuance. "But I

would put the chances of EGCO and RGCO being repurchased well under 50 percent," says

Hutchinson.

Although the cancellation of the reform programme means fewer financing opportunities for

offshore lenders, banks have mixed feelings about the news. As has been the case in the

Philippines, reform initiatives invariably create market uncertainty, and heighten perceptions

of the risk involved in lending to the power business.

Sponsors and lenders draw comfort from the fact that EGAT and the Thai government have

fully honoured their contractual commitments to the IPPs. "In fact when Gulf Power and

Union Power were forced to switch from coal to gas, EGAT agreed to make comprises to

assist the two companies in that switch and the subsequent relocation of their power plants,"

Hutchinson points out.

EGAT's current stance is a strange mix. On the one hand, the authority has managed existing

commitments to private power producers in an exemplary manner, while, on the other,

moving to prevent any further large-scale private power projects beyond the seven IPP

projects.

Small is beautiful?

14

For this reason Hutchinson says, "If I were advising foreign investors about potential

opportunities in the Thai power market, I would say forget about new large-scale plant and

focus on smaller plant opportunities". This half of the market continues to flourish. There are

already over 50 small power producers (with plants of between 5MW to 200MW)

contributing a total of approximately 4,000MW to Thailand's electricity needs.

Indeed, a number of foreign players, including Japanese and Malaysian companies, are

currently looking at small-scale power projects. However, this is a sector many foreign

bankers are reluctant to enter. "The typical deal size is small, but more importantly the power

purchase agreements [PPAs] are quite different to the PPAs for the seven major IPPs. In our

view it is very difficult to attach a project financing to the power purchase agreements in this

sector," says Gore.

Structuring the finance

Due to the delays to both the Gulf Power and Ratchaburi Power projects, the Nam Theun 2

development (for which ANZ is financial adviser) will now be the first of the remaining IPPs

to start the financing process, although financial close is not expected until the first or second

quarter of 2005. Sethu says information memoranda on the project have already have sent out

to banks and multilaterals.

Nam Theun 2 is likely to be financed half in Thai baht and half in US dollars to reflect the US

dollar-indexed tariff structure, says Pierre-Antoine Barreault, also in SG Asia's project

finance and advisory, who was involved in the recent BLCP financing. The reason for the US

dollar indexation is historical. The power purchase agreements for the seven IPPs were

agreed before the Asian financial crisis at a time when foreign funds were plentiful and

liquidity in the local bank market was restricted. US dollar indexation was the means chosen

to mitigate a potential currency mismatch between the financing and project revenues.

"Given the country risk, the financing for Nam Theun 2 will also need strong support from

the multilaterals. The ADB, the World Bank and a number of ECAs are likely to be support

the scheme," adds Barreault.

Ratchaburi Power will probably be the next project financed, with Gulf Power roughly six

months behind. Several sources indicate the financing for Ratchaburi could be launched

between the second quarter of 2004 and the end of 2004. "The exact timeframe is fluid

because of the strong rise in demand for electricity, which has increased the possibility of an

electricity shortfall in Thailand," says Gore. "As a result the IPPs are accelerating their

discussions with all the relevant parties."

Similar to the US$1.1 billion (equivalent) BLCP financing which is in the process of closing

and the Nam Theun 2 deal, financiers expect Ratchaburi Power and Gulf Power to be

financed with a mix of local and foreign currency funding.

Yet, in contrast to pre-crisis days, domestic liquidity is no longer in short supply and future

power projects, even those with foreign sponsors, need not involve any foreign finance. "The

attraction is not just that it is now relatively abundant, and cheap to finance in baht, but it is

also easy to arrange. Documentation and terms are less onerous than deals involving foreign

banks," says one financier.

15

Foreign involvement

Bankers do expect some proportion of funding for other Thai power projects to come from

offshore lenders. One of the benefits of an offshore financing is the ability to fix interest rates

beyond five years. "This is not possible with a baht deal," adds Barreault.

"Certainly with projects that are partly owned by foreign companies, there will generally be a

desire for a US dollar debt tranche," adds Barreault. The banker suggests BLCP sponsors

would have preferred a greater volume of US dollar debt in the financing package. "But the

amount international lenders could commit on a clean basis was constrained by the sweet-

sour ratio or the ratio of debt covered by private insurers, ECAs or multilaterals to uncovered

debt. Banks limited themselves in this project to 30% of their overall exposure," explains the

banker. Thai banks also have the ability to lend in US dollars, but their capacity to do so is

limited both in terms of quantity and tenor.

What of foreign bank appetite for further power deals in Thailand? "There are a number of

factors to be considered," says Gore. "Many international lenders already have exposure to

Thai power projects and the last of the upcoming IPP projects to come to market may find

appetite has reduced a little more as banks have committed to the preceding deals." On the

other hand, Barreault notes that project finance opportunities in the region are relatively

scarce. "This may encourage greater exposure to the Thai power market," he says.

Sethu points out that foreign interest in the BLCP financing where ANZ acted as lead

arranger was sufficient to allow cover to be reduced from the normal four point cover to three

point cover as well as have an uncovered tranche. The financing is not yet complete (both the

ADB and Japan Bank for International Cooperation are to join the transaction) but more

international commercial lenders are also set to participate, in addition to the 10 foreign

banks already in the deal.