Almonte’s ‘regulatory capture’: The Smart and Globe case

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Second of two parts

(Read Part 1 Almonte: Cory Resuscitated Muslim Insurgency

Every year when Forbes’ magazine’s roster of Philippine billionaires comes out, we pore over the list in curiosity, envy, and we wonder how these immortals spend their billions. They are considered models to emulate, and top capitalist-apologists like Dr. Bernardo Villegas idolize them who were in the past called “captains of industry.” I hardly hear that term anymore, and what’s used is the more neutral “billionaire” or the dramatic-sounding “taipan” – one indication of changing views.

As our country, though, sinks deeper and deeper into poverty – the latest official poverty incidence is 25.8 percent for 2014, from 24.9 in 2013 – and as scholarly works like Thomas Piketty’s Capital in the 21st Century are published, which rigorously show that capitalism by itself creates vast income inequality if not checked through a herculean effort by government, one gets to wonder: Are these billionaires part of the solution, or have they been always part of the problem?

It is significant that somebody, former President Fidel Ramos’ closest adviser, Jose Almonte, who has spent much of his working life in the corridors of power, was led to conclude: The elites are the problem. Ours isn’t a democracy, but an oligarchy.

Following is Almonte’s observations on the root cause of the country’s malaise in his recently released book, “Endless Journey: A Memoir”:

The core problem, as we saw it, was the irresponsibility of our leaders. We observed that our leaders in media, business, religion, and especially in politics – because they were the most important actors – had a sense of personal entitlement that was superior to or stronger than their sense of civic responsibility. To put it another way, their sense of personal rewards was superior to serving the common good.


Forbes’ Philippine billionaires: Solution or problem?
Forbes’ Philippine billionaires: Solution or problem?

How did this come about? For generations, our political economy allowed the accumulation of wealth by a few, through the simple process of manipulating the political process. In short, there was not much use for industry, intelligence, and talent. The primary anchor for their success was their entrepreneurial skill in controlling our politics. That was why we had a phenomenon where, according to the World Bank, the primary problem of the Philippines was that the national policies did not serve the common good but only special interests. That had been said repeatedly. It was not only in the Philippines where this phenomenon thrived; other countries were similarly situated.

After every election, Malacanang was practically captured by the oligarchy because those who contributed huge amounts to the campaign of the victor practically ran the government. We had a phenomenon where not only the elite and the oligarchy but also the regulatory agencies captured the political center. Apart from “regulatory capture,” we had a phenomenon of “state capture.” The core challenge was to break this twofold iron grip. [Emphasis added-RDT]

I once described our country as an archipelago of Mount Everests, of very high mountain peaks where monopolies, cartels, and the elite were ensconced. Only they were enjoying most of our country’s wealth.

This core problem was the answer to the question, why were our people rebelling? Remember that this was the question we asked when Ramos and I were young officers in the Sierra Madre [fighting the Huk insurgency in the 1950s]. They were rebelling because of poverty, because of the enormous income gap. Why were they in such a state? Because of the irresponsibility of the elite. They inserted themselves into our politics by greasing our wheels of corruption, and through a system of patronage. Using these two techniques, they dominated the political process. This was the systemic culprit that promoted poverty and widened the wealth gap. [Almonte quotes end here.]

If “regulatory capture” is too abstract, it is really as concrete as the cell phone you’re using now. Following is a case study of “regulatory capture.”

In 2011, the Supreme Court ruled that the Philippine Long Distance Telephone Co., violated the Constitution’s 40 percent limit on foreign control in public utility firms, since the shares of Indonesian First Pacific, the Japanese NTT and other foreign firms, amounted to 58 percent of the firm’s capital. Smart, since it is PLDT’s 100 percent cell phone subsidiary, therefore, was also violating the Constitution.

Going by the Court’s ruling, Smart’s competitor, Globe – controlled by Forbes billionaire Jaime Augusto Zobel – also violated the 40 percent foreign limit, since Singapore Telecoms had 47 percent of shares, with the Ayalas holding only 30 percent.

What do PLDT’s clever foreign owners do? In October 2012, the company issued 150 million shares of the strangest form of stocks ever, called “Voting Preferred Stock.” These were a lot, as there were only 234 million common shares, the usual type of stocks used as evidence of ownership and universally considered as the only kind of stock that gives the owner the right to vote in the company.

Who bought these Voting Preferred Stocks? PLDT’s Beneficial Trust Fund, or the fund for its employees’ pension, which is really controlled by the PLDT board. After First Pacific bought PLDT, the fund’s chairman was Albert del Rosario, who is now foreign affairs secretary. (Do you get an idea now how elites function?)

A classic case of regulatory capture.
A classic case of regulatory capture.

Then just seven months later, in October 2013, the regulatory body — Securities and Exchange Commission – issued memorandum circular No. 8, which made PLDT’s voting-Preferred-shares gimmick such a bright idea.

The memorandum allows PLDT to compute foreign control not as a percentage of common stocks as the Supreme Court ruled, but as a percentage of all types of voting stocks – including the 150 million “Voting Preferred Shares” PLDT invented!

PLDT had to admit the maneuver in its 2013 report to the US Securities and Exchange Commission: “As a result of the issuance of Voting Preferred Stock, PLDT’s foreign ownership decreased from 58.4% of outstanding common stock … to 34.5% outstanding stocks (common stock and Voting Preferred Stocks)…”

“PLDT, therefore, is in compliance with the requirement of Section 11, Article XII of the 1987 constitution, ” it asserted.

Cliché it certainly is, but only in the Philippines: Only here is highest court of the land, in effect, overruled by a relatively obscure regulatory body such as the SEC.

That is what Almonte means by “regulatory capture.” Guess in what law firm the SEC chairman who issued memorandum no. 8 was a partner before getting appointed to the post by President Aquino in 2011?

But you don’t care, don’t you, dear reader, as long as you get less dropped calls using your phone. You don’t care even if the huge profits of PLDT are being remitted to Hong Kong and to the tax-haven islands that are home to the companies of its ultimate owner, the Indonesian Anthoni Salim. You don’t care even if PLDT profits and financial resources are used to invest a mammoth $445 million (P19.6 billion) not to build up its infrastructure here in our country for more efficient and cheaper services, but to buy a 10 percent stake in an internet firm in Germany.

But how can we build a nation – by definition an association under the rule of a particular set of laws – when even foreign oligarchs can just ride roughshod over our basic law, the Constitution?

(Read Part 1 Almonte: Cory Resuscitated Muslim Insurgency