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Special Reports

Philippine telecoms: A bad connection

By Mary Ann L Reyes

MANILA - When company chairperson Oscar M Lopez was asked to describe the year 2000 for Benpres Holdings Corp, which owns the telephone company Bayan Telecommunications, he did so in two words. Annus horribilis. It was indeed a horrible year, not only for Benpres and BayanTel, but also for the whole Philippine telecommunications sector, and especially the landline telephone business.

The Philippine economy took a definite downturn last year, precipitated mainly by negative economic fundamentals and sagging confidence of the business sector. Investors, local and foreign alike, withheld and withdrew their funds from the local economy and the value of the peso plummeted to record lows. The economics of the landline business was under threat for the whole of 2000, not only in the Philippines but worldwide.

In the United States, competitive local exchange carriers suffered from the growing popularity and affordability of wireless telephony. Traditional telephone companies were under siege on a global scale as the Internet began replacing voice networks, new competitors sprang, and growth rates slowed down. In the Philippines, companies such as BayanTel, which borrowed heavily to finance a massive rollout of telephone lines beginning in 1997, found themselves saddled with loans that were incurred at a time when the foreign exchange rate was only P25 to US$1 and which have now ballooned given current rates of P51 to the dollar.

What's worse is that there were very few takers for the millions of new telephone lines that were installed, mainly due to reduced consumer purchasing power. People, especially in depressed rural areas, would rather spend their money on more important items such as food. With this year expected to even be more difficult for business, the telecommunications industry sees no immediate hope, especially for the local exchange carrier (LEC) business, which has been offsetting the profits of the more profitable cellular, data, and international telephone business. And with telephone rates dropping fast as a result of cutthroat competition, the industry is beginning to have doubts whether the deregulation of the telecommunications sector was any good after all.

For several decades, at a time when it would take many months before one could get a telephone line installed, and at huge cost, the Philippine Long Distance Telephone Co (PLDT) had a virtual monopoly in the voice business. PLDT, until the early 1990s, controlled 95 percent of the voice market, the balance divided among small rural telephone companies. Prior to the industry's deregulation, other players in the telecommunications market were limited to offering data services in the form of "telex". Many of these companies were controlled by known cronies of former president Ferdinand Marcos as well as families close to the powers that be.

It was not until 1987 that the Philippine government allowed limited or "regulated" competition in the telephone business, which basically meant that it allowed new players to come in, but still limited the number of participants. In 1994, the Fidel Ramos administration issued Executive Order (EO) number 109, otherwise known as the "service area scheme", to bring basic telephone services to rural areas and to fast-track the rollout of telephone networks by the local exchange carriers.

In 1995, the Telecommunications Act of the Philippines was enacted, setting the policy for competition and liberalization of the telecommunications sector. It opened up the paging and value-added services business but continued regulating the rates for local exchange carriers, international long distance and the mobile telephone business, "unless there is sufficient competition".

"Basically, RA 7925 [the Telecommunications Act] bolstered EO 109 and institutionalized it, the latter simply being an executive issuance," says Edgardo Cabarrios, who heads the common carrier authorization department of the National Telecommunications Commission.

The SAS basically divided the country into several areas and awarded these areas to certain companies. Among those that participated in the SAS were PLDT, which had a nationwide franchise, and BanyanTel, which was awarded the Metro Manila and Bicol areas. Others included Digital Telecommunications (Digitel) which was awarded the Central Luzon areas; Eastern Telecoms, Northern Luzon; Isla Communications, Visayas; Piltel and Philcom, Mindanao; Globe, Luzon and Metro Manila; and Bell Telecoms, Metro Manila and outlying areas.

Under the SAS, the telephone companies were supposed to install one line to an unprofitable or "missionary" area for every 10 lines installed in rural and more profitable areas. According to NTC commissioner Eliseo Rio, there was very good compliance as far as the required total number of lines to be installed was concerned. "However, as far as meeting the 10-to-one ratio, the compliance is very low," he says. Rio explained that when the companies were about to go into phase three of the SAS, which was in effect the part when they are supposed to install lines in missionary areas, the Asian economic crisis began in mid-1997.

In a recent study conducted by the NTC on SAS compliance, it was revealed that of the more than 6.9 million lines installed all over the country, only 3.06 million are subscribed. Of the PLDT's 2.62 million lines installed, only 1.7 million have been taken, according to the study, although one official says they only have 500,000 unsubscribed lines.

More disturbing is the phenomenal rise of the cellular or mobile telephone business in the Philippines. There are now almost 9 million cellular phones in use in the country against 3 million subscribed fixed telephone lines. This despite the fact that it is more expensive to own a cellular telephone and the rates are by the minute.

Bayantel was the first among the Lopez-owned companies (Manila Electric Company, Maynilad Water) that felt the aftershock of the Asian economic crisis of 1997.

According to Benpres chairman Oscar Lopez, the company had just completed a rollout of its landlines in working class population centers at a cost of around $220 million, raised when the foreign exchange rate was at P25.24 per $1. Now, the exchange rate is about P50 to $1. Lopez says the population covered by BayanTel's rollout was more vulnerable to a decline in consumer buying power resulting from the economic crunch. Subscriber count declined as consumers prioritized expenditure of their household budgets. He adds that because of the nature of the areas assigned to BayanTel, the economic crisis also significantly altered the assumptions of its marketing strategy, pointing out that the population it covered was more vulnerable to a decline in consumer buying power resulting from economic hard times. BayanTel thus in 2000 sought debt restructuring of almost $500 million in loans incurred from network and service rollout. Lopez says BayanTel managed to retain positive earnings before income tax, depreciation, and amortization (EBITDA) last year. "But the company's inability to meet market projections meant it was unable to generate the cash necessary to service its debts, which had grown larger in peso terms."

Compounding BayanTel's problems is what Lopez refers to as "the rather complicated task of operating under an unpredictable regulatory framework". Since only the PLDT enjoyed a nationwide local exchange license, every other telephone company's efficiency was being measured by how well it could "communicate" with a PLDT line. From 1996 up until August of 2000, BayanTel customers had great difficulty in calling a PLDT line since BayanTel and PLDT were not yet fully interconnected. Lopez said during this time, the government regulators, in this case the NTC, was ineffective in compelling interconnection among new carriers and the incumbent, which was PLDT.

"Our unfortunate experience was that the interconnection issue became a tool to impede competition. Regulators, who were duty-bound to make deregulation work, could not be effectively relied upon to level the playing field, one that was tilted heavily in favor of the incumbent," he says. The interconnection issue was finally resolved after what Lopez describes as painstaking negotiations with the PLDT. He adds it helped that control of PLDT's management transferred to an international group (the First Pacific group, headed by Manuel V Pangilinan) "that understood how smooth interconnection can provide a win-win-win environment for PLDT, competing carriers, and the consumers".

But the damage has been done as far as BayanTel is concerned. Consumers, who immediately received BayanTel lines not only because they were cheaper than PLDT's but also to avoid the long installation delays associated with PLDT, could not wait until the interconnection problem was solved. Many consumers refused to pay their bills to BayanTel when they realized that they could not even call a PLDT customer living across the street.

Lopez also noted that in the move towards deregulation, rate restructuring assumed that earnings from operating international gateway facilities and cellular mobile telephone systems (CMTS) would subsidize the local exchange carriers (LECs). The chairman of one of the country's biggest business conglomerates pointed out that the reverse happened, with LECs receiving only P2 per minute in access fees while serving as collecting agents for CMTS charges of as much as P9 per minute.

Another unfortunate development for BayanTel is the Supreme Court's upholding of a lower court ruling which in effect nullified a provisional authority given by government to the company to go into the cellular business.

With revenues from international calls dropping and without a profitable cellular business to subsidize the losing LEC business, speculation is now rife that the Benpres group may be forced to sell its local telephone business to PLDT in order to curb mounting losses.

Lopez says one valuable lesson that can be learned from the company's experiences comes from the weakness in emerging market funding in the past three years. The Asian contagion, which began in the second half of 1997, led international fund managers to lump the Philippines together with other countries in Southeast Asia. "Even if the Philippine economic fundamentals were initially not as base as its neighbors, it made no difference. We were placed in the 'isolation ward' of the world capital market just the same," he says.

Like most developing countries, the Philippines is heavily dependent on foreign investment. There is a dearth in local currency funding for long gestation projects such as those in the telecommunications and utilities sector. "Unlike in Thailand where the local savers can support borrowings of up to 15 years, the longest term we can get in our country is seven years. Hence, foreign funding is an essential part of the business risk that goes with the kind of public utility projects we undertake. The challenge is in how to position ourselves such that we remain attractive regardless of the vagaries of the capital market in the short term," Lopez adds.

Next week: PLDT, Globe and Islacom talk about their experiences in the local telephone business and how they are reinventing their respective businesses as the voice market goes wireless.

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