Takeover of telcos possible, but costly for virus-hit PH

From breaking the duopoly to recent threats of a takeover, President Rodrigo Duterte’s relationship with industry giants PLDT Inc. and Globe Telecom has been a tense affair since the start of his administration.

With his term ending in 2022 and the launch of a telecommunications startup controlled by campaign donor Dennis A. Uy of Davao not expected until 2021— later than initially expected—the President issued his strongest warning yet against the incumbents.

On Monday, he devoted part of his State of the Nation Address (SONA) to scold PLDT and Globe for lousy services and threatened them with closure and the “expropriation” of their assets if service quality failed to improve by the end of this year.

While the government has the power to carry out the threat, this scenario raises a host of concerns apart from glaring economic and competition contradictions.

Increasing competition in telecommunications, not removing it, was a cornerstone campaign of the administration. Seizing assets of multi-billion dollar enterprises also requires fairly compensating the owners, money that could be used fighting the deadly new coronavirus (COVID-19) pandemic.

Such a move will test the Philippine Constitution and laws that protect the rights of private businesses providing essential public services.

But the President’s tirade also placed the spotlight on the government’s shortcomings in helping the industry grow, including its failure to free up permitting bottlenecks that have plagued the telcos for years.

“You cannot improve the service without improving the infrastructure,” Rodolfo Salalima, former head of the Department of Information and Communications Technology (DICT), told the Inquirer.

The former top legal counsel of Globe, Salalima said the telcos are willing to spend more but are constrained by dozens of permits from the national and local governments that slow the construction of cell sites and installation of fiber cables.

“When we say poor service, such as coverage or speed of the internet, the question of the network comes in. Then we go back to the old problem of regulatory permits,” he said.

While he was secretary of the DICT until September 2017, Salalima pushed for the issuance of an executive order that would cut the permitting process, which could take months, to nine days.

Mr. Duterte did not issue the proposed order. At present, it can take up to eight months to build a single cell site, much of the time spent on accomplishing government permits.

The National Telecommunications Commission has yet to respond to a request for comment to clarify the service quality that Duterte expects by December.

However, the DICT said it supports the President’s call to “accelerate the improvement of services throughout the country.”

It recently passed rules to allow independent tower companies to build cell sites. Last week, the DICT signed a joint agreement with other government bodies to cut permit processing times to 16 days from 200 days.

Because most Filipinos own a mobile phone, telco infrastructure, like cell towers, are crucial in communications and indispensable during a health crisis.

Over the past 19 years, PLDT and Globe have invested over P1.1 trillion combined and paid hundreds of billions of pesos in dividends to shareholders, data complied by the Inquirer showed.

Roughly a quarter of the investments materialized in the last three years, signalling faster spending by the telcos to meet rising demand for internet applications.

For 2020, PLDT and Globe were poised to spend over P145 billion before the pandemic disrupted their rollout plans.

The prevailing policy of leaving nearly all investments in telecommunications to the private sector, however, has also revealed deficiencies.

Vast areas of the Philippines remain without access to reliable and affordable internet. Moreover, internet speed in the Philippines continues to lag behind regional neighbors and the global average.

Should the government choose to step in, there are provisions in the Constitution that allow such a takeover, Salalima explained.

Under Section 17 of Article XII, which covers times of national emergency such as a pandemic, the government can “temporarily” assume operations of privately-owned public utilities.

Section 18 provides that, in the interest of national welfare or defense, such as a war, the state may take ownership of businesses and other private enterprises “upon payment of just compensation.”

The Constitution further states that owners enjoy protection in terms of due process.

Salalima also pointed to the Civil Code of the Philippines, which provides “no person shall be deprived of his property except by competent authority and for public use and always upon payment of just compensation.”

“We have to be clear on the concept of expropriation and using assets for public use. It’s already being used for the public,” Salalima said.

The courts will determine the compensation for Globe and PLDT’s assets in the event of a takeover.

This could be complicated and costly, with both valued by the stock market at about P550 billion combined.

The final amount would further strain and divide the governments’s resources during the health crisis.

Still, there is cause for investors to worry. As Duterte delivered his threats during the SONA, he called on Congress to “find a way how to do it.”

Just weeks before, his allies in the House of Representatives successfully killed the franchise bid of ABS-CBN Corp., triggering mass layoffs and crippling the media giant which the President had previously attacked.

PLDT is led by businessman Manuel V. Pangilinan while Globe is controlled by the Zobel family of Ayala Corp.

These are the same personalities behind Metro Manila’s water concessionaires, whose decades-old contracts with the government are being rewritten by the administration to remove supposedly onerous terms.

While Globe and PLDT’s Smart Communications secured fresh 25-year franchises in the past three years, the case of ABS-CBN weighs on investors’ minds as a powerful display of Malacañang’s power in the halls of Congress.

Former House member Terry Ridon said lawmakers can “file whatever resolution they want”, including cancelling or amending the franchises of PLDT and Globe.

However, such requirements would be better left to regulatory agencies to identify and clarify the service quality standards, he said.

Above all, he noted that a takeover runs counter to the administration’s goal of increasing competition in telecommunications.

“It’s a contradiction of what you wanted to do in the telco sector if you take out Globe and PLDT by December. Instead of having more players, competition will be lost,” said Ridon, who is also convenor of the think tank Infrawatch PH.

As early as his presidential campaign, Duterte said he wanted to bring in telco challengers to dismantle the so-called PLDT-Globe duopoly.

In late 2018, the administration made good on that promise when it selected a venture between Uy’s Udenna Corp. and state-run China Telecom.

That startup known as DITO Telecommunity was also required to meet minimum internet speed requirements—a first in the industry. It will face hefty penalties it fails to deliver its commitments.

DITO said it would raise the bar of service quality when it rolls out to the public by March 2021. Subscribers were initially expecting a so-called commercial launch as early as this year.

Beyond a new telecommunications player, advocacy group Better Broadband Alliance urged lawmakers to pass sweeping reforms in the information and communications sector through the Open Access in Data Transmission bill.

This will remove barriers, like a legislative franchise, and allow small players to build and operate broadband networks, helping speed up the development of internet infrastructure and lower costs across and Philippines.

The importance of public and private sector collaboration was stressed by Republic Act. No.7925, or the Public Telecommunications Policy Act of the Philippines, which deregulated the industry when it was passed by the Ramos administration in the mid 1990s.

It identified the private sector as the “engine of rapid and efficient growth in the telecommunications industry”.

But it also cited the government’s important role in promoting a “fair, efficient and responsive market to stimulate the growth and development of the telecommunications facilities and services” especially in remote and underserved areas.

As threats of a takeover loom, former DICT secretary Eliseo Rio Jr. said he doubted the government can provide a better quality of service than the incumbent telcos.

“In their franchise, there is a provision that government can take over operation of the telco if there is a national emergency, for public interest and safety,” Rio told the Inquirer.

“But what government agency can take over operation of Globe and Smart, and give better service than they are giving right now?” Rio said.

“There is the condition that they improve their services by end of December. I think the telcos will take that seriously,” he said.

TSB