[ANALYSIS] Disturbing red flags in the 3rd telco selection

It’s tempting to think that our connectivity woes will soon be coming to an end. But we could be wrong.

Last week, on November 7, the National Telecommunications Commission (NTC) held a public bidding for the selection of the Philippines' 3rd telco provider. 

After tedious procedures, the selection committee declared that the Mislatel Consortium – which comprises Udenna Corporation, China Telecom, Chelsea Logistics Holdings Corporation, and the Mindanao Islamic Telephone Company – provisionally won the bid.

On the face of it, this seems a step in the right direction. For the longest time the country’s telco industry has been characterized as a “duopoly,” or an industry dominated by just two firms: PLDT-Smart and Globe Telecom.

The entry of a third player makes economic sense since it could finally break the incumbent duopoly, thereby lowering phone and internet costs and providing better quality for long-frustrated consumers nationwide.

However, in this article, I discuss a number of red flags that attended the selection process last week – red flags which suggest the situation is less promising than it seems.

And then there was one

First off, the bidding that happened was hardly a bidding at all. (READ: Editorial: China's telco play in the Philippines)

A bidding is supposed to be an avenue to discover the price of a product or service. This is done by allowing different players to compete against one another and offer the biggest bang per buck.

But when it came to the 3rd telco bidding last week, only Mislatel ended up being properly evaluated by the selection committee. All other contenders either dropped out or got disqualified.

This is odd. Back in August as many as 7 telco providers were identified as potential contenders by the Department of Information and Communications Technology (DICT). These companies – poised to take a slice of the local market – come from the US, Japan, China, South Korea, Vietnam, and Norway.

The biggest of them all is China Telecom, owned and controlled by the Chinese government. It’s the largest fixed-line provider and the third-largest mobile telecom provider in China.

Because of the 60-40 restriction in our Constitution, all these foreign firms must team up with local firms if they are to do business in the country.

It was not until bidding day itself that Udenna Corporation confirmed it would be China Telecom’s local partner under the Mislatel Consortium.

On that day, only 4 groups showed up: Mislatel, Sear (a consortium led by former Ilocos Sur governor Chavit Singson), PT&T, and NOW Telecom. Other players unceremoniously (if not bafflingly) dropped out.

Although NOW Telecom did show up, they bowed out too due to a pending case with the NTC. Sear and PT&T, meanwhile, were later disqualified by the NTC for various reasons. Both contested their disqualification, but their motions for reconsideration were junked on November 13.

In the end, only Mislatel was left for consideration and hurdled the NTC’s myriad criteria.

Despite a seemingly transparent selection procedure, it boggles the mind that no one else from the original list of contenders was viable or eligible enough to even have a sporting chance at the third telco slot.

For whatever reason, this series of events led to a lack of effective competition among the prospective telco entrants.

Cronyism?

The profile of the winning bidder – Mislatel Consortium – is also worth unpacking.

The local partner is mainly Udenna Corporation, the fast-expanding holding company owned by Davao tycoon Dennis Uy.

Udenna is the parent company of Phoenix Petroleum (which captured 6.2% of the petroleum market share as of 2017) and Chelsea Logistics (its tanker fleet accounting for 18% of the industry’s gross tonnage as of 2017).

It’s no secret that Dennis Uy is a staunch supporter of President Duterte. In fact Dennis Uy contributed P30 million to Duterte’s presidential campaign.

Since then, Dennis Uy has been on a roll.

For example, Duterte graced the 10th listing anniversary of Phoenix Petroleum in July 2017 – a rare moment where the sitting president attended a listing anniversary in the Philippine Stock Exchange. The share price of Phoenix Petroleum has also taken off since the beginning of 2017.

Of late, Dennis Uy has also been on an acquisition spree: Udenna has already acquired 100% of Enderun Colleges (July 2017), 100% of FamilyMart (October 2017), and 70% of Conti’s Holding Corporation (September 2018). Udenna also has indirect shares in 2GO.

Dennis Uy is also poised to make it huge in real estate. Aside from completing a spanking new 24-story Udenna Tower in BGC, Udenna is also set to build Clark Global City, a 177-hectare development in Clark Freeport Zone.

This rapid expansion has come with mounting debt: Udenna’s loans grew by roughly 200% in 2017 from the previous year. But despite this, Udenna’s net income also came in at P4.1 billion in 2017, a 426% increase from the previous year.

Dennis Uy is doubtless one of the fastest-rising businessmen of his generation. But not a few people have raised their eyebrows at the astonishing growth of his business portfolio under the Duterte administration. Dennis Uy’s unchallenged bid in the third telco slot adds to such suspicions.

Indeed, some have already dubbed Dennis Uy a Duterte “crony” – similar to the ones the late Ferdinand Marcos kept close to his side throughout his dictatorship.

Biggest red flag

Finally, China Telecom’s involvement might be the biggest red flag of all.

Security concerns are top of mind. For one, China Telecom is owned and controlled by the Chinese government, which has a history of cyber surveillance.

One report claims that China “has become the biggest state sponsor of cyber-attacks on the West” and is “now ahead of Russia as the most prolific nation-state mounting attacks on firms, universities, government departments, think tanks and NGOs.”

Another recent report showed that China Telecom, in particular, has been involved in the misdirection of large amounts of internet traffic to China, likely in an effort to assist the Chinese government’s “surveillance of Western countries and companies.”

Given this track record, what could prevent China Telecom from similarly redirecting a sizeable chunk of Philippine internet traffic to China?

Consumers should be wary, too. Right now China is one of the world’s leaders when it comes to mass surveillance – à la Big Brother – what with its reliance on millions of CCTVs as well as a “social credit system” that hands out merit and demerit points to citizens based on their real-world behavior and online conversations.

Surrendering private information to a telco company closely linked to the world’s most advanced surveillance state is unsettling to say the least.

If many consumers would be unwilling to drop their PLDT-Smart or Globe subscriptions in favor of China Telecom, this new 3rd player is unlikely to make a significant dent in the market, thus defeating the original purpose of introducing competition in the first place.

All in all, a Chinese telco provider could be more trouble than it’s worth – not just for the government but also for millions of Filipino corporations and consumers.

Beyond competition

Filipinos deserve cheaper and faster connectivity, and many assumed the entry of a new player would automatically bring this about.

Yet the way the third telco provider was selected last week was far from satisfactory and raised many red flags.

It now seems the issue goes way beyond the mere introduction of competition in the telco industry. Suspicions of cronyism, as well as serious national security and privacy concerns, deserve more than a passing glance from our leaders and policymakers.

Otherwise, the country’s new third telco might only bring with it more problems than solutions. – Rappler.com

The author is a PhD candidate at the UP School of Economics. His views are independent of the views of his affiliations. Follow JC on Twitter (@jcpunongbayan) and Usapang Econ (usapangecon.com).

                       

           

JC Punongbayan

JC Punongbayan is a PhD candidate and teaching fellow at the UP School of Economics. His views are independent of the views of his affiliations.

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