TOT ready to lead road to recovery in Thailand

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Thailand was adversely affected by the Asian economic crisis in 1997. To raise investment levels and restore market confidence, the Telephone Organization of Thailand (TOT), founded in 1954, is scheduled for privatization in 1999, after over 40 years as a state-owned monopoly. TOT's president Thongchai Yongchareon comments on recent developments to Mark Holmes.

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In 1995 the Thai government embarked on a privatization and liberalization programme, passing new legislation - the so-called Telecommunications Master Plan - to direct the privatization of both the Communications Authority of Thailand (CAT), which handles international services, and the Telephone Organization of Thailand (TOT), the government agency responsible for domestic calls. However, implementation of the plan was repeatedly delayed. The economic crisis that swept over the country in 1997 - and led the International Monetary Fund to play a key role in the drafting of macro-economic policy - appeared to give a new impetus to liberalization in 1998.

The government has announced plans to privatize TOT. The operator needs to restructure now. In an interview with Global Telecoms Business, TOT's president Thongchai Yongchareon describes the steps that the operator is taking prior to privatization and developments in Thailand.

Thongchai believes that the operator may be partially privatized in 1999: "If you talk about the corporatization of TOT, I think this is the year when TOT might be transformed into a private company. But to become a really private company, that means reducing the government's stake below 50%. This will take time. But this is the goal. It depends upon the equity markets both inside and outside Thailand. There is also the issue of finding a strategic partner from abroad. Currently, the strategic partner would not hold more than 25%, while another 22% would be privately owned by investors, both domestic and international."

Thongchai is in favour of privatization: "I think that privatization would constitute a positive development. I believe in the qualitative force of competition. No agreement has been reached so far on privatization proceeds. There has been a discussion in the ministry, as well as in the cabinet, about the percentage of the proceeds that will be re-invested into the company, but these discussions have not been finalized."

Preparations for privatization
Thongchai explains how the company is already preparing for transformation from a state-run monopoly into a privately-owned enterprise: "We have already begun the transformation process inside the company. This year we have set up a new project that will take four years to accomplish. We have established a new vision, mission, value and culture that we would like to implement. It will take about four years. We hope to be successful in changing the process and also the people to meet the challenge coming from competition and also from other operators."

TOT is not afraid of competition. According to Thongchai, the operator welcomes the opportunity and is restructuring to meet competitive challenges: "We are not afraid of competition in the domestic market. We are looking forward to the prospect of competition. We have many programmes, such as early retirement programmes and other types that help us reduce the number of employees, but on a voluntary basis."

Privatization terms may well stipulate the involvement of a foreign partner. Thongchai believes that the company could gain from the experience of a foreign operator: "As for the strategic partner, I think that is part of the programme for the privatization. The acquisition of a foreign strategic partner has had a delay of two years. I think that we will soon initiate the procedure to acquire a foreign partner. I think that there is a lot for us to gain, since TOT has been a state-owned enterprise and we have been operating this way for over 40 years. There are many things in our blood, the culture and everything else. We would like to switch to the private sector environment. It is difficult to naturally change on our own. We would like to have new blood coming into the organization from Thailand, in terms of employees, as well as a foreign strategic partnership. We invite new blood in the TOT organization: this will stimulate change."

Merger between TOT and CAT
There has been speculation about a possible merger between the two state operators in Thailand, TOT and CAT. Any such alliance would create a great deal of synergy and make the company a more attractive investment opportunity. Thongchai talks about a potential merger and his perception of the consolidation process: "I think that at present, as stipulated in the National Telecoms Masterplan, TOT and CAT will go under the umbrella of one holding company. I think that this is important. We look at this from the investor perspective: if you have a business that has a total cycle of services, there would be substantial interest from investors. So I think that TOT has a domestic network and CAT has the international one. There is a synergy right there. I think that there have been efforts in the area of consolidation in Thailand. But it is difficult to be successful. If you talk about alliances and other forms instead of consolidation, I think that it is already happening in Asian telecoms."

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TOT and CAT recently started to co-operate in cellular. The attorney-general authorized the two operators to form a joint venture. Thongchai talks about this joint venture and the potential of cellular: "The minister of communications has asked TOT and CAT to study and form a joint venture to offer mobile services. This is only a study. But we also perceive a strategic importance for TOT to be in the cellular market on our own. We are looking to use wideband-CDMA. We see a lot of potential growth in this area."

Currently we have over two million subscribers on the network out of the 68 million people in Thailand. I would say that the growth in subscribers would only be marginal owing to the impact of the economic environment. You have wideband and narrowband CDMA. W-CDMA, which is a new technology, would use the GSM infrastructure. That is the kind of opportunity that TOT is opting for over the next three years. If you talk about narrowband CDMA compared to GSM, I think that narrowband CDMA has been employed in Korea and in the US. We also have narrowband CDMA in place, but only in Bangkok."

Potential of Internet telephony
TOT plans to diversify its service offerings. The company will expand into the area of Internet telephony. Thongchai explains: "Later this year we will provide Internet telephony on our network. I think that Internet telephony in terms of cost is much cheaper than conventional telephony. We see only high growth coming from Internet telephony. On the Internet service side, the market is growing faster than a number of other services, but it is not yet comparable to those experienced in other countries. We have an IN service that will be offered to business customers. We also have ATM services, broadband ISDN that will be coming this year. For ATM, we provide an information superhighway throughout the country."

TOT expects to see considerable escalation in data traffic and Internet usage. Thongchai talks about one of the projects involving the build-out of a nation-wide ATM network in Thailand: "I think that we have already spent over $150 million on the ATM network, not only for Bangkok, but also for all the other major cities in Thailand. The main application will be Internet telephony and this will be put on the ATM network. The second one will be on the superhighway - high-speed data transmission circuit. These would be the two main applications. We will also try to demonstrate Video-on-Demand over ATM. I think that Internet growth will fluctuate between 15-20% a year. I think that the growth in Internet Telephony will be much higher, because we will be charging the customer 50% below the price of conventional telephony services."

Impact of the Asian economic crisis
Despite the company's ambitions to bring the benefits of modern communications to the country, the state of the Thai economy has led TOT to reduce expenditure on network modernization. Thongchai talks about the constraints that are being placed on TOT: "At the moment, we are not spending so much on network modernization, as we have to comply with the conditions that the government has committed to the IMF. There is the current project that we are implementing, but investment has to be controlled and reduced significantly. In two or three years it will get back to normal. In the past, we would spend about $200 million on network modernization."

TOT has had to delay a number of projects and sustained a steady decline in revenues. In September 1998, TOT yielded a profit of Bt15.5 billion ($400 million). The previous year it had been Bt23.7 billion. Thongchai attributes this fall mostly to the depreciation of the national currency: "I think that this decline is mainly attributable to the devaluation of the Baht currency. But from this year on we have noted another source for the decline: the impact of the economic and financial crisis. This has just reached TOT. So we also expect to see revenue fall this year."

Thongchai describes the strategy that TOT is employing to combat the slowdown: "The economic slowdown only arrived this year. Our net number of customers only started to fall this year. The impact of the economic environment has just affected TOT. We are now reviewing this issue: some of our projects may have to be delayed. I think that the success of the telecoms sector is vital for future economic prosperity. You need telecoms communications services as a vehicle, as an engine for economic growth. If you do not have the telecoms services and facilities, it is difficult to try to boost the economy and also other industries in the country. Telecoms has to be first. Naturally some projects have to be delayed."

Delay of services to rural areas
The programme to provide better services to rural areas in Thailand is one such project. Thongchai talks about the operator's ambitions to improve services and bring the benefits of modern communications to remote areas: "For the past 15 years we have been trying to provide access to service to the rural community in Thailand. We aim to provide the access to services to every community in the country this year. Unfortunately, owing to the economic circumstances and some other factors, part of the project has to be delayed for maybe up to three-four years. We have no actual universal service obligations exclusively. But we are trying to provide universal service ourselves."

TOT is also delaying the installation of new lines, as there are currently more lines than customers: "In terms of telephone density, the current level is about 12%. For the next few years we will delay the expansion of fixed lines, because we currently have about two million lines waiting for new subscribers."

Revenue share agreements
The harsh economic conditions have taken a toll on all the operators, but TOT's competitors, TT&T and Telecom Asia, have been feeling the strain more than most. They are both heavily in debt: many attribute this situation to the current revenue share agreements. It has been claimed that they are too favourable to TOT. Charles Peza, a telecoms equity analyst at Salomon Smith & Barney, believes that the revenue share agreements placed too heavy a burden on the new players: "Unfortunately, the private operators committed more than they probably should have. That is part of the reason why they are in financial trouble right now. There are certain key questions in Thai telecoms. Everyone knows about the difficult financial conditions faced by the private operators. I would say that in part the new operators did not do a good job in terms of market research. Therefore they have probably over-projected revenues. As a result they over committed in terms of the revenue shares that they are paying to TOT."

Peza continues: "The revenue share burden would have to be reduced. That would mean converting those revenues into equity most probably, or assets. Under the current legal framework you can't do that, because Thai telecoms is still about state monopolies. There are certain key legislative pieces that need to be passed. Once it is passed, there is a lot of work that needs to be done. An independent regulator needs to be set up, if you convert the revenue share into equity. That is going to be done under the premise that you are deregulating and demonopolizing the market. You would need the independent regulator to mediate between formerly public companies and new operators."

While Thongchai sympathises with the plight of the new operators, he remains adamant that the revenue share agreements are fair and believes that the debt problems that the operators are experiencing can be resolved: "I think that it is a difficult time for TT&T and Telecom Asia. As for the current revenue sharing agreements that have been implemented, I think that they are fair. The percentage of revenue sharing was proposed by those operators. Of course they are heavily in debt mainly because of the Baht devaluation. But that is the risk of business and they have taken that challenge. They cannot view that risk as unfair. The debt problem in the telecoms sector in Thailand has to be solved. This process is already underway. Some have already restructured their debt. Some are still facing difficulties, but sooner or later it has to be solved."

Thongchai believes that an independent regulatory body could be in place by the end of the year: "There is no national regulatory body at present. The NCC has not yet been established. I think that it has already been agreed that the regulator will be independent and that the regulatory environment in Thailand will provide a level playing field. At present, there are two proposals concerning the regulatory environment. I think that they will soon combine the two together to make one proposal to the cabinet and of course to parliament. Optimistically, the independent regulator could be in place this year, but it could take longer."

Regional ambitions
TOT has a number of regional ambitions: it aims to become a regional hub for international traffic in Asia. "Of course we have ambitions to become a regional hub for international traffic. We would like TOT to be a leading company in the region. Our international strategy does not necessarily depend on domestic competition. We are always looking for opportunities outside Thailand. We would like to extend our reach abroad. That is why we invested in the Oxygen project. I think that it is very important for us to be involved and extend our reach beyond Thailand. That is why we decided to invest in Oxygen."

"Our international ambitions are not clear at the moment, but there is a view that TOT and CAT (Communications Authority of Thailand) would be allowed to compete, even though they are under the same holding company, so that we can go out and provide international telecoms services. With that in mind, I think that is why we decided to invest in Project Oxygen. But CAT might receive a certain period of protection, where they still enjoy a monopoly, but after that it would be free and we could compete."

Its regional ambitions were further underlined by the recent announcement of a joint venture with the global satellite operator Iridium. Thongchai pinpoints the benefits of this JV, especially in terms of cost: "In the past we did not take an active role concerning satellite services. We stayed mainly on the landline side. At this time we have to think about investment levels and we don't have much to invest. So we decided to invest in the Iridium project. At the moment we are reviewing all our planned investments regarding other satellite projects. The advantages of being involved is firstly, that the gateway to Iridium is in Thailand, and secondly, we would like Thailand to be a hub in one of the global networks such as Iridium's."

Prospects for TOT
TOT's long-term prospects look positive. It will play a pivotal role in Thailand's economic recovery and, aided by a strategic partner, would be in a prime position to expand its service offerings, both at home and abroad. Thongchai describes the company's ambitions and a new era in Thai telecoms: "In our own region, in the year 2003 we would like to be one of the leading companies in the Asian region. We want to be number one in Thailand - that is our ambition. To achieve that goal we have to do a number of things. That is why we have come up with the transformation programme. You will see more mergers, alliances, acquisitions and strategic partnerships. These are already common and they will continue to grow."