Third of a Series: Filipinize the telcos!
The PLDT-Smart and Globe Telecom duopoly has been making a killing from its control of the telecommunications industry in the country, with all of the companies’ profits almost every year given to their owners in the form of cash dividends.
From 2006 to this year, these dividends reached a staggering P356 billion for Philippine Long Distance Telephone Co. (Smart Telecom’s parent firm) and P108 billion for Globe Telecoms, for an astonishing P468 billion income in 10 years, or P47 billion per year.
That meant PLDT and Globe were distributing 90 to 100 percent of their annual profits to their stockholders the following year during that period. While this isn’t exceptional, such profit-hungry behavior is in sharp contrast to the dividend payout ratios of 30 to 50 percent of other Filipino-controlled conglomerates such as of SM Investments, San Miguel Corp. and Robinson’s Land.
The duo’s profit-voracity is unconscionable since telecom is a public utility with natural-monopoly characteristics: it has a captive market, and its physical and economic features bar new players into it – the folding in into Smart of Sun Cellular, the cellphone company of tycoon John Gokongwei, is a good case study for this. The telcos have even changed Filipinos’ consumption patterns, with even minimum-wage workers having become addicted to texting, spending their hard-earned money on prepaid loads instead of food.
This is the reason why all countries in the world had restricted that sector to state-run corporations until their economies and private companies had matured and could be privatized. Stupidly, we thought we could privatize our telcos even before our economy could reach that maturity.
The fact of monopoly profits in public utilities is also the reason why the telecom sectors of most Asian countries – Japan, China, South Korea – are dominated by state firms, or by public firms with a significant block of government equity stake.
With PLDT and Globe distributing nearly all of their profits to their stockholders, little or none of that profit is reinvested in the expansion of their infrastructure and improvement of their services.
Instead, the two firms acquire much of what they need to improve their infrastructure not only from borrowing abroad but from the local financial market. This crowds out the smaller Filipino companies from the local credit market when they need to borrow capital.
Filipino savings in effect are financing the operations of PLDT and Globe that yield huge profits for foreigners. That belies the argument that the country doesn’t have enough investment capital. For example, out of PLDT’s long-term debt of $2.3 billion, nearly half or $1 billion are from local banks and other debt instruments.
Even Filipino taxpayers are in effect bankrolling PLDT: Total exposure of the Land Bank of the Philippines has reached P12 billion – the bank’s biggest exposure to any private company. How on earth could a bank that was set up by law for farmers and fishermen and to bankroll the agrarian reform program be lending billions of pesos to a firm owned largely by foreigners?
But there’s worse news.
What we should be alarmed over as citizens of this nation is the fact that with 76 percent of PLDT and 64 percent of Globe owned by foreigners, the profit they have generated from their firms has meant a huge outflow of capital from the country, amounting to $8 billion over the last 10 years.
To get an idea what that number means, that is equal to the total foreign equity investment in the country in the last seven years, Total dividends by PLDT and Globe distributed to their foreign shareholders mean a reverse outflow of much-needed capital from the country.
PLDT and Globe epitomize the dark side of foreign investments.
While their propagandists boast that foreign capital contributes capital to a country which, because of its poverty, lacks capital for investment, the reality is that the profit they take out from public utilities are much more than they had put in, which means a net outflow of funds, a de-capitalization of the country.
The framers of our 1987 Constitution were certainly not as gullible as many of our economists now.
They realized that the 40 percent foreign ownership limit on the operation of public utilities would not only reduce at least such massive outflow of funds from the country. It would also allow the majority Filipino owners to out-vote the foreign owners in declaring so much dividends, or the bleeding of capital out of the country.
Sadly, our elites have again failed us, allowing foreigners to skirt the legal limit on foreign ownership in public utilities through a ruling by the Securities and Exchange Commission that mocked and, in effect, threw to the dustbin the 2012 Supreme Court decision which reaffirmed the Constitutional ban.
No doubt we need foreign investment, but not in public utilities where the Constitution has set limits. We should emulate the experience of the Asian Tigers: Get as much foreign investment in manufacturing (as in Korea’s case) and financial services (as in Singapore); ban them, though, in public utilities.
How could the country come to this?
Most of those who have and who will be profiting from the boom in the telecom industry are not just the richest Filipinos with shares in PLDT. The majority of the shareholders of PLDT and Globe are, first, the richest people on this planet who have invested through global fund managers, in the shares of these firms here and in the case of PLDT, in the US stock market.
The lion’s share
And second, the lion’s shares have been going to the huge conglomerates in the region.
The Indonesian tycoon Antoni Salim through his layers of firms has invested $1.6 billion for his 25.6 percent in PLDT since 1998. Based on PLDT’s reports on the dividends it has distributed, Salim’s earnings from it have amounted to $2.1 billion from 2006 to this year.
That means he had already recovered his investment in 2012 and is now $500 million ahead, with profits in succeeding years pure gravy. The financial reports of Hong Kong-based First Pacific, Co. Ltd. – Salim’s investment firm – actually gives a higher figure of $2.9 billion, partly because it reported income for the years 2002 to 2004, for which years strangely, PLDT had not declared dividends.
A huge part of what Salim spent for capturing PLDT in 1998 wasn’t even used to infuse capital to build better infrastructure. It involved only a change of ownership: $197 million for buying shares in the stock market and $552 for the controversial purchase of the controlling bloc dominantly held by the Antonio Cojuangco clan. The $552 million didn’t even enter the country, as Bangko Sentral ng Pilipinas had no report that this was remitted into the country in 1998 up to 2000.
PLDT’s huge profits are indicative of the fact that these are actually what economists call “rent income,” or that derived solely because of the control of a key resource, may it be land or a captive market.
This is one reason why governments of all countries in Asia, except the Philippines and Thailand, have restricted one way or another, and prevented foreign firms from dominating their telecom industries.
If the telecom industry generates monopoly profits, then these should be used to build infrastructure for better service, to lower prices for the benefit of the users, the citizens, or as in the case of Singapore, to create an investment fund (such as Temasek, majority owner of Singtel) for the needs of the country.
Because of such nature of its profits, PLDT quickly became more profitable for Salim than his purely manufacturing enterprise Indofood, which was his conglomerate’s biggest firm in Indonesia after they lost much of their empire when their patron, the strongman Suharto, was toppled in 1998.
Salim captured PLDT in that year, and after just four years its profit growth from that firm outpaced that from Indofood, and from 2000 to 2014, First Pacific’s profits from its Philippine telco totaled $2.7 billion, nearly twice the $1.3 billion from his Indofood.
Our telecom industry has been a big money machine for two other foreign firms.
The Japanese firms NTT Communications and NTT DoCoMo recovered their $1.8 billion stake (22 percent of total shares) in PLDT BY 2013, with their total dividends from the firm so far amounting to $1.8 billion.
In the case of Globe, the Singapore state-owned firm SingTel recovered its $846 million investments in the firm (47 percent of shares) by 2011, with its dividends so far amounting to $1.2 billion.
While foreign investment definitely has positive effects on its host country, such as the so-called spillover effects to other industries and technology-transfer, the downside, particularly in public utilities, is the amount foreign investors drain out of the country is more than what they put in.
Contrary to claims that there is consensus among economists on the positive impact of foreign investment in a host country, several economic studies have pointed out, especially after the 1997 Financial Crisis, that the impact of foreign capital on a host country is mixed, depending on the industry in which it invests, and on the quality of political and economic institutions in the host country. It has been shown to have even negative effect in many cases.**
Most economists also say foreign investment must be “greenfield” investments, or when the foreign firm starts an entirely new venture, as in the case of most foreign investment in the Asian Tiger and Tiger Cub countries of Asia.
One shocking finding of recent studies on the FDI impact is that economic growth in certain countries — Singapore and Malaysia, for instance – has not been because such countries were huge recipients of foreign capital. It was the other way around: as they fixed their economies to be competitive, foreign capital came in.
*The amount of dividends declared by the two firms and their percentage ownerships were from their financial reports. The value of their investments was computed based on, in the case of PLDT, the $440 million NTT DoCoMO paid for the 7 percent of PLDT shares it acquired in 2006. In the case of Globe, this was based on the $472 million price on Deutsche Telecom’s 24.8 percent share acquired by Ayala and SingTel in 2003.
**See among others: United Nations Conference on Trade and Development, Geneva; Action Aid, 2009, “Where Does it Hurt?; “The Impact of the Financial Crisis on Developing Economies;” and Rodrik, D. & Subramaniam, A., 2008, ‘Why Did Financial Liberalization Disappoint?,’ IMF Staff Papers, International Monetary Fund, Washington, DC; Rui Moura and Rosa Forte, The Effects of Foreign Direct Investment on the Host Country’s Economic Growth – Theory and Empirical Evidence.”
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