1

PHILIPPINES TELECOMMUNICATIONS IN AN ASEAN CONTEXT

Michael Minges Telecommunication Development Bureau (BDT) International Telecommunication Union (ITU)

November 1994

The views expressed are those of the author and may not necessarily reflect the opinions of the ITU or its members.

The lost decade The Philippines has been the odd country out in Southeast Asian telecommunications. For most of the 1980s, the members of the Association of Southeast Asian Nations (ASEAN)1 have had one or two government-owned telecommunication companies operating in monopoly environments, while the Philippines had numerous private-owned operators in a market where competition was theoretically allowed. The ASEAN countries have recently begun to liberalize their telecommunication sectors on the assumption that it will lead to an increased supply of telecommunication services. Yet ironically, the Philippines has performed worse over the last decade than its ASEAN neighbours.

In 1981, the number of main telephone lines per 100 inhabitants (teledensity) in the Philippines exceeded the ASEAN average. After that, things changed dramatically. While the Philippines telecommunication sector stagnated, networks in the rest of ASEAN grew rapidly. By 1992, Philippine teledensity was just over one, half the ASEAN average, placing it second to last (see Figure 1). The Philippine network had become the least accessible, most centralized and expensive to use of all its neighbours (see Figures 2-4). It would have taken over 35 years to eliminate the waiting list for telephone lines in the Philippines based on existing network expansion rates as opposed to 4 years in the rest of ASEAN. Almost 80 per cent of the lines were in Metro Manila even though it had only 15 per cent of the population. And though tariffs are regulated in the Philippines and subsidised by long distance calls, it has the second highest residential charges.

Figure 1: The gap grew Main lines per 100 inhabitants (teledensity), 1981-93 and annual average growth in main lines from 1983-92

0.00

0.50

1.00

1.50

2.00

2.50

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

Philippines

ASEAN

Teledensity

Annual growth in main lines, 1983-92

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

ASEAN

12.3%

12.8%

12.9%

4.7%

6.2%

16.2%

11.1%

Source: ITU.

1 The six members are Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand.

2

Figure 2: Poor access Waiting time for telephone line and payphones per 10'000 inhabitants, 1992

0

5

10

15

20

25

30

35

40

1986 1987 1988 1989 1990 1991 1992

Waiting time for new telephone line

Philippines

ASEAN

Payphones per 10'000 people

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

ASEAN

1.7

2.2

18.4

0.6

20.0

5.4

4.2

Note: Left chart is statistical measurement calculated by dividing the waiting list for telephone lines by the number of lines added. Source: ITU.

Figure 3: Costly Residential telephone monthly service charge, 1992 and as a per cent of GDP per capita, 1992

Residential monthly service charge (US$)

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

ASEAN

10.44

3.69

7.84

9.01

5.05

3.94

6.45

Residential telephone service charge as %of GDP per capita

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

0.9%

6.4%

3.1%

13.0%

0.4%

2.5%

Source: ITU.

Figure 4: Better to be in a city Largest city population as per cent of country total and largest city main lines as per cent of country total, 1992

Per cent of population in largest city

Brunei

Indonesia

Malaysia

Philippines

Thailand

ASEAN

27%

5%

10%

14%

13%

9%

Per cent of main lines in largest city

Brunei

Indonesia

Malaysia

Philippines

Thailand

ASEAN

33%

66%

11%

78%

60%

47%

Note: Singapore is a city state. Source: ITU.

3

Figure 5: External shocks GDP annual average growth rate, 1980-92 and external foreign debt as per cent of GNP, 1992

GDP annual average growth rate, 1980-92

Indonesia

Malaysia

Philippines

Singapore

Thailand

5.7%

5.9%

1.2%

6.7%

8.2%

External debt as % of GNP, 1992

Indonesia

Malaysia

Philippines

Thailand

61.9%

35.2%

56.8%

35.2%

Source: World Bank.

Causes Part of the poor performance in the Philippines telecommunication sector can be attributed to political-economic factors. Political upheaval during the mid-1980s affected investor confidence. Economically, the ASEAN countries grew between 6-9 per cent a year from 1980-92 while the Philippine economy only grew a little over 1 per cent a year (see Figure 5). Growing foreign debt contributed to high interest rates and on-going currency devaluation which inhibited network investment and made telecommunication equipment imports more expensive. Other drags on the economy were widespread power shortages and an unusual string of natural disasters including droughts, typhoons, earthquake and volcanic eruptions.

Telecommunication investment in the Philippines during the 1980s was lower than other ASEAN countries. It invested around US$ 2.1 billion from 1983-92, less than any other ASEAN country except Singapore. It is worth noting that though Singapore invested less, in overall terms, it was investing over 20 times more per inhabitant than the Philippines in 1992. The Philippines also gained practically nothing from the multilateral development agencies for telecommunications. During the 1980s, the Asian Development Bank and the World Bank provided Indonesia with over US$350 million and Thailand with over US$150 million in project loans while the Philippines received a paltry US$ 4 million. Ironically, the fact that the major Philippine telecommunication operators are private worked against them since there was a moratorium on foreign borrowing and they could not directly borrow from the multilateral agencies.

However political-economic factors alone do not explain all of the problems in the Philippine telecommunications sector. Thailand experienced a number of coup attempts throughout the 1980s yet managed to record the highest main line growth of any of the ASEAN countries. And Indonesia has a higher external debt than the Philippines yet saw its network grow twice as fast during the 1980s. Another explanation for the poor Philippine telecommunications performance were structural bottlenecks in the sector.

The structure of the telecommunication sector during the 1980s in the ASEAN countries, except the Philippines, was government monopoly with services provided by one or two government-owned public enterprises. This was in sharp contrast to the Philippines where there were 61 companies providing telecommunications services in 1993. While on paper, the Philippine model looked to be the most liberal and diverse, in reality, telecommunications were dominated by one company, the Philippine Long Distance Telephone Company (PLDT), which accounted for more than 90 per cent of all telephones in 1993. Competition was stifled by legal challenges over interconnection that ended up in the Supreme Court. So in reality, the Philippine situation was no different than the other ASEAN countries except that a public monopoly was replaced by a private one.

4

Figure 6: The growing importance of telecommunications Telecommunication revenue as a per cent of GDP, 1983-92

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1983 1986 1989 1992

Telecom revenue as % of GDP

Philippines

ASEAN

Malaysia

Singapore

-109%

42%

-90%

22%

-32%

-63% Brunei

Indonesia

Thailand

Philippines

Difference between actual and expected

teledensity

Note: The right chart shows the difference in per cent between current teledensity and expected teledensity based on the country’s GDP per capita

Source: ITU.

Signs of change Toward the end of the 1980s, the roots of telecommunication liberalization began surfacing in the ASEAN countries. This was driven by the growing importance of telecommunications in the ASEAN economy. For example, the telecommunications service sector contributed less than 0.8 per cent of ASEAN Gross Domestic Product (GDP) in 1983; by 1992 this had doubled to almost 1.6 per cent. The relation between economic and telecommunication development is very apparent in ASEAN where there is a strong connection between GDP per capita and teledensity. However, the less developed ASEAN economies -- the Philippines along with Indonesia and Thailand -- are further behind in telecommunications than they should be (see Figure 6). This imbalance could create bottlenecks for future economic expansion. Changes were needed to attract private capital to foster rapid telecommunications development.

Malaysia was one of the first to liberalize when it separated regulatory and operational functions in 1987. The operational entity, Telekom Malaysia (TM), was partly privatized in 1990. The mobile market has been increasingly liberalized. Over 30 radio-paging licenses have been issued. A second company, CELCOM, began competing with TM in analog cellular and by 1993 it had captured over 70 per cent of the market. In 1993, CELCOM's holding company was awarded a digital cellular license as well as a international gateway license. Two more cellular licenses have also been awarded to other companies.

Although telecommunications services remain a monopoly of Singapore Telecom (ST), it was partly privatized in 1993. Regulatory functions are clearly separated in the Telecommunications Authority of Singapore (TAS). ST will lose its exclusive cellular franchise in March 1997.

In Thailand, constitutional restrictions have meant that service provision technically resides with the two government-owned operators, Telephone Organization of Thailand (TOT) and Communications Authority of Thailand (CAT). Liberalization has thus unfolded differently. Build-Transfer-Operate-(BTO) concessions have been awarded for mobile and data communications and most recently, the installation of 3 million fixed telephone lines.

Indonesia has followed the Thai model with a number of revenue-sharing arrangements between the domestic operator, PT Telekom, and private companies for cellular and fixed-link telephone service. In 1993, a new operator PT Satelindo was licensed to provide nationwide digital cellular service as well as international telephone services. In 1994, the state-owned international operator, PT Indosat, was partly privatized in a global equity issue that raised more than US$ 1 billion.

5

The Executive Orders Clearly the Philippines faced something of a dilemma. It had tried to introduce additional competition in the sector in the late 1980s by licensing cellular and international gateway operators to compete with PLDT. However something drastic was needed if it was not to fall further behind its rapidly liberalizing ASEAN neighbours.

In 1993, President Fidel Ramos signed two Executive Orders (EO) designed to spur development of the Philippine telecommunications sector. The first, EO 59, was a long overdue mandate obliging telecommunication operators to interconnect their networks. The second, EO 109, is an innovative policy requiring licensees of lucrative cellular and international franchises to also provide fixed-link telephone service in underserved parts of the country. Each cellular licensee is required to install 400'000 lines within 5 years and each international licensee 300’000 lines within 3 years. EO 109 is designed to enforce compliance by requiring licensees to put up performance bonds (which will be forfeited if line installation targets are not met). To ensure that lines are not only installed in major cities there are targets for the ratio of urban lines to rural lines.

One measure of EO 109 initial success is the large number of applicants. Ten companies have been awarded licenses (see Table 1). According to the terms of EO 109, they will have to install 4.4 million lines by 1999, which would quadruple the number of telephone lines in the country. Another measure is the reaction of PLDT. Faced with the possibility of real competition, it has enacted a Zero Backlog Program which aims to sharply reduce the pending applications by installing 1.2 million lines between 1993 and 1996.

Table 1. License awards for international gateways and cellular, Philippines, 1994

Company Licenses Lines to install

Capwire IGF 300'000 Digitel IGF 300'000 ETPI IGF 300'000 Extelcom CMTS 400'000 Globe IGF, CMTS 700'000 ICC IGF 300'000 Isla IGF, CMTS 700'000 Philcom IGF 300'000 Piltel CMTS 400'000 Smart IGF, CMTS 700'000 TOTAL 4'400'000 Note: IGF=International Gateway Facility. CMTS=Cellular Mobile Telephone System.

Source: NTC.

6

Table 2. Ambitious plans

Telephone line installation plans of selected ASEAN countries

Main lines, 1993 Planned main lines Country

Total (m)

Per 100 people

Year a)

Total (m)

Per 100 people

Lines added (m)

CAGR b)

Est inv. c) (b US$)

Basis

Indonesia 1.8 0.96 1999 6.8 3.35 5.0 25% 7.5 Pelita VI Malaysia 2.4 12.56 2000 5.5 25.00 3.1 13% 4.6 6th ED.Plan Philippines 0.8 1.30 1998 6.2 8.44 5.4 49% 8.0 EO 109, PLDT ZBP Thailand 2.2 3.74 1996 5.5 9.00 3.3 36% 5.0 BTOs, 7th NESDB TOTAL 7.2 2.19 24.0 16.8 25.1 Note: a). Year by which plan will be completed. b). CAGR=Compound Annual Growth Rate. c). Estimated investment at US$1500 per

line.

Source: ITU.

Plans The network expansion plans of the ASEAN countries are impressive indeed. Indonesia, Malaysia, the Philippines and Thailand aim to install over 15 million lines at a cost of almost US$25 billion. This would triple the existing number of lines.

How realistic are the plans? Based on the track record of the individual countries and the method in which the lines are to be installed they seem plausible. Indonesia exceeded the targets of its previous development plan, the Thai concession for installation of fixed-link lines is ahead of schedule and Malaysia will reach its target based on existing growth rates. In the Philippines, the new service providers could forfeit their performance bonds if they do not fulfil the targets.

The planned growth rates are higher than the countries achieved in the past. One encouraging development is that there is a trend to higher growth rates. For example, the annual growth in ASEAN's main lines in last four years (15%), was higher than the corresponding period a decade ago (11%). If 20-30% per year increases in main lines seem implausible, one only has to turn to China which achieved a growth of over 50% in 1993. The Philippine plan is the most ambitious in terms of the needed 50 per cent annual growth rate. However, almost 30 per cent more lines were added in 1993 by PLDT before the new licenses were awarded. Under the worst scenario, even if only a fifth of the Philippine plan is achieved, it would still double the existing number of main lines.

A more serious constraint could be the availability of capital. The ASEAN countries are not only competing amongst themselves for investment but also among many other countries in Asia and around the world that are liberalising their telecommunication sector in the hopes of attracting private capital. While early privatizers in Asia and Latin America have been successful in attracting private funds, the number of countries contemplating privatization has grown dramatically. A number of developed countries have announced ambitious information superhighway plans which will require large investments. And telecommunications is competing with other sectors with other large infrastructure needs such as energy and transport. A number of analysts foresee a growing funding gap in the second half of the 1990s.

One factor in the Philippines' favor is that it has a successful track record in attracting foreign investment in its telecom sector. It allows foreign partners to own up to 40% of joint ventures. There is more scope for telecommunication investment in the Philippines due to the large number of operators. Also, unlike the other ASEAN countries, the Philippines has attracted strategic investors including international telecommunication companies such as Millicom and Cable and Wireless.

7

Figure 7. Let’s call ASEAN international outgoing telephone traffic, minutes, 1983-93 and annual change, 1984-93

ASEAN international telephone traffic(minutes)

0

200

400

600

800

1000

1200

1983 1987 1991

ASEAN

Other

Annual change in ASEAN telephone traffic

0%

10%

20%

30%

40%

50%

1984 1988 1992

Out of ASEAN

Within ASEAN

Source: ITU.

Regional cooperation While the Southeast Asian economies may be competing against themselves for capital, ASEAN is a regional grouping designed to encourage political and economic cooperation. A modern trans-ASEAN network can do much to enhance trade and investment and to position the region as an attractive single market for foreign investment.

Inter-ASEAN communications is growing. After declining in the 1980s, inter-ASEAN telephone traffic has been on a rebound since 1990 and growing faster than overall international traffic. However, the Philippines talks the least to its ASEAN neighbours; only 7 per cent of its traffic was destined there in 1993. One challenge for the Philippines will be to forge closer links with the other ASEAN economies since they are among the world’s fastest growing.

One interesting development is cross-ASEAN telecommunications investment. Singapore Telecom, with a well developed and protected domestic market, has been the most active, investing in value-added, mobile and directory operations in Malaysia, Indonesia and a 30 per cent stake in Globe, one of the international gateway operators in the Philippines. Thailand's Shinawatra Group, involved in a number of BOTs including the recently launched Thaicom satellite, has invested in the Philippines through a 30 per cent stake in Isla Communications.

There are a number of regional telecommunication initiatives. The ASEAN Optical Fibre Submarine Cable Network (AOFSCN), scheduled for completion in 1994, will provide high-speed broadband connections among all the countries. Malaysian operators and Singapore Telecom have cellular roaming agreements. Indonesian, Malaysian and Thai operators have signed a Memorandum of Understanding to develop telecommunication networks and services for the so-called growth triangle of northern Sumatra (Indonesia), northern peninsular Malaysia and southern Thailand. One concrete result has been a reduction of tariffs for calls originating and terminating within the triangle. The Philippines needs to ensure that its is not left out of closer telecommunication collaboration because of its distance from the ASEAN epicenter.

The next decade There are a number of favorable conditions to suggest that over the coming decade, the Philippines will narrow the telecommunications gap with its ASEAN neighbours. It is unlikely that the combination of political, economic and natural disasters it experienced in the 1980s will be repeated. Its new telecommunication liberalisation initiatives look set to stimulate rapid network development. The Philippines tradition of private ownership and separation of regulatory functions in the telecommunication sector should be an advantage compared to the other ASEAN countries where this is new. Its educated labor force and wide-spread use of English can make the Philippines an attractive hub for the ASEAN region. Although the Philippine legal system can be slow, it should nonetheless inspire investor confidence compared to some of the other ASEAN countries where laws are vague. The broadcasting sector is probably the most dynamic of all ASEAN countries, putting the Philippines in a good position for the growing convergence of telecommunication and broadcasting.

8

Hopefully, in another decade, one will be able to look at the Philippines as one of ASEAN’s telecommunication success stories.

Acknowledgements The assistance of the National Telecommunications Commission (NTC) and the Philippines Long Distance Telephone Company (PLDT) in providing background information is appreciated.

References Asian Development Bank. 1994. Annual Report 1993. ADB, Manila. Digitel. 1994. The Philippines. Digitel, Manila. Hukill, M. and Jussawalla, M. 1991. Trends in Policies for Telecommunication Infrastructure Development and Investment in the ASEAN countries. East-West Center, Hawaii. Kintanar, S. 1994. Telecommunications regulation in the Philippines - Effective policies for development and growth. Rural Communications Summit, Hongkong. International Telecommunication Union. 1994. Telecommunication deregulation and private sector participation in Indonesia. World Telecommunication Development Conference, Buenos Aires. Pamintuan, W. 1993. Marketing and distribution of telecommunications in cities of the Philippines - Opportunities and constraints. The Pan-Asian Telecommunications Summit '93, Bangkok. Pasa, L. 1992. International accounting rates - National strategies considered, A perspective from the Philippines. The Pan-Asian Telecommunications Summit '92, Singapore. Philippine Long Distance Telephone Company. Various years. Annual Report. Manila. Singapore Telecom. 1993. Annual Report 1992/1993. Singapore. Technology Resources Industries Berhad. 1993. Annual Report 1993. Kuala Lumpur. Telephone Organization of Thailand. 1993. Annual Report 1992. Bangkok. Telekom Malaysia. 1994. Annual Report 1993. Kuala Lumpur. The Economist Conferences. 1994. Telecommunications challenges in Asia: a Roundtable dialogue. The Economist Conferences, Hongkong.

9

Annex. ASEAN communication indicators

Geography

Indonesia

Thailand

Singapore

Brunei

Philippines

Malaysia

Basic indicators, 1993

Land area

Population GDP, US$ 1992 Main telephone lines

Country km2 (000s)

Total (000s)

per km2

Total (b)

Per capita

Total

Per 100 people

Brunei 6 281 49 3.8 14'000 55'228 19.65 Indonesia 1'919 187'151 98 126.4 690 1'805'946 0.96 Malaysia 333 19'103 57 58.0 3'110 2'410'721 12.62 Philippines 300 65'775 219 52.8 820 859'762 1.31 Singapore 0.6 2'867 4'654 46.0 16'330 1'245'571 43.45 Thailand 514 58'824 114 110.6 1'910 2'184'892 3.71 ASEAN 3'073 334'001 109 397.5 1'210 8'562'120 2.56 Source: World Bank (population, GDP), ITU.

Cellular profile, 1993

Cellular subscribers Service providers Country

Total

Per 100 people

as % of total telephone subscribers

End 1993

New licenses

Total

Brunei 8'304 2.96 13% 1 1 Indonesia 53'438 0.03 3% 3* 1 4 Malaysia 290'000 1.52 11% 2 2 4 Philippines 101'738 0.15 11% 2 3 5 Singapore 179'000 6.24 13% 1 1 Thailand 436'000 0.74 17% 4* 4 ASEAN 1'068'480 0.32 11% 13 6 19 Note: * In Indonesia and Thailand, includes concessions and revenue sharing arrangements in cooperation with licensed operators.

Source: ITU.

10

Inter-ASEAN telephone traffic, 1993 Millions of minutes

To Brunei Indonesia Malaysia Philippines Singapore Thailand ASEAN From

Total As % of total

Brunei a 0.67 2.53 0.95 4.19 0.65 8.99 41% Indonesia a 0.34 5.67 2.04 30.70 1.62 40.37 32% Malaysia 2.10 8.14 4.12 110.10 8.64 133.10 53% Philippines 0.50 1.08 2.02 5.24 1.29 10.13 7% Singapore a 3.40 40.00 110.00 12.00 19.00 184.40 56% Thailand 1.78 7.72 0.89 15.67 26.06 16% ASEAN 6.35 51.67 127.94 20.00 165.89 31.20 403.05 39% Note: a. 1992.

Source: ITU.

Television profile, 1993

TV sets TV homes Cable TV TVRO Multi-channel homes

VCRs

Country

Total (000s)

Per 100 people

Total (000s)

% of house-holds

Sub-scribers (000s)

Antennas

(000s)

Total (000s)

% of TV homes

% of TV

homes Brunei 70 25 45 90% -.- -.- -.- -.- 89% Indonesia 15'000 8 15'000 42% -.- 500 500 3% 10% Malaysia 4'000 21 2'700 90% -.- 40 40 1% 35% Philippines 7'000 11 7'000 58% 250 30 280 4% 21% Singapore 1'050 37 629 90% -.- -.- -.- -.- 95% Thailand 10'000 17 10'000 83% 126 -.- 126 1% 17% ASEAN 37'130 11 35'374 55% 376 570 946 3% 18% Source: ITU estimates adapted from national sources and Unversity of Hongkong.