Thailand’s State-owned firm reform: for better or worse

A state-owned enterprise is somewhat an anomaly as it is neither public nor private in nature. It is owned by everyone and yet no one.

It’s raison d’etre is often the delivery of public services and yet most operate commercially. How to deal with state-owned enterprises has been a constant challenge facing many governments.

Thailand has had her share of stateowned enterprises reform. In the year 2001, during the then-Thaksin Shinawatra administration, the national oil and gas company, the PTT, was corporatised then subsequently partially privatised through the stock market.

The listing of the Airport Authority of Thailand, which became the AoT Plc, and the Mass Communication Organisation of Thailand, which became MCOT Plc, followed in 2003 and 2004 respectively.

The privatisation scheme facilitated the mobilising of private capital that helped to expand these enterprises.

At the same time, mandatory compliance to the more stringent stock market rules governing disclosure, conflict of interests as well as internal and external audits and controls helped boost transparency and accountability within these organisations.

However, the reform left a bad taste in many Thai people’s mouths for several reasons.

First, a large portion of the lucrative PTT’s share ended up in the hands of several politicians and their relatives. Although these share acquisitions may be legitimate, the resulting concentration of the much coveted shares in the hands of the wealthier and financially privileged few did not help.

Second, the failure to remove the monopolistic business unit from the enterprise designated to be privatised (the gas pipeline in case of the PTT) reveals the government’s narrow objective of maximising revenue rather than the industry.

Third, and most importantly, the partial privatisation that left the state the majority equity shareholding did nothing to prevent the political meddling in these enterprises. Corruption, scandals, fraud continued to plague these listed state enterprises.

Since the mentioned privatisation bout, there were only marginal reforms undertaken mainly by the bureaucrats at the Ministry of Finance which supervises the state-enterprises.

For example, in 2007 a roster of names of those who are qualified to sit on state-enterprises’ board of directors was created in order to vet candidates. This was known as the “director’s pool”. The scheme did not work, however. Politicians in power could always add the names of those they would like to appoint as directors on the roster.

When the current government came into power, consolidation of the management and control of the rather unruly state-owned enterprises was among the issues on top of its agenda.

A committee known as the “SOE superboard” consisting of the prime minister himself as the chairman, the governor of the Bank of Thailand and a few prominent bankers and financiers was created in 2014.

The “superboard” recommended that a holding company that owns and manages state enterprises, much like Temasek Holdings of Singapore or Khazanah Nasional Berhad of Malaysia, should be established. And so for the past three years, a draft law setting up such an entity has been in the making.

The bill was approved by the cabinet in August this year and in September, it passed the first reading of the National Legislative Assembly (NLA). Proponents claim the law will help steer a major reform in the management and governance of state enterprises.

Opponents, on the other hand, accused the law of having a hidden agenda to simplify the privatisation of state-owned enterprises whose shares are held by the holding company and to centralise the control and management of state-owned enterprises in the hands of politicians.

It’s my belief that the law has been drafted with good intentions. It contains many provisions that would help boost the transparency and efficiency of stateowned enterprises. First, with establishment of the holding company, the oversight of state-owned enterprises will be clearly separated from the policy work. In the past, the State-owned Enterprise Policy Committee was responsible for both policy and supervision of SOEs.

Second, the consolidation of the supervision and management of SOEs will facilitate better coordination among state enterprises in terms of investment plans that will lead to better allocation of financial resources. An illustrative example would be that public buses and trains will now be better connected.

Third, the law sets out clear procedures for the nomination and selection of state enterprises and holding company directors with some provisions for disclosure of the selection process to ensure this transparency.

Finally, the bill contains transparent procedures governing the provision of financial subsidies to state enterprises and a more rigorous regime to hold the enterprises accountable for their performance. These are just a few of the key reforms contained in the bill.

All this seems to be very good for state enterprises and their management. However, the Archilles’ heel of this bill is the selection and appointment of directors of both the holding company and the individual state enterprise.

Although the bill spelled out clear procedures for vetting, nominating and selecting directors by supposedly “independent committees”, these committees consist of former bureaucrats like permanent secretaries of finance, governors of the central bank and secretaries general of stock exchange commissions handpicked by the stateowned enterprise policy committee made up of various ministers, several high-ranking bureaucrats and chaired by the prime minister.

Proponents of the bill posit there are disclosure provisions that can ensure transparency of the nomination and selection process. But the bill merely states that the committee vetting candidates for directorship of individual state-owned enterprises shall “disclose criteria and the selection procedure to the public” [Section 37] but is silent on the transparency of the actual selection process undertaken by line ministries.

The same goes for the selection of board of directors of the holding company. Section 64(3) prescribes that the nominating committee shall “establish a procedure that is transparent and open, keeping in mind about good governance” and Section 64(4) stipulates the nomination criteria, method and procedure to the public”. I believe these provisions are not sufficient to ensure a merit-based selection process.

So what can be done? In the absence of trust in politicians, it is necessary to “depoliticise” the selection criteria. There are three ways.

First, the law may spell out exactly the skill or discipline of the director to be selected. This is a common practice in many countries. For example, if you look up the list of directors on the board of Singapore Airlines, you can see they are professionals in the areas of finance, investment, marketing, law or engineering.

Second, third parties may be appointed to the committee vetting candidates. Examples of those with sufficient social capital include the governor of the Bank of Thailand, the head of the Transparency International (Thailand), the head of the Anti-Corruption Thailand (a private outfit), or the head of the Thai Institute of Directors (IoD). These people can set up subcommittees to oversee the task.

Third, the government may invite third parties to observe the selection process from the very beginning to the very end and report directly to the public.

At the same time, the bill can go much further in setting a new governance standard for state-owned enterprises. For example, it may stipulate that stateowned enterprises’ investment projects above a certain size must set aside a fund for third-party observation and audit. It may also include a provision requiring all state-owned enterprises comply with the same rules as listed companies do in terms of the disclosure standard, the directors’ accountability, dealing with conflict of interests, and so forth. If time is required for full compliance, then provide for a definite phase-in period.

So will this latest attempt at reform be better or worse for state enterprises? It will be difficult to tell, as the whole scheme depends on who is in charge.
De-politicising the selection process and prescribing a concrete governance standard in the law can help comfort Thais who are weary of crooked politicians.

That said, there are no reasons to reject the law. Thailand cannot afford to have state-owned enterprises managed like a fiefdom as it has in the past. Let us help ensure the reform delivers benefits to the people, not just to those in power.

Deunden Nikomborirak

Deunden Nikomborirak, PhD, is research director for economic governance, Thailand Development Research Institute (TDRI). Policy analyses from the TDRI appear in the Bangkok Post on alternate Wednesdays.

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First Published: Wednesday, November 22, 2017 on Bangkok Post: Policy focus

The post State-owned firm reform: for better or worse appeared first on TDRI: Thailand Development Research Institute.

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