Funding challenge for new telco

With President Duterte offering China the opportunity to operate as the country’s third telco operator, the public can look forward to getting relief, sooner or later, from the grip of the PLDT Inc.-Globe Telecom duopoly.

The offer is expected to draw the interest of Chinese technology companies that want to extend their footprint in the Philippines.

Due to constitutional restrictions, the Chinese company that gets the nod of Malacañang to operate in the country has to tie up with a Filipino company and invest in not more than 40 percent of the capital stock of that joint venture.

The joint venture has to be funded by up to 60 percent by Filipino stockholders and the membership of the Chinese investor in its board of directors should not exceed the equivalent proportion of its investment.

According to an expert, a third telco operator would need at least P500 billion to construct and operate the facilities that can provide meaningful competition to PLDT and Globe and get a decent market share within a five-year period.

Given the huge financial requirement and market risk involved, the question is posed: Is there a Filipino company or consortium of Filipino companies willing to raise P300 billion (or 60 percent) and partner with a Chinese company that can provide the balance of P200 billion?

Although the P300 billion does not have to be made upfront, the funds needed to defray the initial construction and operating costs, say, one-fourth or P75 billion, have to be on the table, so to speak, at the outset. The “show money” would prove to the Chinese investor that the Filipino stockholders are serious about the joint venture.

Considering that the local business conglomerates that may be interested to be the third telco operator are either highly leveraged or close to breaching the single borrower’s limit of the banks, the prospective partner/s of the Chinese investor may have to invite other foreign investors to invest in the companies that may be formed to engage in the joint venture.

The infusion of foreign capital in special purpose companies would not give rise to nationality issues as long as the majority (or 51 percent) of the voting stocks of these companies are owned by Filipinos.

Under existing regulations, a corporation engaged in a business that is not covered by nationality rules and has foreign stockholders is considered Filipino-owned as long as the foreign ownership of its stocks does not exceed 49 percent.

Properly handled, this scheme may enable local companies to raise the funds needed to meet the 60 percent capital requirement of the joint venture with the prospective Chinese investor.

If this approach doesn’t work, the government, through any of the existing government-owned and-controlled corporations (GOCC), can help by linking up with local companies in putting up a special purpose company that would enter into a joint venture with the Chinese investor.

In lieu of cash, the GOCC can give land or office facilities as payment for its subscription to the stocks of that company. And if accounting rules permit, the frequencies still available or held by the government can be given a valuation and included as part of the consideration for the subscription.

The value of the land, office facilities and frequencies (which can be substantial) can increase the amount corresponding to the 60 percent capital requirement without making an additional cash out. Any upward adjustment in this percentage would invariably allow the Chinese investor to increase the amount of its investment as long as it keeps to the 40 percent limit.

The funding of the third operator would not be a problem if a bill pending in Congress that excludes telco business from the definition of a “public utility” and removes the nationality requirement is enacted into law.

But knowing how slow Congress acts on matters that do not directly affect its members’ pockets and an almost certainty that the redefinition would be questioned in the Supreme Court, it’s best, this early, to think out of the box in finding a solution to the potential funding problem of the prospective third telco operator.