Duterte calls on China for telecom competition

In a move that promises to provoke legal and political backlashes, Philippine President Rodrigo Duterte’s administration provisionally awarded a consortium led by China Telecom Corp a license to become the third major telecoms player in the local market.

China Telecom’s entry will be facilitated by local partners Udenna Group and its unit Chelsea Logistics Holdings Corp to form a consortium known as Mislatel. The local partners are owned by Filipino tycoon Dennis Uy, known to be close to Duterte.

The move, announced last week, follows on the Filipino leader’s warning made to Globe Telecom and Philippine Long Distance Telephone (PLDT) Company that he was determined to tap a Chinese telecom company to challenge their duopoly and open the market to foreign competition.

Foreigners were required to join a consortium due to a 40% ownership cap in a local telecoms outfit, which experts say has limited competitiveness in a sector worth about $5 billion a year in revenue.

Duterte told Xinhua news agency that China Telecom’s entry “will give a good competition” to the industry incumbents. China Telecom is the second largest player in China’s local market and listed on the New York Stock Exchange in the US.

“I’m not saying that the two (existing telcom players) are lousy. But there is room for much improvement, and I do not see that here right now in my country,” Duterte said in announcing the deal. “”But if you put China there, which has the money and the state of electronics is good, many will stand to benefit.”

Those views, however, will likely be challenged. There are already concerns among lawmakers about the security and surveillance implications of state-linked China Telecom gaining a foothold in the country’s telecom infrastructure, as well as over the transparency of the bidding procedures given the president’s open bias for Chinese investors.

Opening up the Philippines’ heavily monopolized public utilities and services sector has been a hot button issue for decades. In the name of protecting national sovereignty, the 1987 constitution placed high restrictions on foreign investments in key sectors.

The upshot has been concentrated domination of the telecommunications, electricity, and infrastructure industries in the hands of few powerful business families.

The Philippines telecommunications sector, particularly mobile and internet services, have been dominated by the duopoly of Philippine Long Distance Telephone Company (PLDT) and Globe Telecom, which are led by tycoons Manny Pangilinan and the Ayala family respectively.

“I do not want the courts to interfere and prolong this process. Do not issue any TROs [temporary restraining orders] or injunctions,” said Duterte, cognizant of the potential political backlash and legal challenges to the entry of a new, especially Chinese, telecom player.

“This is a matter of national interest for the benefit of the public,” he said.

Duterte was catapulted to power in mid-2016 in part on his promise to overhaul the country’s creaky infrastructure, enhance basic public services, and end the stranglehold of oligarchs over the local economy. Breaking the duopoly over the local telecom market has been key to that agenda.

Duterte has portrayed China as a much welcomed correction to the status quo, because “[i]n a free enterprise democracy like the Philippines if the other two go into a cartel they can monopolize and if they have a monopoly you cannot go to another entity for help (because) they’ll always manipulate the prices and the quality remains the same.

Last year, during the Internet of Things (IoT) conference in Manila (August), Department of Information and Communications Technology (DICT) undersecretary Monchito “Mon” Ibrahim openly lamented that the Philippines’ internet services are among the world’s slowest and most expensive.

“What’s up, guys?” Ibrahim taunted the corporate executives in attendance, warning them to step up or move aside for a new player. “We still have the slowest internet in the region. We still have the most expensive Internet in the region.”

“(We) are hoping by the end of the third of this administration’s term, we should have a decent Internet connectivity in the Philippines at least at par with the neighboring countries across Asean,” the top official said, referring to the Association of Southeast Asian Nations.

Both Globe and PLDT’s mobile unit, Smart, have invested heavily recently to boost their coverage, pouring in US$950 million and US$1 billion respectively so far this year. Reports note they have been constrained by weak regulations that make acquiring permits for infrastructure painfully slow and cumbersome.

The China Telecom consortium, nominally led by Chinese-Filipino tycoon Uy, a Duterte ally from his hometown of Davao, effectively won the bid by default, with all other bidders being disqualified or withdrawing their bids under unclear circumstances.

One of the defeated contenders, the Philippine Telegraph and Telephone (PT&T) Corporation consortium, was disqualified for supposedly not having a certification of technical capability. It has since filed a petition against an allegedly “unfair” bidding procedure.

Another consortium which involved Korea Telecom withdrew its bid because, “The [new player] is required to incur an inordinate amount of funds and carry out commitments at a pace that was not required of the current dominant service providers.”

“Moreover, a failure to comply is subject to penalties that are not even graduated to consider substantial compliance,” the consortium said in a statement.

Aside from concerns over a perceived lack of transparency in the bidding procedures, where critics say the president himself picked the winner, there are also concerns over the national security implications of the deal.

A former high-ranking intelligence officer, speaking on condition of anonymity with the local Philippine Daily Inquirer, warned last December that “It’s going to be a long-term disaster for us…[w]e’re dead. They [will] now have access to our telecom infrastructure.”

Former president Benigno Aquino, now the de facto leader of the opposition, also warned last year, “I think it would be difficult if your communications infrastructure is with a country that the Philippines could have an actual conflict with.”

The Duterte administration, however, seems determined to push through the move for the sake of opening up competition and bringing down Internet rates, moves that will potentially boost his grass roots popularity.

There’s a diplomatic rub, as well: the deal’s announcement comes just weeks before the expected visit of Chinese president Xi Jinping and amid government hopes that Beijing will make good on its previous pledge to provide billions of dollars worth of aid and assistance for infrastructure building.