Easing FDI caps seen driving telco innovation
THE opening of telecommunications to foreign direct investment (FDI) will encourage the industry to become more competitive and innovative, analysts said.
“The telecommunications industry’s growth potential has almost peaked. Hence, to remain competitive, telcos need to reinvent themselves and go beyond telco into techco,” Globe Telecom, Inc. General Counsel Vicente Froilan M. Castelo said in an e-mail.
“Full foreign ownership for countries that allow reciprocity for Filipino investment will provide additional liquidity to the listed telco companies and allow shareholders to exit and cash out of their investments,” he added.
Earlier this month, the National Economic and Development Authority (NEDA) released the implementing rules and regulations (IRR) for Republic Act No. 11647, which amends the Public Service Act (PSA).
The PSA allows full foreign ownership in more public services such as telecommunications, airlines, and railways. It is set to take effect on April 4.
Under the IRR, telecommunications was the only public service classified as “critical infrastructure,” those services deemed “so vital to the Philippines that the incapacity or destruction of such systems or assets would have detrimental impact on national security.”
Other public services cannot be considered critical infrastructure unless the President declares them through an executive order. NEDA can also recommend that a public service be considered critical infrastructure upon request of a government agency.
The IRR includes a reciprocity requirement for foreign investment in critical infrastructure, which means foreign nationals cannot own more than 50% of a company engaged in services classified as critical infrastructure, unless their country extends reciprocal treatment to Philippine nationals.
The rules also outline the process and criteria for a national security review of foreign investment in public services and critical infrastructure.
Foreign sovereign wealth funds and independent pension funds may also collectively own up to 30% of the capital of a public service classified as critical infrastructure.
Ateneo de Manila University Economics Professor Leonardo A. Lanzona said that telco’s designation as critical infrastructure will be beneficial in the long run.
“Companies engaged in public services will be forced to compete with the foreign companies in order to survive. This means that they should focus on being world class in order to remain in business,” he said in an e-mail.
Mr. Lanzona said the country is “better off” as there will be better public services provided without raising prices.
“Currently, because of their difficulty in accumulating the necessary inputs, domestic public service corporations can only expand their services if prices are raised. With the threat of foreign competition, the local companies as well as the government have to innovate and adopt the new technologies in order to supply services without causing greater burden to their consumers. With the emergence of digital technologies, the local outlets can achieve scale economies through learning by doing,” he added.
“Even in a mature industry, sustained investment for expansion, upgrading and maintenance of telecom infra is indispensable because of equipment obsolescence and advancement of new technology,” he said.
“As for investment by new players, there may be room for niche players for fixed broadband and satellite broadband but for the mobile space, the scarcity of available spectrum is a challenge that will limit the options of new mobile players,” he added.
A recent study by London-based analytics company GlobalDataPlc showed that the total revenue of telecommunications companies in the Philippines is expected to rise at a compound annual growth rate of 4% from 2021-2026.
The study also noted that this growth will be primarily supported by the mobile data and fixed broadband segments.
The Philippines is also estimated to need as many as 4,000 new telecommunication towers per year, according to a report by PwC Philippines.
Terry L. Ridon, a public investment analyst and convenor of think tank InfraWatch PH, said in an e-mail that telcos’ classification as critical infrastructure was likely due to national security concerns.
“The focus on the telco sector as critical infrastructure has been due to concerns that foreign control over telco firms may compromise the country’s national security and state secrets, and the public’s data and communications privacy, particularly if foreign telco partners have inseparable ties and legal obligations with their own governments and state-owned and controlled firms,” he said.
Mr. Ridon said that this is part of the government’s strategy to “ensure that the country does not hand over secret, sensitive and private information to foreign governments and their proxies, particularly to nations with which we have real and ongoing disputes.”
“Allowing more than 50% equity of telcos to foreign investors effectively surrenders corporate control of critical infrastructure to foreigners. In other words, allowing more than fifty-percent foreign equity allows foreigners to determine the strategic direction of telco firms they control, including lawful and legitimate objectives, or malevolent and covert objectives,” he added.
Antonio A. Ligon, a law and business professor at De La Salle University, likewise said in a Viber message that the sector’s “critical infrastructure” status was due to “observations that security and privacy of delicate information relating to countries stability and well-being might be compromised if inappropriate safeguards to communications are in place.”
“In this digital age, information and communication networks are likely to be the first line of a breach in national security. As it is, critical and confidential data can be stolen with a click of a button. On a larger scale, such theft can potentially lead to economic sabotage,” Globalinks Securities and Stocks, Inc. Head of Sales Trading Toby Allan C. Arce said in a Viber message.
Mr. Arce also noted that more investment is needed to ensure that telcos “safeguard critical data from entities with malicious intent.”
“Telcos may not be equipped or well capitalized enough to provide such safeguards. Thus, calling upon foreign investors to fill in the gaps with their expertise. But it’s unlikely that these foreign entities will be content with just a minority share in a company in a very lucrative industry,” he added.
Mr. Arce also said that there is still a long list of economic activities where foreign ownership is still limited due to national security concerns.
Under the PSA, public service utilities that are still subject to the 40% foreign equity limit are electricity transmission and distribution, water and wastewater pipeline distribution systems including sewerage, petroleum and petroleum products pipeline transmission systems, seaports, and public utility vehicles.
Mr. Lanzona said that education is also a crucial public service that must be opened to foreign ownership.
“Allowing more foreign schools can be the solution to the poor education system especially at the basic and primary, as well as the technical and vocational, levels. For the latter, allowing foreign investors to set up technical schools in the Philippines can be the best approach for upskilling our workers,” he said.
Mr. Ligon said careful study is required for opening up mass media and education to foreign ownership.
“These two industries largely affect and influence the thoughts and ideas of our people, particularly the youth. History and study show that the US successfully colonized the Philippines because of the educational system,” he added.
Mr. Ligon also said that other public services that could be considered critical infrastructure are water and electricity.
“Opening more industries to foreign ownership is indeed crucial to attracting much-needed capital and technology for the country to sustain its high-growth trajectory by generating higher quality jobs, thereby reducing poverty. But it is also important that favorable conditions or terms are in place for such mergers and acquisitions in order to protect local businesses and the national interest,” Mr. Arce added.
On the other hand, Mr. Ridon noted that the restrictions on public service ownership were not the main obstacle preventing investment from entering the country.
“Our limited economic growth has mainly been due to continuing governance issues which had never been resolved through several administrations, such as bureaucratic red tape and corruption at all levels of government. This has always been the main roadblock for both domestic and foreign investments into the economy,” he added. — Luisa Maria Jacinta C. Jocson