It is generally accepted that two different approaches can be taken to introduce market competition. Either government-owned assets can be broken down and privatised, introducing more participants in the market, or the government can introduce a market liberalisation programme to attract new market participants. Although both of these approaches are linked the market is still faced with two alternative competition models: either privatise first and then liberalise, or liberalise first and then privatise.
In the more emergent market economies of South East Asia and Central & Eastern Europe the preferred model is to privatise electricity assets, in particular generation assets, as a route to introduce market liberalisation and competition. For these more emergent market economies with an outdated electricity market infrastructure the privatisation approach is seen by government as the best approach to raise revenues and provide much needed investment to upgrade the power market infrastructure, as well as to provide much needed capital to support government budgets.
At face value such an approach would appear sensible. However, it is not just the process of privatisation that is important but also the method of privatisation. In both South East Asia and Central & Eastern Europe the issue of privatisation is becoming politically sensitive as sectors of the market argue against governments selling out control of the power sector to foreign companies.
Thailand’s new government was swept to power last month on a populist promise to restrict the sale of privatised energy assets to the Thai public. But if the government keeps to its election promise analysts believe its asset sales will be undervalued and the future prospects for its energy market development could be impaired.
Of all the energy market economies in South East Asia, Thailand should have the greatest prospects for success based on its energy assets and high per capita demand for energy. But as with other economies in Asia it is beholden to powerful union organisations, which argue that these assets should remain the property of the public. By pacifying these unions with promises to restrict assets sales to the domestic market the Thai Rak Thai (Thais love Thais) party of Thaksin Shinawatra won the election decisively last month. But gaining power and remaining true to election promises are not necessarily linked.
The problem faced by the new government is to reform the energy market, and in particular the electricity sector, while being faithful to its election promise. But in doing so it could undermine the future economic success of the energy market. One of the key issues at stake is the privatisation of the country’s main electricity utility – the Electricity Generation Authority of Thailand (EGAT) – which is necessary if the country is to effect a competitive supply market and meet its objective of introducing a power pool by 2003. The consensus among analysts is that this deadline is now unlikely to be met and may slip by a couple of years to 2005.
Previous asset sales in the electricity sector suggest that limiting sales to the domestic market will seriously undervalue the assets and limit the capital received by the government, which is badly needed if it is to continue its economic redevelopment following the recent financial crisis. The sale of 40 per cent of EGAT’s flagship Ratchaburi power plant to the Thai public was heavily sweetened with most of the fuel risk removed but still only raised the equivalent of $400 000 for each megawatt of capacity. By comparison the sale of equivalent generation assets in Malaysia realised $680 000 per megawatt of capacity while the planned sale of Singapore generation assets are expected to value them at around $600 000 per megawatt of capacity.
If Thailand is to position itself as a major competitive energy market in South East Asia it has to allow foreign investment and participation in its market. Domestic investors are unable to provide the level of capital of foreign investors, and more importantly, foreign investors bring not just capital but experience of operating companies in competitive market environments.
Restricting the investment opportunities to the domestic market will undermine the prospects for developing a competitive energy market and could also risk impairing the country’s fragile economy.
Meanwhile, in Poland, which has been the most proactive country in Central & Eastern Europe to address electricity market liberalisation, the differing positions between the Economics Ministry and the Treasury as to how the market should be privatised may impact on the future success of the market. This lack of consensus on timing and structure of privatisation risks potential foreign investors losing interest in the Polish market.
Existing government privatisation plans call for privatisation of up to 25 per cent of power distributors, up to 35 per cent of generators and up to 45 per cent of combined heat and power plants. But foreign investors are unlikely to be receptive to purchasing minority stakes in these assets, and for privatisation to be successful the government will have to sell majority stakes in all assets.
The other contentious issue to be resolved is the packaging of privatisation assets which the government believes will accelerate the privatisation process through selling combined distribution and generation assets.
Again this is unlikely to be attractive to foreign investors. While distribution assets are highly valued, this value will likely be reduced if distribution assets were sold in conjunction with generation assets given the investment required to upgrade the outdated generation assets.
The Polish government has to balance the timing and structure of its privatisation process with its forecast budget revenues for this year. If it delays the process or undervalues the assets being sold the risk extends beyond the domestic electricity market into the country’s budget revenues. It may also impact on the timing of Poland’s entry into the European Union, which is partly dependent on the country meeting the European Union directives for gas and electricity competition.
