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How Salim group skirted foreign ownership limits

The Indonesian Anthoni Salim’s empire has grown since 1998 to be the country’s largest conglomerate—controversially based on public utility firms where foreign investors are purportedly restricted by the Constitution.

Chances are, you won’t spend a day without a Salim firm getting a cut of your expenses.

When you turn on light, chances are, you’ll be making money for a Salim firm, the ultimate parent company now of Meralco (see my column February 24). When you use your cell phone, you’ll likely be paying Salim-controlled mobile phone companies—Smart and Sun, which together has 2/3 of the market. If you live in the western part of greater Manila, in any of its 17 cities and towns, the water you pay for is from his Maynilad Water Services, the country’s biggest water concession.

When you travel on the expressways, part of the toll you’ll pay goes to Salim, through his Manila North Tollways and Cavitex, which together make up the country’s largest tollway operator that runs 64 percent of the country’s toll roads.

If you get sick (and if you can afford it, that is), you’d be probably treated in one of his six hospitals, which include the most venerable ones such as Cardinal Santos and the Makati Medical Center, and the newest, Asian Hospital in Alabang.

And if you’re reading either two of the country’s biggest newspapers, Philippine Star and Philippine Daily Inquirer or even the has-been business paper BusinessWorld, or if you’re watching TV-5, Salim’s executives control those too.

In fact, according to Hong Kong-based First Pacific Co. Ltd. in its 2012 annual report, Salim’s holding and “command” firm, its profits from its Philippine operations now exceed those in the magnate’s home country, Indonesia, by about $200 million.

What a country we have become.

final salim empire chart 1

Ownership structure of Salim’s conglomerate in the Philippines.
Source: Company Reports, Submissions to US and Philippine SEC.
(Click to enlarge.)


Why ‘Salim,’ not ‘MVP’

As I explained in my column last Monday, the common media reference to Salim’s empire in the Philippines as the “MVP group”—after his top executive Manuel V. Pangilinan—is the result of one of the most successful PR campaigns in the Philippines. It is an utter misnomer.

First Pacific’s revenues, by country, 2011 and 2012.

First Pacific’s revenues, by country, 2011 and 2012.

Pangilinan owns only 0.09 percent of Salim’s flagship firm Metro Pacific Investments, and 1.4 percent in the parent company, First Pacific. The Indonesian tycoon’s holding companies own in those firms 56 percent and 45 percent, respectively with the rest of the shares dispersed to thousands of stock market investors.

For his huge role in building up Salim’s empire, Pangilinan has no share at all in any of the three offshore firms, which at the end of the corporate layering ultimately own the empire.

Instead, Salim’s partners in one of these offshore firms, the Liberia-based firm First Pacific Investments Ltd., are Sutanto Djuhar (with his son Tedy) and the late Ibrahim Risjad—both his father Sudono’s (Liem Sioe Liong) original collaborators in founding the conglomerate in Indonesia in the 1960s.

I doubt though if Pangilinan is complaining. First Pacific’s reports indicate that he could be the highest paid Filipino executive ever, making P25 million a month — nearly P1 million for his day’s work.  This does not include his salaries and directors’ fees in at least 40 of Salim’s firms in the Philippines, especially in the blue-chip firms Philippine Long Distance Telephone Co. (PLDT) and Meralco. (The other Filipino director in First Pacific is Napoleon Nazareno, who gets P14 million monthly from First Pacific.)

The empire, according to First Pacific’s 2012 annual report. (Click to enlarge,)

The empire, according to First Pacific’s 2012 annual report.
Foreign Affairs Secretary del a key figure in the Salim conglomerate's expansion into the Philippines

Foreign Affairs Secretary del Rosario: a key figure in the Salim conglomerate’s expansion into the Philippines

Foreign Affairs Secretary Albert del Rosario was reportedly a key figure in Salim’s entry and expansion in the Philippines, and for that he was non-executive director from 2003 until he resigned in March 2011 when he became an Aquino Cabinet member. Del Rosario received about P10 million yearly in director’s fees from First Pacific, even
when he was ambassador to the US until 2006.

Salim and his executives must be laughing over the raging debate here that the Philippines’ continues to be poor because our Constitution restricts foreign investments so much.

Smarter than others

The reality: Some foreign businessmen—such as Salim—are just smarter than others.

Salim’s empire here is even using huge amounts of local funds—through such instruments as PLDT’s P15 billion bond offering—and bringing out of the country millions of dollars in capital as its profit remittances.

How can an Indonesian control industries, which the Philippine Constitution’s Article 12, Section 11 reserves only to companies at least 60 percent owned by Filipinos?

No problem, Salim and Pangilinan must have thought more than a decade ago. “These folks are living in the 1960s, with no idea how the modern corporate world work,” Salim’s two Western executive directors, reputedly his strategists, Edward Tortorici and Robert Nicholson, must have told each other.

Even in 1987 when the Constitution was formulated, its provisions to reserve the operation to public utilities to Filipinos were so antiquated, and so vulnerable to an audacious foreign tycoon.

First, in modern corporations, especially those listed in the stock market, 60 percent or even 40 percent is not necessary to achieve corporate control.

Metro Resources and Philippine Telecommunication Investment Co. (which Metro Pacific Investments wholly owns) has 27 percent of PLDT’s shares. The next biggest corporate owners are two Japanese NTT entities, with 17 percent. The rest are shares held by over 12,000 stockholders, mostly bought and traded in the stock market.

With that 27 percent share, Salim has full control of PLDT. This was in fact demonstrated when he used the firm’s 100 percent subsidiary Piltel and even its Beneficial Trust Fund to take control of Meralco in 2009. It is also money from that Beneficial Trust Fund that was used to set up TV-5 and buy into newspapers.

Another example: First Pacific companies—Asia Link B.V., Maxella Ltd., and Kirtman Ltd., and Artino Ltd.—altogether have 31 percent in Philex Mining to make up the biggest bloc of shares. (The second biggest shareholder is the Social Security System with 20 percent holdings.)

With that 31 percent, Salim’s First Pacific has uncontested control of the company and its finances. So much so, that a source alleged that even the 12-page ads in Philippine Star greeting Pangilinan on his birthday in July were charged to Philex’s advertising expenses.

(I had begun asking asking two months ago people close to Pangilinan or who worked in his firms to interview him, to get his side for this series, to no avail.)

SEC’s sympathetic rulings

A second reason why an Indonesian conglomerate could go into public utilities is the fact that decisions issued by the Securities and Exchange Commission in effect have negated the spirit of the constitutional provisions restricting foreign ownership in certain strategic industries—a clear case of regulatory capture by the elites.

It wasn’t the Hong Kong-based First Pacific Co. that invested directly into Meralco, PLDT and other public utilities. It was Metro Pacific Investments Corp. (MPIC), which is incorporated in the Philippines, with First Pacific subsidiaries owning 59 percent, (reduced since to 56 percent) with the rest of the shares held by hundreds of investors who bought them in the stock market.

By setting MPIC up as a Philippine-registered corporation, rather than having his holding company First Pacific in Hong Kong directly invest here in our country, Salim can pretend that his flagship firm is a Filipino entity.

Common sense says that MPIC is majority controlled by foreigners, Indonesian magnate Salim’s firms, since it has the majority or 56 percent of the shares. The next biggest shareholders have 2 percent and fewer shares, and are even mostly foreign fund managers.

No, the SEC rulings would say. Amazingly, SEC jurisprudence says that the “primary test” whether a firm is Filipino is if it is incorporated in the Philippines. MPIC was incorporated in the Philippines, therefore it is Filipino. MPIC therefore can control more than 60 percent of utility firms since the SEC defines it as a Philippine national.

The SEC has ruled that a case has to be filed at the SEC, which has jurisdiction in such matters, to question whether a corporation is Filipino or not.

No such case has been filed at the SEC questioning MPIC’s nationality.

No case has been filed at the SEC whether Meralco, Maynilad Water Resources, and the two Salim rollway corporations are violating the Constitution by having foreign ownership larger than the 40 percent limit set by the Constitution.

(A case though was filed several years back alleging that PLDT had breached the 40 percent ceiling on foreign investments. The Supreme Court had ruled in 2011 and 2012 last year that PLDT foreign ownership amounted to 64 percent and therefore violated the Constitution. However, the SEC has defied the Court’ ruling. More on that in coming installments of this series.)

And if a case is brought to the SEC, it will apply—as it has done in several cases—the so-called “Grandfather Rule.”

In the case of Maynilad Water Services, this rule would be applied in the following manner.

MPIC, 59 percent owned by Salim’s subsidiaries, took the construction firm DMCI as a partner with the Indonesian firm holding 55 percent of the joint venture. It is that joint venture that owns 92 percent of Maynilad Water Services.

The Grandfather Rule applied by an SEC sympathetic MPIC would mean that foreign ownership totals (59 percent) x (55 percent) x (92 percent) or just 30 percent, below the 40 percent constitutional ceiling.

Modus operandi

It is the modus operandi for nearly all of Salim’s investments in our country. It is perhaps legal but certainly it violates the spirit of the Constitution’s provisions.

No wonder Foreign Secretary Alberto del Rosario and Speaker Feliciano Belmonte (whose family owns Philippine Star which Salim’s empire is poised to buy control of soon) are vocal in supporting a constitutional amendment to lift restrictions on foreign investments.

The Salim empire’s hold on public utilities could be declared unconstitutional, or illegal by the SEC in the case of PLDT, which it admitted as one of the risks for its recent P15-billion bond offering,

The only way to preserve Salim’s billion-dollar conglomerate here is for the Constitution to be amended to lift foreign investment restrictions, and thereby legalize its control of public utilities here.

It’s been a long way since the 1980s when Salim’s firms in the country were in humdrum sectors such as bottling mineral water, paper manufacturing, and inter-island shipping. A long way since Metro Pacific was on the edge of defaulting on its huge loans and nearly went bankrupt that it had to give up its prize catch  Fort Bonifacio in 2003,   for which  it had bid way too high in 1995.

Ironically, Salim’s conglomerate here has largely failed in the market. But it has been a phenomenal success in the supposedly highly regulated public utility sector.

For our nation this is a painful irony.

A World Bank study (“Investing Across Borders”) of 87 countries has concluded: “More than a quarter of 87 countries have few or no sector-specific restrictions on foreign ownership of companies.”

However, it noted: “Worldwide restrictions on foreign ownership are strictest in media, transportation, electricity and telecommunications.”

But those sectors are precisely where we have allowed the Indonesian Salim conglomerate to exercise control.

On Wednesday: Salim in media: Isn’t that unconstitutional? Hm…

Details of Metro Pacific's conglomerate map. Source: Metro Pacific report to the SEC

Details of Metro Pacific’s conglomerate map. (Click to enlarge.)
Source: Metro Pacific report to the SEC.

metrro pacific map2

Other minor Metro Pacific Firms.