Smart’s operations could stop end-March 2017

WITH time running out for it to get a new franchise — its permit to operate — from Congress, with its current one ending March 27, 2017, Smart Communications faces the unthinkable: its shutdown, or at the very least a major disruption of its operations. Smart is the country’s biggest mobile phone operator, a 100 percent subsidiary of Philippine Long Distance Telephone Co., which is controlled by the Indonesian tycoon Anthoni Salim.

That likely scenario could be prevented only if President Duterte rams down Congress’ throat a new franchise for Smart to operate, and in just two months. Congress adjourns this week and resumes sessions only on January 16 next year, to adjourn again on March 17.

It is virtually impossible for Smart by March 27, 2017 to (1) list 30 percent of its shares in the stock market, which is necessary to prove it complied with its 1992 franchise ; and 2) to get a new franchise from Congress, passed by both the House of Representatives and the Senate. Unless it wants to trample on our laws, President Duterte’s government would have to order Smart to stop its operations as it no longer has the authority from Congress to do so by the end of March next year.

Smart very nearly in May this year got the last Congress controlled by the Liberal Party to extend its 1992 franchise by another 25 years, even without having to list its shares in the stock market, as required by law for a telecommunications company.

It was the Liberal Party, through then Senate President Franklin Drilon himself, who had pushed for the new franchise. It would have been one of the last laws enacted by the previous Liberal Party-dominated Congress, which adjourned June 6.

It was then Majority Leader Alan Cayetano who blocked the passage of the law on May 23— two weeks after the May 9 elections, and when Duterte already emerged as the president-elect—when it was scheduled for third and final reading that day. Only three other senators, including Senator Vicente Sotto III, raised objections to the granting of the franchise.

Smart’s biggest legal obstacle in getting a franchise has been its failure to list at least 30 percent of its shares in the stock market, as required by law, and by its 1992 franchise.

Will Congress or Duterte bow down to PLDT/Smart?
Will Congress or Duterte bow down to PLDT/Smart?

Section 21 of the Public Telecommunications Policy Act of 1995, or Republic Act 7925, requires telecommunications companies to offer to the public through the stock exchanges 30 percent of their shares by 2000. Section 13 of the 25-year franchise that Congress granted to Smart in 1992 (R.A. 7294) categorically required it, as a condition for its permit to operate, to list its shares by 1996.

The bill in the current Congress, House Bill 2617, to grant Smart another 25-year franchise was filed last August, with former Liberal Party stalwart Reynaldo Umali as its principal sponsor. The co-author is Rep. Giorgidi B. Aggabao, who was also the principal author of the bill for Smart in the previous Congress.

Law ignored
Significantly, and an indication of how compromised legislators ignore laws enacted by their own institution, the two bills filed in the previous and present Congress that would have given Smart another franchise simply ignored the Public Telecommunications Policy Act requiring telcos to list 30 percent of their shares in the stock market.

For the past 25 years, Smart has ignored the two laws and has made no move at all to publicly offer its shares. In contrast, its main competitor Globe Telecoms, through its precursor Globe-Mackay, has been listed in the stock market since 1975.

Instead of complying with the law, Smart ignored the two laws through two means.

First, it argued that its mother firm PLDT’s being listed in the stock market, means Smart was in compliance with the law. However, the Securities and Exchange Commission ruled that argument to be trash since under the Corporation Code, every “corporation has a ‘separate juridical personality,’ a doctrine affirmed by the Supreme Court. “

Invoking this doctrine, the SEC in its latest decision on the issue, communicated in a November 7, 2016, letter by its chair Teresita Herbosa to Rep. Franz E. Alvarez, chairman of the House committee on legislative franchises–pointed out:

“Although Smart is wholly owned by PLDT, the former has a separate and distinct personality from the latter. When PLDT listed its shares, the same is incompliance with its own franchise, i.e., Act. No. 3436, as amended by Republic Act No. 76082… Reading section 13 of Smart’s existing franchise, it is the grantee of the franchise (that is, Smart) which is required to list and make a public offering through the stock exchange of its shares.”

Second, Smart—or its ultimate owner, the Indonesian Anthoni Salim, or his top executive Manuel Pangilinan—lobbied in 2004 for a law that would have declared that a “telecommunications entity shall be deemed to have complied with the requirement of making a public offering of its shares if two-thirds of its outstanding voting stock are owned and controlled directly or indirectly, by a listed company.” That was of course tailor-made to exempt Smart from the Public Telecommunications Policy Act’s requirement that a telco must be publicly listed. Few supported the bill for its clear intention to serve an Indonesian-controlled company, and it was withdrawn without even being deliberated by a committee.

Ramon Isberto, Smart senior vice president for public affairs, as of press time had not replied at all to my queries on this franchise problem, which I had asked him Monday.

PLDT itself has been reporting to the US Securities and Exchange Commission its failure to list Smart’s shares as one of the “risk factors” for its profitability. In its most recent report (“Form 20-F”) covering the year 2015, it explained:

“The Philippine Congress may revoke, or the Solicitor General of the Philippines may file a case against Smart to revoke, the franchise of Smart and DMPI [Digital Mobile, which operates Sun cellular services under the “Sun” brand] for their failure to comply with RA 7925, which requires making a public offering of at least 30 percent of the aggregate common shares of a telecommunications entity with regulated types of services…

“If Smart and DMPI are found to be in violation of RA 7925, this could result in the revocation of the franchises of Smart and DMPI and in the filing of a quo warranto case against Smart and DMPI by the Office of the Solicitor General of the Philippines.., the occurrence of any of which could have a material adverse effect on our business, results of operations, financial condition and prospects.”
 
Disastrous for PLDT
Smart’s losing its franchise as a telco would be disastrous for PLDT: 68 percent of its revenues come from its subsidiary’s mobile phone operations. The timing couldn’t be much worse as next year PLDT would have to book another estimated P5 billion in losses because of the steep fall—and expected continued decline—in the share prices of the German firm Rocket, 10 percent of whose shares PLDT bought in 2014 at its listing price of 42 euros per share. Its share prices are about half now. Its main competitor Globe has also succeeded in getting significant market shares that contributed to the steep 35 percent drop in PLDT’s income in 2015.

Whoever in government who can solve PLDT/Smart’s problem would be in effect winning something like the US Poswerball lottery in January 2016, an analyst quipped. (Prize there was the record $1.6 billion).

Why did PLDT make such a horrendous strategic blunder of not listing Smart in the stock market, which would be grounds for it to lose its right to operate a telecom business?

“Sheer arrogance,” says a member of the House committee on legislative franchises. “This country has been that conglomerate’s oyster. PLDT’s owners and executives thought that it would be a cinch to get another 25-year franchise by hook or by crook. Or perhaps it miscalculated that this congress would still be dominated by the Liberal Party, with its president Manuel Roxas III, since they were just days short of getting a franchise in the last Congress.?”

“PLDT obviously thought that if it could go around the constitutional limit on foreign investments*, it’s a walk in the park to skirt the public-listing requirement,” he said.

Smart and PLDT though could still be saved by some executive action by President Duterte. But will he, given his declared disdain for oligarchs?

One stock market analyst though is still confident that Smart will be saved somehow: “PLDT and Smart are too big to fail. For Smart to stop operations, and for PLDT to crawl on the ground would disrupt business so much, even crash the stock market, and pull down our economy. Some 50 million Filipinos—Smart’s active cellphone subscribers—would overnight be deprived of communications service.”

“We just have to forget our laws, and let Smart operate,” he added, with a wink. “Accuse Manny V. Salim [sic]of anything else, but you can’t accuse him of stupidity. He’s got some secret solution, or a Plan B,” an investment analyst said however.

The problem is clearly one of the worst legacies of President Aquino: In the last six years, he could have threatened and prodded Smart to start efforts to list its shares, or face severe penalties and then ultimately, closure.

He didn’t, and now the nation is hostage to an Indonesian magnate’s firm, ignoring our laws. What kind of spineless country have we become?

Must read: Bobi Tiglao’s ‘Colossal Deception’
Cover: ‘Colossal Deception’

*For more on PLDT’s violation of constitutional limits on foreign investments in public utilities, refer to my book Colossal Deception: How Foreign Firms Control Our Telecom Industry — A Case Study on Corruption, Cronyism, and Regulatory Capture in the Philippines.

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