The Road to Third Major Telco

“Can the mayor from the South make the Philippines into the network hub of Asia?” – Ma. Lourdes Tiquia, “Is Duterte the ICT president?” The Manila Times, March 20, 2018

As of this writing, the Terms of Reference (TOR) for the bidding for the third telco have not yet been released. On the afternoon of March 22, 2018, Palace spokesperson Harry Roque said “Wala na po siyang (Duterte) deadline na si-net basta deadline niya March, [but] it was not met then [so] as soon as possible [na lang].”[i] Meanwhile, the Department of Information and Communications Technology (DICT) has said that they will release the TOR after the Lenten holidays[ii] and the announcement of the third telco may have to wait until the “end of June or early July,” but definitely before the State of the Nation Address of President Rodrigo Duterte on July 23, 2018.[iii] This, despite a previous commitment to release the TOR by mid-March and hold the bidding itself on May 24, 2018.

Many sectors are waiting with bated breath, not least of these being several million frustrated Internet users. But even ICT advocates have to take a deep breath and take stock of what this delay means. The delay is not all bad, is not all good, it just is – and we merely have to understand the implications.

Threats

The fundamental threat to the third telco initiative is as of today, there is no TOR to speak of. Any conversation regarding how the bid will go is no more valuable than idle speculation at this point. No TOR, no bid; no bid, no third telco. Uwian na, panalo na ang duopoly.

The major threat to the third telco initiative are the strong disagreements over the TOR itself. In her article “Is Duterte the ICT President?” Tiquia discusses a conflict between the Department of Finance (DOF) and the DICT over the model that should be used, something verified by multiple independent sources. The DOF favors a highest committed investment (HCI) model, while the DICT – supported by ICT advocates and consultants from the International Telecommunications Union (ITU) – is pushing for a highest committed level of service (HCLOS) model. What are these models?

The HCI is simply a straight bid. The entity that promises the most billions of investment pesos wins. Even if the TOR specifies commitments and perhaps some technical considerations, it will all boil down to which bidder has the most money.

The HCLOS model, on the other hand, is a formula that will require several commitments: how fast will the bidders roll-out; where will the bidders prioritize their roll-outs; what the telecommunications services to be rolled-out are; what are the promised average minimum wireless and wired internet speeds; and when 5G will be made available. The HCLOS model also includes a factor that prioritizes the underserved class 3 to 6 municipalities over the relatively better-served cities and class 1 to 2 municipalities. Only when these factors are analyzed will the resulting rating be multiplied against the investment commitment, resulting in an index that will be the basis for comparison. HCLOS thus takes many more factors into account, beyond the initial investment commitment.

Complicated? Not really. Merely hours after the HCLOS model was announced in the DICT forum held in Novotel Araneta last February 27, 2018, advocates had readily created working spreadsheet templates for HCLOS calculation. A few days after the ITU recommended that individual barangays could be made a factor in calculation, advocates converted their templates to include all 43,026 barangays across the country. The DICT is in possession of these templates and has commented positively on their ease of use. We advocates hope that these templates will be used officially, as we believe it will push for the best and most aggressive bidder to win the bid.

What is the advantage of the HCLOS model? Consider these numbers:

The bulk of class 3 to 6 municipalities are in Mindanao and the Visayas. The President wants to prioritize rural development. The HCLOS model prioritizes rural development, while the HCI does not. In fact, using HCI will concentrate prioritization in the cities, particularly NCR, as mathematically NCR has the bulk of the nation’s potential subscribers. With HCI, Visayas and Mindanao will likely be shunt aside (again).

Now, if NCR is prioritized, it will pit the third player directly against the duopoly where the duopoly is strong, lessening its chances of competing effectively. To simplify the matter, what the DOF wants is not only contra to what the President wants, but it will also make it easier for the President to fail.

Secondly, HCLOS is a transparent model, and transparent models prevent corruption. The bidder will have to openly commit when, where, and how they will meet the country’s demands for ICT services, and will have to show the math that includes how much will be spent. The HCI model which the DOF wants does not promote transparency; a single figure promising a billion-peso value will not provide the public any information as to what is promised, and what we should expect. “Huwag namang masyadong transparent!” is not in keeping with President’s drive against corruption.

We do not understand why the DOF seems to be opposing the spirit of the President’s instructions, even as the DICT is doing its best to comply with the President’s orders. It would be best if those involved in crafting the TOR get their acts together. The DICT, strongly supported by the NTC, has already presented a viable model that follows both the word and the spirit of the President’s intent; why then this insistence on their model by the DOF?

Still on the issue of threats and the TOR, Democracy. Net.PH recently learned through an FOI request to the National Telecommunications Commission (NTC)[iv] about how much money some legislative franchise holders owe the government:

Thus perhaps more importantly – in the draft TORs, the rules make mention of entities with “uncontested liabilities” being disallowed from joining the selection process. This means that anyone with “contested liabilities” can still be qualified. The rule on “contested liabilities” is a loophole as it is easily evaded. After all, one can readily and easily “contest” just about anything. This means that anyone with “contested liabilities” can still be qualified. This is not very sensible.

A liability is just another fancy term for the word “debt.” May utang ako. An “uncontested liability” simply means, a debt that you accept that you have to pay. Oo, may utang ako, babayaran ko ito. A “contested liability” means that you do not accept that you have a debt you have to pay. Excuse me, wala akong utang sa iyo.

This is the sticky part: some of these legislative franchise holders have millions, and even billions, of so-called “contested liabilities”, for over a decade. And, some of those with “contested” liabilities have publicly expressed their intention to join the third telco selection process.

This "uncontested” provision is a bad idea. It’s an easy “out” for the bidding company, with the public at the losing end. After all, would it make sense to award a bid to a company that has committed to pay (the government) in the past, but then upon award subsequently contests the terms of its own commitments?

Further, anyone with contested liabilities who joins the selection process and wins the bid, but then later loses the cases contesting or seeking to reduce these liabilities – will have to pay the government somehow. In that event, from whom will they get the money to pay for these debts? Of course, from subscribers. A contested liability is an existential threat, not just to the entity with the debt, but to the entity’s subscribers, to whom the payment of debts would be passed on to via subscription fees, call and SMS charges, data charges, and other charges levied upon subscribers, either directly or indirectly. It would be in accordance with the provision on obligations, and make better sense to ensure that any potential entrant does not have any baggage before joining the selection process; otherwise, how competitive can this potential winner even be?

It remains to be seen if the TOR will retain this gaping loophole of allowing entities with “contested” liabilities to join the third telco selection process. For as long as the TOR has not yet been finalized and published, we simply do not know.

Weaknesses

It is well-known that in the Cabinet of this administration, there are two types of seats – “inner cabinet” (those President Rodrigo Duterte knows personally and has a high level of trust and confidence), and “outer cabinet”. Secretary Carlos Dominguez III of the DOF is “inner cabinet,” having been a confidant of the President for decades. Officer-in-Charge Undersecretary Eliseo Rio, jr of the DICT is “outer cabinet”, having been appointed in a caretaker capacity after President Duterte reportedly fired then-Secretary Rodolfo Salalima.[v] As such, the conflict we discussed previously is skewed against the DICT and for the DOF; it doesn’t much matter that the DOF is the one going the wrong direction.

Even worse, the lack of a DICT Secretary means that there is nobody of the same rank who enjoys the President’s confidence enough to effectively argue for and on behalf of the department. As such, Usec. Rio, competent though he is, cannot effectively put the case for the HCLOS properly before the President; he cannot argue that the HCLOS model is aligned with the President’s vision, he cannot demonstrate the math to show that the HCLOS model will result in the prioritization of Visayas and Mindanao, he cannot prove that the HCLOS model is more transparent and therefore less prone to corruption than the HCI model. In fact, Usec. Rio can be treated shabbily by “inner cabinet” counterparts choosing to not attend decision meetings and for underlings to try to bully the DICT into submission.

While this is the reality of politics, it is no less disappointing. OIC Rio is one of the few ICT-related officials to have listened and engaged with ICT advocates, and his credentials are as impeccable as his integrity and work ethic. If President Duterte loses the services of Usec. Rio, he will be hard-pressed to find someone of similar caliber and drive. If that happens, the President could very well fail in ICT reforms and initiatives – including the third telco initiative – and it will be unlikely that Duterte will ever be considered an ICT president. (Sorry, Malou, but that’s the way it is.).

All is not lost, however. ICT reforms advocates are learning that the President has been paying attention to some key ICT issues, such as spectrum management (which he calls “frequency”), and has spoken of these in various fora. Should the President pay attention to the issues of the third telco initiative a little more closely, there is a chance that the HCLOS model will be adopted for the selection process.

And still, all of this remains to be conjecture until the TOR is published formally. Unless the TOR is released soon, and the HCLOS model is adopted by the TOR, we will have no confidence that the third telco initiative will succeed.

Opportunities

ICT advocates have been active in the push for reforms in the legislature, Democracy. Net.PH. being one of the groups at the forefront of ICT advocacy, alongside the Better Broadband Alliance and the Internet Society – Philippine Chapter (ISOC-PH). Through their efforts, a lot of improvements and reforms have been pushed and are nearing completion in just over two years of this administration.

There are ICT reforms in the pipeline that have a direct impact to the third telco initiative. Here is a list of these reforms that ICT advocates such as https://www.dhirubhai.net/redir/malware-page?url=Democracy%2eNet%2ePH have been working on closely with legislators, what their effects to the third telco initiative are, and their status in the legislative mill:

The first four bills mentioned above, if given due consideration by the legislature, have a chance of passage before the State of the Nation Address (SONA) of the President. With enough diligence on the part of Congress, these bills can even be passed before end of May, and can be used to attract more foreign and local bidders for the planned late June or early July target. The fifth bill, spectrum management, can be passed within the year if the President agrees with the DICT’s plan, and can bring in even a fourth, fifth, or more full-service player before the President’s term ends in 2022. Of side interest is that spectrum auctions through proper spectrum management has the potential for earning billions of pesos that can be earmarked for the administration’s various infrastructure programs and its “Build Build Build” drive.

These bills have been on the radar of various foreign players expressing interest in the Philippines, the most recent of which is Viettel of Vietnam.[vi] A telco with already 90 million subscribers in 10 countries, if Viettel enters the Philippines and grabs a third of the market, Viettel would have a total of 120 million subscribers by just adding one country. The point is this: the Philippines’ population, growth potential, and economy are sufficient “sweeteners” for foreign players to come in and bid aggressively. The potentially advantageous policy environment (if and when these laws are passed) is just icing on the cake.

As such, the slight delay allows interested foreign players more time to do due diligence. Sources have informed various advocates and interested parties that at least one of the top law firms in the country has been engaged to perform due diligence on select legislative franchise holders and local major conglomerates on behalf of at least one foreign telecommunications company or group. The results have been described as “promising” and “attractive”, and there is enthusiasm among interested foreign players in pushing forward with becoming a bid partner and/or major investor.

However, adopting the highest committed investment (HCI) model instead of the highest committed level of service (HCLOS) model can very well prevent the Philippines from selecting the best choice for the Filipino people.

The TOR is up in the air, there is a slight delay – we ought to maximize this time we have available and make sure we get the TOR right. The President should approve the adoption of the HCLOS model and make all opportunities to pass these ICT reforms measures quickly. The country wins.

Strengths

First of all, the Philippine subscriber base, economy, and growth potential is in and of itself a bag of “sweeteners” for foreign entities interested in participating in the selection process. The country has these[vii]:

• Over a hundred million in population, with over two million abroad as OFWs
• Over sixty million cellphone users, and only about thirty million using smartphones
• Over ten million households, with only about three million having home broadband via copper, coaxial cable, fiber, or fixed wireless
• Only two out of every hundred Pinoys have a landline
• Only about three out of every hundred Pinoys have cable TV service
• Digital TV is being rolled out, freeing up valuable TV whitespace (TVWS) spectrum that can be used for public free wifi, community mesh networks, and other intervention implementations

No wonder the foreign players want to come in and partner with the locals for an aggressive rollout. There’s growth to be had, across all sectors of the Philippine ICT space.

Second of all, our location in the western Pacific makes us the ideal location to be be Asia’s “internet router” and “internet switch.” Take a look at how cables go all around us (photo credit to Submarine Cable Map and TeleGeography) instead of through us:

The Philippines is well-positioned to become the internet hub for Asia-Pacific. The Luzon Bypass Infrastructure project of the Department of Information and Communications Technology (DICT) opens the door to this, and we can encourage more players to land their submarine cables in our country.

Other sweeteners mentioned by the DICT and National Telecommunications Commission (NTC) specifically, such as the use of Transco dark fiber, spectrum assignments, and efforts of government to reduce red tape, while important, pale in comparison to the advantages that the Philippines has, and is promoting by way of the highest committed level of service (HCLOS) model. The Philippines stands to limit the advantages of its sweeteners should the government adopt the highest committed investment (HCI) model that the Department of Finance (DOF) is pushing.

Hence, the serious efforts for ICT policy reform and support for the DICT’s efforts are needed now. This is where the admittedly few but actively participating ICT advocates have stepped up. For years now, Democracy. Net.PH, alongside the Better Broadband Alliance and the Internet Society – Philippine Chapter (ISOC-PH), has been pushing government to make efforts for access, affordability, and quality of service for ICT services, especially in the rural areas. While progress for ICT reforms was slow in the previous administration, much has already moved in this one, and we hold on to the hope that reforms might finally be achieved. It helps very much that the DICT has listened and engaged with ICT advocates. The fact that the Philippines has a DICT is in itself a plus, but is a DICT that listens to ICT advocates that is promoting the growth of ICT in the Philippines.

There are people who will claim that it is the political will of this President that is making things happen that did not in past administrations, and ICT advocates give due credit. However, if it is truly in the President’s best interests to make the third telco initiative successful to improve the lives of ordinary Filipinos, then the President ought to listen to the DICT, ICT advocates, and ordinary citizens. If the President does otherwise, rural ICT development will fall by the wayside, his chances of failing the Filipino people will increase, and the hoped-for change will likely not come. The President must approve and instruct the DICT to implement the HCLOS model for the third telco selection process to succeed and result in positive changes in the lives of the Filipino people.

End Notes

[i] "Palace: No more deadline for entry of 3rd telco player". Inquirer.Net. https://newsinfo.inquirer.net/977339/palace-no-more-deadline-for-entry-of-3rd-telco-player-palace-duterte-dict-telco-third-player

[ii] "DICT likely to issue terms for third telco after the Holy Week". GMA News Online. https://www.gmanetwork.com/news/money/companies/647259/dict-likely-to-issue-terms-for-third-telco-after-the-holy-week/story/

[iii] "Third telco selection may have to wait until July - DICT". ABS-CBN News. https://news.abs-cbn.com/business/03/20/18/third-telco-selection-may-have-to-wait-until-july-dict

[iv] "List of spectrum rights holders with outstanding obligations." FOI Philippines. https://www.foi.gov.ph/requests/aglzfmVmb2ktcGhyHQsSB0NvbnRlbnQiEE5UQy04OTg4MDYxNjExMDkM

[v] "Duterte admits he fired DICT chief Salalima." SunStar Manila. https://www.sunstar.com.ph/manila/local-news/2017/09/28/duterte-admits-he-fired-dict-chief-salalima-566624

[vi] "Vietnamese firm interested in 3rd telco bidding." ABS-CBN News. https://news.abs-cbn.com/business/03/19/18/vietnamese-firm-interested-in-3rd-telco-bidding

[vii] "The Problem of #PHInternet: How Can President Duterte Make Philippine Telecommunications Faster, Reliable, Cheaper, and More Accessible Across the Country." https://www.dhirubhai.net/redir/malware-page?url=Democracy%2eNet%2ePH%2e https://www.facebook.com/https://www.dhirubhai.net/redir/malware-page?url=Democracy%2eNet%2ePH/posts/1186625928039977