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BTS corporate governance: Conflicts of interest, nepotism, and a lack of transparency?

By Jon Fernquest

[Introduction | Vocabulary | Article | Reading Questions | Answers]

Today's article is a complicated piece of investigative journalism into the corporate governance of an important Thai company.

You will learn intimate details about how BTS and Skytrain are run.

This rare glimpse into a very private world of what most people would think is a very public company might be a little bit frightening. BTS is not yet listed on SET, so its operation is not yet fully transparent.

Especially, frightening is the implicit threat by the chairman of BTS that anyone who dares to look further might end up in jail. ("I think they have the legal right to file charges against anyone alleging wrongdoing", said of his son's company VGI)

Will such a veiled threat dissuade or persuade people to probe further? One thing is for sure, the facts are dense and it will take you a little while to read this whole article and make sense of it.

Those who thought that criminal defamation suits ended with Thaksin's fall from power might have been wrong.

Reading Questions

Here are some questions to guide your reading (See answers at end):

1. What controversial claim has been made about BTS?

2. Who operates Skytrain?

3. Who made the claim?

4. How was the claim made?

5. Why is the conflict of interest claim being made now?

6. How much BTS debt is being restructured?

7. Who was going to make a decision on the debt restructuring? When?

8. Who holds the advertising and retail concession for BTS? One or more than one company?

9. Is the only problem that the concession was given to a family member of the Chairman of BTS?

10. What role is the chairman of BTS playing in the restructuring?

11. Which creditors have already agreed to the restructuring plan? What percentage of the total debt is held by them?

11. Is the company that holds exclusive rights to BTS retail and advertising a publicly held company?

12. What two things would this allow VGI and his son to do according to the chairman of BTS?

13. What percentage of VGI's revenues from BTS did BTS actually receive ontime? Why?

14. How large of a cash loan did VGI make to its director, the son of the BTS chairman? At what interest rate?

15. What is the contradiction between making large loans and claiming it did not have enough cash to pay concession fees on-time to BTS?

16. When BTS is listed on SET will the lack of transparency in all these deals become an issue?

17. Does the fact that the creditors that hold 90% of the debt have agreed to the restructuring plan, invalidate the claim by the minority creditors? What do you think?
[Express opinion]

18. If the claim by the minority creditors is true, would the chairman of BTS be discredited in your opinion?
[Express opinion]

Bangkok Post Article: October 28, 2006

Conflict claims stall BTS revamp

Creditors question ad firm's obligations NUNTAWUN POLKUAMDEE

Creditors of the Bangkok Mass Transit System (BTS) have alleged improper conflicts of interest involving company chairman and major shareholder Keeree Kanjanapas and ad concessionaire VGI Global Media Co. The allegations have surfaced at a time when creditors and BTS are contesting the Bangkok skytrain operator's 67-billion-baht debt restructuring.

The Central Bankruptcy Court yesterday directed BTS to review the creditors eligible for participation under the plan, following a petition filed by Siam Commercial Bank and Bangkok Commercial Asset Management. The decision will delay the vote on the restructuring plan, originally set for tomorrow.

VGI Global Media was founded in 1999 and holds exclusive rights to manage advertising and retail space within the BTS skytrain network. It's controlled by Mr Keeree's son, Kawin Kanjanapas.

BTS creditors allege that VGI Global Media is well overdue on payments owed the skytrain operator, and that BTS revenues from advertising should be higher than actually reported. But Mr Keeree, who is acting as the rehabilitation plan administrator for BTS, dismissed the claims as an attempt to discredit him personally ahead of the creditors' vote.

''The 28 creditors holding 60 billion baht in claims, led by Deutsche Bank, have essentially approved the restructuring plan. Only a small portion are opposed and are trying to force a review by the court,'' he told the Bangkok Post. ''I will follow the court's directive and remain confident that a successful resolution will be found, with BTS listed on the Stock Exchange of Thailand sometime next year.''

Mr Keeree said VGI accounted for only a small portion of total revenues and its obligations were minuscule when compared with BTS's debt.

''The BTS board, including our independent directors, approved the decision to allow VGI to stagger its payments. This wasn't approved by just one person,'' he said. ''Mr Kawin has done well, with revenues increasing each year.''

He said VGI's decision to offer loans to its directors did not involve BTS itself: ''[The loans] have not harmed anyone. [VGI] isn't a public company. Actually, I think they have the right to file charges against anyone alleging wrongdoing.''

According to the Commerce Ministry, VGI reported revenues of 478.96 million baht in 2005, a slight increase from 458.18 million the previous year.

BTS, meanwhile, reported for its fiscal year ending in March 2006 revenues from advertising and retail store management from VGI of 211 million baht.

Of this, 172 million baht were booked as accrued receivables, with VGI essentially overdue on its payments. Previous years are similar. For fiscal 2005, BTS reported ad revenues from VGI of 200 million baht, of which 172 million were receivables, and revenues of 152 million in fiscal 2004, with 130 million in receivables.

''An analysis of VGI's financial statements for the 2005 calendar year also showed that the company made a 375- million-baht loan to its director, Mr Kawin. I don't think one can say that VGI lacks liquidity, if it was in a position to approve such a loan,'' said one source familiar with the issue.

''At the same time, VGI is able to approve this loan, but won't pay BTS anything except interest. If it wasn't for the fact that VGI belonged to Mr Kawin, I believe that [BTS] wouldn't tolerate the situation.''

VGI's 2005 financial statements show outstanding loans of 405 million baht, the bulk of which were made to Mr Kawin. Accrued interest from related parties totalled 24 million baht, of which 23 million came from Mr Kawin. Loans to the company's directors carried an interest rate of just 1.75% per year.

Mass transit advertising has risen steadily in recent years, in large part due to the growing popularity of the skytrain. According to AC Nielsen, a market research company, transit advertising has shown double-digit annual growth over the past few years. Industry executives say BTS ad revenues rose by 10-12% in 2005.

But while estimated ad spending on BTS locations was 432 million baht for 2005, VGI reported revenues of 306 million.

According to VGI's contract, it must split at least 50% of profits with BTS.

BTS on March 18 approved a measure allowing VGI to stagger payments for its contractual obligations and pay below minimum guarantees. BTS approved a second waiver on June 29.

VGI's corporate website notes that the group was founded in 1991 as an ''integrated advertising and marketing services company'' with operations in China, Hong Kong and Thailand. VGI Global Media (Thailand) was set up in 1999 ''to manage the exclusive advertising media and merchandising licence of the BTS''.

Sources said the lack of transparency at BTS and VGI would certainly become an issue if the skytrain operator moves forward with its plans to list on the SET.

BTS reported revenues of 3.32 billion baht for the year ending March 31, up from 3.02 billion the previous year. Net losses totalled 8.02 billion baht last year, due to asset revisions of 6.33 billion baht.

Under the BTS restructuring plan, creditors would accept a debt-to-equity swap valuing each share at 15.80 baht each. The company will then write down existing capital by as much as 90%, followed by the issue of 13.8 billion new shares at one-baht par value.

Creditors will receive payment of 47% to 63% of their principal in the form of cash and the equity swap. Subordinated creditors with debt of three billion baht will receive only 9% of their debt.

Vocabulary

corporate governance - the subject of how corporations, like nations, should be governed, "the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large." (See Wikipedia on corporate governance)

nepotism - unfair use of power to get benefits or a job for family and friends

investigative journalism - a kind of journalism in which reporters deeply investigate and research a topic of interest, often involving crime, political corruption, or some other scandal (See Wikipedia on investigative journalism)

intimate - very personal and private

Sky Train - the elevated electric train in Bangkok (See Wikipedia)

BTS - the Bangkok Mass Transit System, another name for the Sky Train

SET - the Stock Exchange of Thailand (See Wikipedia)

implicit - expressed in an indirect way (not directly said, but implied by things said)

a veiled threat - an indirect threat, not directly threatening

probe - ask questions and try to discover facts about something

stall - prevent from happening, slow down or stop

revamp - make changes to improve

Bangkok Mass Transit System (BTS) - the Skytrain, the elevated train that runs through Bangkok (See Wikipedia on Bangkok Skytrain)

alleged - fact not yet proven true

conflicts of interest - (See Wikipedia on conflicts of interest)

a concession - a special right to run a certain kind of business (for example Thaksin made his billions from telecommunications concessions)

ad concessionaire - a company that has the right to display advertisements (here in BTS trains and stations)

allegations have surfaced - people have made controversial claims public (before this they were probably only privately circulated as rumours)

contesting - objecting formally to a decision or plan, trying to stop it

restructuring - improve an organisation to make it better or to make it more profitable

bankruptcy - when a company does not have enough money to pay its debts (so it either ceases to exist or is restructured)

eligible - can be chosen for a task, because they have the right qualifications

a petition - formal request to a court of law to take action

x has exclusive rights - x is the only one who had these rights, no one else ahs them

allege that x - claim that x is true, state that x is true

a rehabilitation plan - the plan to improve the condition of a business so that it can start doing business again, profitably

dismissed the claims - say that the claims are not worth considering (they are obviously untrue)

discredit x - cause people to lose respect and trust in x

resolution - solution to a problem

miniscule - very small, very small amounts

independent directors - independent representatives on a company's board of directors who are capable of challenging the decisions of management, a means of protecting the interests of shareholders and, where appropriate, other stakeholders (Source and also Wikipedia on non-Executive directors and a model definition)

stagger payments - spread payments over time (so they do not all happen at the same time)

accrued - added to and accumulated over time

receivables - accounts receivables (accounting), money that people owe a company that they haven't paid yet

x is essentially y - x works or looks like y, but is not actually y (for example a motorcycle is effectively a Harley-Davidson because it has the same sized engine and performance, but does not have the actual brand name)

lacks liquidity - has no cash (or assets that can be quickly sold or borrowed against to get cash)

mass transit - public transportation (that moves large numbers of people around a city)

AC Nielsen - an American marketing research firm famous for their 'Neilsen Ratings' which measured how popular television shows were with their audiences in the United States (See Wikipedia on AC Nielsen)

double digit growth - growth greater than 10% ("1" and "0" are "digits")

contractual obligations - the things that the contract says that you must do

pay below minimum guarantees -

x and y are integrated - x and y work so closely together, so they become one

a waiver - permission not to obey a rule

exclusive - only the people in a small group possess it (not shared with anyone else)

merchandising license for x - the right to make products (merchandise) that use x in them (for example the right to produce Skytrain hats)

lack of transparency - not enough transparency, not enough public visibility of how the business is run (See Wikipedia on transparency)

become an issue - become a problem, that someone will object to and take action on

stock lists on the SET - shares of the stock are traded on the SET

debt-to-equity swap, the equity swap - a refinancing deal in which a debt holder gets an equity position in exchange for cancellation of the debt.

write down a debt - make a downward adjustment in the accounting value of an asset. opposite of write up.

subordinate - less important, lower priority

subordinated creditors - creditors who get paid later or last (imagine a long line of people who lent the BTS money, subordinated creditors are at the end of the line to get money when the company has problems)

Answer Key:

1. What controversial claim has been made about BTS?

That there is an "improper conflict of interest" between the chairman of BTS and the firm that holds the advertising concession for BTS which is "controlled" by the chairman's son.

("VGI Global Media was founded in 1999 and holds exclusive rights to manage advertising and retail space within the BTS skytrain network. It's controlled by Mr Keeree's son, Kawin Kanjanapas."

2. Who operates Skytrain?

BTS (Bangkok Mass Transit System). If you didn't already know this you could guess (infer) from reading the article.

3. Who made the claim?

Siam Commercial Bank and Bangkok Commercial Asset Management.

4. How was the claim made?

The claim was made through a petition filed at the central bankruptcy court which is restructuring BTS.

5. Why is the conflict of interest claim being made now?

BTS and creditors of BTS are contesting the debt restructuring of the BTS. A debt restructuring determines which creditors get paid first.

6. How much BTS debt is being restructured?

67 billion baht.

7. Who was going to make a decision on the debt restructuring? When?

The Central Bankruptcy Court was going to vote on the restructuring plan tommorrow.

8. Who holds the advertising and retail concession for BTS? One or more than one company?

Only one company: VGI Global Media. This company controlled by the BTS chairman's son has "exclusive rights."

9. Is the only problem that the concession was given to a family member of the Chairman of BTS?

No, the conflict of interest itself does not appear to be the real problem. The real problem seems to be that the concessionaire is:

a. Overdue on payments owed the skytrain operator.
b. BTS revenues from advertising should be higher than actually reported.

10. What role is the chairman of BTS playing in the restructuring?

The chairman of BTS is also the "rehabilitation plan administrator" for BTS.

11. Which creditors have already agreed to the restructuring plan? What percentage of the total debt is held by them?

"The 28 creditors holding 60 billion baht in claims, led by Deutsche Bank" have already agreed to the restructuring plan. They hold 90% of the debt.

11. Is the company that holds exclusive rights to BTS retail and advertising a publicly held company?

No, VGI is privately held.

12. What two things would this allow VGI and his son to do according to the chairman of BTS?

a. Give loans to VGI's directors.
b. Sue anyone who investigates this or criticizes this. (i.e. lack of transparency backed by lawsuits.)

Shouldn't company's that possess monopoly concessions be transparent?

13. What percentage of VGI's revenues from BTS did BTS actually receive ontime? Why?

One can only estimate from the numbers provided and guess:

(200-172)/306 = 9% [VGI's reported advertising revenues]
(200-172)/432 = 6.5% [VGI's estimated advertising revenues]
(200-172)/478.96 = 6% [Total VGI revenues]

So somewhere between 6% and 9%, not much.

Only 6% was paid because VGI was allowed to pay late and stagger its payments to BTS, supposedly because it had a liquidity or cash flow problem, because it didn't have enough cash to pay BTS.

14. How large of a cash loan did VGI make to its director, the son of the BTS chairman? At what interest rate?

375-million baht at 1.75%.

15. What is the contradiction between making large loans and claiming it did not have enough cash to pay concession fees on-time to BTS?

The loan is cash and the concession fees are also cash.
Why didn't they pay BTS the cash they used for loans?

("I don't think one can say that VGI lacks liquidity, if it was in a position to approve such a loan...")

16. When BTS is listed on SET will the lack of transparency in all these deals become an issue?

Yes, it will.

("Sources said the lack of transparency at BTS and VGI would certainly become an issue if the skytrain operator moves forward with its plans to list on the SET.")