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July 28, 2020

Asia

PHILIPPINES: The context to Duterte’s threat against the telcos

BY Bob Herrera-Lim

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( 5 mins)
  • President Rodrigo Duterte’s threat to cancel the licenses of the country’s two largest telecommunications companies will be more difficult to carry out than his denial of a broadcast license to ABS-CBN this June.
  • However, given his administration’s actions over the past year against several businesses, the perceptions of risk around these two telcos will be higher than in the past few years, at least through early 2021.
  • The rest of the speech did not signal much that was new and read more as a committee-drafted set of pronouncements.

The most notable part of President Rodrigo Duterte’s policy speech to Congress yesterday was his renewed attack on two of the country’s largest conglomerates: Ayala and First Pacific/Metro Pacific. It was a noticeable turnaround from early May, when he apologized for his “hurting words” against the two groups.

Yesterday, he threatened to shut down and expropriate the assets of their telecommunications subsidiaries, Ayala’s Globe and First Pacific’s Smart, if they failed to improve their services by December. This is not the first time that Duterte had acted against the two business groups; last year, he ordered a review of their contracts to run the water and sewerage concessions, Ayala’s Maynilad and Metro Pacific’s Manila Water, and both were supposedly being scheduled for renegotiation until the pandemic hit.

Globe and Smart operate under congressional licenses and given Congress’ recent denial of ABS-CBN’s legislative franchise for TV and radio broadcasts, markets and investors may see the risk to the two firms as no longer negligible. However, the two companies are better situated than ABS-CBN. The latter had an expired broadcast franchise and needed an affirmative act from congress, while the two telcos still have valid licenses that expire well beyond Duterte’s term: Globe has two licenses, one that expires in 2031 and the other in 2044; Smart’s license expires in 2042.

Cancellation of these licenses could be initiated by the pliant lower house through legislation but there will be a serious battle in the senate. The specific laws granting Globe and Smart their franchises also likely contain provisions that could give the executive or the regulator the ability to cancel the allocation of frequencies to both firms based on certain conditions.

To justify any punitive action against them, whether by law or administrative action, the Duterte government would also need some highly visible and publicly defensible cause of action. This would likely require an investigation by the main regulator, the National Telecommunications Commission, into whether they have significantly violated their licenses or any administrative rules – a process that will take months. There is also possibility that a tax issue or some securities’ law violation may be raised, as it was against ABS-CBN, but it is difficult for now to determine whether either of the two companies have these vulnerabilities.

There are two possible outcomes. The first, which is more likely, is that Duterte, will not go beyond the rhetoric. Flush with the success of his administration’s effort to deny ABS-CBN a franchise, he may see the political value of sustaining with his base his anti-oligarchic credentials, even by just randomly threatening these two conglomerates. There is a theory that it may be leverage for any of a possible set of unknown business or political demands. One of Duterte’s top business supporters, Dennis Uy is, after all, starting up the country’s third telco in partnership with China Telecom, and is currently setting up its infrastructure.

The second, unlikely but not impossible, outcome is that while the threat may as of today be constrained by the bureaucracy, ultimately Duterte could see some punitive action as necessary to maintaining his populist credentials, especially if economic pain persists in the second half of the year.

Other businesses, even though they may hold dominant positions in their respective industries, are unlikely to incur the same ire. Duterte’s apparent world view is that the history of the Lopez family, owners of ABS-CBN, and the Ayalas as among the country’s most prominent landholders in the past allowed them to accumulate the political and financial capital to become oligarchs. Therefore, entrepreneurs such as ethnic Chinese or some local Filipinos that have built up their wealth in more recent decades are not targeted by his government.

The rest of the speech

Contrary to his spokesperson’s announcement prior to his Monday speech, Duterte did not lay out any recovery plan for the economy, or at least announce any new initiatives that would be considered as adding to what his government and economic team have already been discussing in previous weeks, from the infrastructure program to small business loans.

The government’s likely legislative priority for the next few weeks will be to secure passage of another stimulus program, roughly estimated at about 0.75% of GDP, to be followed by the tax reform program called CREATE that would reduce the corporate tax rate from 30% to 25% while changing the system for the grant of investor incentives, and finally, the 2021 budget.

Several times during his speech, Duterte also reverted to his signature law-and-order campaign, by highlighting how the proliferation of illegal drugs had threatened to undermine families. He then asked Congress to reimpose the death penalty. This has less traction with congress, however.

Duterte also avoided any mention of constitutional change, although there apparently continue to be discussions within parliament and at the local government level. This will be an issue for early next year, should the government still decide to pursue it.

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