Local conglomerates: friends or foes?

Are local conglomerates friends or foes? Many people are of two minds on this in the light of the San Miguel-Globe-PLDT deal and the possibility that San Miguel and MPIC will work together on the proposed $10 billion Manila Bay International Airport.

On the one hand, we want our conglomerates to invest their money here rather than go elsewhere and cause a capital drain. On the other hand, we don’t want them to be working too closely with each other to the point of restricting competition.

Maybe it really depends. On the airport project, it is alright to have some of our conglomerates work together. Maybe they should include JG Summit, the SM Group and Megaworld as well. But their unsolicited proposal for the airport should be subjected to a Swiss Challenge that should include international bidders.

For background, San Miguel honcho Ramon Ang is eyeing a partnership with Metro Pacific on the airport project. When he told us about it last week, he asked us to hold the news until he has talked with Manny Pangilinan.  During the San Miguel stockholders meeting last Tuesday, he announced that he has talked with MVP and that he was receptive.

That’s news. Up until then, there seemed to be a not so subtle competition between the two. The Meralco boardroom proved too small for the two of them. That’s why San Miguel gave up its Meralco shares.

Now, not only will Metro Pacific probably join San Miguel in a partnership to construct a $10 billion new international airport in Metro Manila, the table was left open for cooperation in other infrastructure projects like power and toll roads.

That proposed airport to be built within 1,600 hectares of reclaimed land in Manila Bay had been a pet project of Mr. Ang. It is expected to initially accommodate 50 million passengers annually, compared with the existing Ninoy Aquino International Airport’s 30 million.

President Aquino was reported to have been receptive about the proposal when it was presented to him. But DOTC officials led by Sec. Jun Abaya immediately thumbed it down, saying they dislike unsolicited proposals.

Sec Abaya was inclined to build the new airport in Sangley Point, located in his home province of Cavite. He asked JICA to do a study and presumably planned to ask Japan for ODA loans to build it.

But the San Miguel proposal is the only one on the table with a completed feasibility study and a timetable for completion of the first phase before president-elect Duterte’s six year term expires. It is also at absolutely no cost to the government and with the proponents completely taking on commercial risk.

In other words, it is the only light at the end of a long tunnel of hopelessness at the NAIA. The air traffic congestion has worsened and costing passengers and carriers tons of money in lost opportunities and actual costs (like wasted fuel).

The proposal also offers the hope of more efficient management under the private sector.  Our Mactan airport experience showed what private management can do to vastly improve service.

There should be no problem having the major conglomerates work together on this airport. Government’s role is merely to make sure that the facility will be constructed and operated with utmost safety in mind. Government must also ensure needed adjoining infrastructure are planned and executed at the same time.

  But the telco situation is different. It starts with the negative public experience of the duopoly’s service. The deal the three conglomerates agreed upon seems to imply a strengthening of the status quo to the detriment of the consumers.

The assurance of a vastly improved service after the duopoly acquired San Miguel’s 700 MHz spectrum is not credible to an increasingly skeptical public.  The requirement for the duopoly to surrender enough frequencies to allow another telco to operate is also not being seen as feasible.

This is why all eyes are now focused on the newly created Philippine Competition Commission to show it has teeth. After all, if San Miguel could be bullied to give up a potentially disruptive third telco challenge, who would dare risk capital to challenge the even more entrenched duopoly in the future?

The duopoly has rejected the jurisdiction of the PCC over them on this deal. They point out it is a done deal before the PCC’s Implementing Rules was released. There are enough lawyers who can argue either side of the issue. Here is one I received from a competition law expert who would rather not be named:

• This is a rushed deal. It appears that they’re doing this to get automatic approval (without review by the PCC) as provided in the PCC’s first Memorandum Circular (which was issued as a temporary measure to provide clarity for the market pending the IRRs). The MC will expire as soon as the IRRs are issued. It also works for San Miguel which looks like it’s getting a premium price — could also have been driven by Duterte’s threat to open the market to foreign competition.

• The PCC should look at this, however, not just as an acquisition. It has all the appearances of a horizontal agreement between the only two competitors in the telecoms sector — in which case this is an illegal act that opens both companies (and their officers) to civil and criminal liability.

• Perhaps the Globe and SMART lawyers did not appreciate this possibility. But it’s easy to come to that conclusion as reasonable: They have the same agreement, announced the same day. Both issued press releases that also detail what each is getting. And they have press conferences one after the other. On top of that, the language of the press releases are not only nearly identical, but also point to such collusion: e.g. in Globe’s press release: “We entered into this transaction as a solution TO HARMONIZE THE SPECTRUM ASSETS IN THE COUNTRY.”

In any other jurisdiction, this would raise very red flags of collusive behavior from the point of view of competition authorities, and as such the agreements would likely be voided, and the officers and companies fined and penalized.

• The MC issued by PCC of course is tricky - it says that all companies have to do is to notify the Commission of a merger or acquisition, and it would automatically be deemed approved. BUT, an MC such as that should not be able to tolerate an illegal act, especially one that has the potential to further damage competition in the market, leading to even worse services and higher prices. It would also hinder the entry of future competitors.

• All this is not to necessarily say with certainty that any illegal act was committed. But the Commission has the duty to review and make sure, and if necessary to take appropriate action. That’s why it was created in the first place, and why it was given such broad powers. It has to move responsibly but also swiftly given the scope and urgency of the transaction.

• This is a defining moment for the Commission. If it asserts itself, it can really be seen as a credible and powerful regulator for competition.

Then again, it could well be that this potentially anti-competitive deal is the quickest way we can have decent Internet service. Is there another way for government to regulate the duopoly to ensure civilized broadband service at decent rates? A prolonged legal battle does nothing for consumers and is a situation only highly paid lawyers who charge by the hour can love.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco