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Japan, China, SKorea, others restrict foreign capital in their telecom industries

In a recent hearing in Congress, representatives of the Foundation for Economic Freedom repeated the chant that has become for some reason louder and louder in recent months: The lifting of Constitutional restrictions on public utilities will attract foreign investments, which the country direly needs.

I’m not sure who is the ideologue or ideologues for this ideological stance. Are its two gurus (the two-man advisory board) former Marcos technocrats Cesar Virata and Gerardo Sicat, architects of the debt-driven growth that lead us to the economic catastrophe of the 1980s? Or are they the Foundation’s chairman Roberto de Ocampo and its vice-chairman Romeo Bernardo, both of whom are directors of the Singaporean-controlled Globe Telecoms?

After all, a Constitutional amendment to lift the 40 percent limit on foreign ownership in public utilities would, to use the words of FEF president Calixto Chikiamco, lift “the Damocles sword” on both Globe and Philippine Long Distance Telephone Co, in which foreign companies own 64 percent and 76 percent, respectively, of their commons stocks. That’s of course the other way of saying C charter amendment would legitimize their blatant violation of the Constitution. (Smart Telecoms, the country’s biggest cellphone firm, is a 100 percent PLDT subsidiary)

It astonishes me why FEF would even call for the lifting of such restrictions, with many of their members either economists and students of history.

Public utilities were reserved to state firms and nationals in all countries of the world while they were developing. It was only when they had achieved industrial status and when their companies became the best in the world that they privatized their public utilities and opened these up to foreign investments.

In our case, it was during the corrupt regime of President Joseph Estrada that the Indonesian Salim conglomerate captured PLDT. A PLDT shareholder, the tycoon Alfonso Yuchengco, had alleged that he was coerced to sell his shares, or his son would be charged with illegal drug possession. Estrada sued Yuchengco for libel for those accusations in a San Juan court. The tycoon beat those charges, and in the legal proceedings even providing juicy details how he was coerced. Pefecto Yasay, Jr. claimed in Estrada’s trial for plunder and his book that the president yanked him out of his post as Securities and Exchange Commission when he tried to investigate if PLDT complied with corporate laws for allowing the take-over.

But our distinguished FEF “fellows” and even the Opus Dei’s most renowned member, Bernardo Villegas, are justifying that capture of our prime telecom firm using perverted economic theories.

Foreign investments great, but…
Don’t get me wrong, I am for foreign investments, and there is no question we need these. But not in public utility firms in which the Constitution has put a 40 percent limit on foreign ownership.

Why? Because this sector, as framers of the Constitution wisely perceived it, involves limited resources (in telecoms, bandwidths and a captive market) and has natural-monopoly features that should be reserved to Filipinos since they involve rent-profits.

These are also public-utility firms, where by definition, public welfare must be paramount rather than dividends. PLDT for instance, after the Indonesian Salim conglomerate took over in 1998 has been declaring dividends every single year amounting to 100 percent of its income. For comparison, SM Investments dividend pay-out ratio has been only 30 percent.

Instead of investing in better infrastructure here so we can have the fastest Internet speeds, PLDT invested last year $445 million (P19 billion!) for a 10 percent stake in the Berlin-based Internet platform firm Rocket Internet. That may or may not yield huge profits for PLDT, but it certainly won’t help a bit in building the firm’s infrastructure in the Philippines.

The FEF argument is as follows: If we lift restrictions on foreign investments in public utilities, we will get more foreign investments.

First of all, it is in telecoms and power – ironically the sectors the Constitution has put a 40 percent limit on foreign ownership – that records show has received the biggest chunk of foreign direct investments

Second, if that argument were true, why on earth did Asian countries that have attracted the most foreign investments in the past two decades are those which have restricted their public utilities to their state firms and nationals?

Accompanying table show stock of foreign direct foreign investments for each country for which there is a description of the structure of their telecoms industry.

The truth is the opposite: Asian countries that reserved their public utilities for their state firms (Singapore Telecoms for example) and nationals (NTT in Japan) made sure their telecom industries were developed, rather than just enriched their foreign owners, so that this became part of their modern infrastructure that has attracted foreign investments.

None of the four Asian Tigers, neither Japan nor China, and none of the other Tiger Cubs have been so stupid as to do so.

The Thai case is even very unique; as it had been completely dominated by Thai firms until January 2006 when Prime Minister Shinawatra Thaksin unexpectedly sold his firm Advanced Info Service Limited that was the biggest in the industry, to Singapore’s Temasek Holdings.

He justified the sale on grounds he was tired of conflict-of-interest accusations by the opposition. After eight years though, there seems to be validity in the allegations that it was a clever, quick move to get his assets beyond authorities’ reach in case he was overthrown, as indeed he was through a coup d’etat in September 2006, or just a few months after he sold his firm.

Ironically, what added fuel to the popular outrage against him that justified the military takeover and his ouster was the Thais’ anger because he sold the biggest Thai telecom firm to foreigners.

China reserves its huge market
China, the biggest mobile phone market in the world with over 1.2 billion subscribers is completely controlled by three state-owned firms, with the leader, China Mobile (which has a token 10 percent Spanish equity) also the biggest telecom firm in the world. China Mobile is also the second biggest mobile phone firm in China’s economic powerhouse, Hong Kong.
China even demonstrated its policy of keeping telecoms beyond foreigners’ control when it blocked in 2000 the sale of British Cable & Wireless, which had been the biggest telecom firm during the United Kingdom’s occupation of the island, from selling its shares to SingTel. China backed a consortium of Hong Kong banks to bankroll its acquisition instead by a group of Hong Kong businessmen led by Li Ka-Shing.

Taiwan’s largest telecom firm Chunghwa Telecom was formerly a unit of the state’s Directorate General for Communications, until its privatization to Taiwanese investors, although 33 percent of it is still state-owned. All of Taiwan’s other telecom firms are owned by its nationals.

The 5th biggest telecom firm in the world, the Japanese NTT Corp., is required by law to be at least 25 percent owned by the Japanese government. NTT, 35 percent owned by the Japanese state, and its subsidiaries together with two other private Japanese conglomerates (KDDI Corp. and Softbank Corp.) have total control of telecommunications in the country.

“Protectionism” is a bad word for our supposedly top economists like columnist Villegas as well as Marcos technocrats Sicat and Virata.

But as in the case of Japan and China, it was Korea’s protectionist policies that made possible Korean-owned firms — SK Telecom, KT Corp, and LG Corp — to totally control its telecoms industry. Their profits in such captive markets allowed them to become richer so that they have become global telcos.

Collaboration among the Korean firms – e.g., the telcos firms carrying mostly Korean-made mobile phones — in fact helped make Samsung now the biggest mobile-phone manufacturer in the world, overtaking Motorola in 2007, and Nokia in 2012. It was the same pattern of cooperation in China, with Chinese firms taking advantage of their control of its market of 1.2 billion cellphone subscribers, so that even if Samsung and Apple (assembled in China) smartphones are the most widely used, five Chinese-brand and made phones mainly ZTE and Hwawei are fast easing out the two.

So did Lee Kuan Yew protect the state-owned Singapore Telecoms to become not only the island state’s dominant telecom firm but to control telecom firms in other nations, including the Philippines.

(Give it to Mr. Lee to know what his country’s interests are. He ranted against PLDT in 1992 – even quoting my articles on it – in a widely publicized speech here that helped electrify the President Fidel Ramos’ telecoms deregulation program. The next year, SingTel would be in Globe Telecoms.)

Restrictions helped the Tigers develop
All these countries are the original Tiger Economies of Asia. What was one factor that allowed them to develop into First World status?

Protectionist policies reserved their vast markets for their own telecom firms, and the natural-monopoly features of the telecom captive market yielded huge profits for their nationals. These then went on to become global telecom companies, as in the case of NTT and Singtel, and in the case of Korea, to become the biggest cellphone manufacturer.

Another very nationalist country, Vietnam, has kept its telecom industry under its tight control, with three 100 percent state firms having 87 percent of the market.

The Vietnamese way of instilling competition?

The biggest, Viettel, is owned by its Ministry of Defense, while the two other largest firms, MobiFone and Vinaphone, are subsidiaries of Vietnam Posts and Telecommunications Group, owned by the central government.

It is Malaysia and Indonesia that have substantial foreign participation in their telecom firms. Unlike the Philippines though, two Malaysian companies, Ananda Krishnan’s conglomerate and the Axiata Group are the undisputed leaders in the country’s telecom sector.

Indonesia also has SingTel in its telecoms sector, but only as a 35 percent investor in its biggest mobile phone firm Telcomsel, which is 65 percent owned by the state firm Telkom, one of the largest firms in that country. I don’t think Salim’s Hong Kong based First Pacific would have a chance to become the owner of the biggest or even third or fourth biggest telecom firm in Indonesia. So he’s here instead, a country whose regulatory bodies have proven easy to capture.

“Even following partial liberalization and opening to competition in 2001 (in Indonesia), the dominant operators partially owned by the government have been able to erect entry barriers to newcomers and maintain relatively stable market shares, “ according to an OECD December 2014 study entitled “Southeast Asia Investment Policy Perspectives.”

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    I pray all Filipinos will rad your articles.

    thank you for your knowledge and courage.

    I pray GOD will proctet you and your family .

    may THE LORD be merciful to us and give us a regime change where ” leaders who love the Lord, reads and loves God’s Word, is humble, is strong, is clear-sighted, will pursue bold reforms and can call the nation together to head in the right direction. ”



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