Thailand’s duty-free monopoly up for grabs

On May 31, the state-run Airports Of Thailand (AOT) is scheduled to announce which big conglomerate has won the highly lucrative concession to run duty-free shops at Bangkok’s Suvarnabhumi International Airport.

On June 10, it will announce the follow-up winner of the duty-free concession at Chiang Mai, Phuket and Hat Yai airports, more tourism-geared cash cows in the making.

Odds are that one, if not both concessions, will go to King Power Duty Free Company, which has monopolized the duty-free retail space in Thailand for the past two decades and has run the duty-free shops at Suvarnabhumi Airport since it was opened in 2006. That concession will end in September 2020.

AOT, the state enterprise that operates Thailand’s six international airports – Don Muang, Suvarnabhumi, Chiang Mai, Chiang Rai, Phuket and Hat Yai – initially announced there would be one bid for all four airports but Thai Prime Minister Prayut Chan-ocha was forced to step in after the monopolistic move sparked angry protests from business groups, anti-corruption activists, economists and academics.

On March 14, 10 days before the March 24 general election, Prayut ordered the AOT to split the bids up into two concessions, one for Suvarnabhumi and one for the three provincial airports.

This followed an objection to the single bid move lodged by the Anti-Corruption Organization of Thailand (ACT), a private sector body that professed high hopes that Prayut would drain the Bangkok mangrove of corruption when he came to power after the May 2014 coup.

The Thai Retailers Association (TRA) issued a white paper on the airport duty-free concessions in January 2018 that spelled out in great detail the benefits of having multiple concessions by product category rather than a “master concession” that has been followed by AOT.

TRA pointed out that Seoul’s Incheon, Hong Kong and Singapore’s Changi airports – which have 10, seven and five duty-free operators, respectively, have demonstrably more profitable, income-generating duty-free operations than Suvarnabhumi.

“Thailand was only able to generate approximately $1.9 billion in duty-free and travel sales in 2016 [when 32.6 million tourists visited the country].

South Korea’s traffic is only 16.9 million tourists but its total duty-free and travel retail sales were 5.7 times that of Thailand at $10.9 billion,” said the white paper.

In an open January letter to Prayut, the RTA claimed that Thailand could generate up to 270 billion baht ($8.5 billion) worth of sales from duty-free shops if the existing “master concession” system was dropped. AOT has countered that the master concession was easier to manage, according to news reports.

The RTA’s appeal apparently fell on deaf ears. Although Prayut’s decision to split the duty-free concessions into two separate bids was better than nothing, critics were duly unimpressed since the threat of a duty-free monopoly remains.

“This is a sign that nothing has changed in Thailand,” said Deunden Nikonborirak, research director of economic governance at the Thailand Development Research Institute (TDRI), a think tank. “The government’s SOE (state-owned enterprises) reform has failed.”

When the Prayut government came to power five years ago, it vowed to clean up elected government corruption, attributable in part to the systematic exploitation of cash cow SOEs that have traditionally fallen under the control of line ministries.

The AOT, 70% owned by the Finance Ministry with the remaining 30% listed on the stock market, reported a record high net profit of 7.7 billion baht ($242 million) in the first quarter of 2019, up 5% year-on-year.

The AOT’s profits have risen steadily with international tourist arrivals, which have jumped from 14.6 million in 2008 to 38.7 million last year, generating about 2 trillion baht ($62.8 billion) in tourist receipts, or about 18% of Thailand’s gross domestic product (GDP).

Under the Prayut-sponsored ‘Improving Governance of SOEs Law,’ which passed its first reading in Parliament in 2017, a holding company would have been set up owned by the Finance Ministry, (similar to Temasek Holdings in Singapore) which would be run by a 10-person board of industry experts who would be responsible for electing the boards of Thailand’s 11 incorporated SOEs, such as AOT, Thai Airways (THAI), PTT (national oil company) and others.

The bill, intended to end the political practice of putting these SOEs under line ministries (eg AOT and THAI are traditionally under the Transport Ministry, while PTT is under the Energy Ministry), never passed its second reading and was quietly dropped in the hubbub leading up to the March 24 polls.

“This government was supposed to come in for reforms and anti-corruption so the expectations were higher, but in fact they turned out just the same [as elected governments], or even worse because there has been less accountability,” said Thitinan Pongsudhirak, director of Bangkok’s Institute of Security and International Studies (ISIS) and a part-time AOT consultant ahead of its 2004 initial public offering.

The outcome of the AOT duty-free bidding will be closely watched to see if the Prayut regime has done anything to loosen the lucrative nexus between government, SOEs and big business.

King Power was founded by Vichai Srivaddhanaprabha, whose career began in the duty-free department of the Tourism Authority of Thailand (TAT), a state entity responsible for tourism promotion.

In 1989, Vichai went into business with the HK-based Duty Free Shoppers (DFS) to open Downtown DFS (Thailand) Co Ltd at Mahathun Plaza, running a duty-free shop in Bangkok, with the items claimed at the airport upon departure.

Next, Vichai set up King Power International Co Ltd in 1994, shortly before winning the concession in 1995 to run duty-free shops at Don Muang Airport – then the only international airport serving the capital.

In 2004, King Power was granted a 10-year concession to operate all duty-free retail space at Suvarnabhumi International Airport when it opened in 2006. The concession was later extended up to 2020, resulting in a highly lucrative 16-year monopoly. Most airports in Asia offer five to seven-year concessions for their duty-free airport spaces.

When Vichai died in an accident in October (his helicopter crashed in the parking lot of the UK-based Leicester City Football Club which he owned), he was listed by Forbes magazine as the fourth richest man in Thailand, with an estimated $4.7 billion in assets. His son, Aiyawatt, now heads the group and faces his first major challenge in retaining King Power’s duty-free monopoly.

King Power is believed to be a major financier behind both the Palang Pracharat Party, backed by the military, and the Bhumjaithai Party, led by construction magnate Anutin Charnvirakul. The parties are seen as likely partners in the next coalition government.

Palang Pracharat, which won 115 of 500 contested seats in the election, and Bhumjaithai, which won 51, have both expressed interest in running the Transport Ministry if they succeed in forming the next government, and by extension controlling the AOT – not to mention all the railway mega-projects started under the coup-installed Prayut regime.

“For Pracharat it is a question of continuity, but for Bhumjaithai this is their rice bowl,” Thitinan said of the Transport Ministry and associated AOT portfolios.

Even if King Power does not win both, or even one of the concessions, critics note that Thailand has blown its opportunity to maximize its duty-free income and to redistribute wealth within its highly competitive retail sector. The deadline for concession bids is May 22.

Apart from King Power, the other main business groups that have sent the AOT bid envelopes include Bangkok Airways, Central Department Group and Royal Orchid Sheraton (Thailand).

The Chirathivat family, the owner and founders of the powerful Central Group, are ranked as Thailand’s second wealthiest family in Forbes’ latest ranking, while Prasert Prasarttong-Osoth, founder of Bangkok Airways, is ranked 7th.

These groups, like King Power, are politically well-connected, ties that are expected to extend to the next Thai coalition government regardless of which opposed side forms it.

“The thick web of cronyism and vested interests has transcended all governments,” Thitinan said.