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Beauty Contest or Bidding War: What’s the Best Way to Select the 3rd Telco Player?

How government will choose a new telecoms firm will impact industry and consumers alike
By Elyssa Christine Lopez |

 

 

After months of delay, the Department of Information and Communications Technology (DICT) finally released not one, but two diametrically opposing drafts of Terms of Reference (ToR) for the selection of the new major player (NMP) in the telco industry on the last week of June.

 

The first version, published on Monday, June 25, puts forward the Highest Committed Level of Service (HCLoS) formula for the selection process. The DICT and the National Telecommunications Commission (NTC) listed three major criteria that the participant must meet in a commitment period of five years to be awarded the status of new major player (NMP).

 

The third telco player must commit to cover a minimum of 30 percent of the national population each year, provide an average of five megabits per second (Mbps) broadband speed, and allocate at least Php40 billion in capital and operational expenditures a year. By the end of the five-year period, the NMP must have national population coverage of 50 percent.

 

On the other hand, the second version released on Thursday, June 28, proposed auction as mode of selection, wherein the participant to bid the highest amount of Spectrum User Fees (SUFs) will be selected as the NMP. The minimum bid amount was pegged at Php36.58 billion based on the SUFs paid by existing telecommunication companies. The NMP must also cover at least 50 percent of the population by the fifth year of its operations with a minimum average broadband speed of 10 Mbps.

 

To be sure, there are common provision in both versions. For example, they set similar qualifications for the prospective third telco player. The participant must be a domestic corporation, holds a congressional franchise and has a minimum paid-up capital worth Php10 billion. It must also have experience in the provision, delivery and operations of telco services for the last five years.

 

But there is no denying the divergent approaches implied by the two drafts. While the first one, often described as a “beauty contest”,  prioritizes promised or committed future levels of service, the second approach, which might be described as a “bidding war”, prizes actual or current financial capacity needed to win an auction. Both methods have their prime government champions. The first is favored by Acting DICT Secretary Eliseo Rio while the second one is advocated by Department of Finance (DOF) Secretary Carlos Dominguez III.

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Industry and consumer stakeholders seem to favor the “beauty contest” approach as it entails lesser financial burden on the third telco player. Rio has argued that while the auction method may raise additional government revenues, it could crimp the new major player’s capital expenditure program. Money that should go into building telecom infrastructure will instead go to paying the government. The DICT secretary also expressed worry that the third telco player will simply try to recover its winning bid by charging higher fees to customers eventually.

 

“It will put a big burden on a new player by (forcing it to) put up a huge amount up front that has nothing to do with putting up an infrastructure and improving telecommunications services,” Rio said in a report by BusinessWorld on June 24.

 

He also raises the issue of fairness: the two largest telecom players, Globe Telecom and PLDT Inc., didn’t have to bid for their spectrum so why burden the new major player with the requirement?

 

For ICT advocacy group Democracy.Net.PH co-founder Pierre Galla, the highest committed level of service approach represents the better approach at this point in time.

 

“Democracy.Net.PH strongly cautions against the adoption of a spectrum auction model at this time, when spectrum management reforms have not yet been put in place,” said Galla in a post published on the group’s Facebook page on July 1. “The amount used in the bid could be better spent by the NMP in roll-out of telecommunications infrastructure, resulting directly to telecommunications services for the benefit of Filipinos.”

 

Still, Dominguez, perhaps the most senior and experienced member of President Rodrigo Duterte’s Cabinet, is not impressed by the HCLoS method.

 

“The proposed process fails to set up parameters that will ensure that the third telco has the capability, both financial and technical, to compete in the long term,” Dominguez said in a statement posted on the DOF website in June. “The beauty contest [awarding of frequencies based on committed service] in the past resulted to frequency hoarding and those companies failed to improve service. They just made money by flipping assets government owns.”

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In the finance chief’s view, an auction discourages hoarding by the new major player because the cost of winning the telecom frequencies will compel it to invest right away to build the infrastructure so it can begin to earn revenues from the spectrum as soon as possible. Moreover, Dominguez believes letting the private companies pay for frequencies is only a matter of fairness as they would make big profits out of it.

 

“They [the frequencies] are not owned by the government, they are owned by the Filipino people. So why should we allow a situation where we give it for free and let the private sector make money out of it—and tremendous amounts of money,” Dominguez said in a press conference, according to a television report in ABS-CBN News Channel on July 2. “It’s not even in the hundreds of millions, it’s in the billions. It’s a matter of fairness. It’s not about a matter of revenue for the government, of course that would help, but it’s a matter of fairness to the Filipino people.”

 

The DICT will hold a public consultation on July 6 to discuss the two versions of the TOR drafts. It remains to be seen if the meeting with industry stakeholders will pave the way for the resolution of the matter soon.

 

 

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Elyssa Christine Lopez is a staff writer of Entrepreneur.com.ph.

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