Implementing Philippine broadband: The complex web of challenges

MANILA, Philippines - How do you solve a problem like the national broadband network in the Philippines?

To get to the bottom of the problem, you need to run around a maze. As you get deeper into the puzzle, you begin to see that it’s not simple; it’s actually a complex labyrinth of deeply entangled issues.

Here’s one for the books: For a telecommunications company to construct a single cellular tower or base station in the country, it needs to secure 25 to 30 permits from the local government unit where the tower will be constructed. Processing time for the paperwork generally takes eight months to complete, while constructing the tower itself takes all of three months.

Fees also vary depending on the city or municipality and range from as low as P5,000 to as high as P500,000.

Because of the Philippines’ challenging geography as an archipelago, there is a need for more cell sites across the country. The lack of adequate base stations impacts signal strength and the quality of connectivity.

“The service generally improves if users are closer to the cell sites,” said Gamaliel Cordoba, commissioner of the National Telecommunications Commission (NTC). “However, due to the growing demand for high-speed internet, there is a need to increase the number of cell sites.”

Limiting the permitting process to three days and standardizing the fees may be the obvious answer, but in Metro Manila, where large swaths of land are private property, homeowner-associations refuse to allow the construction of cell sites inside exclusive villages.

Cordoba said the Ayala Alabang Village alone south of Metro Manila occupies an estimated 700 hectares of land and there is only one cell site inside the village. Forbes Park (150 to 300 hectares) and Dasmariñas Village (300 to 400 hectares), both in Makati, do not have cellsites on their premises. Ironically, these are areas where residents are heavy users of cellular services and data.

Geographical constraints notwithstanding, the deployment of wireline infrastructure requires huge investment, and in the absence of government funding for infrastructure, is purely a private sector initiative.

“We are looking at establishing a Universal Access and Service Fund so that we can lower the risk of private telcos going into less commercially viable areas,” Department of Information and Communications Technology (DICT) Undersecretary Dennis Villorente said. “There’s a lot of opportunity for co-deployment to lower the cost.”

Gil Genio, chief technology and information officer at Globe Telecom, clarified that telcos have been more than willing to spend for the infrastructure required both for fixed and mobile internet. In fact, Globe spends 30 to 31 percent of its revenues per year on capital spending.

“From a capex-to-revenue ratio, the Philippines is the second highest in this part of the world, second only to China,” he said.

Joachim Horn, chief technology and information advisor at PLDT, added that telcos support the open access model to allow service providers to connect to telco infrastructure, as well as tower sharing or co-location. He emphasized, though, the greater need to grow the number of cellsites – from less than 20,000 today to around 70,000 to 80,000.

In previous speeches since his appointment as DICT Secretary, Rodolfo Salalima had repeatedly stressed the need to review the spectrum management regime, encourage co-use of spectrum, look into dynamic spectrum allocation, and introduce incentives to players in underserved areas.

While the government sees the need for connecting unserved and underserved areas, the proposed National Broadband Plan (NBP) is silent on the amount that the government is willing to invest or spend on subsidies for a massive infrastructure rollout, especially in the countryside.

DICT officials have consistently hinted on pursuing more public-private initiatives instead and of determining areas of “possible intervention.”

Third Wheel

The so-called duopoly in the telecommunications industry of PLDT and Globe Telecom has raised issues on the absence of competition in the market that keeps the price of connectivity high and the quality low or below everyone’s expectations.

Dr. Epictetus Patalinghug, professor emeritus at the University of the Philippines Diliman, however, disagrees. In a presentation entitled “Competition Policy and Regulation in Philippine Telecommunications,” Patalinghug, who teaches industry competitiveness and analysis and regulation and public policy at the Virata School of Business, said the market is actually highly competitive because there is intense rivalry between PLDT and Globe.

“Telecom is a capital-intensive and a high-sunk-cost industry that requires both concentration and gross margin must be relatively high to be viable,” he explained.

“If you analyze the cash flow of Digitel when they were in the market (as a third player), they weren’t doing well. Cash flow margins were negative that resulted in its exit from the industry. The intensity of the competition did not change drastically from an industry with three players to an industry with two players. And if you use the market prices and the available spectrum, it is almost impossible for a third-party operator to enter,” he added.

This view was echoed by Sean Gowran, president and country manager, of Ericsson Philippines and Pacific Islands, who said that this is a very difficult market to come into.

“Telcos here spend 25 percent of their revenue for capital expenditure on the network. Last year, it’s more than 30 percent, which is way more than the global average of 18 percent. We don’t have an investment problem, we have a revenue problem,” he said.

“We are on the very low end of the mobile revenue over GDP. We only take in about one percent of GDP, compared to countries like Vietnam (3.5 percent),  Malaysia (3.2 percent) and  Thailand and  Myanmar (2 percent),” he added. “In Singapore, the average revenue per user (ARPU) is $55. In the Philippines, it’s $2.”

Gowran estimates that for a new player to come in and introduce the same level of service as the existing players, it would need an investment of about half a trillion pesos.

A new entrant, he added, would also need to catch up with subscribers. “There are no new subscribers out there so you have to steal from the existing pool. Instead of a 50-50 split, there will be a three-way split if they are successful,” he said.

Patalinghug concluded that while the average number of players in the ASEAN and OECD countries is three to four, it is extremely difficult for a privately funded firm to be financially viable in the Philippines.

“In my analysis, the only viable third-party entrant is the Philippine government. Only a cost-insensitive, subsidy-dependent public firm is most likely to enter as a third player,” he said. “A third player will also face late-mover disadvantage, so only a government-backed firm is likely to be the third player. But if the DICT is limiting itself to a last mile broadband connection, it will not make any difference.”

Scrutiny, sanctions and legal reform

While the case filed by PLDT and Globe Telecom against the Philippine Competition Commission (PCC) over its plan to review their co-purchase of the telco assets of San Miguel Corporation (SMC) is still pending before the courts, it speaks volumes about the influence of two dominant carriers.

Johaness Bernabe, commissioner for PCC, however, insists the need to pursue the proposed review of the deal.

“Some of the controversy underlying PCC’s involvement in telecoms  is perhaps because of the lack of familiarity with what the PCC is all about,” he said. “There has been talk about the PCC as just another layer in bureaucracy or red tape in government. To clarify, competition law matters because consumers are entitled to the quality of service at the most affordable price and with an assurance of reasonable quality.”

He cited one of the published connectivity rankings in the ASEAN region, which perhaps, coincidentally, point to the fact that we have higher cost for higher fixed broadband speed. The Philippines was reported to have an average connection speed  of 4.2 Mbps, compared to Vietnam’s 6.3 Mbps, Indonesia’s 6.4 Mbps, Malaysia’s 7.5 Mbps and Singapore’s Mbps.

“With these numbers, it is perhaps useful to look at what the PCC can do with its powers under the Philippine Competition Act and determine whether or not there is going to be a substantial prevention restriction or lessening of competition in the market,” he said.

“Obviously, there are various opportunities in the telecom sector for intervention as far as the competition law is concerned – ranging from span of the value chain from international connectivity to the national backbone, the so-called middle-mile to the last mile, even after-sales and internet service,” he added.

Should the government come in as an owner of infrastructure and should it operate that infrastructure?

“In international practice there is the notion of competitive neutrality,” Bernabe said. “That is, the government should not come in and act as a competitor in areas where the private sector may already be entrenched or providing a service.”

Meanwhile, the NTC said it needs urgent help from Congress. The Public Service Act of 1936, which is being used by the commission as basis to impose sanctions against erring public service companies, is obsolete.

“The fine is too low and does not deter violators,” Cordoba said, revealing that for violating provisions of pro-consumer regulation, companies may be fined not exceeding P200 per day after due notice and hearing.

NEDA estimates that the P200 in 1936 is now equivalent to P1.07 million, thus the need to amend the law.