A Tale Of Two Cities

“It was the best of times, it was the worst of times.”- Charles Dickens

June 30, 2016 marks the end a Presidency and the beginning of another.

Much has been said about the legacy of the PNoy Administration and that should suffice. The more important question is what are the lessons learned? How did an Administration born in sunshine and hope finish in rejection?

On a balmy day in 2010 Noy Aquino became leader of a Republic incensed at the rampant  corruption in public office, the entrenchment of family dynasties and the juggernaut of the Political/Business complex. The new President vowed an era of honesty and care for those he called his “Boss”.

PNoy delivered on many of his promises. He brought to justice some big fish and ushered a regime of transparency. He grew the economy and brought the country international recognition and an investment grade rating. He passed controversial bills- the Sin Tax and the RH Bill. He and his immediate family were untainted by money. PNoy has reasons to be proud.

In other senses he failed albeit it not consciously. It was a case of beware of what you wish for. The economic growth that his Administration so highly touted had unseen costs that were not addressed. The quality of daily living especially in the urban areas and among the marginalized is worst today than it was six years ago. Rising property prices have put decent housing beyond the reach of the middle class not to mention the poor. The gap between the rich 1% and the rest of the nation has widened.

Daan Matuwid and the specter of the Ombudsman delayed the approval of key infrastructure projects which is now coming to haunt us. The obsession with our credit rating and our budget deficit slowed the release of funds for development. The “savings” were channeled to PDAF for special interests which became the genesis for the Napoles-type scams.

On the economic front, the Administration kept to the Western metric of GDP growth without concern for the quality or distribution of growth. It adopted a trickle down approach that benefitted Big Business and owners of capital like landlords, banks and industrial concerns. Interest rates were kept low to promote growth but had the unintended consequence of rewarding capitalists with assets to leverage and punishing the fixed income earners and farmers with none. The low interest rates also discouraged savings and promoted consumption leading to the rise in relatively low-employment and urban-centric retail rather than jobs-intensive manufacturing and agriculture.

What can the new Administration learn from these lessons?

One, do not rely on GDP as a measure of progress. Gross Domestic Product is a flawed measure of development. It does not reflect the hours of commute, the quality of teachers, the affordability of decent healthcare, the lead in the air nor the safety of our communities. Yet these are the concerns of people. It explains why Duterte was elected President.

Two, Government has to switch from a top-down to a bottom-up approach to economic management. The standard of excellence should not be obtuse macro-economic metrics but the well being of the individual. The new metric should not be the number of cars sold but the number of pedestrian sidewalks built and the commute time and comfort of the man in the street. The new metric should not be per capita GDP but the affordability and quality of education, health care and housing per Filipino. The new metric should not be the budget deficit but how well it is put to use. The new metric should be about the efficiency of public service, the waiting time and other inconveniences to process a business license, pay one’s taxes, secure a driver’s permit, get to work and collect one’s pension.

Three, do not believe all that Big Business tells you especially, as unashamedly suggested by one high profile CEO, that Government should not interfere, that markets should be allowed to run rough shod over the public because that is what is efficient (and profitable).

The business community submitted a Ten Point Program which included the usual suspects but notably asked for “income tax reform” (Code for lower our taxes) while recommending a “review of the conditional cash transfer (CCT) program” (Code for scrap direct help to the poor). Yet CCTs worldwide have proven to be one of the most effective means to reduce wealth inequality. I rest my case.

Lastly, focus on the key drivers to progress which are judicial reform and investment in infrastructure and human resources especially in education and the civil service. Our corrupt and glacial justice system is the single largest deterrent to national development. The Ampatuans, the Napoles’ and the Big Business shakedowns go unpunished while small-time innocents languish in jail. The bureaucracy is the face of Government yet so little is devoted to improving the quality and pay of our public servants.

On June 30 the torches of power and political culture will pass from Imperial Manila, a congested and decaying hive of wealth, dysfunction, entitlement and corruption; to Davao, a refreshing, clean, safe and unassuming provincial city. In Duterte we have an Administration with a unique DNA. It is ground based with none of the pretensions of the elite. With a few exceptions, the Cabinet is composed of low-key, experienced, honest and believing men and women whose principal goal is how far they can move this country. There are many pitfalls –the vested interests, the criminals, the corruption and lethargy in the three branches of Government. The expectations are high and the task immense. The key is how to get to the tipping point when the momentum changes, when the rock up the hill becomes a cascade of good will down the hill; before the forces of darkness come to play. That is the challenge of our new Government.

How To Make Or Lose P70 Billion Without Really Trying

Filipinos just lost P70 billion from the sale of San Miguel Corp.’s frequencies to Globe and PLDT (the Telcos). This is the money the Government would have earned had it sold the frequencies directly to the Telcos rather than have SMC do it for itself.

SMC-controlled companies held critical frequencies which were largely unused. The Telcos have over the years unsuccessfully petitioned the National Telecommunications Commission (NTC) to reallocate these to them. Of particular value are the 700 MHz and the high-band 2300 and 2500/2600 MHz spectrum. The 700 MHz spectrum requires less investment for 4G/LTE, has a longer range and broader reach. The high band frequencies optimize high-speed data.

Globe and PLDT were considering taking this matter to court when SMC came around with an offer: Why not buy these frequencies from me rather than face a protracted legal battle to get them reallocated to you?

Frequencies are national assets that cannot be traded. To go around this, SMC sold the companies that owned the spectrum rather than the spectrum itself which violates the legal principles of “beneficial ownership” and “piercing of the corporate veil”. Parties cannot hide behind the façade of corporate layering to do something that is questionable.

The NTC imposed certain conditions before approving the deal: One, the Telcos have to raise internet speeds to between 5-10 MPBS (the latter being the definition of high-speed transmission) within the year. Note: The NTC never required SMC to utilize its bandwidth much less attain a minimum level of performance.

Two, NTC forced the Telcos to return some of the SMC frequencies to the Government to accommodate a possible third competitor. Note: The NTC never obliged SMC of this even when it was basking in unused spectrum. Is this conditionality an admission that indeed SMC’s unused bandwidth should have been surrendered to Government and the frequencies auctioned to interested parties? The Ombudsman might want to have a chat with NTC head Gamaliel Cordoba.

The Telcos deserve more frequencies. They have over 100 million subscribers while, with a handful of customers, SMC cornered all of the 700MHz and 57% of the high band spectrum. But why did the Telcos agree to a deal structure that so harmed the Filipino people?

One, the Telcos would not be able to get the frequencies without a fight. The NTC was not going to be helpful.

Two, the price looks cheap: The tag of less than $10 million/MHz is below what frequencies have recently fetched in other countries. The Telcos might have had to pay far more in a Government auction. With funding costs of 3-4% p.a., the Telcos’ acquisition will pay for itself fairly quickly especially if they can pass on to the consumer the P70 billion premium they paid SMC. Last year Globe and PLDT had core net profit of P16.1 billion and P35.2 billion respectively.

Three, the additional frequencies will allow the Telcos to strengthen their fortress against outside invaders.

Four, the NTC, DOTC and presumably the Office of the President signed off on the deal. Unfortunately, somebody forgot about the Philippine Competition Commission.

The PCC is an independent office recently formed to oversee anti-monopolistic mergers and acquisitions. On June 3, 2016 it was to issue its Implementing Rules and Regulations (IRR). To avoid scrutiny under the rules, the Telcos and SMC closed on the sale a few days earlier. Absent the IRRs, all that would be needed, said their expensive lawyers, was to notify the PCC of the transaction which they did on May 30, 2016. The PPC did not buy this. It has since advised the parties that their notification was “deficient” and the transaction would now have to undergo the full Monty, warts and all. The PCC head is NEDA Secretary Arsenio Barasican.

Seriously? Did Globe and PLDT believe –and pay a downpayment of P35 billion on this belief- that the nation’s anti-trust body would not and should not review (a) a controversial (b) multi-billion deal (c) involving the only two players (d) co-sharing (e) valuable frequencies (f) in a vital public utility (g) with a handsome return on equity exceeding 25% and (h) over 100 million subscribers; because of a minor technicality? Perhaps they need even more expensive lawyers.

The protagonists skirted the provision on non-assignability of our patrimony. They deprived the Republic of the equivalent of 30-40% of our budget deficit, 41,000 classrooms, 320,000 new teachers, 280,000 low cost homes, pay raises for nurses and free irrigation to farmers; and they want the Government not to crash their party? My goodness, was the deal really that awesome?

MVP, CEO of PLDT, says the Government should not interfere. As the beneficiary of a privileged, Government-awarded franchise that reportedly charges consumers 3.5 times the global average for internet speed that is just above last place Afghanistan; that is, I am afraid, not the right answer. It is not even close. This high-handed attitude explains why less than 1% of our nation owns more than 70% of its wealth, why over 30 million Filipinos are poor and why Duterte is annoyed.

Shares of Globe, PLDT and of course SMC rose after the deal announcement increasing the wealth of their owners by an estimated P100 billion. I guess the transaction was really that awesome. Unfortunately the average Filipino saw none of this. The only shares he owns are in the Republic of the Philippines and their value, tragically, dropped by P70 billion or a swing in wealth inequality of P170 billion.

Message of Big Business to the Filipino: “Kuya, pasyensiya ka na lang”.

The TELCO Deal

The SMC/Globe/PLDT deal is imbued with national interest. It speaks to President Duterte’s call for affordable universal internet.

Internet is one of society’s great equalizers. Access to information -whether looking for  the best job, education, technology, markets or suppliers- is what allows all Filipinos, big and small, to compete on a more equal basis.

Internet is accessible via mobile or fixed technology. Mobile uses radio frequencies, fixed uses copper wire, co-axial or fiber optic cables. Mobile internet is growing at over 50%. It is the quickest to roll out given our island geography and rural dispersion: It avoids expensive, disruptive and time-consuming layout of cables. Frequencies are therefore very valuable.

Frequencies are a nation’s patrimony. They are assigned to telecom companies typically under a “use it or lose it” policy i.e. the frequencies must be utilized or surrendered if not. The National Telecommunications Commission (NTC) is responsible for the assignment of frequencies. It is a quasi-judicial body attached to the Office of the President and administratively supervised by the Dept. of Information and Communications (formerly the DOTC). The NTC is one of the most powerful, least transparent and least accountable Government offices. “With respect to its quasi-judicial functions, NTC decisions are appealable only and directly to the Supreme Court”.  It is subject to political and monetary pressure. It is a disgrace. The NTC head is Gamaliel Cordoba who was appointed by GMA in 2009.

The Philippine Competition Commission (PCC) is an independent quasi-judicial body established by law in 2015 to oversee anti-monopolistic practices in industry. Companies seeking mergers or acquisitions of over P1 billion must notify the PCC or have such agreements “considered void and subject the parties to an administrative fine of 1-5% of the value of the transaction”. The head of the five-person body is NEDA Sec. Arsenio Barasican.

SMC-controlled companies (SMC) recently sold their telecom assets to Globe and PLDT (the Telcos) for P53 billion and P17 billion assumption of debt for a total of P70 billion. SMC’s principal assets were unused frequencies. The Telcos have for years petitioned the NTC to reallocate these frequencies to them to no avail. There may be several million reasons for this. Faced with a long legal battle over this unused bandwidth, the Telcos decided to accept SMC’s offer to “sell’ its spectrum to them. The frequencies are not legally transferrable so the Telcos bought the companies that owned the frequencies and not the frequencies themselves; which seems a violation of the spirit if not the word of the law. Under the arrangement, Globe and Smart will equally “co-use” the SMC spectrum while returning some to Government for allocation to a third party. The agreement is subject to a 60 day “confirmatory due diligence” on the P17 billion in supplier payables the Telcos are assuming.

The NTC has approved the deal but the PCC has not. The Telcos believe they properly notified the PCC of the buy-out but the PCC disagrees saying “the transaction has not been deemed approved “, the Telcos’ filings were “defective and deficient” and therefore the NTC “has nothing to reject” or approve.

The transaction raises two issues: One, is the telco deal good for the consumer and, two, who should have benefitted from it, should it be SMC or the Filipino people”?

Pres. Duterte has challenged the Telcos to shape up or face the consequences. The Philippines has among the slowest and most expensive internet and mobile phone services among comparable countries. The Telcos argue this is due to the lack of frequencies and local government and other bureaucratic hindrances to the building of cellsites and laying of cables. There are 21,000 cellsites in the Philippines versus 55,000 in Vietnam, 76,000 in Indonesia and 300,000 in the U.S. Globe alone has a backlog of 3,000 cellsites which will take it 6.6 years to complete.

The Foundation for Economic Freedom, a prominent think tank, has said the SMC/Telco deal will deter competition. Maybank ATR, a  major stockbrokerage firm, has written “it is now more difficult for any new player to compete in the market”. With the return of some of the SMC frequencies to Government, the Telcos argue a new entrant has a “complete set of frequencies” to compete. In fact the Telcos cherry picked SMC’s frequencies principally the valuable 700MHz (for coverage, 4G/LTE) and the 2500/2600 MHz (for speed): They returned only 20 (out of 90 of SMC’s 700MHz) and 15 (out of 100 of SMC’s 2500/2600 MHz) to Government.

Critics say Globe and PLDT compete in service but not in price. This may explain their high profit margins of 40%. The Telcos argue mobile phone and broadband prices are below the cap set by the NTC and have been dropping due to competition. However the lower prices can also be due to economies of scale and new technology which allows for more efficient deployment of bandwidth. In terms of Pesos/Gigabyte, Philippine mobile phone and broadband prices are much lower than developed countries like Singapore and HK but a little higher than comparable countries like Indonesia and Thailand. The higher prices in the former may be due to their faster and more reliable service.

The Telcos defend their high profit margins as necessary to finance new infrastructure. They claim they have the region’s highest capital expenditure/revenue ratio (29%) after China (36%). The PCC might want to compare the Telcos’ gross margins and return on fixed assets with similarly situated countries to determine whether the Telcos are exercising predatory pricing. In the electricity distribution industry, Government has set a cap on return on rate base to control excessive charges by Meralco.

Critics also claim the fact Globe and PLDT came together to acquire the SMC frequencies is proof if not of collusion at least of a certain degree of friendliness.

The PCC should conduct public hearings to determine whether (i) there exist duopolistic practices in the industry (ii) the assignment of the SMC frequencies will deter competition and (iii) the returned SMC frequencies are sufficient to attract a new entrant. The PCC should ensure the consumer will not shoulder the P70 billion premium the Telcos paid SMC.

If the PCC nixes and/or an advocacy group challenges the deal, the matter will have to be decided by the Supreme Court leaving the Telcos with the protracted legal battle they wanted to avoid, except now potentially lighter by P70 billion.

Talking of being short, the Filipino people are shorter by P70 billion from the deal but this is another matter altogether.

Did We Just Lose P70 billion?

PLDT and Globe (the TELCOS) recently announced they had “bought” the telecommunication assets of San Miguel Corp. for P70 billion.

Over decades SMC had acquired companies whose principal and arguably only assets were certain telecom frequencies, notably the 700 megahertz bandwidth. This spectrum allows for the strongest and most efficient transmission of data (it cannot be used for voice) and for rollout of high-speed LTE/4G services. Data is the fastest growing and most profitable segment of the business. Governments assign such spectrums to telecom companies on condition the “franchise” holder utilizes them.

It appears the SMC-owned companies had been under-utilizing their frequencies even as PLDT and Globe were exhausting theirs. The latter had petitioned the National Telecommunication Commission (NTC) to release SMC’s unused bandwidth to them. This would allow them to improve their service. The Philippines has among the lowest internet speed and the highest cost of service among Asian countries.

SMC had unsuccessfully sought out foreign partners to create a third telco which could compete with PLDT and Globe. It was in talks with Telstra, the Australian telco, but the latter backed out for unknown reasons. There was talk SMC’s frequencies had been granted for broadcast and not for data which could legally expose the venture. News reports indicated PLDT was ready to go to court. Incidentally, now that the TELCOS have acquired the spectrum they are mum on the validity of the frequencies. On the contrary they are actively selling the transaction to the public.

It was SMC who reportedly approached Globe and PLDT for a deal. Some of SMC’s principal shareholders had supported Grace Poe: Were they concerned a Duterte regime would jeopardize their  frequencies? Does this explain what some consider a fire-sale price? On the other hand, the TELCOS felt it more expeditious to come to terms with SMC rather than face a protracted court battle to secure the desired bandwidth. As structured Globe and PLDT would each “buy” one third of the frequencies and leave the balance for a new player. This way they could not be accused of cornering the market.

There are two issues from a national standpoint. One, is the sale of the frequencies to PLDT and Globe good for the consumer? Second, who should benefit from the sale of such assets, should it be SMC or should it be the Filipino people?

The PNoy Government signed off on the deal. A number of parties including the Foundation for Economic Freedom oppose the transaction. FEF is a Filipino think tank composed of prominent economists and past technocrats. FEF argues the transaction will strengthen the hold of the two local telcos and deter the entry of a new player. It has asked for a Congressional hearing and for the NTC to review the sale. The Philippine Competition Commission, an independent quasi-judicial body that rules on anti-trust issues, is currently doing just that.

In the short term the acquired frequencies may not significantly improve internet and mobile phone service. The existing cell sites have to be reinforced to support the heavier 700 MHz antennas.There are also issues of rights of way, Local Government permits, and fiber optic roll-out for home broadband.  Currently the Philippines’ internet service is among the most expensive in the ASEAN at $7.10 per gigabyte of data and amongst the slowest: We rank 107th globally (13.9 mbps) in average connection speed.

President Duterte has warned the TELCOS to improve their service and pricing or face the entry of a third competitor perhaps with Government support. For example, a strategic investor would put up the money, the Government the frequencies so there would be no cash out for taxpayers.

The second and more controversial question is whether SMC should have benefitted to the tune of P70 billion from the transaction. Here is an analogy: The Government assigns a piece of land to a private party on condition it builds a public park. The party does not build the park and instead sells its rights to a developer for P70 billion. Should not the Government have simply taken back the property, sell it to the developer and pocket the money for itself?

Telecommunication frequencies are a national asset, they belong to the people. The Government assigned certain valuable frequencies to companies owned by SMC who it appears never fully utilized the bandwidth. This in fact was the claim of PLDT and Globe in their pleadings with the NTC. Therefore should the Government under its “use it or lose it” policy not have taken back the frequencies for failure to deliver and auctioned the frequencies to PLDT, Globe and whoever else? PLDT and Globe could still have the desired frequencies but the cash will have gone to the Government and not to SMC. As it is our nation ended up with nothing, just the taxes from the sale if ever.

The Government would have received at least P70 billion (around $1.5 billion) under an auction. Some believe this price was a steal: Auctions of frequencies in other parts of the world have fetched several billion dollars. What does P70 billion buy you these days? Well, it is one third of our annual budget deficit, it is 41,200 classrooms and vocational labs, it is the pay of 320,000 new teachers, it is over 280,000 low cost homes, it is free healthcare for 30.8 million indigents.

At least P70 billion, is that what the deal cost the Filipino people?

The Curious Case of Rody Duterte

Will the real Rody Duterte please stand up? That is the question on the lips of media and the Establishment.

The President elect has made pronouncements that are outlandish, scary, perceptive, caring and often contradictory. He has called Pope Francis a SOB (for which he apologized or did he really?), Catholic priests whores and hypocrites, and murdered journalists as deserving of their fate.

He would jail Binay for corruption but again maybe not, he is against political horse-trading but, with Marc Villar, again maybe not, he has vowed to put the nation ahead of himself but again maybe not. He offered Leni a Cabinet post then withdrew it. He is a man with a lantern looking for honest people and here she is, a dedicated public servant. Rody has not questioned her credentials. Leni in the Cabinet would, he claims, simply offend the Marcoses, his political ally. It might also be his revenge on the Liberal Party for sicking Trillanes on him and for PNoy’s offensive remarks during the election.

The truth is, despite her assurances, Rody is not totally comfortable with Leni. It is not personal. He believes, correctly, she is still very close to PNoy & Co.and he does not want a mole in his Cabinet. He will eventually offer her a post but only when he has gotten to know and trust her. It is the nation’s loss. Never mind, Leni: 14.4 million Filipinos still believe in you even if your senior partner does not.

Otherwise, the President’s Cabinet appointments seem good enough. They are (literally) old hands, a crew of grounded, unassuming yeomen. As a provincial mayor, Rody admits to having a limited network and a strict set of standards which have limited his choices. To those seeking a job, here are some tips: 1. Earn his trust. 2. Do not outshine him. 3. Stand your ground, he may still fire you but he will respect you. 4. Do not give excuses or flatter him. 5. Don’t take yourself seriously because he himself does not.

The new President is a man of many faces. He has his Election Face, his presumptive-President face and his Chief Executive face. His Election Face is provocative, outrageous and entertaining. It is the face of the Spratley jet ski, rape and Pope Francis comments. His presumptive-President face is playful, folksy and unbelieving of his new situation. It is enjoying the attention of office without the responsibility. His Chief Executive face is business-like, stern and aware of the power, the expectations and the accountability. The trick to understanding the man is knowing what face he is wearing at any time.

Duterte manages through fear, intimidation and public ridicule (the tools, incidentally, of Mao’s Cultural revolution). He called Mar a faggot. His comments on murdered journalists are his reflection on corrupt newspeople. They could, however, also be interpreted as a threat to media to do its work, whatever that means.

The President is mischievous. He particularly enjoys unsettling the press. He has actually had to rebuke reporters for taking his “preposterous” comments at face value. He understands the medium is important to his job but seemingly has little respect for the profession. He believes media is either corrupt or naïve which explains how unconcerned he is with the murder of newsmen, how he tells annoying journalists to shut up and how he leads them astray with his pronouncements. He is not cowed by some press’ call to boycott him because he knows he is their only game in town.

Media has only itself to blame for being disrespected. It headlines the President’s outrageousness. It hangs onto rather than hold him to his word. It laps him up like some puppy. Media has abdicated its oath to seek the truth in favor of being entertained and counting the cash. It was therefore shocked when the President kicked the puppy, when he acknowledged no remorse for the killing of journalists. You mean, with all the foreplay, you never really loved us? With that reality check maybe the industry will start to take itself seriously because Duterte is not.

The qualities the President holds most highly are loyalty, courage, principles, authenticity and respect. He hates pomp. He is unafraid to kill or to die and likes that in others. He respects Joma Sison and other Communists not for their ideology but for believing in what they do. He seeks the truth in you. He thinks the Church is plastic. He disdains the “balimbings” in Congress (he did not attend his proclamation), the businessmen who fawn on him, the elitists from Imperial Manila and the sycophants who grovel at his feet. He believes the Filipino deserves a better life.

So is Rody a demagogue, a patriot, a dirty old man, a man on a mission, a narcissist, a prankster, a Dirty Harry, a Don Corleone, or simply an astute mayor of “a small city in Mindanao” who cannot quite believe what happened? He is all of these.

The Establishment is perplexed by the man because they see him through a bourgeois, Western, neo-liberal and Manila centric prism instead of through a raw, macho, populist, and provincial eyeglass. He is a flawed person (are we not all?) but he is not without high tenets. The Presidency will amplify the best and the worst in him. Hopefully it will be the former for the Filipinos’ future is riding on it.