De-monopolizing telecommunications

Opinion

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Posted on September 18, 2011 05:03:57 PM

Introspective -- By Romeo L. Bernardo

Two key issues on telecommunications have lately hogged business headlines: a) the PLDT-Digitel Merger, and b) the proposed National Broadband project. Both these issues test the clarity of government’s development vision and its commitment to sound regulation and competition policy. Its decisions will impact not only the efficiency of delivery of telephony and data services to both private users and government, but our country’s competitiveness and development over the long run.

Let me start with a disclosure -- I am a board director of Globe Telecom. In a previous life, though, for over two decades, I was a civil servant at the Department of Finance and in multilateral institutions. There, I had a good view of the politics of economic reform, especially as undersecretary under the reform-minded Aquino 1 and Ramos administrations. With this background, I was asked, together with my colleague Christine Tang, to do a case study on the subject by the World Bank Growth Commission. (The Political Economy of Reform during the Ramos Administration, link (http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf). A key chapter, the “De-monopolization of Telecommunications,” documents the political and regulatory fortitude needed to dislodge entrenched interests.

Then

It starts with a quote attributed to Singapore Senior Minister Lee Kuan Yew in 1992: “The Philippines is a country where 98 percent of the residents are waiting for a telephone and the other 2 percent are waiting for a dial tone.” Indeed it best describes the situation of the domestic telecommunications industry in 1992. An estimated 800,000 applicants, 75percent in the country’s capital, Metro Manila, were queuing for a telephone line. At the time, the Philippine Long Distance Telephone Company (PLDT), which owned the only nationwide transmission backbone, was a virtual monopoly, controlling over 90 percent of the country’s telephone lines. Its controlling shareholder was politically well connected, its influence extending across the three branches of government as well as the media.

“None of the telephone companies operating at the time were in a position to challenge PLDT’s leadership. Following news accounts, PLDT, instead of expanding its network to meet service demand, “spent heavily for the protection of its market share.” For instance, when the previous government decided to open up the sector to competition, reports indicate that PLDT was able to secure as needed favorable legal rulings to block prospective entrants. It had apparently been a risky venture for the president to go after PLDT. “If he loses in this duel, the president’s credibility as a strong leader will be severely dented,” observed one report at the time.

“Nevertheless, the Ramos administration proceeded to pry the sector open with various tactics... from encouraging the formation of consumer groups that took to the streets and clamored for change, to boardroom battles. One case reportedly led to the resignation of a Supreme Court justice whose decision favoring PLDT was alleged to have been written by a PLDT lawyer.

As a result, the twin executive orders (EO) that the president issued in 1993 opened the floodgates to investments in the sector. By the time Congress passed legislation largely echoing provisions of the two executive orders, the country’s teledensity had doubled and PLDT had already embarked on a zero backlog program.”

Our 2008 paper continues: “Fifteen years on, the benefits of the reform may be seen in (i) increased access to telecommunication services, with teledensity in the cellular mobile telephone service (CMTS) segment of the market reaching 50 per 100 population in 2007; (ii) increased market competition with the entry of more players representing domestic and foreign interests; (iii) the rise of new growth industries such as business process outsourcing; and (iv) a whole new range of business solutions using cellular mobile telephone technology that caters to the retail client, such as money transfers for overseas workers. An interesting, perhaps ironic turn of events is that PLDT, which had strongly resisted the reform, managed to shape up and emerged a big winner of the reform....”

Now

Fast forward to the present. PLDT, under new controlling ownership, proposes to acquire Sun-Digitel, threatening to re-establish a near monopoly situation. Together, the combined companies will control 73% of the market. Even more tellingly, the combined PLDT-Digitel will control three out of the four blocks of telephone frequencies -- 75% of the highway for delivering the service. This level of control is against the spirit, if not a direct contravention of the Ramos era EO which sought to limit each telco to only one bloc.

This issue has been recently deliberated in the appropriate Senate committee whose findings we await, and is now under consideration by the NTC. What was made clear during the hearings is that nowhere in the world is such a degree of concentration allowed without putting effective limitations on the dominant provider. For example, in the US, the recent AT &T/T-Mobile merger triggered alarm bells in the US top anti-trust agency even though both carriers combined subscriber bases would amount to a little less than 44% of the total wireless market. Well established regulatory regimes everywhere else would have done the same.

Widely followed analyst Boo Chanco wrote in his latest column about the ill-advised revival of the National Broadband project. He provided yet another reason why we need to strengthen competition in the industry. To combat the fear of Secretary Montejo that our private telcos might overcharge government for telco services, he cited that two noted economists (Dr. Raul Fabella and Dr. Noel de Dios) at that meeting with the secretary urged government “to make sure no one of the private telcos gain even near monopoly powers.

Government must exercise its function and duty to regulate the telcos not just to get the prices they are seeking for government operations but for the sake of the consumers as well.”

I am hopeful that the present regulators -- and the national leadership -- will be equal to the challenge of the times.

Mr. Romeo Bernardo is a Philippine GlobalSource Partners advisor, managing director of Lazaro Bernardo Tiu & Associates, Inc. and a board member of The Institute for Development and Econometric Analysis, Inc, (IDEA).


http://www.bworldonline.com/content.php?section=Opinion&title=De-monopolizing-telecommunications&id=38461

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DOST ignored lessons from ZTE fiasco

BUSINESS

DOST ignored lessons from ZTE fiasco DEMAND AND SUPPLY By Boo Chanco (The Philippine Star) Updated September 09, 2011 12:00 AM

Science Secretary Mario Montejo cannot be accused of not having read the study of National Scientist Dr. Raul Fabella and former UP School of Economics Dean Dr. Emmanuel de Dios. Mr. Montejo made references to it in his memo to P-Noy. But it seems Mr. Montejo just totally ignored the lessons learned from Ate Glue’s unfortunate foray into the broadband business.

Let us look into that paper again to help us understand why Mr. Montejo’s proposal to revive a government-owned backbone for broadband services is ill-advised. The study begins with a question: “Does the Philippines need a government-owned backbone? Our answer is: No.”

The two UP economics professors declared that it is hardly debatable that providing the greater mass of people with digital access to data and communications through greater bandwidth is a matter worthy of national government attention. But they emphasized, government’s direct participation in terms of investing on it is not called for.

“Unlike the country’s physical transport and logistics infrastructure, which have been neglected for decades, the Philippines’ information and communications infrastructure has been the recipient of recent massive (mostly private) investment.”

Before the previous administration’s motives got clouded by the ZTE deal, the DOTC’s Philippine Information Infrastructure Program also envisioned the “development of a robust and expanded digital infrastructure with the private sector playing a major role”. The thrust was to enhance the inter-operability and the connectivity of all networks to attain “universal access” at affordable cost.

“The currently available broadband backbones (those of the telephone companies and the National Power Corporation) would serve to fill the country’s urgent need for ample, universal, and affordable broadband access. The brunt of the work was expected to consist of providing ‘last-mile’ and missionary connections (i.e., connections to remote and inaccessible areas).”

The UP economists emphasized that “It is essential to note that original government plans at no point envisioned a separate backbone to be financed, owned and operated by, and dedicated to the needs of the government. At worst, what was recommended was a market-mediated build-operate-and-transfer (BOT) plan.”

It is typical of “network economies”, of which ICT backbones are an instance, the UP paper pointed out, that the unit-cost of service falls with increasing capacity-utilization (measured, say by number of users). This is because fixed costs are high while variable costs are low.



“As already noted, there are now already two operational backbones, both privately-owned and -run. Increasing these to three (and possibly four) would saddle the entire industry with excess capacity that was entirely of the government’s making.

“Once implemented, the expanded NBN would steer demand away from private backbones and effectively raise the cost for all users. Even if half of government demand hives off from private providers towards the cheaper government backbone, costs become higher for the telcos’ private customers, including business.

“Ironically one of those to suffer would be government itself. For it is virtually certain that government agencies will nonetheless continue to spend the rest of their telecommunications budgets (e.g., half of their spending on landline calls and 92 percent of their cell-phone expenses) on the private telcos’ services. Therefore they too become affected by higher costs. Hence it is not even entirely assured that total government telecoms costs will even be reduced.”

The UP economists also discounted the argument about congestion. “The possibility of congestion (leading to slow connections) is likely the only valid economic rationale for an extra backbone (not to mention two), and possibly some allowance for redundancy in an emergency. At present, however, no congestion is in sight.

“Quite the contrary, current fiber-optic pipelines are hugely under-utilized, implying zero marginal cost of additional traffic. Even assuming the point of congestion is reached, however, there is no reason to doubt that private telcos would scramble quickly enough to absorb excess demand, as they did upon inter-connecting the country under competitive pressure.”

The UP economists urge government to concentrate on government’s core competence: to govern. They pointed out that indeed, “from the 1990s up to until recently, the government has been progressively outsourcing all non-core needs. Government agencies that have followed this formula have realized good savings.

“In the meantime, government concentrates on its more important regulatory task of preserving competition; then rather than bother to run a single firm, it comes to influence the entire sector. This strategy has clearly yielded more success than the previous one.” Dr de Dios, in an e-mail to me, suggests that P-Noy instead consider using government’s bargaining power as bulk or consolidated buyer to obtain more favorable broadband rates from the telcos, say through a public bidding.

A good friend of mine, a Pinoy expat in New York with telecoms investments here and abroad as far as Latin America, agrees with the general theme of the UP paper in an e-mail responding to my questions. Here are portions of his reactions:

“Yes, there’s a dark fiber in the NGCP grid which can be used by the government. But you will have to build connecting fiber links to existing PLDT/Globe/Digitel/Bayantel submarine cable landing stations (link to worldwide Internet) and buy lots of broadband equipment (Huawei, Cisco or Juniper) to ‘light up’ the dark fiber. Then you will need an army of tech people to service a nationwide network - a new set of government bureaucracy.

“Note that the NGCP grid is just an expressway. Connecting and maintaining the ‘last mile’ to each government agency or office around the country is the more expensive part. Iyon ang madugo !

“For instance, in Metro Manila the NGCP grid stops at the Meralco point of interconnection somewhere in Caloocan. Meralco then receives the power and distributes it in Metro Manila and Laguna via its electric cable network. So, how will this government broadband project distribute the Internet bandwidth to each government office in Metro Manila and Laguna from Caloocan?

“Multiply this last mile scenario nationwide; province by province, town by town and compute the cost of installation and service maintenance and the price zooms up.

“If lighted, the NGCP fiber will just duplicate the existing national microwave networks of PLDT, Globe, Digitel and Bayantel. And, there are unused capacities in these telco microwave networks which government can just lease or use for free in exchange for spectrum that the government gives to them. If necessary, PLDT, Globe, Digitel or Bayantel can increase capacities by adding broadband transmission equipment on the same microwave tower using same number of people to maintain them.

“Moreover, PLDT, Globe, Digitel and Bayantel have existing last mile connections to most government offices nationwide.

“Government should just bid out this project (network plus last mile) to our existing telco boys using Chinese equipment if a Chinese grant is seen as funding source. An open auction will be far cheaper since PLDT, Globe, Digitel and Bayantel already owns capacities various international submarine cable network which carries internet traffic worldwide.”

Interestingly, New Zealand, a country that tried putting up a government sponsored broadband network gave up on it. NZ State Services Minister Tony Ryall announced in February 2009 that the government’s Government Shared Network (GSN) is to be discontinued because it is financially unsustainable. Participating government agencies will be moved to a new provider in the private sector.

Ryall says, “The project had been running at a considerable financial loss ever since it became operational.” Dr. de Dios remarked: “You cannot accuse NZ of being corrupt or inefficient, as countries go, yet even they have not been able to make a go of a government broadband.”

Whatever the government ends up doing, it is essential that everything is done in a highly transparent manner. Assumptions on Montejo’s P800 million estimated cost, for instance, should be publicly revealed. Experts are wondering where that figure came from. The terms of reference should also be crystal clear unlike the ZTE deal in the previous regime.

In the end, the UP economists concluded “the only backbone the government needs today is a moral one; not fiber optic but fibre politique.”

Due diligence

Ruth Marbibi sent me this classic which stresses the need to always do due diligence.

After a long night of making love, the guy notices a photo of another man, on the woman’s nightstand by the bed. He begins to worry.

“Is this your husband?” he nervously asks.

“No, silly,” she replies, snuggling up to him.

“Your boyfriend, then?” he continues.

“No, not at all,” she says, nibbling away at his ear.

“Is it your dad or your brother?” he inquires, hoping to be reassured.

“No, no, no! You are so hot when you’re jealous!” she answers.

“Well, who in the hell is he, then?” he demands.

She whispers in his ear, “That’s me before the surgery.”

Boo Chanco’s e-mail address is bchanco@gmail.com. He is also on Twitter @boochanco

http://www.philstar.com/Article.aspx?articleId=725208&publicationSubCategoryId=66

New Zealand Discontinues Government Shared Network

By Alice Kok | 4 February 2009

State Services Minister Tony Ryall has announced that the government’s Government Shared Network (GSN) is to be discontinued because it is financially unsustainable. Participating government agencies will be moved to a new provider in the private sector.

The Government Shared Network is a network linking government agencies with high speed internet and telecommunications services. It was previously touted as more cost effectively and was meant to improve the delivery of information and services to the New Zealand public.

GSN has been operational since 2007 and is currently used by sixteen agencies providing connections to around 130 government offices.

Ryall says, “The previous government wrote off US$5.4 million from the GSN project in the 2007/2008 financial year. The project had been running at a considerable financial loss ever since it became operational—losingUS$358,000 per month. Despite that the previous government had planned to carry on with it.”

“We are taking the earliest practical opportunity to begin shutting it down. All public service agencies need to demonstrate fiscal responsibility and focus on high value and high performance programmes.”

The State Services Commission will oversee a managed exit of government agencies from the GSN, working with existing users to put in place a single procurement process for a replacement provider. This will be done with the aim of minimising costs. The exit from GSN is expected to take 12 months.

http://www.futuregov.asia/articles/2009/feb/04/new-zealands-government-shared-network-be-disconti/

Not a good idea to revive gov't broadband

DEMAND AND SUPPLY By Boo Chanco (The Philippine Star) Updated September 07, 2011 12:00 AM

Poor P-Noy. Some people may just be trying to use his good name and clean reputation to revive that infamous government broadband network (GBN) project. That project got Ate Glue into trouble not only because it was overpriced. Worse, it was also not urgently needed because the private sector can provide the service better. It is this last part that is ignored by the proposal of some Aquino administration officials to revive this unworthy project.

The project’s revival was proposed by Science Secretary Mario Montejo. He was able to get P-Noy to sign last June, Executive Order 47, downgrading the Commission on Information and Communications Technology or CICT into an office under the control of Department of Science and Technology (DOST). Also transferred to DOST were CICT’s attached agencies, namely, the National Computer Center and the Telecommunications Office or TELOF.

As pointed out by a report from ABS-CBN’s Lynda Jumilla, this movement of agencies jibes with Montejo’s proposal to designate DOST and the former CICT as point agencies for the implementation of the GBN project. I read the 35-page proposal submitted to Malacañang and I got the feeling it merely regurgitates the justifications made by Ate Glue’s DOTC we heard during the Senate hearings.

DOST’s Montejo claims a government broadband network will supposedly integrate and address data processing, storage, computing and high-speed connectivity needs of government agencies. DOST also estimate the GBN project will cost P800 million, which is claimed to be less than half of the P2 billion that government spends for Internet connectivity.

But experts are not impressed. Dr. Raul Fabella, one of two UP economists who studied the anomalous NBN-ZTE deal, believes DOST’s estimate is on the low side, designed to misrepresent actual project cost and does not include expenses for labor, maintenance and system upgrade. Input all those expenses and the claimed savings will likely not be compelling.

Fabella also doubts that a broadband network operated by government would be competitive and have the cutting-edge technology provided by private telcos. Fabella told ABS-CBN News: “Ang kinatatakutan ko dito, we spend P800 million for set-up cost and then you eventually simply turn your back because it’s not workable anymore.”

It isn’t as if something like that didn’t happen before. As Fabella pointed out, this happened to the government’s “Telepono sa Barangay” project that sought to provide landline phone services in every barangay across the country. That project was abandoned, after so much money had been spent, as cellular phone service became widely available and more reliable too.

Another industry consultant who is familiar with past government telecom projects agreed with the view of Fabella. He expects the project to entail a higher set up cost than DOST is claiming and doubts if the project will save money for government in the long run. “I may even grant that it would save government recurring cost – but only at the beginning. Then after a year or two, the whole thing breaks down because maintenance is the bane of government agencies. No one looks at sustainability.”

Because telecoms technology is constantly changing, government will be left with obsolete equipment rendering less than adequate service way before they can fully depreciate the facilities in their books. Private sector telecoms companies are better situated to deal with this fast rate of obsolescence. On the other hand, government agencies can demand and can get top state of the art service from private telcos under threat of losing the account. Fabella thinks “government agencies should be able to choose their providers. Paano na lang kung pangit ang service ng gobyerno? Eh di patay na. No choice ang government agencies. Monopoly eh.”

ANC’s Coco Alcuaz interviewed Ray Anthony Roxas-Chua who said reviving the project was not just a mistake but “an extreme response”. He told Coco, anchor of ANC’s Business Nightly, that the government should stick to its competency and, rather than build its own broadband network, provide incentives for the private sector to take on that need.

Roxas-Chua said government should provide policies and incentives to encourage private players to put more broadband capacity in the country specially in under served rural areas. Chua said that if the proper incentives are given, the private sector, not the government, will invest the capital needed to provide a more robust telecoms infrastructure. But government must work on the industry’s competitive dynamics so that prices of broadband services will go down for both government and ordinary consumers. I guess this means government must never allow a telecoms monopoly or de facto monopoly to exist.

That was exactly the point of Dr. Fabella, who incidentally was conferred by P-Noy the distinct honor of being called a National Scientist. At the very least, P-Noy should hear out the man he thought was of superior accomplishments and intelligence to merit being a National Scientist. Rather than use scarce government resources building its own broadband network, Dr. Fabella thinks government agencies are better off getting Internet services from the private sector. Between the National Scientist and the Secretary of Science, I am sure the scientific community would have more respect for Dr. Fabella’s wisdom.

From the perspective of political strategy or even just simple PR, it is plainly stupid to revive the project that practically brought down the Ate Glue regime in the minds of our people. If P-Noy revives GBN, not only will her defenders be able to say that the broadband project was valid and was only politicized by the opposition including then Senator Aquino. P-Noy has better use of his time than to defend this less than worthy proposal.

Reviving a less than urgent project whose stench of corruption was simply unbearable is like committing political hara kiri. It will confirm what some people already suspect, that while they think P-Noy is immaculately honest, his subalterns are rather eager to capitalize on his clean image to make hay before the political tide turns.

If P-Noy is unable to smell a rat in this DOST proposal and supports it, then heaven help him and the country when the bigger infrastructure projects come up for decision.

Competitiveness

In a speech in a business meeting in Xiamen, P-Noy pointed out that Filipino foreign direct investments in China total $2.8 billion, while Chinese investments in the Philippines total $500 million. Something must be seriously wrong if we have become a net exporter of capital when we need such capital badly to move our economy and country along.

Over the weekend, one of the US Embassy documents leaked by Wikileaks provides an analysis of what’s going on. The document dated Jan. 25, 2010 noted that weak public institutions had repelled foreign businesses.

The report, in particular, states that “many foreign investors describe the inefficiency and uncertainty of the judicial system as a significant disincentive for investment”. The legal system’s shortcomings were said to be the result of “...judges rarely [having] a background in, or thorough understanding of, market economics or business, and that their decisions stray from the interpretation of law into policymaking”.

Corruption, meanwhile, was described as a “pervasive and longstanding problem” because “the enforcement of anti-corruption law has been weak and inconsistent”. The report also noted that the Philippines “is not a signatory of the Organization for Economic Cooperation and Development Convention on Combating Bribery.”

Inefficiencies in agencies concerned with business registration, customs procedures, and immigration have also been “a source of frustration” for many US investors.

That’s why our taipans are investing in China a lot more money than Chinese businesses are investing here. P-Noy wants to even up the flow of investment money, or so he says. He must read that US Embassy memo leaked by Wikileaks and order Sec Greg Domingo to enlist Sec Jesse Robredo’s help because a big bulk of the anti-business behavior and procedures of government is at the LGU level.

Novenas to saints

Rosan C and Romy B sent variations of this text joke now going around.

Kung ayaw mong umulan kasi may party ka, magdasal ka kay Sta Clara.

Kung feeling hopeless ka, mag novena ka kay St. Jude.

Kung may subpoena ka galing sa Senado, tumakbo ka patungong St. Luke.

Boo Chanco’s e-mail address is bchanco@gmail.com. He is also on Twitter @boochanco

http://www.philstar.com/Article.aspx?articleId=724436&publicationSubCategoryId=66

UP economist doubts new gov't broadband project

from an ANC report by Lynda Jumilla, ABS-CBN News

Posted at 09/02/2011 10:51 PM | Updated as of 09/03/2011 6:01 PM

MANILA, Philippines - The Aquino administration's efforts to revive the aborted National Broadband Network (NBN) project has received failing marks from a University of the Philippines economics professor.

Dr. Raul Fabella, one of 2 UP economics experts who conducted a study of the anomalous NBN-ZTE deal entered into by Arroyo administration, said government agencies are better off getting Internet services from the private sector.

"Government agencies should be able to choose their providers. Paano na lang kung pangit ang service ng gobyerno? Eh di patay na. Monopoly eh," he said.

In a 36-page proposal submitted to Malacañang, the Department of Science and Technology (DOST) claimed that the government would save on Internet costs if it had its own broadband network.

The DOST placed the set-up cost at P800 million. Fabella, however, believes that this is on the low side and does not include expenses for labor, maintenance, and system upgrade.

He also doubts that a broadband network operated by government would be competitive and have the cutting-edge technology provided by private telcos.

"Ang kinatatakutan ko dito, we spend P800 million for set-up cost and then you eventually simply turn your back because it's not workable anymore," Fabella said.

He said this happened to the government's "Telepono sa Barangay" project that sought to provide landline phone services in every barangay across the country.

The project was overtaken by the rise of cellphone technology because of bureacratic delays.

Engineer Jun Lozada, a consultant-turned-whistleblower in the anomalous NBN-ZTE deal, said  a government broadband network would fill a need in information dissemination.

However, Lozada warned against possible opportunities for corruption, as cited his NBN-ZTE deal experience.
"Alam mo, para sa pangalan ng mahihirap, andami nang yumaman," he told radio dzMM.

In separate statements, Malacanang and DOST Secretary Mario Montejo confirmed proposals to revive the NBN project.
They added, however, that there is no final decision yet on the issue.

http://rp1.abs-cbnnews.com/nation/09/02/11/economist-doubts-new-govt-broadband-project