Foreign Investors on Edge in Junta Ruled Thailand

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BANGKOK – Thailand’s military regime, keen to promote its ambitious Eastern Economic Corridor (EEC) development program, sent mixed signals to the same foreign investors it hopes will commit capital to the multi-billion dollar scheme.

On March 19, the Board of Investment (BOI), the government agency responsible for granting promotional privileges to foreign direct investment (FDI), hosted its annual public relations event titled “Thailand – Taking off to New Heights.”

Government big wigs including Deputy Prime Minister Somkid Jatusripitak appealed to the 2,000 participants to join the ambitious EEC, designed to lift the kingdom out of its middle- income trap and move up the value-added chain to higher tech industries such as electric vehicles, robotics and biochemical.

The 1.7 trillion baht (US$54 billion) scheme will leverage into the existing Eastern Seaboard, the country’s industrial heartland that has fueled decades of industrial export-led growth that has more recently lost competitiveness to lower cost regional rivals, including China.

“We need partners,” Somkid, the junta’s economic czar, said at the event.

The next day, however, the Commerce Ministry’s Business Development Department announced plans to amend the Foreign Business Act (FBA) to tackle the nation’s long-festering “nominee problem.”

Nothing sends chills down the collective spine of Thailand’s foreign business community like plans to amend the FBA, a protectionist piece of legislation that prohibits 100% foreign-owned companies from participating in a host of business activities ranging from rice farming and making Buddha images to wholesaling, retailing and operating hotels and restaurants.

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Many elude the provision by taking on Thai nominees who are nominally shareholders in their foreign-invested ventures, but through contractual provisions lack managerial, operational or legal control. An entire industry, facilitated by local and foreign law firms, has developed around the nominee system.

Threats to amend the FBA have come and gone in the past. The last nationalistic push came months after the May 14, 2014 coup that brought then army commander General Prayut Chan-ocha and his military lieutenants to power.

That effort, coming at a time when Thailand’s international reputation was in already in tatters for reverting to military rule, especially among Western democracies, was shot down by vocal objections by various foreign chambers of commerce, including representatives of the Japanese business community which accounts for about 50% of Thailand’s manufacturing.

Japan Inc started shifting its production bases to Thailand in the mid-1980s to avoid the ill-effects of the appreciation of the yen currency following the 1985 Plaza Accord signed by five industrial nations to deliberately weaken the US dollar vis a vis the yen.

Japan has more than 2,000 registered companies in Thailand, which are the bedrock of Thailand’s export-oriented industries such as automobiles, electronics and electrical appliances. The Japanese expatriate community in Bangkok is one of the largest in the world, giving rise to a plethora of restaurants, bars, super markets, services and apartment blocks catering to Japanese customers.

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While many of the largest Japanese manufacturing companies are 100% Japanese-owned, provided they are BOI promoted, and some even own industrial land if allowed by the BOI or based on industrial estates, the majority operate as joint ventures with Thai partners.

Under the FBA, a company is defined as “foreign” if ownership is more than 50%. Most joint ventures have 49% foreign equity, with Thai partners owning the remaining shares, acting essentially as nominees. As such, joint venture companies can participate in the myriad business activities reserved for Thais under the FBA.

The existing FBA, promulgated in 1999 to replace the even more onerous-sounding Alien Business Act of 1972, a decree passed by former dictator Field Marshal Thanom Kittikachorn (1963-1973), does not prohibit the issuance of different classes of shares with different voting rights, a loophole that allows a 49% foreign-owned company to exercise majority voting rights.

The Commerce Ministry’s latest proposed amendment to the FBA would apparently change that by expanding the definition of a foreign company to one with majority foreign shares or majority voting rights.

“The new definition of foreigner will also take into account the management control or voting rights,” Kulanee Issadisai, director general of the ministry’s Business Development Department, told the Bangkok Post newspaper.

Details of the proposed amendment, which might include relaxing the list of businesses in which foreigners are excluded, have yet to be fully disclosed. But an amendment of the voting rights clause is exactly what the foreign business community dreads and what Thailand’s military and future governments should fear as well.

“If the amendment was enforced everything would collapse,” opined one foreign lawyer who has been operating in Thailand for the past 40 years.

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That is what the collective foreign chambers of commerce told the Commerce Ministry three years ago, when the FBA amendment was first mooted under the junta regime. The first bid to amend the FBA was dropped after the negative implications for FDI became apparent.

“I was at a meeting with the Commerce Ministry three years ago where a Japanese representative stood up and said, ‘Don’t do this. You will destroy the county,’” recalled one former president of a European chamber of commerce. “The Japanese are concerned not because of their restaurants, but because the whole Japan Inc in Thailand is using these structures.”

While some Japanese manufacturing companies are 100% foreign owned, they need to use joint ventures to operate trading and wholesale activities which are essential to running an integrated business in Thailand.

American, European, South Korean, Taiwanese and now increasingly Chinese investors are all use Thai “nominee partners” in their joint ventures to operate many aspects of their businesses.

Thai businesses also utilize the nominee structure to their advantage. For example, when former Thai premier Thaksin Shinawatra, who made his fortune in the telecoms sector, sold his family’s 49% stake in the Shin Corporation to Singapore’s Temasek Holding in 2006, he put in place alleged Thai nominees to hold the remaining 51% to qualify as a Thai company.

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The sale fueled nationalistic street protests against Thaksin that eventually led to the September 2006 coup that overthrew his elected government.

The coup-installed regime under prime minister Surayud Chulanont also mooted an amendment to the FBA in a bid to undermine the Shin Corp sale by exposing the nominee structure of the deal. That bid was eventually dropped, however, after much lobbying by the FDI community.

Some legal experts speculate that the latest FBA amendment drive may have been motivated by the military regime’s renewed investigations into Thaksin’s business dealings, although he has been in self-exile since 2008.

Others point to powerful Thai business groups that don’t appreciate foreign competition in the local markets they dominate.

In other respects, Prayut’s regime has been pro-FDI, going out of its way to remove obstacles to investments that helped Thailand jump to #26 in the World Bank’s Ease of Doing business index last year, rising from #46 in 2016.

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The regime has lifted restrictions on foreign participation in financial services and insurance, and introduced new incentives to attract international headquarters to Thailand that include eased rules on foreign participation in certain business activities such as wholesale and trade.

But the military government’s biggest gamble is the EEC scheme, designed to transform three eastern coastal provinces into an FDI-fueled liberal business zone to rival Singapore.

By design, the program will be heavily dependent on FDI to jumpstart high-tech and R&D driven industries where Thais lack a natural competitive advantage.

“We have done everything in our power to make sure the benefits given in the EEC are comparable, if not better, than other alternatives,” said Kobsak Pootrakool, Minister Attached to the Prime Minister’s Office. “I think this will be one of the most exciting times to invest in Thailand.”

But this week’s threats to amend the FBA have made Thailand’s foreign investment climate exciting again for reasons that could cause more FDI to leave, rather than enter, the kingdom.

By Peter Janssen
Asian Times