Should the Shares of PTT and Thai Airways Be Sold?

There was interesting news recently about the government wanting to sell 2% of PTT and Thai Airways shares to the Vayupak Fund. The purpose was to make PTT and Thai Airways no longer state enterprises so that the public debt would be reduced by approximately a trillion baht (or 10% of GDP) as the government would no longer have to guarantee their debt. If we combine the impact from this policy with the impact of transferring the Financial Institution Development Fund (FIDF)?s debt to the Bank of Thailand, the total public debt would be reduced by 20% of GDP.

Ultimately, the present public debt of 4 trillion baht, or about 41% of GDP would decline to be 20% of GDP. The result of public debt reduction would enable the government to increase borrowing for Thailand?s further development, while also improving our country?s credit in the eyes of foreign investors.


Sources : http://www.bangkokpost.com/media/content/20120121/351297.jpg

These ideas, whether right or wrong have already stirred some controversial social reaction. Should they adopt this plan? Will it benefit or adversely affect the public?

In order to consider the matter, the IMF and World Bank have established some assessment criteria for the fiscal sustainability of Low Income Countries that have usually received financial assistance from the IMF and World Bank. The principle is that debts of state enterprises may not necessarily be included in the public debt if the state enterprises can borrow without state guarantees, and their operations do not pose much risk. In addition, the IMF and World Bank have defined six criteria in case of separating the state enterprise debt from the public debt. These enterprises must be as follows;

1)  Independently managed from the government, with no interference in business management and the appointment of staff and Board

2) Have no patronizing relationship with the government. No subsidies and preferential treatment received from the government

3) Have a standard audit.

4) Disclose a comprehensive and transparent annual report

5) Have a strong and sustainable financial status

6) Pose no risk factors to the country, public and other businesses

 

Personally, I think that this sale of 2% of PTT and Thai Airways shares to Vayupak Fund, which will exclude PTT and Thai Airways from being state enterprises, can be done by following the six criteria above. But after consideration, it was found that PTT and Thai Airways could meet only two requirements; those of the third rule of having a standard audit and the fourth rule, which is to disclose the annual report because they had to report to the Office of the Auditor General and the Stock Exchange of Thailand. However, they failed the other criteria almost completely (see Table 1).

Table 1: Analysis of PTT and Thai Airways according to the criteria of IMF and the World Bank

Criteria

PTT

Thai Airways

1) Independently managed from the government, with no interference in business management and the appointment of its staff and Board

Fail

Fail

2) Has no patronizing relationship with the government. No subsidies and preferential treatment received from the government

Fail

Fail

3) Has a standard audit

Pass

Pass

4) Discloses a comprehensive and transparent annual report

Pass

Pass

5) Has a strong and sustainable financial status

Pass

Fail

6) Poses no risk factors to the country, public and other businesses

Fail

Fail

Source: Analysis of Kriengsak Chareonwongsak in, "Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries."

Failure to reach IMF and World Bank standards will risk causing adverse effects, rather than good.

Although the sale of shares of PTT and Thai Airways will lower the public debt, it is likely to leave the government unpressured to find revenue, along with no pressure to increase tax rates. This situation enables the present and next government to continue to use populist policies, which may be detrimental to long-term fiscal discipline and may harm the country, especially when over these recent years, every political party uses populist policies.

The question of whether the Shares of PTT and Thai Airways should be sold, and to whom, should be considered on a case by case basis.

In the case of Thai Airways, I think it should be sold to private investors rather than Vayupak Fund because private investors will help to reduce interference and intervention from the political sector, which has been one of the major problems in Thai Airways all along. It will also improve flexibility, thus enabling global competitive ability. Indeed, many foreign airlines that used to be state enterprises, have all been transformed into private businesses, such as Korean National Airlines (KNA) to be Korean Airlines, Air Canada, British Airways, and even Japan Airlines.

In the case of PTT, I think that the Ministry of Finance should not sell it off to private investors or Vayupak Fund at this time because PTT is an important state policy tool, having a business of enormous potential, related to national security, especially energy, and the well-being of the entire country.

By taking international principles into consideration, in the decision of whether to sell PTT and Thai Airways, we need to consider wider issues than just the reduction of public debt. The issue of share holding of each state enterprise has to be considered against its status and context, therefore a common practice cannot be used for every organization.

Kriengsak Chareonwongsak.
Senior Fellow at Harvard University?s Center of Business and Government.
kriengsak@kriengsak.comhttp://www.kriengsak.com