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thesis entitled

TELECOMMUNICATIONS DEREGULATION AND COMPETITION
IN THE PHILIPPINES
1993-1996

presented by

Maria Catherine Advincula Obien

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M.A. Telecommunication

degree in

 

 

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1M WWW“

 

TELECOMMUNICATIONS DEREGULATION AND COMPETITION
IN THE PHILIPPINES
1993-1996
By

Maria Catherine Advincula Obien

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF ARTS

Department of Telecommunication

1998

ABSTRACT
TELECOMMUNICATIONS DEREGULATION AND COMPETITION
IN THE PHILIPPINES
1993-1996
By

Maria Catherine Advincula Obien

The Philippine government introduced major telecommunication reforms in 1993,
namely Executive Order 109 (universal service) and Executive Order 59
(interconnection) and also in 1995 Signed into law Republic Act 7925 (Public
Telecommunications Policy Act of the Philippines). These directives led to the
deregulation of the telecommunications sector, with the formation and/or re-entry of nine
competing Filipino telecommunications firms.

This work deals with the competitive scenario in telecommunications service
provision in the Philippines, particularly the 1993-1996 period. This thesis discusses the
new policies and their impacts, performance, regulation, and emerging issues. A case
study approach using documentary research and strategic interviews was used for this
thesis.

The initial impacts of the reforms for consumers are increase in number and
access to telephones and decrease in cellular telephone prices, to name a few. Both
private companies and the government are concerned about issues on interconnection,

reorganization, reporting protocols, technology, and ownership, among others.

Cepyright by
MARIA CATHERINE ADVINCULA OBIEN
1998

DEDICATION

To my parents
Dr. Santiago Rigonan Obien and Mrs. Razela Morales Advincula Obien
from my heart

to
yours

and in loving memory of

Francisco Michael Advincula Obien
September 22, 1972 - May 30, 1975

ACKNOWLEDGIVIENTS

My warmest thanks to my thesis adviser Dr. Bella Mody for her guidance,
wisdom, patience, and support, and my thesis committee members Dr. Johannes M.
Bauer and Dr. Gilbert A. Williams for their indispensable comments and suggestions. I
also thank the faculty, staff and fellow graduate students at the Department of
Telecommunication at Michigan State University.

Thank you to Consuelo Campbell for her insights and encouragement.

I am grateful to all the government, private sector, university officials, as well as
their respective staff members in the Philippines who served as valuable resource persons
for this thesis:

From the Philippine government: Undersecretary for Communications Josefina
Trinidad-Lichauco, Engr. Aurora Rubio, Engr. Ofelia Datuin-Astrera, Mr. Ranier Angeles
all of the Department of Transportation and Communications: Commissioner Simeon
Kintanar, National Telecommunications Commission; Mr. Nelson P. Beniabon,
Philippine Council for the Advanced Science and Technology Research and
Development; and Mr. Edgar Doi‘la, National Economic and Development Authority.

From the private sector: Maria Mercedes F. Garcia and Jesus Renato T. Carpio,
Bayan Telecommunications Holdings Corporation (Bayantel); Rogelio V. Quevedo, Bell
Telecommunication Philippines, Inc. (Bell Telelcom); Epitacio Marquez and William L.

Velasco, Capitol Wireless, Inc. (Capwire); Eric J. Severino, John W. Young, and Arne

Larsson, Digital Telecommunications Philippines, Inc. (Digitel); Alfredo Panizales, The
New Domestic Satellite Philippines, Inc. (Domsat); Richard H. Pratte, Eastern
Telecommunications Philippines Inc. (ETPI); Emilio P. Festejo, Express
Telecommunication Co., Inc. (Extelcom); Jones T. Campos and Benedict Buhain,
GlobeTelecom; Conrado A. Hernandez and Alfredo O. Velez, Isla Communications Co.,
Inc. (Islacom); Arsenio R. Afable Jr., Philippine Communications Satellite Corporation;
Antonio A. Ong and Lea M. Wong, Philippine Global Communications, Inc. (Philcom);
Alfredo B. Carrera, Philippine Long Distance Telephone Company (PLDT); Ramon O.
Cojuangco, Jr. and Deborah Anne N. Tan, Pilipino Telephone Corporation (Piltel);
Marilyn Eleanor P. Santiago Philippine Wireless, Inc. (Pocketbell) and Philippine
Telephone and Telegraph (PT&T); Orlando Vea, Ramon G. Duremdes, Jr., and Giselle
Garcia, Smart Communications, Inc.; Wilson C. Morrell, Philippine Association of
Private Telephone Companies (PAPTELCO); Ricardo C. Baflagale Philippine Electronics
and Telecommunications Federation (PETEF); Raymundo P. Reyes, Radio
Communications of the Philippines, Inc.; Dr. Jose Azarcon, Consultant; and Mr. Lincoln
Drilon, Consultant.

_ From the academe: F lorangel Rosario-Braid and Ramon Tuazon, Asian Institute
of Journalism; Juan F. Jamias, Felix Librero, and Rex L. Navarro, University of the
Philippines Los Baflos.

I thank the staff of the Institute of Public Utilities at The Eli Broad Graduate
School of Management, Michigan State University. It has been a great joy for me to
learn from and work with Johannes M. Bauer, Michelle F. Wilsey, Harry M. Trebing,

and Bob Holetz. Many thanks to Margie Gray, Michelle St. Ours, and Nicole Craig for

vi

cheerfulness and support, as well as former staff members Kathy Lessard, Cean
Burgeson, Becky Reynolds, and Sara Reynolds. I also deeply thank Laurent Besancon
for his friendship and the many enjoyable discussions about telecommunications and the
world.

I would not be where and what I am today without the love and friendship of my
fellow MSU Filipino Club members. To all of you, many thanks. To Rudie Altamirano,
Letlet Carpio-Altamirano, Sue Saguiguit, JoAnn Palma, and Glenda Soriano, special
thanks for taking me under your wing, then and now, and for prodding me to accomplish
nothing but the best. Kudos to Oggie Arcenas, Raul Tomas, Aggie Legaspi, Jong Aznar,
and Bong Macalincag for all your concern and for being there when my spirits need
uplifting. To Anne Macalincag, thank you for all the special ways you care for me.
Vivienne Valledor, thank you for sharing with me your many passions! My gratitude
also goes to Cecilia Samonte, who gave precious time and talent - and a lot of heart — to
make this thesis happen.

To my friends and former roommates Leah Cuyno and Elma Trinidad, the times I
spent with each of you will always be treasured.

Many thanks to the De Leon, Macalincag, Viray, Lazaro, Quiachon, and Bemsten
families for welcoming me into their homes and hearts.

To the St. John Catholic Student Parish in East Lansing — the Pastoral Team,
Parish Pastoral Council, and Music Ministry, thank you for journeying with me in my

faith and for the opportunity to serve and participate in the parish.

vii

I heartily thank the alumni and resident members of the UPLB Lisieux Music
Ministry at St. Therese Parish, Los Bar‘ros, Philippines, for the prayers that sustain me and
for continuing our “mission of music”!

I express special thanks to Anna-Marie Tamayo, Christiane Ong, Mimi Cosare-
Belizario, Carrie Coles-Prollamante, Albert and Steph Gapud, Pol Ilag, Nora Cabansag-
Cardenas, Mia Alcantara-Lustria, and Wena Tubafia: friendship and fellowship with you
through all these years -- whether we are next door, just beyond state borders, or across
continents -- means ever so much to me. From the depths of my heart, thank you.

To many others who have knowingly or unknowingly touched my life, I thank
God for you.

With all my heart, I thank my parents, Dr. Santiago R. Obien and Mrs. Razela
M.A. Obien. Thank you Daddy and Mommy, for believing in me. There are no words to
say how grateful I am for your unwavering love and steadfast faith. This work has come
to fruition -- because of you.

Most importantly, I praise and thank our Almighty God for all the blessings

bestowed on me. In this thesis, God is the Writer, and I, the pen and paper.

viii

TABLE OF CONTENTS

DEDICATION
ACKNOWLEDGEMENTS
LIST OF TABLES

LIST OF FIGURES
CHAPTER

Chapter 1. 1.0 Introduction ......................................................
1.1 Purpose ofthe Study .....................................
1.2 Research Questions .......................................
1.3 Methodology ..............................................
1.4 Organization of the Thesis ...............................

Chapter 2. 2.0 Literature Review ..............................................
2.1 Description of Telecommunications in
the Philippines .............................................
2.2 Competition ................................................
2.2.1 Definition — Kinds of Market Structure .........
2.2.2 How Competition Started First ....................
2.2.3 Reasons for Limited Experience ..................
2.2.4 Stages Promoted by the EEC ......................
2.2.5 How Competition Was Exported Elsewhere,
Reaching the Philippines ...........................
2.3 Regulation .................................................
2.3.1 Definition .............................................
2.3.2 History of Telecommunications Regulation. . ..
2.3.3 Regulation and its role .............................
2.4 Performance ...............................................
2.4.1 Definition .............................................

PAGE

ADJUJN"

Chapter 3.

Chapter 4.

Chapter 5.

Chapter 6.

3.0

4.0

5.0

Telecommunications Prior to the Introduction of Reforms
in 1993 ............................................................
3.1 The Philippine Context ...................................
3.2 The Evolution of Telecommunications Services .......
3.2.1 Spanish Era until 1898 ................................
3.2.2 U.S. Era until 1946 ...................................
3.2.3 Post World War II 1946-1965 ....................
3.2.4 The Marcos Years : 1965-1986. ...................
3.2.5 The Aquino Years: 1986-1992. ...................
3.2.6 The Ramos Administration: 1992-1998 ..........
3.3 The Evolution and Development of the Policy and
Regulatory Framework .....................................
3.3.1 Characteristics of Regulation in the Philippines.
3.3.2 Problems .............................................
3.4 Foreign Influences ........................................
3.5 Change of Government: From Aquino to Ramos

The Telecommunications Scenario from 1993 to 1996:
The Reforms and Their Impacts ..............................
4.1 A Discussion of the Major Reforms ...................
4.2 Impacts of the Reforms ...................................
4.2.1 Increase in Number of Telecom Entities
4.2.2 The Service Area Scheme ..........................
4.2.3 Impact on Basic Telephone Service ...............
4.2.4 Impact on Cellular Telephony .....................
4.2.5 Impact on other Telecom Services ................
4.2.6 Domestic Ownership Issues ........................
4.2.7 Foreign Partnerships/investors .....................
4.3 Performance ................................................
4.3.1 Government Targets and Indicators ...............
4.3.2 Selected Performance Indicators ..................
4.4 Regulation .................................................
4.5 Emerging Issues and Concerns .........................

Summary and Conclusions .....................................
5.1 Research Question 1 ......................................
5.2 Research Question 2 ......................................
5.3 Research Question 3 ......................................

6.0 Bibliography .....................................................

30
3O
32
32
33
34
34
41
46

47
56
58
63
64

66
66
71
71
77
82
94
99
104
107
110
110
111
115
117

127
127
132
137

142

APPENDICES

A DOTC Department Circular 92-269 (November 1992) — Cellular
Mobile Telephone System Policy 150

B EC. 59 (February 1993) - Prescribing The Policy Guidelines
For Compulsory Interconnection Of Authorized Public
Telecommunications Carriers In Order To Create A Universally
Accessible And Fully Integrated Nationwide
Telecommunications Network And Thereby Encourage Greater
Private Sector Investment In Telecommunications 153

C DOTC Department Circular 93-273 (June 1993) — Domestic
Satellite Communications Policy 159

D ED. 109 (July 1993) Policy to Improve the Provision of Local
Exchange Carrier Service 166

E RA. 7925 (March 1995) - An Act to Promote and Govern the
Development of Philippine Telecommunications and the

Delivery of Public Telecommunications Services 171

F List of Resource Persons Interviewed in the Philippines 184

xi

Table 1

Table 2

Table 3

Table 4

Table 5

Table 6

Table 7

Table 8

Table 9

LIST OF TABLES

Telecommunications Operators and their Services.

Telecommunications Operators and their respective
Service Areas.

The Philippine Basic Telephone Program, status as of year
end 1996.

Telephone Distribution by Region: Comparative Summary
for 1993 and 1996.

Cellular Mobile Telephone Service for 1995 and 1996.

Philippine Telecommunications Companies and their
Foreign Strategic Partners.

Selected performance indicators for the Philippines,
1991-1996.

Change in number of main lines, 1993 to 1996.

Change in number of cellular subscribers, 1993 to 1996.

xii

72

78

91

93

98

108

113

114

114

figure 3

Figure 4

Figure 5

Figure 1

Figure 2

Figure 3

Figure 4

Figure 5

LIST OF FIGURES

Xavier’s Performance Assessment in Economic
Terms.

The Philippine Telecommunications Industry
Structure.

The Philippine Telecommunications Industry
Organizational Scheme.

Organizational Structure of the National
Telecommunications Commission.

Map of the Philippines.

xiii

26

51

54

55

81

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CHAPTER ONE

1.0 INTRODUCTION

For more than seven decades, the telecommunications sector in the Philippines
has been a virtual monopoly of the Philippine Long Distance Telephone Company
(PLDT). PLDT has had the sole authority to establish a nationwide long-distance
network in the country and up to 1992 remained the sole owner of a nationwide telephone
backbone. It provided telecommunications in urban areas where demand was high and
profits were expected, but left the rest of the country unserved or underserved.
Telecommunications in rural areas ranged from some service provided by a small local
private telephone company, to one or a few municipal telephone calling offices/booths, to
none at all. Overall, telecommunications was inadequate, often inefficient when
available, and inaccessible due to the high costs of obtaining service.

Under the leadership of President Fidel V. Ramos, the govemment’s response to
the problems of the telecommunications sector was to promulgate new policy directives
in 1992/1993 through the National Telecommunications Development Plan (NTDP) of
the Department of Transportation and Communication (DOTC) and through Congress.
Executive Order 59 prescribes interconnection of authorized public telecommunications
carriers, while Executive Order 109 mandates provision of local exchange service by

international gateway operators and cellular telephone operators. Both Executive

 

Orders 59
(VIC) of l

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Orders 59 and 109 are implemented by the National Telecommunications Commission
(NT C) of the DOTC.

These directives have led to the deregulation of the telecommunications sector,
with the formation and/or re-entry of nine competing telecommunications firms, each
involving a mix of Filipino and foreign investors. Each company was assigned one of 11
“service areas” where it will develop local exchange service and thus compete with
PLDT (where available). Companies will also compete against each other, including
PLDT in providing long distance service.

On March 1, 1995 President Fidel V. Ramos signed into law Republic Act 7925,
known as the “Public Telecommunications Policy Act of the Philippines.” The Act took
effect 15 days later and aims to “promote and govern the development of Philippine
telecommunications and the delivery of public telecommunications services.” This Act,
along with policies like the Executive Orders, is an initiative to spur economic
development by providing improved telecommunications as part of the government plan
called “Philippines 2000”. One of the major goals of this plan is to elevate the

Philippines to Newly Industrialized Country (N IC)- status by the year 2000.

1.1 ‘ Purpose Of The Study
In light of the above-mentioned new policies, this thesis proposes to study the
restructuring of telecommunications, particularly the emerging competitive scenario in

telecommunications service provision in the Philippines.

11 R8562

Theb

1.2 Research Questions
The basic research questions (RQ) include:

RQl. What impact has the changes in the market structure of
telecommunications in the Philippines had on service and
competition? When and why (economic, political, cultural,
domestic, and foreign forces) was competition introduced?

RQ2. What impact has the proposed regulatory framework had on the
introduction of competition? What are the forces (economic,
political, cultural, domestic, and foreign) that influenced its
development? Is the regulatory structure adequate/ inadequate?

RQ3. What impact has the new competitive environment had on the
performance of the telecommunications sector? What are the

factors affecting this performance?

1.3 Methodology

A case study approach, using documentary research and strategic interviews was
used for this research. Available literature on telecommunications in the Philippines and
other countries on competition, regulation, universal service, sector performance and
related areas were studied. Personal interviews were conducted with key government,
industry, and academic officials in the Philippines (see listing in Appendix F).

This methodology enabled the researcher to closely study the Philippine
telecommunications scenario using contextual analysis. Contextual analysis tells us

which “background” forces influenced a communication system, and in what time period

(Mody. 19
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innovation
cultural. an
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Chapter

(Mody, 1987). It could Show that “the adoption of a particular technology has more to do
with political, economic, and sociocultural forces in the surrounding environment, and
their interactions, than with the technical advantages and cost-effectiveness that the
innovation promises” (Mody and Borrego, 1991). Taking the political, economic,
cultural, and scientific-technical factors into consideration puts in perspective and context
the past successes or failures of a telecommunication system, and could facilitate the

understanding of present and possible future scenarios.

1.4 Organization Of The Thesis

This thesis is organized as follows. The first chapter provides the background and
purpose of the study, identifies the research questions, explains the methodology, and
gives the overall organization of the thesis.

Chapter Two reviews available literature on telecommunications in the
Philippines and provides general overviews on telecommunications competition,
regulation, and performance.

Chapter Three traces the evolution of telecommunications prior to the 1993
reforms, including infrastructure, policy and regulatory frameworks, as well as internal
and external factors influencing the sector.

Chapter Four delves into the 1993-1996 period and discusses the reforms and
their impacts, performance, regulation, and emerging issues.

Chapter Five addresses the research questions of this study and presents
conclusions.

Chapter Six lists the materials and sources used for this study.

This.
the Philippi

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CHAPTER TWO

LITERATURE REVIEW

This chapter summarizes available literature that describes telecommunications in
the Philippines and provides a general review on telecommunications competition,

regulation, and performance.

2.1 Description of Telecommunications in the Philippines

The development of telecommunications in the Philippines may be said to be
characteristic of a developing country, i.e., modest growth concentrated in major urban
areas (Carrera, 1992). Although the telecommunications system in the Philippines is not
state-owned and operated as in other developing countries, the private oligopoly in the
Philippines has nevertheless been characterized as an “exemplary case of a private but
inefficient firm” (Wolf and Sussman, 1995; Wellenius, 1989).

Sussman (1991b) describes communications as one of the Philippines’ most
concentrated areas of business ownership and state control. He further contends that “the
elitist pattern of communication investment and usage has brought deteriorating quality
of local telecommunication services and telephone rates that effectively disconnect most
Filipinos from information lines and social mobility, while transnational subsidiaries

have never had better channels of information,” (Sussman, 1991a).

T
telecomrr
1993. as s
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and to spe
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The elite continues to shape the national political structure in general, and the
telecommunications sector in particular. The deregulation of telecommunications in
1993, as stipulated by the new executive orders, has led to frantic competition throughout
the industry (Clifford, 1994) and also thereby forcing PLDT to become more competitive
and to speed up the installation of new telephone lines (Tiglao, 1994)

2.2 Competition

2. 2.1 Definition — Kinds OfMarket Structure]

Four most common kinds of markets can be distinguished according to (1) how
many firms there are, (2) whether the products of the different firms are identical or
somewhat different, and (3) how easy it is for new firms to enter the market. The four
market structures are: perfect competition, monopolistic competition, oligopoly, and
pure monopoly.

A perfectly competitive market has the following characteristics: a) there are
numerous buyers and sellers; b) an identical commodity is bought and sold; c) there is
perfect information wherein each firm and each customer is well informed about the
available products and prices; d) there is perfect mobility of the factors of production; e)
there is free entry into and exit from business; and i) no one buyer or seller can influence
price, since price is determined by the aggregate action of all buyers and sellers or by
total demand and supply.

As in perfect competition, monopolistic competition likewise has: a) numerous
buyers and sellers; b) perfect information; and c) free entry into and exit from business.
However, a similar, rather than an identical product is bought and sold. The main

distinction between perfect competition and monopolistic competition is product

difiiireiztia.
few. which
A r
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dijferentiation, manifested in quality, packaging, or in supplementary services, to name a
few, which all give the firm a limited degree of control over price.

A market dominated by a few sellers at least several of which are large enough
relative to the total market to be able to influence/ have some degree of control over the
market price is called oligopoly. Any oligopolistic industry includes a group of giant
firms, each of which keeps a watchful eye on the actions of the others. Products may be
identical or differentiated. Since each of the three or four firms puts out a substantial
share of the total supply, any one of them can affect price by altering its individual
output. Rivalry among firms is keenest and most direct under an oligopolistic market,
and if one lowers price in the hope of obtaining more business, however, the others can
retaliate by lowering their prices. Since the fear of retaliation to the initiator of price
cutting is very strong, oligopoly is very conducive to collusion, or some form of mutual
interdependence to lessen uncertainty. This anticipation of response can provide some
limit on how much the price maker or price leader can control price. Agreements are
often made to stabilize prices, to limit output, and to use other means in order to
maintain higher profits. Arrangements designed to make it possible for the firms to live
and let live have also been utilized: price leadership is one example; an agreement
allocating geographic areas among the different firms is another. Although entry of
new firms is possible, the barriers to entry are formidable, for production usually
requires large scale operation, much capital, and advanced and often unavailable
technology.

A monopoly is a one-firm industry, producing a unique product for which no good

close substitutes are available (Kreinin, 1983). The monopolist is certainly a price maker

 

' Sources: Baumol & Binder, 1985; Kreinin 1983; Edward, 1984; Nambu, 1994; Bauer, 1996 session 2.

7

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and has such market power. Barriers to entry are formidable, ranging all the way from
advanced technology to economies of scale to patent rights to access to critical materials,
and even to legal limitations.

A natural monopoly is an industry in which advantages of large-scale production
allows a Single firm to produce the entire output of the market at lower average cost than
multiple firms each producing a smaller quantity (Baumol and Blinder, 1985). This does
not necessarily mean that “single” equals “sizable”; a natural monopoly need not be a
large firm if the market is small enough. What matters is the size of the single firm
relative to the total market demand for the product. Many public utilities have
traditionally been permitted to operate as monopolies precisely because no new entrant
can hope to match the low average cost of the existing monopoly firm since the
economies of scale in itself act as a very effective deterrent to entry. Technology has a
role in enabling a monopoly to achieve substantial cost reductions when they produce
large quantities. It is therefore often considered desirable to permit these firms to obtain
the lower costs they achieve by having the entire market to themselves, and subject them
to regulatory supervision rather than break them up into a number of competing firms

(Baumol and Blinder, 1985).

2.2.2 . How Competition Started First - Where And Why ,° Who Were The
Forces That Pushed Competition In The USA And Europe

For most of its history, telecommunications has been regarded as a natural
monopoly with one govemment-owned or privately held but closely regulated provider
offering voice services over an analog network. Straubhaar (1995) notes: “For years,

nearly all telecommunications in the Third World, as in the industrialized nations and

Eastern E”
called P05“

explains:

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(Hills. 1986; PI

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Eastern Europe as well, were owned and operated by governments in what typically
called Postal, Telephone and Telegraph administrations (PTTS). Petrazzini (1995) further
explains:

“Decades of state-owned telecommunications led to
an assumption that telephones have always been a
public service owned and run by the national
government of a country. However, historically, in
almost every nation around the globe, telecom
services began as a private commercial business.
Monopoly and the notion of universal service,
which have dominated the sector for so long, were
also absent at the industry’s inception. In those
early days, telephone companies operated in a
competitive unregulated environment and targeted
the most profitable areas. In LDCS2 services were
not only private, commercial, and unregulated but,
in most cases, were provided by foreign telephone
companies. Many of the patterns that characterized
the early industry were progressively transformed in
the first decades of the twentieth century.”

Petrazzini (1995) and Urey (19950 explain that most, if not all of the reforms in
telecommunications started in industrialized countries. The drive to restructure the
industry emanated within the “large and dynamic firms dominating the industry” (Urey,

1995) as well as various “pressures from large corporate users and actors outside the state

(Hills, 1986; PetrazzinI, 1995).

a. The USA. Telecommunications in the United States has traditionally been in
the hands of the private sector. Many of the current worldwide reforms started in the
United States and can be traced to 1959 when the Federal Communications Commission

(FCC) for the first time permitted the softest type of competition by authorizing operation

 

2 Petrazzini defines LDCS as “less developed countries.”

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of private point-to-point microwave systems (Datapro, 1990). Interconnection with the
public network was not required but this competition allowed firms to provide alternative
services even though it was no match for AT&T’S monopoly. From the late 19505 to the
mid-19705, further FCC investigations and rulings changed the face of the
telecommunications industry. Key decisions include: a) the Carterphone Decision in
1968, which allowed for competition in the terminal equipment market; b) the
Specialized Communications Carrier Decision in 1971, which allowed for private line
services to be offered by selected carriers; c) the Execunet Decision in 1977 issued the
US. Circuit Court, which permitted MCI to offer intercity switched services ; d) the
Computer 11 Decision in 1980, which ruled that other customer premises equipment
(CPE) could be installed without special tariffs being applied by AT&T; e) in the 19805,
AT&T was permitted through separate subsidiaries, to provide “enhanced services”
which involved linking the telecom network with computer-generated information
services; f) Bell Operating Companies (BOCS) were also required to interconnect with
any competitive interexchange carriers; g) the Competitive Carrier Decision subjected
companies which held market power to tariff and facilities authorization from the FCC;
h) the Justice Department’s Consent Decree of 1982 which ruled for the divestiture from
AT&T of the 22 BOCs effective January 1984.

In 1974 , the Department of Justice filed an antitrust case against AT&T, charging
it with abusing monopoly privileges. The suit was settled in January 1982, when
representatives of the United States government and AT&T signed what came to be
known as the “modified final judgment” (MFJ). AT&T had to spin-off seven regional

bell operating companies (RBOCS), which would operate in a protected monopolistic

market. A
restrictions
to enter nor
hand could
services. or
loops. on eq
the manufac
Labs. but at
domestic or
telephone se
Weflem Elec
In lhc
Private comp;
added netvvoyj

b- The

competitive re g1

Scan! Hills (1 986

market. AT&T would face competition in its long-distance service market, but the
restrictions established by the 1956 Consent Decree were lifted and AT&T was allowed
to enter noncommunications service and equipment markets. The RBOCS on the other
hand could not enter other competitive markets, such as long-distance toll, information
services, or terminal equipment. They had also the obligation to connect to the local
loops, on equal price and quality, any long-distance service company. The RBOCS lost
the manufacturing capabilities of Western Electric and the R&D provided by the Bell
Labs, but at the same time gained the freedom of purchasing their hardware from any
domestic or international provider. AT&T lost its RBOCS and the provision of basic
telephone services, but keep for itself the profitable intercity long-distance service,
Western Electric, and Bell Labs.

In the 19905, telecommunications and information services are provided by
private companies under competitive and monopoly conditions. Long-distance and value
added network services (VANS) are offered by various forms in an open market, while

local services are still monopoly under the RBOCS.

b. The United Kingdom." The UK. was the next country afier the US. to
introduce significant reforms in its telecommunications industry (Hills, 1986; Bemt and
Weiss, 1993; Petrazzini, 1995; Ashley, 1996). The UK. was the first European nation to
privatize its PTT, liberalize the supply of telecommunications equipment. and adopt a

competitive regulatory policy towards telecommunication network services. .

 

3 See Jill Hills (1986) for detailed history.

11

A:

in the 19
monopol}
British Tt
l98l vvitl
national It
initiated t
Telecomm
through a 1
BT vim gr
Smite obl
that would
avoid discn'
to cuSlOmer:
Para]
Services. gm
aparallel net
nor{Etluiredt
Petraz
Telecom A Ct (
Set. In 1982,
their Paved tl

stuffy

Ashley (1996) relates the transformation of telecommunications provision starting
in the 19805. She mentions the change from the original state-owned and -controlled
monopoly to a duopoly of privately-owned and -controlled service operators, namely,
British Telecommunications plc and Mercury Communications Ltd. Reform began in
1981 with the British Telecom Act which separated the British Post Office from the
national telecom company, British Telecom (BT). A second bill introduced in 1982
initiated the privatization of BT, which occurred two years later under the 1984
Telecommunications Act. The British government sold 50.2 per cent of BT’S shares
through a public stock offering, yielding about £4 billion. As a result of this legislation,
BT was granted a license to Operate and meet the following criteria: a) meet universal
service obligation; b) subject itself to price regulation; c) practice accounting methods
that would prevent cross-subsidization between monopoly and competitive services; d)
avoid discrimination among customers; e) publish tariffs; and i) provide interconnection
to customers and other network providers, notably Mercury.

Parallel to the privatization of BT, the UK. opened its market for long-distance
services, granting Mercury a license to compete with BT. Mercury’s license requires that
a parallel network linking the major cities of the country be built, but this company was
not required to provide universal service -- an obligation BT still has to fulfill.

Petrazzini (1995) notes the liberalization of the CPE market through the British
Telecom Act of 1981, thus effectively ending the monopoly on all but the first telephone
set. In 1982, the UK. introduced the Value-Added Network Service Licensing Act
which paved the way for liberalization of telecom services. The reform provided the

sufficient conditions for an explosion of value-added network services.

Be
cautious. t
competitio
pushed b;
Telecomm
played a L
included tl
1995).

Lllx'
document c
That docut
mlironmen
approach vii

the netWork:

C. la;
in its lClecor
telecommimic

Teleco
ltl‘cgra

Pl? Puh

Reed back to

it‘leCO .
mmUmCai

Bernt and Weiss (1993) point out the U.K.’5 approach to liberalization was
cautious, choosing to first opt for a duopoly rather than a full blown scheme of total
competition like the US. As in the American case, British telecom reform was largely
pushed by large corporate users (Petrazzini, 1995). Collectively known as the
Telecommunications Managers Association (TMA), this group of large telecom users
played a key role in British telecom reform. By the mid-19805, TMA’s membership
included the largest 400 corporations in Britain (Duch, 1991, as cited by Petrazzini,
1995)

U.K.’5 “fixed links duopoly” approach was reviewed in 1990 through an advisory
document called “Competition for Choice: Telecommunications Policy for the 19905.”
That document “called for discussion of broad-based changes to the regulatory
environment. It also called for the end of the duopoly policy and replacement of that
approach with extensive liberalization, which would introduce competition to all areas of

the network: local, long distance, and international.”

c. Japan. Japan is the third industrialized nation to introduce significant changes
in its telecommunications sector (M012, 1995). It has one of the most liberalized
telecommunication sectors in the world.

Telecommunications services were provided by the Nippon Telephone and
Telegraph Public Corporation (NTTPC) since 1952. The road to liberalization can be
traced back to the late 19705. Until this time, official policy dictated that providing

telecommunications infrastructure and services, especially in the domestic arena, was

13

 

best sen
thCP.
B
mfrastruc
nationvtic
was incor
year. thel
and these
basic sen'
Covers enh
the regular
0fthe telec
The
State appari
the UK. CE
{1986) Con
Seemed tha
progress in
firms: mil

best served by govemment-owned entities, hence, the rationale for the monopoly by
NTTCP.

By 1979, however, the basic policy aim of widening the telecommunications
infrastructure base was achieved when installation backlogs were eliminated and
nationwide direct dialing was installed for subscriber telephones. In 1985, the NTTPC
was incorporated , giving birth to Nippon Telephone and Telegraph (NTT). That same
year, the NTT Corporate Law and the Telecommunications Business Law were instituted
and these established two types of service providers (Petrazzini, 1995). Type I comprises
basic service providers and Type 11, divided in two categories -- general and special --
covers enhanced service companies. The Telecommunications Business Law established
the regulatory framework required to introduce widespread competition in most segments
of the telecom market.

The initial pressures to end the monopoly system in Japan came from outside the
state apparatus ( Petrazzini, 1995; Naoe, 1994; and Moiz, 1995). But unlike the US. and
the UK. cases, the forces that pushed for change came from outside the country. Hills
(1986) contends that “American pressure began in the late 19705, at a time when it
seemed that the American economy was sliding into recession and when the Japanese
progress in microelectronics begun to threaten the U.S.’ world technological lead.” US.
firms, with the strong support of the American government, pressed Japanese

administrations to liberalize and later privatize their domestic market.

14

Sé‘t
intensified

not all 0

positions i
te indus
centralizati
three count
rethink th
technolOgy
Change in
econoij 2
Were prim
1995').
Tin
Mom of 1h
While the

competing

2.2.3. Reason (3) For Limited Experience With Competition In The
Telecommunications Sector

Sectoral reforms, which began in the early 19805 in industrialized countries, have
intensified and become widespread in the 19905. As seen in the previous section, most, if
not all of the reforms in telecommunications started in industrialized countries,
specifically the US, the UK, and Japan, notably when their industries were in different
positions in the world market and with different traditions and ideologies towards
state/industry relations, and with different political systems which differ in their
centralization and the strength of their respective bureaucracies (Hills, 1986). These
three countries are generally acknowledged to have paved the way for other countries to
re-think their telecommunications sector. While pressures for reform were sector-led,
technology-induced, and industry-executed in developed economies, pressures for
change in less developed nations were “exogenous to the sector, deeply rooted in the
economic and fiscal crises, and governments -- more specifically the executive branch --
were primarily responsible for pushing reform onto the political agenda” (Petrazzini,
1995)

Time is a factor in the limited experience in telecommunications competition.
Most of the key reforms in the US, UK, and Japan were initiated in the early 19805,
while most LDCS attempted reforms (privatization, liberalization, deregulation,
competition) in the mid-19805 through the early 19905. By 1993, at least 15 countries
have made considerable changes in telecommunications (Wellenius and Stern, 1994 p.
18). The strategies differed from country to country, and from region to region.
Countries that have completed privatizing their state telecommunications enterprises

include Chile (1987), Argentina (1990), Mexico (1990), and Venezuela (1991). Other

15

Laun .Arn
liberalizatit
consonniza
hbendizatu
India (1985
developmet
reorganizati
Thi(l990).
hmknmnut
instituting 1
enabhshing
Malaysian g
ludian g0“
Colllpcftition

L'rev

Latin American countries are currently at various stages of privatization and
liberalization. Wellenius and Stern (1994) enumerate reforms in Asia including
corporatization (1987) then privatization (1990) in Malaysia; corporatization and
liberalization of nonbasic services in Indonesia (1990); decentralization of operations in
India (1985, partial) and China (1988, extensive); government initiatives to accelerate
development outside the main urban centers in the Philippines (from the late 19805), and
reorganization from telecommunications departments to state enterprises in Sri Lanka and
Fiji (1990). The pace has picked up with Pakistan preparing for privatization; Thailand
implementing major build-transfer-operate (BTO) ventures; the Philippine government
instituting policies to develop competition (international services, 1993); Indonesia
establishing a new, partially state-owned competing international operator (1993); the
Malaysian government issuing several new international gateway licenses (1993); the
Indian government liberalizing basic service (1995); and China moving toward
competition and possible private investment.

Urey (1995) notes “[m]ost governments of developing countries have restructured
in some way their national telecommunications industries; these nationally based
industries now take a wide variety of public/private and national/foreign ownership and
operating forms. Some govermnents liberalized only telecommunications; others did so
as part of a broader national liberalization. Countries like Argentina, Mexico, Malaysia,
and Thailand initiated broad state reform between 1987 and 1989 that made
telecommunications a crucial, if not the key sector in the process.”

Morgan and Sayer (1988, as cited in Urey 1995) identify pressure since 1980

from the United States, Britain, multinational users of telecommunications services, the

16

World Bar
the balance
during the
rising inves
Petr
competitior
Clqualiry at
They maint
recent event
caution that
and teleden,
seems indie:
examples m
“m Confid.
teledensitk
Trebi
lHSight into 1

made fOr Inc

World Bank, and others as factors which “forced the pace of liberalization,” and shifted
the balance toward private control. Additionally, foreign direct investment grew rapidly
during the 19805, and the relative preference for countries in the Americas declined with
rising investment in Asia.

Petrazzini and Clark (1996) studied the impact of market opening to both
competition and private investment in a) teledensity growth; b) evolution of prices;
c) quality and diversity of services; (1) operators’ performance; and e) employment trends.
They maintain that “competition in wireline basic local and long distance is a relatively
recent event for LDCs and has been introduced by a limited number of countries”. They
caution that although statistical data yielded a positive correlation between competition
and teledensity for domestic wireline services competition, the limited data available
seems indicative that these statistics might not be reliable and could represent isolated
examples rather than a general trend. Through their study, however, they claim 99 per
cent confidence that competition is correlated with increased growth in cellular
teledensity.

Trebing (1995) notes that the US. experience in deregulation allows significant
insight into the privatization process. He says: “Individual adjustments will have to be
made for industrialized and developing nations, but the US. pattern could serve as a

starting point for analyzing markets and public policy options.”

17

ll988. as

Telecomm‘

2.2.5.

11989) Obsep

is i y I
f '. . allQIiOn
. d)‘

2. 2.4 Stages Promoted By The European Economic Community (EEC)
The series of steps towards liberalization" proposed by Ungerer and Costello
(1988, as cited in Straubhaar, 1996) as part of the EEC’s 1992 Green Paper on
Telecommunications are:
0 Separation of regulation and operation.
a More interconnection of user equipment to lines.
o Liberalized use of leased lines.
0 Permission for private value-added networks to compete.
o Privatization or competitive offering of specialized services, such as cellular
and mobile.
0 PTT offering more competitive services, while not changing ownership patters
or allowing major competition (France is a prototype of this approach).
0 Permission for competition in long-distance service.

0 Competition in basic local or regional service.

2. 2. 5. How Competition Was Exported Elsewhere, Reaching the Philippines
The turn of events in Philippine telecommunications supports Nulty’s
(1989) observation that virtually all telecommunications reforms being considered by

governments around the world involve some reduction in the monopoly control of the

 

’ Straubhaar refers to liberalization as the opening up of selected sectors of the telecommunications area to
competition by private fums, which varies widely, but it more common, and in some ways, more important,
than privatization of the principal telecommunication companies themselves. It is also defined as the
lowering of entry barriers or opening the domestic telecommunications market to competition (Petrazzini,
1995).

telecommu
operations

reforms all
mponsibili
likely to Cl
innovative 5
investment 1
in the econt
achieve a

suggested pr
process. and

Melody (198

necessarily m
Philippines p0

Several
have Undergon
Lheralizmion ;
”WHOM he

3the

lam '
9116a and ye

telecommunications entity and some increase in the influence of market forces over
operations and investment in the sector. Wellenius (1989) further explains that such
reforms allow existing monopolistic telecommunications enterprises to be relieved of
responsibilities that others can discharge. This relief introduces competitive pressures
likely to enhance sector efficiency and responsiveness, provide greater variety and
innovative service, promote higher usage and productivity gains ; mobilize additional
investment resources; reduce prices; and generate new business opportunities elsewhere
in the economy (Wellenius, 1989; Baer, 1995; Bernt, et.al, 1993; Hills, 1986). To
achieve a dynamic competitive market in telecommunications, researchers have
suggested preconditions such as non-discriminatory interconnection, an open regulatory
process, and a clear definition of regulatory authority (Garfmkel, 1994; Baer, 1995).
Melody (1986, as cited in Melody, 1995) comments that certain aspects of competition
can serve as an effective public policy tool -- a complement to other policies in achieving
economic and social objectives but not a substitute for them.

On the other hand, Esfahani (1994) puts forth the idea that more firms do not
necessarily mean increased competition. He mentions this in the context of the
Philippines political-economy, wherein the possibility of cartelization is not ruled out.

Several countries that started telecommunications reforms in the 19805 and 19905
have undergone and/or are currently undergoing varying experiences in privatization,
liberalization and deregulation. In most cases, results of the reforms (through
competition) have driven the prices down, and have challenged companies to provide
efficient services and products. Petrazzini (1995) states that Mexico, Malaysia, Chile,

Jamaica and Venezuela are among those that achieved their initial privatization goals.

19

Mexico ar
telecommun
govemment
Thailand is l
privatize its
Communicat
possible con
competition
telephony, w.
lntemational.
lhat the natio
three or four ‘
BUT this comp
ID lap
phone market.
long distance
domestic 1mg

Mexico and Malaysia were able to create a more competitive domestic
telecommunications market, with most services either open to competition or the
government retains the right to open them when it considers appropriate to do 50.
Thailand is an interesting case because up to now, the government has not been able to
privatize its national carriers Telecommunications Organization of Thailand and
Communications Authority of Thailand (TOT and CAT, respectively) due to politics and
possible conflicts of interest (V atikiotis, 1995). However, it was able to introduce
competition in other segments of the telecommunications market such as cellular
telephony, with Six hardware and service providers competing for users (Advertising Age
International, 1996). Chile today has eight long distance carriers, although analysts say
that the nation’s 13 million people can not support that level of competition and expect
three or four to fade away eventually (Advertising Age International, January 15, 1996).
But this competition, however, has cut prices in half and doubled long distance traffic.

In Japan, the Nippon Telephone and Telegraph (NTT) monopolizes the local
phone market, while a group of companies known as new common carriers compete in
long distance service. Japan was the first Asian nation to allow competition in its
domestic long distance market (Friedland and Westlake, 1993), but after eight years they
have carved out only a small share of the market (Moffett, 1996). NTT, being a long
distance carrier itself, also decides the rates the new carriers pay to connect to its local
service.

Afier 45 years of monopoly, India has opened up telecommunications to private
sector participation (Mody, 1995). Unlike other countries, India has allowed competition

in the least profitable market segment, i.e., basic service, before Opening up long

20

distance. In
its long-term
in a duopolis

the more prol

23 Regul
2.3.1.

Regul:

Smite. safet}
can be narrovt
(Smith and St
made by gmfl
either involve :
detailed inten.c
Wills, Or by (1:
what genie“ 1
CODdIIIOnS Of SC:
An OEC
intervention in t
mommer Welfar
topltrsue their in
intervention are

l

tie-4'.-
neuronal]y lusm

distance. In this case, Mody suggests that India “has challenged private capital to prove
its long-term commitment to national needs by first investing heavily in a fiber—optic loop
in a duopolistic structure before it will be allowed to reap the benefits of investment in

the more profitable long distance services market.”

2.3 Regulation

2.3.]. Definition

Regulation, as it has developed in the United States, is concerned with rates,
service, safety, and to a lesser extent, the efficiency of management. (Phillips, 1969). It
can be narrowly defined as control over entry, output, and pricing of common carriers
(Smith and Staple, 1994). Hills (1986) defines regulation as “the substitution of rules
made by government for the competition of the market”. She states that regulation can
either involve setting the framework in which private enterprises operate, or it can mean
detailed intervention in their affairs through the setting of their rates of return, or their
tariffs, or by decisions on which particular enterprises can enter a particular market, or
what services may be offered. A regulatory body can oversee pricing, terms and
conditions of service, quality of service, and industry structure (Bernt and Weiss, 1993).

‘ An OECD report (1992) explains that a major justification for government
intervention in the economy, through either legislation or expenditure, is the view that
consumer welfare will not be maximized in circumstances by leaving private sector firms
to pursue their individual profit-maximization strategies and that the costs of government
intervention are likely to be offset by the benefits. Furthermore, regulation has been

traditionally justified on a variety of non-economic groups related to the public interest,

21

such as "the
ensure a nati«
new industry

ofpeople's 5;

2.3.2.

The 1
operating und
the review of
Utility Commi
FCC is grante.
WC) and to l
PL'CS rCgulate
Cable TV’ rail
telecommunica.
entailed a Sigm’
million: man
telecommumcat
The Unit

1984 ‘0 Serve as
new Strategic;
I” JaPan,

a‘I‘hon‘
IV 10
‘ gran

such as “the need to maintain a particular industry for reasons of national security or
ensure a nationwide network of services or to protect and encourage the development of a
new industry, or, in the case of banking and insurance, to maintain prudential supervision

of people’s savings” (OECD, 1992).

2.3.2. History Of Telecommunications Regulation In Selected Countries

The United States has a tradition of regulation by an independent agency,
operating under the general rubric provided by legislation passed by Congress and under
the review of the courts (Hills, 1986). Formal regulation is divided between state Public
Utility Commissions (PUCs) and the Federal Communications Commission (FCC). The
FCC is granted the authority to issue a Certificate of Public Convenience and Necessity
(CPC) and to require its approval in the issuance of radio licenses. On the other hand,
PUCs regulate the electric, gas, water, sewer, telephone, radio common carrier, telegraph,
cable TV, railroad, and transportation industries in their respective states. For the
telecommunication market structure, the transition from monopoly to competition has
entailed a significant expenditure of public resources and it continues to require careful
regulatory management more than a decade after the first providers of switched
telecommunications services entered the market in competition with AT&T.

The United Kingdom established the Office of Telecommunications (OFTEL) in
1984 to serve as the independent regulatory body that supervises the implementation of
the new strategies and licenses in the United Kingdom.

In Japan, the Ministry of Posts and Telecommunications (MPT) has the sole

authority to grant franchises or approval of telecommunications services. Political

22

interferenc
Telecomm
privatizatit
made possi
and had str
At t
to open In
specific reg
and service
the residual
company
Smit
h-linjsuy Of
regulator am
contrm IO
int‘olvemem
wherein the f
are countries
are subtly at a
pmiatell’punl
maintain that

interference is not prevalent; government officials are not allowed to interfere with MPT.
Telecommunications was monopolized by NTT and KDD from 1952 to 1984. With the
privatization of NTT in 1985, a smooth transition from monopoly to competition was
made possible because the government controlled the dominant carriers (NTT and KDD)
and had strictly enforced the Telecommunication Business Law.

At the one end of the spectrum is New Zealand, which in 1987 adopted legislation
to open most telecommunications services to competition without creating a sector-
specific regulator (Smith and Staple, 1994). Issues such as price control, interconnection,
and service discrimination issues were left primarily to the marketplace, the courts, and
the residual power of the government’s “golden share” in the newly privatized telephone
company.

Smith and Staple (1994) further indicate that there are countries where the
Ministry of Posts and Telecommunications acts as both the dominant operator and
regulator and policy maker. They cite China and Vietnam, among others, as examples. In
contrast to both light-handed regulation (New Zealand) and extensive government
involvement (China and Vietnam), there is a middle ground not easily categorized
wherein the function and strength of the regulator remains to be clearly defined. There
are countries like Singapore, Sri Lanka, Australia, and the Philippines whose regulators
are subtly at arms length from the ministry; the regulatory body oversees corporatized or
privately-owned national telecommunications companies. However, the authors
maintain that the autonomy, goals, and effectiveness of these regulators vary

considerably.

23

2.3..
T1161
social regul
designed for
(19953) ref
access and t
quality. or
independent
related issues
Histo:
potential abu
PTOmote the e
dlStribution o:
in the
fast0T5 that h.-
Slales that the
developmem 0
Si'SIEm. He P
betome an 1m}
Chamnel‘lSIl'Cs
Independence;

afflblguit). of Fee

2. 3. 3. Regulation and its role

There are sector-specific forms of governance, namely economic regulation,
social regulation (Hills, 1986; Bauer,l995a) as well as specific public policy programs
designed for a sector as important for the performance of a sector (Bauer 1995a). Bauer
(1995a) refers to economic regulation as all sector-specific measures that control market
access and exit: economic parameters of service providers such as their prices, service
quality, or investment policy. On the other hand, social regulation, although not
independent from economic regulation, addresses issues of equity, work safety, and
related issues.

Historically, regulation has aimed to protect captive utility customers from the
potential abuse of utility market power; protect utilities from detrimental competition;
promote the expansion and modernization of utility services; and achieve a just and fair
distribution of the benefits of regulated utility systems (Bauer, 1995b).

In the Philippines, however, the weak regulatory mechanism is among the many
factors that have impeded grth in the telecommunications sector. Esfahani (1994)
states that the Philippine elite have helped shape a political structure that has stunted the
development of efficient institutions for market governance as reflected in the regulatory
system. He posits that the historical dominance of a small and competitive elite has
become an impediment to credible regulatory policy in the Philippines. Some of the
characteristics of the regulatory structure that Esfahani mentions are 1) lack of
independence; 2) congressional control of the budget; 3) inadequate resources; 4)

ambiguity of regulations; and 5) bias toward restricted entry.

24

Reg
countries"(
authorities
primary atte

Ther
countries. I:
country's po
Staple. 1994
COuntry-"s go:
are Specific t
from one ma
the role and
Benn et.al. 1

Mody
51.116 bu! Ch0(
regulation‘ i.e
depend 011 trai

Hills .
reinflation an
Slate/industry

bureaucmci CS

Regulation has been regarded as the “weakest part of sector reform in poorer
countries” (Smith and Staple, 1994) and its role as well as the restructuring of regulatory
authorities in various privatization processes in these countries has not been given
primary attention (Straubhaar, 1995).

There is the question of what is the appropriate form of regulation in developing
countries. In this debate it is suggested that regulation must be understood to include a
country’s political and judicial competence as well as its commercial customs (Smith and
Staple, 1994); that the form of regulation adopted by a country is in part dependent on a
country’s goals (Straubhaar, 1995); and that most reasons for making regulatory changes
are specific to each national context (Ghertrnan and Quelin, 1995) . With the transition
from one market structure to another (ex. from monopoly or oligopoly to competition),
the role and institutions of regulation would be subject to “stress” (Garfinkel, 1994,
Bernt, et.al. 1993), as there are expectations that these have to change.

Mody and Tsui (1995) say that “the challenge is not more or less regulation by the
state but choosing the right set of economic development and social equity policies and
regulation, i.e. “getting the policies right”. [W]hether or not this will happen does not
depend on training in policy and regulatory economics alone.”

Hills (1986) explains that “the actual form that the institutional setting of
regulation and re-regulation takes is likely to reflect the historical traditions of
state/industry relations in the country concerned and the power of the relevant

bureaucracies.”

25

2.4 P9

2.4

Bat
contributio
performam
dimensions

Wit
environmer
failures of
economical
shoudl be e
to emphasiz

ho“ Well in;

Solute; Xavj

Opera
15 no.

2.4 Performance

2.4.] Definition

Bauer (1995) states that “performance, in a generic sense, measures the
contribution of a sector to social welfare.” He also points out that measuring
performance involves using a bundle of criteria that capture efficiency and equity
dimensions.

With the technological and regulatory changes in the telecommunications
environment, policymakers need some yardstick by which to evaluate the success or
failures of their policies. Xavier (1991) defines performance as “inputs acquired
economically and converted into outputs efficiently (i.e., at least costs) and these outputs
shoudl be effective in achieving specified effects or objectives.” He provides a diagram
to emphasize the nature of performance assessment in terms of cost-effectiveness, that is,
how well inputs are being used to achieve desired effects (objectives).

Figure l.

Xavier’s Performance Assessment in Economic Terms.

 

 

 

Inputs ~——H Outputs ,_~ Effects

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency Effectiveness

 

 

 

 

 

 

 

Cost Effectiveness

 

 

 

Source: Xavier, Patrick. 1991. “Performance Indicators For Public Telecommunications
Operators. Will They Improve Performance?” Telecommunications Policy. vol.
15 no.2. pp. 137-150. U.K.: Butterworth-Heinemann Limited.

26

An OECD
policymak
comparisoi
performanc
evaluation
public and ‘
Palt
OECD cor
telecommur
ministries. L
on Operating
invesrmem Z
ma“figment
indicators an

measure its 0

An OECD report on performance indicators for public operators (1990) suggests that
policymakers must try to define a set of indicators narrowly defined as tariff
comparisons, tariff structures, measures of quality of service, and other indicators of
performance such as efficiency and productivity; and more broadly defined as the
evaluation of government policies and business strategies in the gray zone between the
public and the private sector.

Paltridge (1993) notes that one result of telecommunications restructuring in
OECD countries is increased autonomy given to formerly state-owned public
telecommunication operators (PTOs) on various decisions which used to be taken within
ministries. He mentions that in a more commercial environment, decisions and activities
on operating practices, cost controls, facitlity and service planning, and sometimes
investment and financing require the use of performance indicators to ensure efficient
management and to keep regulators and customers fully informed. Performance
indicators are also used to establish “best practice” benchmarks against which a PTO can
measure its own performance and compare it to other providers.

Furthermore, Paltridge talks about quality-of- service indicators which “aim to
ensure that all users benefit from improvements in efficiency and reductions in cost, and
to protect users without adequate choice in the selection of supplier.”

The review of performance indicators needs to be set in the context of regulatory
as well as technological changes which have transformed telecommunications in the past
two decades. The OECD report also notes that no single performance indicator can

satisfy the three main interest groups, namely, regulators, competitors, and users, and it is

27

for this re;
indicators
consistent.
Xav
range of a
meaning 0:
individually
comparison
accounting 1
regulatory e
policies (11k.
PCI'IOI'mMCe
The
{Clifcommum
lisp local tel
data C0mmuI
[Elephone
teleComrmlllit
militichanne]
M95. and 199
ACCO”

or; _
C' .

for this reason that a “basket approach” is suggested. The ideal aim would be to select
indicators which can be used with a minimum of bias in a methodology which is
consistent, transparent, and objective.

Xavier (1996) comments that performance monitoring is a difficult task, since a
range of assumptions are involved and simplifications are necessary regarding the
meaning of the indicators and international compatibility. He cautions that if taken
individually, many of the indicators have many shortcomings. Conclusions based on
comparisons of absolute numbers or ratios could be insufficient, because of different
accounting or technical definitions and different demographic, economic, geographic, and
regulatory environments. Other factors that could affect performance are price control
policies (like price cap regulation) that influence price levels and structures and financial
performance; the country or company’s starting point; among others.

The International Telecommunication Union (ITU) uses a set of
telecommunication performance indicators which include: main telephone lines, waiting
list, local telephone network, tele-accessibility, urban main lines, text communications,
data communications, mobile subscribers, mobile cellular, telephone tariffs, international
telephone traffic, telecommunication staff, telecommunications revenue,
telecommunications investment, equipment, trade, infromation technology, television,
multichannel management (ITU World Telecommunication Development Reports, 1994,
1995, and 1996).

According to Xavier (1996), employing a range of indicators helps describe an
overall picture of relative performance. He says “such an assessment can be

constructive, Since, by helping to raise awareness of relative performance, it can exert the

28

pressures of
most potent
OECD'S tar
performance
baskets. C l
development
becomes imp

TheC

Both the 0E C
assessmean in e

Indicating ale US
l

pressures of ‘benchmark competition’ and focus remedial attention on the areas with the
most potential for performance improvement. Paltridge (1993) writes that knowledge of
OECD’S tariff-comparison baskets enable regulators in OECD countries to compare the
performance of a national PTO pricing and assist in the development of their own tariff-
baskets. Considering that the telecommunication network plays a role in economic
development and high investment is needed, careful weighing of available evidence
becomes important in policy-making (Paltridge, 1996).

The OECD report on performance indicators (1990) concludes with the following:

“There is no single indicator of performance but a
variety of different measures which provide an
insight into the operations of the PTO from
economic, social, managerial, and consumer
perspectives. The standards by which the PTO
should be judged vary according to the objectives
which are set by management or the regulators.
These may relate to price, quality, user choice or
efficiency. International comparisons reveal
interesting and growing disparities between PTO
perofrmance, but there is surprisingly little
correspondence between indicators. A good
performance in one service does not allow one to
predict a favourable performance in other services,
and no PTO can claim to be perfect in all respects.”

Both the OECD report (1990) and Xavier (1996) caution against over-simplistic

assessments in evaluating a PTO, as well as the importance of the context in which the

indicators are used.

29

TEI

C ha]
frame of ref
evolution 0;

P0110}? and re

CHAPTER THREE
TELECOMMUNICATIONS IN THE PHILIPPINES PRIOR TO THE
INTRODUCTION OF REFORMS IN 1993
Chapter Three first gives a historical and socio-cultural background to provide a
frame of reference in understanding the Philippine context. This chapter then traces the
evolution of telecommunications prior to the 1993 reforms, including infrastructure,

policy and regulatory frameworks, and factors that influence the sector.

3.1 The Philippine Context"

The Philippines, although geographically located in Southeast Asia, is regarded in
certain ways as outside or different from the Asian mainstream. It is the only
predominantly Roman Catholic country in the region. Its culture is a unique mix of
Asian, Spanish, Latin American, and North American characteristics, and has a political
and economic system patterned after the United States. After World War II, the
Philippines stood as a showcase of American-style development, adopting private
enterprise as the means to economic prosperity. This was in contrast to most Asian
governments who took the state capitalist or socialist economy approaches to
development. The Philippines has maintained a free-market economy in which foreign

capital, especially American, and more recently Japanese, has been able to freely operate.

 

5 Wolf, Alexandrina Benedicto and Gerald Sussman. 1995. “Privatization of Telecommunciations:
Lessons from the Philippines.” in: Mody, Bella et.al. (eds) Telecommunications Politics. Ownership
and Control of the Information Highway in Developing Countries. New Jersey: LEA.

3O

t'r
indusrriali.
cent of it:
Sussman 1
economic 1
Singapore,
other foreig
neighbors(

But
19805 left t
7.0001513nc
tTansition to
conventiona
elites) and c
Weak. He
Elsewhere in
American co

and the pen

I“‘entien, Cen

control.

Up to the 19605, the Philippines experienced a relative golden age of
industrialization, with buoyant Optimism, continually high growth rates, and nearly 20 per
cent of its net national product in the manufacturing sector (Bello 1989 as cited in
Sussman 1991). At that time, the Philippines was a considerably more impressive
economic model than the current Asian economic powerhouses -- South Korea, Taiwan,
Singapore, and Hong Kong -- and could easily avail itself of transnational corporate and
other foreign transfers -- economic, political and cultural -- than could any of its regional
neighbors (Sussman, 1991).

But deteriorating social and economic conditions from the late 19605 through the
19805 left the country impoverished, unstable, and deeply in debt. Made up of more than
7,000 islands, close to 70 million people, the Philippines in many ways has had a difficult
transition to political and economic self-rule. Riedinger (1994) states that judged against
conventional standards of autonomy (independence from dominant socio-economic
elites) and capacity (the ability to predictably implement policy), the Philippine state is
weak. He further explains state-building in the Philippines, as in Black Afiica and
elsewhere in the Third World, as more of a product of external forces -- Spanish and
American colonial rule in the Philippine case -- than of internal factors. Colonial policies
and the penetration of the world market economy in the late nineteenth and early
twentieth centuries institutionalized dramatic inequalities in wealth and fragmented social

control.

31

political

energy 1

economi

last dec
ll‘SlallCCl
the Spar

interisla

later ext
mbmari
PIOVII'icg
Telegrat
Altman

B)? 1881

The government of President Fidel V. Ramos (1992-1998) pledged to restore
political stability, streamline the bureaucracy, protect the environment, alleviate chronic
energy shortages, and promote export-oriented growth while minimizing the state’s
economic role.

3.2 The Evolution of Telecommunications Services and Facilities in the

Philippines

3.2.1 Spanish Era (until 1898)

In the Philippines, foreign and domestic communications started evolving in the
last decades of Spanish rule. The first communication link in the Philippines was
installed between Manila and Corregidor island in 1867. Steamship lines subsidized by
the Spanish government provided mail service between Manila and Barcelona. Similarly,
interisland ships carried domestic mail.

Telegraph lines were established in 1872 linking several provinces in Luzon and
later extended to provinces in the Visayan region. Eight years later in 1880, the first
submarine telegraph cable was installed from Hong Kong to Bolinao, Pangasinan, a
province north of Manila. This was Operated by Eastern Extension Australia and China
Telegraph Company Limited. The same company was granted concession to lay three
submarine cables connecting Manila with major trading centers in the Visayan region.
By 1887, 65 government telegraph offices were already in operation, i.e., 49 in Luzon,
nine in Panay, four in Negros, and three in Cebu. About 2,818 kilometers of telegraph
lines served to interconnect these telegraph stations.

At the turn of the century, war broke out between the US. and Spain. This ended

Spanish colonial rule and begun the American era/control in the Philippines.

32

governrr
America
common
1941. th
telegrapl
francisc:

V
Telegrap
011161 an
Elephon.
Telephor

C
new cm-
formerly-

AUEUSI 0

3.2.2 U.S. Era (until 1946)

During the American era in the 18905, the Philippine Commission set up
government telecommunication services using the telegraph network established by the
Americans as center of operations on September 15, 1902 (Carrera 1994) . Facilities for
communication grew considerably during this period. Steadily through the years until
1941, the government telecommunication network covered 108 radio stations and 459
telegraph offices in the different parts of the country. In 1903, the Philippines-San
Francisco submarine telegraph cable became operational.

With the founding of the Manila-based Philippine Islands Telephone and
Telegraph Company (PTTC) in 1905, telephone service was introduced in the country.
Other areas where telegraph lines were already installed made it feasible for establishing
telephone companies like Cebu Telephone and Telegraph in 1914, as well as Panay
Telephone and Telegraph Company, and the Negros Telephone Company.

On November 28, 1928, the Philippine legiSlature granted a 50-year franchise to a
new corporation called the Philippine Long Distance Telephone Company (PLDT),
formerly PTTC. In July 1930, the PTTC transferred its properties to PLDT and in
August of the same year, the three Southern telephone companies did likewise in favor of
the same company.

PLDT was run largely by American management whose majority stockholder
was British Columbia (Canada) Telephone. During the 19305, PLDT acquired the assets
and franchises of other telephone companies and initiated long distance services to
various parts of the country. Overseas radio-telephone services between the Philippines

and the US. and other countries was established. By 1940, almost 29,000 telephones had

33

been installed by

ll.

3.2.3 P0

In 1947
exchanges were
Telephone Syster
implemented as ‘
Post's Electrical
agency for telecc
“‘0 Years. servici
number of PLDT
dufing the 19505
‘0 (the toll neu
exChanges to aun
(GTE) bought 01
1964- the first hi2

Phlhi’plflC-GUam

been installed by PLDT, of which around 90 per cent were destroyed during World War

11.

3.2.3 Post World War II 1946-1965

In 1947 shortly after the war, operations and maintenance of the telephone
exchanges were turned over by the US. military to the newly created Government
Telephone System of the Bureau of Telecommunications (Butel). An Executive Order
implemented as part of the 1947 government reorganization abolished the Bureau of
Post’s Electrical Commission Service, which was among other things the implementing
agency for telecommunications, and the telephone system was returned to PLDT. In
two years, service was restored and exchanges were reopened in the south. By 1953, the
number of PLDT telephone lines in service exceeded the pre-war levels. It was also
during the 19505 when independent telephone companies outside Manila were connected
to (the toll network of) PLDT. PLDT also started converting provincial manual
exchanges to automatic or dialing systems. In 1956, General Telephone and Electronics
(GTE) bought out British Columbia Telephone Company, PLDT’s majority owner. In
1964, the first high quality voice circuit system was introduced with the installation of the

Philippine-Guam Submarine Cable System (TPC-l), owned and operated by PLDT.

3.2.4 The Marcos Years: 1965-1986

Ferdinand E. Marcos became the sixth President of the Republic of the

Philippines in 1965 and was in power until his ouster in 1986. It was during his regime

34

when most of ‘
made.

During
and communi
continued thror

Telecor
communicatior
country. In
INTEISAT vc
Expanding V(
1995). In
C0mmunicatic
€0V€ulment
Telecommunit
Opemed a po
connecting 10
A Static,“ 10 C
l’l‘iilcomSat \v;
Clark Air F0“
Vietnam War
additionay C01
S.l-stern for C0]

198711] Wolf

when most of the expansion of the then existing basic telecommunications facilities was
made.

During this period, new telecommunications services and facilities such as telex
and communication satellites were introduced. The expansion and development
continued through 1970 in the telex and telephone networks.

Telecommunications development during these years, particularly satellite
communications, got a major boost from the existing US. military operations in the
country. In 1966, the Defense Communication Agency arranged for intermediary
INTELSAT voice channels to be set up in the Philippines to augment the US. military’s
expanding voice communication infrastructure war in Vietnam (Wolf and Sussman,
1995). In 1967, then President Marcos complied by setting up the Philippine
Communications Satellite Corporation (Philcomsat), a joint venture between the
government and private investors represented by the Philippine Overseas
Telecommunications Corporation (POTC) (Aquino, 1994). Philcomsat installed and
operated a portable satellite station which was later replaced by a Standard A Station
connecting to a Pacific Ocean satellite. Later on in 1970, Philcomsat then put up another
A Station to complement the first one, and connected this to an Indian Ocean satellite.
Philcomsat was said to be nominally run by the government but reportedly managed by
Clark Air Force Base officials and GTE executives (Wolf and Sussman, 1995). When the
Vietnam war ended, the Marcos government took control of Philcomsat and other
additional communication facilities in order to set up an integrated telecommunications
system for commercial exploitation and for presidential command and control (Sussman,

1987 in Wolf and Sussman, 1995). The charter of Philcomsat as a carriers’ carrier, not

35

regulated by
stations and
1994).
Aquir
lines were i
mmmhnr
and developr
overa four-y
converted to
Mindanm 1}
In 1‘.
domestic UC

(E1131) me

tapacity of!
Cable,

The
of its holdin
LamEI‘Lang
Mod begit
O“tied Arne

domEsric In

The

I“ “5 goat -

regulated by any government agency, covers its operations and maintenance of earth
stations and leasing of satellite circuits only to international common carriers (Aquino,
1994)

Aquino (1994) further notes that by 1968, more than 180,000 PLDT telephone
lines were in service, and PLDT had become a national and international service
monopoly similar to AT&T in the US. That year, PLDT initiated a service improvement
and development program budgeted at 700 million pesos (US. $180 million at that time)
over a four-year period. All remaining manual provincial exchanges were subsequently
converted to dial operation. Also, PLDT’s microwave toll network was extended to
Mindanao, the biggest island in southern Philippines.

In 1969, Ocean Wireless Network (OWNI) installed and operated the first
domestic tropospheric scatter system. Eastern Telecommunications Philippines Inc.
(ETPI), the successor of Eastern Extension supervised this undertaking. The system’s
capacity of 96 circuits operating to Taiwan was replaced a decade later by a submarine
cable.

The Filipinization of telecommunications continued when GTE began divestment
of its holdings in PLDT to Filipino investors because of the slated 1974 expiration of the
Laurel-Langley Agreement, which had granted the US. trade concessions for an l8-year
period beginning in 1956. The divestiture of GTE from PLDT in 1967, the last wholly
owned American utility enterprise, resulted from the conjuncture of nationalist pressures,
domestic business demands, and economic pragmatism. (Wolf and Sussman, 1995).

The 19708 saw further expansion of the Philippine telecommunications system.

In its goal to broaden the ownership base and secure additional capital fimding sources,

36

PLDT impl
applicants 5:
to invest 10
stock is free
awarded Sit
lines. It 3.151
program (R'
decade. PLI
systems wet

In 11
a Capacity (
firth statior
the Palapa s

The
to a fragme
duplication.
fElCilitieg in.
FranCl’tiSes
eStablismnE
lowed man
not imerco
impl‘immti

maintain,
I

PLDT implemented a subscriber investment plan (SIP) in 1973. The SIP required
applicants seeking to acquire new telephone lines, transfer existing lines, or upgrade lines
to invest 10 per cent cumulative, convertible preferred stock in PLDT. Because PLDT
stock is freely traded, a subscriber can immediately sell the shares. In 1977, PLDT
awarded Siemens AG a contract to provide and install 60,000 electronically switched
lines. It also launched a ten—year PhPl 10 million rural telecommunications development
program (RTD) to assist government rural development initiatives. By the end of that
decade, PLDT had close to 500, 000 telephones in service. Additional submarine cable
systems were also installed during this time period.

In 1978, the Domestic Satellite Philippines Inc. (Domsat) started operations with
a capacity of 176 circuits nationwide. A privately—owned company, Domsat leased 11
earth stations and maintains an agreement with Indonesia’s PT Telkom, the operator of
the Palapa satellite system for its space segment needs.

The efforts up until the late 19703, to upgrade and enlarge specific capacities led
to a fragmented network for telecommunications services. Issues and problems such as
duplication, inadequacy of backbone routes, and concentrations of equipment and
facilities indicated the need for a long-range plan to integrate and deve10p the network.
Franchises could be easily obtained, and this liberal environment encouraged the
establishment of local telephone operations. The financial demands of the business later
forced many operators to fold up; while others who used incompatible equipment could
not interconnect with the PLDT backbone and remained isolated. As the sector’s
implementing agency, the Bureau of Telecommunications (Butel) is responsible for

maintaining backbone telecommunications networks to assist the private telecom sector.

37

However. it is
government off:
the exclusive p
Butcl (renamed
central exchang
Govemr
developed if tel.
both national at
single. homogei
development vv
thHZitionvvide:
0Iterators with
Security interest
To ensv
Minis“? of T
executive bran.

Under the San

However, it is also a public utility that operates telegraph and telephone systems in
government offices and in municipalities and cities throughout the country, although it is
the exclusive provider of telecom services to the government even in Metro Manila.
Butel (renamed Telecommunications Office or Telof in 1989) has its own network, with a
central exchange in its Metro Manila headquarters.

Government planners also realized that appropriate infrastructure had to be
developed if telecommunications is to help stimulate social and economic development at
both national and regional levels. As envisioned, the emerging system will consist of a
single, homogenous national network that will pave the way for orderly and progressive
development within the limits of existing resources. Alongside this goal is to improve
the nationwide regulatory system, which oversees compliance by both public and private
operators with government standards for efficient service and monitors related national
security interests.

To ensure that both strategic direction and regulatory needs are addressed, the
Ministry of Transportation and Communication (MOTC) was created within the
executive branch on July 23, 1979 by Executive Order 546 (APT Yearbook, 1994).
Under the same Order, the Telecommunications Control Bureau and the Board of
Communications were abolished and integrated into a single entity, the National
Telecommunications Commission, or NTC (APT Yearbook, 1994). A five-year (1978-
1982) national development plan containing a new focus on telecommunications and a
ten-year (1978-1987) telecommunications sectoral plan underwent major revisions
starting in 1980 in light of the second oil shock. Higher inflation rates and pressure on

international reserves altered the government’s public investment portfolio, which

38

included telecor
l983 MOTC vv
development p
delayed complt
part of a nation
merger of Re
telephone entit
member of the
the 535131“ Ec
cited by Sussm
The fir
“'33 issued in
“3 intended t
thepfriod 198
I“ the 5mm
envisioned the
As the
operation 0ft
national and i:
ParalleliSm’ h!
cultures of th.

“'ell‘pIaCed g]

included telecommunications, other infrastructure, and various industries. Nonetheless, in
1983 MOTC was able to obtain official approval for a long-term (1984-2000) telephone
development program. However, the protracted domestic political crisis that ensued
delayed completion of World Bank studies, a precondition for funding, until 1985. As
part of a national integration plan pushed by the World Bank, Marcos ordered in 1980 the
merger of Republic Telephone Company (Retelco), the country’s second largest
telephone entity, with PLDT, which would put Ramon Cojuangco, its president and
member of the Marcos inner circle, at the helm of a still larger communication network
(Far Eastern Economic Review, Dec. 12, 1980 p. 56; World Bank 1980 Office Memo 78,
cited by Sussman, p.129).

The first Philippine National Telecommunications Development Plan (NTDP)
was issued in 1982 (National Telecommunications Development Plan, revised 1993). It
was intended to guide the development of the country’s telecommunications sector over
the period 1982-1987. In this plan the Government was expected to invest substantially
in the sector, primarily through the National Telephone Program (NTP) which
envisioned the installation of some two million new telephone lines.

As the Government prepared these plans, the tradition of private ownership and
operation of telecommunications continued in the Philippines with PLDT as a virtual
national and international service monopoly similar to AT&T in the US. Beyond the
parallelism, however, lay a significant difference in the entrepreneurial and regulatory
cultures of the two countries. Bruce and Cunard (1995) state that in the Philippines,
private entrepreneurs are deeply entangled in a web of close-knit relationships among

well-placed groups with great economic and political influence which inevitably affect

39

both the
telecommu
or “cronie
telecommt
others. T
services:
leased line
Domsat in
ETPI in in
Du
competitic
What areac
bigger mt
fl'Om Its
ASSOCiatic
Service to
either had
Were 0rde
RelEICQ E
Islepitome
MinimiZe
Ct

both the governance arrangements and the performance of firms within the
telecommunications sector. It is widely known that President Marcos and his associates
or “cronies” had significant ownership or control of some of the country’s larger
telecommunications companies like PLDT, Philcomsat, Domsat, and ETPI, among
others. These companies enjoyed virtual monopolies in various telecommunications
services: PLDT through its telephone service, international gateway facility (IGF), and
leased lines for both voice and facsimilie long distance transmission; Philcomsat and
Domsat in international and domestic satellite transmission facilities, respectively; and
ETPI in international telex and data communications services.

During the Marcos regime, PLDT operated in a market that permitted limited
competition, but its sheer size, strength, and resources allowed the company first pick of
what areas to service which were more often than not, profitable areas like cities and the
bigger municipalities. Servicing urban areas allowed PLDT to reap maximum profits
from its IGF service. The smaller operators, mostly members of the Philippine
Association of Private Telephone Companies (PAPTELCO) were relegated to provide
service to less profitable areas. Other private and government-owned corporations that
either had profitable service areas or maintained strategic telecommunications facilities
were ordered by the Marcos government to either merge or sell to PLDT, as in the case of
Retelco and the GTS. The latter was a government organization which provided
telephone services to Metro Manila and other major provinces, and was dismantled to
minimize any major overlap with PLDT’s network (OPTEL Ltd., 1996).

Considering that PLDT served mostly the urban areas, and the other

telecommunications entities whether private or government operated in limited capacity

40

mother areas, it
concentrated in u
population is abo
(1994) states th;
interventionist te'
legislation to guic
to the granting (
competition. as
(Inedland. 1988)
The onse
mubllll)’ partiCt
programs like thi
telecommunicatii

“Sufficient.
3.2.5 1
The 198

la. .
readership fOr I
rmrganlmtiOns
of

Structural ref

\

Stakes. OPTE]

in other areas, it is therefore not surprising that 90 per cent of telephone lines are
concentrated in urban areas, 60 per cent of which is located in Metro Manila whose
population is about 14 per cent of the entire country. (OPTEL Ltd., 1996). Aquino
(1994) states that historically, there has been minimal government concern for
interventionist telecommunications policies, as evidenced by the absence of major
legislation to guide its evolution and development. Any legislation was usually related
to the granting of franchises. It is generally assumed PLDT was protected from
competition, as were other companies, owned or controlled by Marcos associates
(Friedland, 1988).

The onset of economic problems, foreign exchange scarcity, and political
instability particularly from 1984-1986 delayed the implementation of the government
programs like the NTP, and in general, diverted the Government’s attention away from
telecommmiications development concerns. By the time the Marcos government was
ousted, the telecommunications was generally highly segmented, inadequate, and

insufficient.

3.2.5 The Aquino Years: 19845-19926

The 1986 EDSA “People Power” Revolution led to a change in the national
leadership for the first time in more than 20 years. With this change came massive
reorganizations in the government, the ratification of a new Constitution, and institution

of structural reforms aimed to accelerate long-term economic growth.

 

6 Sources: OPTEL Ltd., 1996 and Digital Telecommunications Philippines, Inc. 1996.

41

Cor
in Philippt
resisuance a
peaceful re

The
Philippines
economic.
Some of th
droughts an
1991; the I
also expel
telecommtr
during the e

In ]

I987-1993.

Corazon Cojuangco-Aquino became the first female president and seventh overall
in Philippine history in 1986, after leading a nationwide campaign for nonviolent
resistance against the Marcos regime. She was assured a term until June 30, 1992 after a
peaceful referendum for a new constitution on February 2, 1987.

The Aquino administration aimed to restore democracy and stability in the
Philippines. This proved to be an uphill climb, considering the significant political,
economic, and social difficulties which arose from natural disasters and military unrest.
Some of the events include: coup d’etats from 1986-1990; a major earthquake in 1990;
droughts and floods in 1990; the Gulf War in 1991; the Mt. Pinatubo volcanic eruption in
1991; the US. bases withdrawal in 1991; and the Ormoc typhoon in 1991. The country
also experienced worsening power and transportation crises, which along with
telecommunications and other infrastructure, took a backseat to other pressing matters
during the Aquino presidency.

In 1987, the Aquino government issued the Medium-term Development Plan
1987-1992, which recognized the importance of communications in the economic
development process and presented development targets for the communications sector.
That same year, the Department of Transportation and Communication (DOTC),
formerly the Ministry of Transportation and Communication (MOTC), issued Circular
No. 87-188. This document contains the policy statements aimed to rationalize and guide
the development of Philippine telecommunications through the 1990s.

As part of the NTDP, the NTP was launched in 1988 to provide 600,000

telephone lines by 1993 primarily in unserved and inadequately served areas. NTP was

42

to be funded
loans and gra

The 3‘
3.4.5; Tranch
11.12. Ira:
creating a nat

The fr
second phase
tiltich 20.900
likeuise by I
million. is no
marIgements

The F
[we Phases a
1mtallation 0
local “Chang
aPrivate 00m

FUl'the
moduced in

and HOUSE B

6849* the ML

0m“ iMTp

pIOjectS IthU

to be funded through Japanese, French, and Italian bilateral government concessionary
loans and grants.

The NTP is divided into three phases or tranches: Tranche 1 covers Regions
3,4,5; Tranche 2 provides for Regions 6,7,8; and Tranche 3 provides for Regions 9, 10,
11,12. Tranche 1 also provides a backbone network connecting other NTP networks,
creating a nationwide interconnected network covering Regions 3-12.

The first phase was completed and acquired on a 30-year lease by Digitel. The
second phase to be undertaken by J S Telecom of France commenced in April 1994, of
which 20,900 lines under this phase will become the Visayan backbone network and will
likewise by privatized. The third phase, earlier awarded to Italtel at a cost of USD27
million, is no longer made available by the Italian government; therefore other funding
arrangements are being negotiated.

The Regional Telecommunications Development Projects (RTDP) consisted of
two phases and serves the requirements of Regions 1 and 2. Phase A covered the
installation of a 960-channel backbone transmission network, 24 repeater stations, 17
local exchanges, 6 toll centers, plus 11,200 lines, all operated under contract by Filphone,
a private company. Under Phase B, an additional 8,000 lines were also put in place.

Further government, legislative initiatives on telecommunications were
introduced in both houses of the Philippine Congress, one of which was Senate Bill 892
and House Bill 3452 passed by the Congress in February 1990 as Republic Act (RA)
6849, the Municipal Act of 1989. Under the Act, the Municipal Telephone Projects
Office (MTPO) became operational and embarked on public calling office (PCO)

projects throughout the country. The Act mandated the establishment of at least one

43

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telephone line in all municipalities without existing telephone service. The Philippine
Government, as well as ODA funding from French, Canadian, US, and German
governments provided financing of the projects. The provision of PC05 is a joint effort
of the government and the participating private telecommunications companies, the
operations of which would later be totally privatized.

In October 1990, the DOTC issued the National Telephone Development Plan
(NTDP) for 1991-2010. The Department also released through 1992 various policies and
accompanying implementing guidelines for cellular mobile telephone systems, and
domestic satellite communications, to name a few.

In late 1992, the Government also completed a new Medium-Term Philippine
Development Plan for the period 1993-1998. The new MTPDP contains new visions and
policies, but retains the previous Plan’s priority on telecommunications development.
The NTDP Plan (1993 update) seeks to support the Government’s vision for the nation as
contained in the new MTPDP.

As of year end 1992, several legislative bills aimed at telecommunications sector
development were introduced in both Houses of Congress. These included proposed bills
on policies and industry structure, the restructuring of the National Telecommunications
Commission, increased private enterprise, penalties on refusal to interconnect,
development of Philippine telecommunications and the delivery of public
telecommunications services, and institutionalizing the development of
telecommunications in the Philippines, among others.

Where telecommunications was concerned, the Aquino administration further

endured leadership changes in key agencies like the Department of Transportation and

44

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Communication (DOTC) and the National Telecommunications Commission (NTC).
From 1986 to 1992, there were three different Secretaries for the DOTC, and five
different Commissioners for the NTC. Despite the turnovers, President Aquino
introduced initial steps to introduce deregulation and liberalization in the
telecommunications industry when Congress passed into law seven new and seven
renewed or amended congressional telecommunications franchises, in addition to
allowing the entry of five operators in the paging market, two new operators in
international gateway services, and one other cellular mobile operator (OPTEL Ltd.,
1996; Kintanar, 1996). Licenses were also granted for other telecommunications services,
such as very small aperture terminal (VSAT), satellite services, trunk radio networks, and
other value added services. Some of the initiatives were the following:

0 Licensing of new operators in previously monopolized services such as IGF,
CMTS, paging, and cable television. ETPI and Philcom were granted IGF
licenses in 1989 to compete with PLDT which until then was the only existing
international gateway; Extelcom’s cellular service was approved in 1988 to
compete with PLDT which migrated its cellular subscribers to affiliate Piltel;
Easycall and Digipage paging services were licensed to compete with
Pocketbell; and new cable television operator Sky Cable was granted a permit
in 1990 to compete with Sining Makulay.

0 Licensing of new telecommunications services such as VSAT, trunked
mobile radio and single channel per carrier (SCPC). VSAT licenses were
granted to ICC, Globe Telecom, and LBNI; companies like Radiophone,

LBNI, Radio Marine Network, TNRI, and ICC were approved to provide
trunked mobile radio; and Capwire got its license to operate a SCPC.

0 Legislation was initiated, including the Public Telecommunications Bill of
1987; the NTC Reorganization Bill of 1988; and the Municipal Telephone Act
of1989.

A report by OPTEL Ltd. (1996) argues that the accomplishments of the Aquino

administration in the field of telecommunications were overshadowed by its inability to

45

address issues such as the widening gap in the national telephone backlog, and PLDT’s
refusal to allow new players to interconnect with their existing public switch telephone
network (PSTN) facilities. The dominant position that PLDT maintained through
political patronage during the Marcos government sustained during the Aquino
administration. PLDT stifled competition but was still not able to address the demand for
more telephones. Wolf and Sussman (1995) recount that President Aquino’s first
secretary of transport and communications, Reynaldo Reyes, was replaced when he
forced down PLDT’s long-distance charges and raised its tax rates. He was replaced by
Pete Prado, who took a far less aggressive stance toward PLDT. In mid-1991, the
government awarded PLDT with a new 25-year national telecommunications franchise,
despite the fact that the current franchise was not yet due for renewal for another 14
years.

At the end of the Aquino administration in 1992, the national teledensity stood at

a mere 1.2 telephones per 100 persons.

3.2.6 The Ramos Administration: 1992-1998

Fidel V. Ramos assumed the Presidency in June 1992, succeeding Corazon C.
Aquino. He fully recognized the importance of telecommunications in the bigger picture
of economic and social development and vice versa and was determined to break up the
PLDT monopoly and open the telecommunications market to other providers. As an
initial step, the Ramos government moved swifily and set policies in place through the
Department of Transportation and Communication (DOTC) and Congress. This would

later be followed by the creation and signing of a law for Philippine telecommunications.

46

Ci

3.3 The Evolution and Development of the Policy and Regulatory Framework
for Philippine Telecommunications,

Telecommunications in the Philippines is regarded as a public utility. To
understand the state of telecommunications in the Philippines, it is important to discuss
the evolution and structure of the sector wherein different actors are involved, e.g.
relevant government agencies, private and public telecommunications network operators,
equipment manufacturers and suppliers, users of telecommunications services, and local
industry associations. This section traces the history of the regulatory structure starting
with the entities created during the American era leading up to the current entity, the
National Telecommunications Commission (NTC).

The first radio regulatory office was known as the Radio Construction and
Maintenance Section under the Telegraphy Division of the Bureau of Posts. This
Section enforced radio laws and regulations, specifically Act No. 3396, known as the
Ship Radio Station Law enacted on December 5, 1927. The law provided for the
installation of radio apparatus obligatory for ships of Philippine register to protect life
and property at sea.

On November 11, 1931, the Philippine Legislature enacted Act No. 3846, known
as the Radio Control Law of the Philippines. Section 8 of the Law provides that the
“Secretary of Commerce and Communications is hereby authorized to create a Radio
Regulation Section, Division or Office which shall take charge of carrying out the
provision of this Act and of the regulations prescribed him, to any bureau or office under

his Department, subject to his general supervision and control.” Thus the Radio Control

 

7 Source: The APT Yearbook 1994.

47

Division in the Bureau of Posts was created under the then Secretary of Commerce and
Communications.

In 1939, the Department of National Defense was organized pursuant to
Executive Order 230. It was realized than that the functions of supervision and
regulating the establishment and operation of all radio stations in the country were
important to national defense and security. Consequently, the Radio Control Division
was transferred to the Department of National Defense.

After World War II, the Department of Commerce and Industry was created
pursuant to Executive Order 94 series of 1947. The Radio Control Division was again
transferred from the Department of National Defense to the Department of Commerce
and Industry. The reason for the transfer was that in time of peace, the function of radio
regulations was a vital factor in the promotion of commerce and industry and in the
economic development of the country.

In 1951, Executive Order 392 mandated the transfer of the Radio Control
Division and the Radio Control Board to the Department of Public Works and
Communications. The Division was charged with supervising and regulating the
establishment and operation of all radio stations in the country. The Board implemented
the provisions of the Radio Broadcasting Law Act No. 3997, regarding the administration
of the national radio broadcasting fund derived from radio receiver registration fees
collected by the Bureau of Internal Revenue, and the purchase, distribution, and
installation of radio receivers to fourth and fifth class municipalities, municipal districts,

barrios, and selected government institutions. In the Department of Public Works and

48

Communications, the Radio Control Division was under the supervision of the Radio
Control Board.

In 1956, Republic Act 1476 abolished the radio receiver registration fees, which
in effect also abolished the Radio Control Board. The Radio Control Division remained
and continued to function under the Office of the Secretary of Public Works and
Communications.

On August 23, 1962, the Secretary of the Department of Public Works and
Communications issued Department Order 51, changing the name of the Radio Control
Division to Radio Control Office. Ten years later the Integrated Reorganization Plan
(IRP) of 1972 provided for the retention of the Radio Control Office which assumed the
supervision and enforcement of policies, rules, and regulations involving
telecommunications. The Office was later named on July 1, 1974 as the
Telecommunications Control Bureau (TCB) headed by a Director. In addition, there was
an Assistant Director and four divisions and district offices, the number and locations of
that were determined on the basis of necessity and effectiveness of the service.

The Board of Communications (BOC) which was created under the Integrated
Reorganization Law of 1972, was the first quasi-judicial body with adjudicatory powers
on matters involving telecommunications services. The Board was composed of a full-
time Chairman and two full—time members. The Director of the Radio Control Office and
a senior representative of the Institute of Mass Communications of the University of the
Philippines were made ex-offrcio members.

The Board of Communications was attached to the Department of Public Works,

Transportation and Communications for administrative supervision. According to the

49

IRP, the Department was in direct possession of facts and situational appraisals inherent
in its role in the fields of communications. Adjudicative Boards operating under its
umbrella would thus have direct access to the substantive bases for decision.

By virtue of Executive Order 546 dated July 23, 1979, the Telecommunications
Control Bureau and the Board of Communications were abolished and integrated into a
single entity now known as the National Telecommunications Commission (NTC). The
Executive Order also created the Ministry of Transportation and Communications, which
has administrative jurisdiction over the NTC.

On April 13, 1987, President Corazon C. Aquino issued Executive Order 125-A
making the NTC an attached agency to what is now the Department of Transportation

and Communications (DOTC).

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51

In the 1980s and through the 19905, the Philippine Government’s involvement in
policy and regulation has been carried out primarily through the following agencies:

1. The Department of Transportation and Communications (DOTC) as the
policy-making body for telecommunications; responsible for the
promotion, development, and regulation of the entire telecommunications
sector;

2. The National Telecommunications Commission (NTC) as the regulatory
arm, with quasi-judicial powers;

3. The Telecommunications Office (Telof) as the operating arm, providing
limited telephone and telegraph services in rural areas; and

4. The Municipal Telephone Projects Office (MTPO) as the implementing
arm for the Government’s municipal telephone program.

The National Economic and Development Authority (NEDA) formulates the
country’s overall economic policies and development strategies. The DOTC policies are
prepared within this general framework. The Department of Trade and Industry (DTI)
and the Board of Investments (BOI), an agency of DTI, formulate policies regarding
investments in the country. They identify preferred areas of investment which may
qualify for incentives.

The Legislative Branch and the local government units (LGUs) are empowered to
grant national and local franchises, respectively.

DOTC implements its plans and policies on telecommunications through the
NTC. A Commissioner and two Deputy Commissioners; one for Planning,

Administrative and Finance, and Legal and the other for Radio Regulations and

52

 

I1'
I

Licensing, Common Carriers Authorization and Broadcast Services head the NTC. It has
five Departments, namely: Administrative and Finance, Legal, Telecommunications
Planning and Development, Common Carriers Authorization, and Radio Regulations and
Licensing. The Office of the Commissioner has two support units, the International
Affairs Coordinating Staff and the Commission Secretariat. The NTC also has an office
in each region in the country which are under the direct authority of the Office of the
Commissioner. Decisions of the NTC, a quasi-judicial body attached to the DOTC, are
appealable only to the Supreme Court.

With the exception of military telecommunications installations, the Commission
exercises jurisdiction over, supervises, regulates, and controls all telecom services in the
country (Aquino, 1994). NTC’s main regulatory functions cover the issuance, revision,
suspension, or cancellation of permits to operate facilities called Certificates of Public
Convenience and Necessity (CPCN); rate regulation; allocation of frequencies; regulation
of equipment importation; adjudication of legal issues; and the establishment and
enforcement of rules and standards governing the issuance of CPCNs. NTC’s judicial
function was also deemed necessary in dealing with the illegal telecommunications
operators that had sprouted up in the rural areas, where little or no licensed telephone
services existed.

Private operators who intend to provide commercial telephone services are
required to secure a franchise either from Congress for a national franchise or from LGUs
for a local franchise. Govemment-owned systems, however, are not required to obtain

legislative franchise nor do they operate under the supervision of the NTC.

53

 

Figure 3.

The Philippine Telecommunications Industry Organizational Scheme.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Source: National Telecommunications Development Plan, 1993.

54

 

     

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55

After getting a franchise, the enfranchised operator needs to obtain a CPCN from the
NTC. A CPCN specifies the period, area of operation, type of service to be provided,
rates to be charged, and other service commitments from the Operators. Amendments to
the original CPCN is needed for every expansion, extension, or modernization of
facilities and services, and changes in rates.

For every application for a CPCN, the NTC conducts hearings so that the public
and competitors are given a chance to oppose the application. In its decision, the NTC is
guided by the primary principle of promoting public interest. Thus, an applicant should
prove that the operation of the proposed public service would promote public interest.

Up until the enactment of RA. 7925 in 1995, the NTC was mandated to regulate
the rates charged by telecommunications companies, and any request for rate adjustments
has to be approved by the Commission. NTC set the rates based on a 12 per cent rate of
return ceiling imposed on public utilities, which is computed based on the net book value
of property, plant, and equipment plus working capital equivalent to two months average

operating expense.

3.3.1 Characteristics of Regulation in the Philippines

The Philippine elite, in their drive to maintain control of political and economic
rents, have helped shape a political structure that has stunted the development of efficient
institutions for market governance and resource mobilization (Esfahani, 1994). This
institutional failure, as Esfahani (1994) notes, is clearly reflected in the main

characteristics of the Philippine regulatory system, which are:

56

Lack of independence. Regulatory agencies are quasi-judicial bodies whose
decisions can be appealed to the Supreme Court. Agency heads are appointed
by the president, subject to approval by Congress, and have no fixed tenure.
The president can dismiss regulators unilaterally.

Congressional control of the budget. Congress maintains influence over
regulatory agencies by controlling their budgets, including salaries and other
expenses.

Inadequate resources. Regulatory agencies often lack the equipment,
experienced staff, and other resources needed to perform their tasks. Their
budgets are too restrictive to allow them to effectively monitor or evaluate
conditions in the sector for which they are responsible.

Ambiguity of relations. The mandate of regulatory agencies is typically so
general that there is wide scope for discretion. Congress has not tried to
achieve sectoral goals by providing detailed instructions about the content of
regulatory rules. For example, there is no fixed rule for setting utility prices,
though Congress could have stipulated specific procedures or even specific
price formulas.

Bias toward restricted entry. Public utility regulators control entry by issuing
or canceling investment permits, known as Certificates of Public Convenience
and Necessity (CPCN), in response to applications from franchised
companies, but they have no control over franchises. Franchises must be
obtained from local governments or from Congress if the coverage is
nationwide. Thus, regulators’ control of entry is circumscribed, and the
system is biased toward entry restriction.

These characteristics make regulation weak and inefficient. Without the

resources to collect data and develop expertise needed to design and implement policies,

coupled by the discretion power of the president, the credibility of regulation becomes

uncertain and limited.

The historical dominance of a small and competitive elite has become an

impediment to credible regulatory policy in the Philippines. The lack of commitment to

regulatory policies extends beyond the term of each administration stems from a

relatively weak legislature and judiciary, dominated by the executive branch. This

57

system of governance is linked to the nature of Philippine society: a small elite engaged
in competitive politics among themselves tries to bar the rest of the population from
active participation without denying their citizenship.

3. 3.2 Problems

The following section describes some of the industry’s problems in greater depth,
e.g. franchise regulation, policy implementation, rate regulation procedure, and
inadequate source of funds.

a. Franchise regulation

The primary cause of service and facility duplication is the lack of coordination
among the different institutions authorized to grant franchises. While the NTC has been
able to exercise some regulatory control through the CPCNs issued, it has been powerless
to regulate government agencies.

The Philippine franchising concept has resulted in various services offered by
different entities using a diversity of facilities, making service provision more capital
intensive and the utilization of scarce capital resources inefficient. The effect is
therefore, higher cost of service. What also has impeded new investment is the lengthy
and costly process required before a new entrant can begin installing telecommunications
facilities.

Another area that probably needs improvement is the NTC regulatory procedure,
i.e., the same procedures apply to the approval for plant additions and rearrangement.
Such administrative procedures unnecessarily overload the NTC which result in delays to
project implementation. It also limits the flexibility of firms to adapt to changing

conditions.

58

b. Policy Implementation

Prior to March 1995, when RA. 7925 (Public Telecommunications Act) was
signed into law, there was no major legislation to guide the course of telecommunications
in the country. Previous legislation was generally directed toward the granting of
franchises and permits to telecommunications entities.

Historically, the government has had difficulty defining its role in
telecommunications development. Having been under the influence of both Spanish and
American regimes in the past, the Philippine government evolved two distinct and
contrasting philosophies on the governance of public utilities (Aquino, 1990 as cited in
Carrera, 1994):

l. The Spanish legacy is the view that public utilities are better lefi under

government direction and ownership (a view although still held in several
European countries, is being challenged);

2. The Americans, on the other hand, introduced the strong participation of the
private sector in public utilities.

Policies and guidelines issued during the 19705 designed to address
telecommunications development were however, “merely reactionary, and were even
claimed to favor companies with strong ties to the Marcos administration.” (Carrera,
1994). As a result, the sector became fragmented. Overlapping of franchises and
concentration of facilities in profitable areas occurred, resulting in the uneven
geographical distribution of telecommunications facilities.

Under the Aquino administration starting in 1986, a renewed commitment to

accelerate the development of the sector was made, through the formulation of

59

Memorandum Circular 87-188 outlining the general policies of government on

telecommunications.

c. Rate regulation procedure

Up until RA. 7925, the 12 per cent allowable rate of return (ROR) on plants in
service has been in effect for about 40 years. Rapid rise in inflation and interest rates
since the past three decades of economic recession and currency instability has made the
limit terribly out of date. A more realistic ceiling would be one that is pegged to the
effective rates at which banks charge prime borrowers for secured loans. ( A more recent
concept is through price cap regulation.)

It is to be noted that of all consumer goods and services, telecommunications
services have always exhibited almost nil price increases over the years. Companies are
discouraged from undertaking necessary rate adjustments because of adverse public
reactions and the tedious expensive process. Required adjustments are delayed to the
point of financial “crisis”. As a consequence, there is limited capability for expansion
and a requirement for rate increase by financial institutions to assure viability . In the
process, average return during the period between rate increased is much less than the
already low ceiling of 12 per cent return.

Some of the major implications of low profitability are the following:

1.. Limited expansion capability during inflationary periods as expansion causes
further erosion in profitability. This is especially true in the case of local
telephone service which is characterized by increasing cost per line as the size
of the exchange expands.

2. Concentration of expansion, if any, to existing area coverage. Even while

concentrated in the few already economically viable areas, expansion still fails
to meet demand in most cases.

60

3. Internally-financed expansion of facilities is limited because of very slow

increase in profit-sourced equity.

d. Inadequate sources of funds

While internal sources of funds are constrained by low profitability,
telecommunication companies also find difficulty in securing external funding.

Domestic long-term loans are extremely limited and are very expensive at a
minimum effective rate of 14 per cent. Whatever long-term ftmds are available are
mostly channeled to other sectors which can afford the cost of borrowing or can better
meet the priorities. The telecommunications sector is highly capital intensive and tends
to have higher debt to equity rations and lower profitability compared with competitive
users of funds.

The high cost is due to factors such as a) a high foreign cost component due to
lack of in-country manufacturing of major equipment; b) foreign exchange rate
deterioration.

The local cost component is also higher because of the extremely high interest
rates on domestic capital. The cost of domestic capital is so high that it is sometimes
much cheaper to import equipment and facilities than purchase those that are available
locally. However, despite the economics, operators are not inclined to resort to
importation, knowing that such action will drain the country’s dwindling foreign reserve.

The telecommunication sector has not been competent to attract additional equity
because of better investment alternatives in a capital-sourced economy. While the
introduction of subscriber investment plans has somewhat helped in raising additional

equity, the amount raised is small relation to the total funding requirement. In recent

61

times, this scheme of fund generation is being questioned on political grounds. It is to be
noted, however, that such scheme is being done in many countries of the world, to raise
the huge capital requirements, i.e., subscribers are called upon to share a portion of total

investment. Such subscriber participation in investment is in two forms, namely:

1. As loans to telephone companies (e.g. Greece, Uruguay, Hungary, Iran)
2. As payment to the telephone company ( e.g. Indonesia, Singapore, UK,
Sweden).

Between these two plans, the former is preferred as the subscribers regain the loan
or amount extended upon discontinuance of service or after a specified time.

Long-term foreign sources loans, when available, come attached with stringent
conditions which discourage companies from undertaking unprofitable but socially
significant projects.

Another area of concern that should be given serious consideration is the potential
impact of technology on regulatory strategy. Once universal service has been achieved,
policymakers could use continuing technological changes to lessen dependence on
regulation because these changes will enable a larger portion of telecommunications
operations to be determined by market forces. It should be noted that despite the
technological changes, dominant service providers/ operators will likely retain
considerable market influence, hence, there may be a need for regulation to stay.
Furthermore, it is believed that despite growing competition, successive waves of

liberalization will tend to increase the need for regulation in the future.

62

3.4 Foreign Influences
Financial institutions, notably the World Bank, have played a role in the

development of telecommunications in the Philippines through various lending and
advisory capacities especially during the Marcos and later Aquino governments.
Sussman (1991a, 1991b, 1995) notes that the World Bank supported the privatization of
some 125 government owned and controlled corporations; influenced both the Marcos
and Aquino governments to expand communication infrastructure as a means of
improving the climate for foreign investment; provided a “seal of approval” (as a credit
rating) to the Philippines which was needed for lending, trade, and investment from First
World countries. He also talks about

“the predominant power relationships engendered when the

international corporate sector, led by giants such as NBC, Siemens,

Cable & Wireless, RCA, and AT&T, operate within Third World

economies...[i]n the Philippine case, private telecommunication

corporations are vital both in supporting other transnational

participants and in helping to buttress the interlocks of foreign

finance capital, technology and marketing firms. At the same time,

new communication technology has been a boon to TNC trade,

banking, insurance, manufacturing, transportation, advertising, and

the mass media industries, which can pay the highly privileged

cost of access. (Sussman, 1991b)”.
Sussman contends that Aquino and Ramos retained the cabinet position in
communications and the close advisory relationship of the World Bank, and following
the Bank’s prescriptions to take more procompetitive positions toward domestic capital
enterprise. He also mentions the World Bank’s sponsoring of the writing of a 20-year
master plan for the telecommunications sector “to rationalize national development

priorities within the hegemonic paradigm of free trade and private profit generation.”

Foreign investment was to be given greater priority as a means of recouping

63

infrastructural costs. It is not clear or evident what and where this 20-year master plan

is, or how it may have influenced the current telecommunications scenario.

3.5 Change of Government in 1992 : From Aquino to Ramos

The national election of May 1992 represented the first, peaceful, democratic
transfer of political power in the Philippines in two decades. Fidel V. Ramos, of the
Lakas-National Union of Christian Democrats (Lakos-NUCD) garnered 24 per cent of
the popular vote. Ramos topped five other candidates, and took office as the first non-
Catholic President on June 30, 1992.

The Ramos government was immediately faced with the challenge of providing
the solid leadership needed to steer the country back on course, which included creating
the stable socio-economic and political conditions necessary for development. The
Ramos government’s economic development goals are expressed in The 1993-1998
Medium-Term Philippine Development Plan (the MTD Plan), its program for an
internationally competitive and improved economy by the year 2000 whereby per capita
income is targeted to reach USD1,500 from the 1996 estimated USD1,055. The
Government’s strategy is to open further the economy to market forces and foreign
competition, reduce the role of the Government in the Philippine economy and promote
private business activity by stabilizing the conditions for business through inflation and
interest rates and accessing both domestic and international capital markets.

Under the Ramos administration, liberalization and privatization efforts were to
be either initiated or continued from the Aquino government. The dismantling of

traditional monopolies in key industries was to be an important step in sprucing up the

64

economy. Telecommunications, specifically the PLDT monopoly, was an inevitable
target for restructuring and was obviously going to be an important item on Ramos’

economic and political agenda.

65

CHAPTER FOUR
THE TELECOMMUNICATIONS SCENARIO FROM 1993 TO 1996:
THE REFORMS AND THEIR IMPACTS
This chapter discusses the key reforms that led to telecommunications
deregulation in the Philippines and their impacts on performance, regulation, as well as

emerging issues in the period 1993-1996.

4.1 A Discussion of the Major Reforms

One of Ramos’ immediate priorities was the “Philippines 2000” plan, which
envisioned newly-industrialized country (NIC) — status by the start of the next century.
Recognizing telecommunications as a key factor in the goal to be a NIC, the Ramos
government made the sector a “flagship program” under the Plan. The Ramos
government’s economic development goals are fiirther expressed in the “Medium-Term
Philippine Development Plan” from 1993 to 1998, the program for an internationally
competitive and improved economy by the year 2000 whereby per capita income is
targeted to improve from USD1,050 (1996 estimate) to USD1,500. The strategy is to
further Open the economy to market forces and foreign competition, reduce the role of
Government in the Philippine economy, and promote private business activity by
stabilizing the conditions for business through reduced inflation and interest rates and

accessing both domestic and international capital markets.

66

This strategy reflects the Ramos administration’s initiative to break-up public
utility monopolies, specifically PLDT, to indicate an effort against protectionism. New
policies were issued to create a more conducive climate for telecommunications
investment and development. These include:

DOTC Department Circular 92-269 (November 1992) -- Cellular Mobile
Telephone System Policy

EC. 59 (February 1993) -- Prescribing The Policy Guidelines For Compulsory
Interconnection Of Authorized Public Telecommunications Can'iers In Order To
Create A Universally Accessible And Fully Integrated Nationwide
Telecommunications Network And Thereby Encourage Greater Private Sector
Investment In Telecommunications

DOTC Department Circular 93-273 (June 1993) — Domestic Satellite
Communications Policy

EC. 109 (July 1993) Policy to Improve the Provision of Local Exchange Carrier
Service

RA. 7925 (March 1995) -- An Act to Promote and Govern the Development of

Philippine Telecommunications and the Delivery of Public Telecommunications

Services

This research will focus primarily on E0. 59, ED. 109, and RA. 7925 which
serve as the key regulations in deregulating the telecommunications industry as
envisioned by the Ramos government. A copy of these documents and the DOTC
Department Circulars (DCs) can be found in Appendices A-E.

ED. 59 mandates all telecommunications service providers to interconnect with
each other. The NTC is tasked to expedite interconnection of NTC-authorized public
telecommunications carriers or service operators in order to promote telecommunications

advancement and expansion, competition, investment, and access. Interconnection is

defined in Section 2 as “the linkage, by wire, radio, satellite or other means, of two or

67

defined in Section 2 as “the linkage, by wire, radio, satellite or other means, of two or
more existing telecommunications carriers or operators with one another for the purpose

of allowing or enabling the subscribers of one carrier or operator to access or reach the

subscribers of the other carriers or operators.” BO. 59 also requires that other

telecommunications services such as radio paging, trunking radio, store and forward
systems of facsimile or messaging, and other value added networks must be
interconnected; points of interconnection must meet all reasonable traffic demands; end-
users must have the freedom to choose the routing of calls regardless of local exchange
utilized; telecommunications providers must arrange, effect, and resolve interconnection

agreements on a bilateral basis; NTC must serve as mediator in the event that two service

providers fail to meet an agreement.

Other salient points of this 130. include what the NTC should consider for
technical/operational and traffic settlement rules; interconnection costs; revenue-sharing;

and the penalties imposed in case any of the provisions in the E0. are violated.

The objective of EC. 109, as stated in Section 2 is “to improve the provision of
local exchange service in unserved and underserved areas as defined by the National
Telecommunications Commission (NTC), thus promoting universal access to basic
telecommunications service.” With this policy, the Ramos government shall pursue the
democratization in the ownership and operation of telecommunications facilities and
services. Furthermore, it allows local exchange service to be cross-subsidized by other
telecommunications services within the same company until universal access is achieved.
By virtue of this E.O., authorized international gateway facility operators (IGFs) are

required to provide local service in unserved and underserved areas, including Metro

68

Manila, within three years from the grant of an authority from the NTC. As stated in
Section 5, the guidelines include:

a. Authorized gateway operators shall provide a minimum of 300 local
exchange lines per international switch termination;

b. At least one mral exchange line will be provided for every ten urban local
exchange lines installed;

c. The establishment of public calling offices (PCOs) at the rural barangay
level shall be given an appropriate credit by the NTC towards the
obligation to provide local exchange service.

The above numbers are derived from the following factors:
number of exchange lines, number of international switch terminations,
traffic, grade of service and demand.

d. No permit for an IGF shall be granted an applicant unless there is a clear
showing that it can establish the necessary foreign correspondenceships;
and,

e. Carriers already providing local exchange service in accordance with
Section 5 (a), (b), and (c) shall be authorized to operate an international
gateway subject to applicable laws.

ED. 59 mandates all telecommunications service providers to interconnect with
each other, while EC. 109 supports the goal of universal access policy by requiring
licensed cellular mobile telephone service (CMTS) providers to install 400,000 local
exchange lines; international gateway facilities (IGFs) to put up 300,000 lines; and

companies that are both CMTS and IGFs to install 700,000 lines within a period of five
years (ending in 1998).

RA. 7925, also known as the “Public Telecommunications Act of the

Philippines” defines telecommunication terms; lists down policies and objectives;

clarifies the role of the NTC as the administrator of the Act; provides categories of

telecommunications entities and other services and facilities; specifies franchise, rates

69

and revenue determination; states the rights of the telecommunications users; and

identifies key steps to telecommunications development and ownership.

It lifts

government control on pricing, allowing companies to adopt market-based pricing of

telecommunication services.

It also mandates privatization of all telecommunication

facilities of the Government, such as public calling offices (PCOs) and local exchanges

within 1995 to 1998.

Some of the highlights of the Act are:

a All public telecommunication entities (PTEs) must have a franchise conferred

by Congress in order to operate.

0 As the principal administrator of the Act, the NTC shall take the necessary

measures to implement the policies and objectives of the Act, in addition to its

existing functions.

Local exchange carriers shall be protected from uncompensated bypass or

O
overlapping of other PTEs in need of physical links or connections to its

customers in the area, except when it is unable to provide the interconnection

arrangements required.
Interexchange carriers shall interconnect with other networks in the same

0
category and with local exchange carriers or with other telecommunications

entities, upon application and within a reasonable time period, and under fair
and reasonable level of charges, in order that domestic and international long

distance services are made possible.

Value-added service (V AS) providers do not need to secure a franchise from
Congress, provided that they do not put up their own networks. But if a PTE

wishes to provide VAS, authorization is needed from NTC.

Radio frequency spectrum allocation and assignment shall be reviewed
regularly, and spectrum user fees will be charged to PTEs.

The 12 per cent rate of return will no longer be used; rather, the NTC is

authorized to establish rates which provide for the economic viability of
telecommunications entities and a fair return on investments considering the

prevailing cost of capital in the domestic and international markets.

Access charge or revenue sharing arrangements between all interconnecting
carriers shall be negotiated between the parties and the agreement between the

70

4.2

parties shall be submitted to the Commission. In the event the parties fail to
agree thereon within a reasonable period of time, the dispute shall be
submitted to the NTC for resolution. In adopting or approving an access
charge formula or revenue sharing agreement between two or more carriers,
the NTC shall ensure equity, reciprocity, and fairness among the parties
concerned.

The NTC shall require each PTE to set up a uniform system of accounts which
shall be one of the bases in establishing rates and tariffs.

Users of telecommunications services shall have the right to be given a
telephone line connection within three months after targeted commencement
of service in the barangay (village) concerned based on the original service
expansion schedule approved by the NTC.

All telecommunications entities with regulated types of services shall make a
bonafide public offering through the stock exchanges of at least 30 per cent of
its aggregated common stocks within a period of five years from effectivity of
the Act or the entity’s first start of commercial operations, whichever date is
later.

Impacts of the Reforms on Philippine Telecommunications
4.2.1 Increase in Number of Telecommunications Entities

The E.O.s have attracted big-league investors into forming new companies, or

enhancing existing ones. With a more open market, the participants are encouraged to

provide the necessary service to challenge virtual monopoly PLDT on telephone services,

especially basic local telephone service.

Telecommunications services and facilities in the Philippines include 1) local or

basic telephone service; 2) domestic long distance; 3) international long distance; 4)

cellular mobile telephone service (CMTS); 5) domestic satellite: 6) international satellite;

7) carrier’s carriers; 8) international carrier’s carriers; 9) radio paging; 10) public repeater

networks; 11) domestic very small aperture terminals (V SATs); 12) domestic record

carriers; 13) value-added services/networks (VAS/V AN); 14) public coastal stations; and

71

15) radio telephone operators. Except for certain small-scale activity in basic telephone
service through Telof and the MTPO and ownership in the satellite operators, the
Government’s presence in telecommunications is decreasing, especially with the
emphasis on privatization as specified in RA. 7925.

After the E.O.s were instituted in 1993, there has been an increase in the number
of providers in almost all of the telecommunications services, most notably in local
telephone service, CMTS, IGF, and paging. There are now more companies providing
local phone service, but most of them are not new, up-start, and novice organizations.
Most of them are larger companies which have been providing service, or were already
licensed to provide telecommunications services other than basic telephone service.

The following are the telecommunications services provided by operators in the
Philippines:

Table 1. Telecommunications Operators and their Services Before and After the
1993 Reforms

 

TYPE OF OPERATORS ADDITIONAL TOTAL
SERVICE OPERATORS8

 

(pre-1993 reforms) (post-1993 reforms)

 

1 .Local
Telephone

 

 

Smart 63
Globe Telecom
Islacom

ETPI
Bayantel/ICC
PT&T
Capwire

Piltel

Extelcom
Philcom

a. Private 0 PLDT
0 Digitel
. PAPTELC09

 

 

 

 

 

8 These are licensed entities as of yearend 1996, whether or not they were able to commence operations
immediately after being granted a CPCN.

72

 

Table 1 (cont’d).

 

b. Government

City of Basilan
Telephone

TELOF

Misarnis Oriental
Provincial

Telephone System
Municipality of San
Jose Telephone System

No additional entities;

same number as pre-
1993

 

 

 

 

 

 

 

 

 

3. International PLDT - Bayantel/ICC
Gateway Facility Philcom I Globe Telecom
Operators ETPI o Islacom
o Capwire
o Digitel
0 Smart
4. Cellular Piltel o Globe Telecom
MObilC Extelcom O Islacom
Telephone 0 Smart
5. Domestic Domsat o No additional entities
Satellite Oceanic Wireless
6. International Philcomsat - NO additional entities
Satellite
7 Carrier’s Domsat 0 NO additional entities
Carrier Philcomsat
Capwire
8. International 0 PLDT o No additional entities
Carrier’s Carrier 0 ETPI
o Capwire
o Globe Telecom
o Philcom

 

 

9 PAPTELCO stands for Philippine Association of Private Telephone Companies. These companies are

ofien small and provide local service in individual towns or cities.

73

 

 

Table 1 (cont’d).

 

 

 

 

 

 

 

9. Radio Paging a Philippine o Islacom 14
Wireless/Pocketbell o Piltel
o EasyCall o Globe Telecom
- Smart
0 Errnita Elec.
0 Radio Marine
o Romasanta
o Infocom
0 Multi-Media
Telephony Inc.
0 Island Country
Telecoms, Inc.
0 Worldwide
Communications Inc.
0 AZ Communications,
Inc.
10. Public 0 Liberty Broadcast - Liberty Broadcast 10
Repeater Network Network Radiomarine
Network Radiomarine Network Network
Contel 0 Contel
Communications, Inc. Communications, Inc.
- Omninet Philippines, 0 Omninet Philippines,
Inc. Inc.
Corona International Corona International
Worldwide Worldwide
Communications Communications
Teodoro Romasanta, - Teodoro Romasanta,
Inc. Bayantel/ICC Inc. Bayantel/ICC
o Infocom o Infocom
Communications Communications
0 Universal 0 Universal
Telecommunications Telecommunications
11. Domestic Bayantel/ICC o NO additional entities 3
VSAT Globe Telecom
LBNI

 

74

 

Table l (cont’d). '

 

 

 

12. Domestic - Oceanic Wireless - Oceanic Wireless 6
Records Carrier Network, Inc. Network, Inc.
a Globe Telecom o Globe Telecom
o PT&T o PT&T
o RCPI o RCPI
0 Universal 0 Universal
Telecommunications Telecommunications
Services, Inc. Services, Inc.
TELOF TELOF
l3 . Value- Infocom Technologies Infocom Technologies 16
Added Executive Power Executive Power
Service/Network Center, Inc. Center Inc.
WAS/VAN) 0 Information Partners, 0 Information Partners,
Inc. Inc.
0 Philippine Network 0 Philippine Network
Foundation, Inc. Foundation, Inc.
Cyberspace, Inc. Cyberspace, Inc.

 

Dovetronix Enterprises
Inc.

Multi-media Telephony
Inc.

SITA (Airlines
Telecoms and
Information Services)
Philworld Online Corp.
Iphil Communications
Network, Inc.

IConnect Link Services
UBIX Corp.

BPI Computer Systems
Corp. Portal Inc.

Sky Internet

Edinet Philippines, Inc.

 

Dovetronix Enterprises,
Inc.

Multi-media
Telephony, Inc.

SITA (Airlines
Telecoms and
Information Services)
Philworld Online Corp.
Iphil Communications
Network, Inc.

IConnect Link Services
UBIX Corp.

BPI Computer Systems
Corp. Portal Inc.

Sky Internet

Edinet Philippines, Inc.

 

 

75

 

Table 1 (cont’d).

 

 

 

 

 

 

 

1 4 . Public Global Global 12
Coastal Stations Communications Communications

Associated Radio Associated Radio
Electronics Electronics
Communications Communications
David Radio David Radio
Communications Communications
Elrnan Radio Elrnan Radio
Communications Communications
Hypersonic Radio Hypersonic Radio
Communications Communications
Marzom Engineering Marzom Engineering
Microwave Microwave
Communications, Inc. Communications, Inc.
RCPI RCPI
Radio Marine Radio Marine
Philippines, Inc. Philippines, Inc.
Teodoro N. Romasanta, Teodoro N. Romasanta,
Inc. Inc.
Errnita Electronics, Inc. Errnita Electronics, Inc.
Universal Universal
Telecommunications, Telecommunications,
Inc. Inc.

15. Radio Concha Radio Network Concha Radio Network 5

Telephone Kayumanggi Radio Kayumanggi Radio

Operators Network Network
Rex Electronics Rex Electronics
RCPI RCPI
PT&T PT&T

Sources: Philippine Electronics and Telecommunications Federation Facts and

Directory, 1996-1997; The APT Yearbook, 1994.

As a result of the policies and favorable business environment, many companies entered

the lucrative markets of IGF, CMTS and paging services between 1993 and 1995. The

number of IGF operators rose from three before the reforms (pre-1993 reforms) to nine

in 1995; paging operators increased from two (1993) to 14 (1995); CMTS operators more

than doubled from two (1993) to five (1995). Under BO.

76

109, nine CMTS and IGF

 

operators (excluding PLDT) would become new local exchange carriers by 1998. The
telecom sector also showed remarkable growth over the three-year period of 1993 to
1995. The country's telephone mainlines almost doubled to 1,409,639 in 1995 from
784,719 in 1993. The number of cellular phone subscribers grew to 493,862 in 1995,
392% higher than the level two years before. Paging services' subscriber base more than
doubled to 324,816 in 1995. Other telecom services like radio trunk repeater, satellite,
and very small aperture terminal markets are also growing although not as fast as the

other telecom services. The last three services have smaller markets.

4. 2. 2. The Service-A rea Scheme (SAS)

With E.O.109, the questions arose as to how and who was going to provide
telecommunication services, and in what parts of the country in order to address the
universal service Objectives. Majority of telecommunications services is established in
the cities and lucrative provinces, which have traditionally been the profitable areas.
Upon granting of a provisional authority (P.A.), Cellular Mobile Telephone Service
(CMTS) Operators are obliged to install 400,000 telephone lines while the International
Gateway Facilities (IGFs) Operators’ requirement is 300,000 telephone lines in a period
of three years. If a company is both a CMTS and an IGF, then its land line Obligation
would be a total of 700,000. To facilitate the new, more competitive telecommunications
market, a “service area” scheme was agreed upon in a government-private sector
workshop held in November 1993. The country was divided into 11 service areas, where
each Of the four most lucrative operating zones (i.e., Northern, Southern, Eastern, and

Central Manila) are paired with the less profitable underserved and unserved areas in the

77

countryside. During the 1995-1998 period, all the IGF and CMTS Operators including

PLDT and Digitel plan to install at least four million additional local exchange lines

within the 11 service areas nationwide. Eight companies, namely ETPI, Capwire/PT&T,

Globe Telecom, Bayantel/ICC, Islacom, Piltel, Philcom/MajorTel, and Smart were each

given at least one, if not more, service areas.

Table 2. Telecommunications Operators and their respective Service Areas.

 

 

 

 

 

 

 

Bulacan, and Nueva
Ecija

 

 

Service Regions Coverage Areas Telecommunications Local
Area Operator Exchange
Lines
Deployment
(1995-1998)
Areal National Capital Pasay City, Las Smart 400,000
Region (Metro Piflas, Parafiaque, lines
Manila) “D” Pateros, Taguig, and
and Muntinglupa.
Region 1 (Ilocos
Region) Abra, Ilocos Norte,
Ilocos Sur, La
Union, Pangasinan,
Mt. Province, and
Benguet
Area 2 National Capital Manila, Navotas, ETPI 300,000
Region (Metro and Kalookan. lines
Manila) “A”
and
Region 2 Batanes, Cagayan
(Cagayan Valley, Isabela,
Valley) Quirino, Nueva
Vizcaya, Ifugao, and
Kalinga Apayao
Area 3 Region 3 Tarlac, Pampanga, Smart 300,000
(Central Luzon) Zambales, Bataan, lines

 

78

 

Table 2 (cont’d).

 

 

 

 

 

 

 

 

 

 

Area4 Region 4a Aurora, Laguna, Capwire /PT&T 300,000
(Southern Quezon, lines
Tagalog) Marinduque, Rizal,

and Romblon.

AreaS Region 4b Cavite, Batangas, Globe Telecom 300,000
(Souther Mindoro Oriental, lines
Tagalog) Mindoro Occidental,

and Palawan.

Area 6 National Capital Quezon City, Bayantel/ICC 300,000
Region (Metro Valenzuela, and lines
Manila) “B” Malabon.
and
Region 5 (Bicol
Region) Albay, Camarines

Norte, Camarines
Sur, Masbate,
Catanduanes, and
Sorsogon

Ara-7 Region 6 Aklan, Antique, Islacom 300,000
(Western Capiz, Iloilo, and lines
Visayas) Negros Occidental
and
Region 7a Negros Oriental and
(Central Siquijor.

Visayas)

Area 8 Region 7b Bohol and Cebu Islacom 400,000
(Central lines
Visayas)
and Eastern Samar,

Region 8 Leyte, Northern

(Eastern Samar, Southern

Visayas) Samar, and Western
Samar

 

79

 

Table 2 (cont’d).

 

 

 

 

 

 

 

 

 

 

 

 

 

Area 9 Region 9a Zamboanga del Piltel
(Western Norte and
Mindanao) Zamboanga del Sur 350,000
and Philcom/MajorTel lines
Region 10 Agusan del Norte,

(Northern Agusan del Sur,

Mindanao) Bukidnon,
Camiguin, Misamis
Occidental, Misamis
Oriental, and
Surigao del Norte

Area 10 Region 11a Davao del Norte, Piltel
(Southern Davao del Sur, and
Mindanao) South Cotabato 350,000
and lines
Region 9b Basilan, Sulu, and Philcom/MajorTe
(Western Tawi-Tawi l
Mindanao)

Area 11 National Capital Makati, San Juan, Globe Telecom 400,000
Region (Metro Marikina, and Pasig. lines
Manila) “C”
and
Region 12 Lanao del Norte, Lanao
(Central del Sur, Maguindanao,

Mindanao) North Cotabato, and
Sultan Kudarat
SUBTOTAL 3.7 M lines
Luzon Regions 1-5 Ilocos Region, Cagayan DTgitel 540,000
Valley, Central Luzon, lines
Southern Tagalog, and
Bicol Region
GjRAND TOTAL 4.24 M lines

 

Source: OIfi‘EL Ltd., 1996; PETEF 1996-1997 Electronics and Telecommunications
Yearbook; DOTC documents; NTC documents.

80

 

Figure 5.

Map of the Philippines.

   

PHILIPPINE
SEA

 

SEA

Source: http://www.arcos.org:80/emie/map2.html

This scheme allows four telecommunications operators to provide telephone services in
Metro Manila, each of which are separate entities and should be interconnected with
PLDT. However, this system does not necessarily or readily enable a new company to
enter a service area and be assured of an equal opportunity in the quest for market share.
Each SAS would theoretically have two, possibly three, local exchange providers — one
of which is obviously PLDT and the other is the new company assigned to the area. The
regions in Luzon that could have three providers are those where PLDT has already been
operating, Digitel is present, and the assigned provider under the SAS is a company other

than Digitel.

4.2.3 Impact on Basic Telephone Service

The private sector is the dominant telecommunications provider, including basic
telephone service. The next section profiles the companies and a bird’s eyeview of what
these companies have done in response to the E.O.s. It should be noted here that PLDT is
not part of the SAS and therefore the requirement to roll-out a certain number of
telephone lines under ED. 109 does not apply. However, PLDT has its own expansion
plans, as discussed below. The two other cases are are Digitel and Extelcom. As an IGF,
Digitel is required to install 300,000 lines, but unlike the other companies, it does not
have a service area assignment. Rather, Digitel continues to develop the telephone
system it leased for 30 years from the Government. Extelcom has been a cellular
operator since 1991 and was the sole competitor of Piltel up until 1994 when other

companies commenced operations. Like Digitel and PLDT, Extelcom has no service

82

area assignment but as a cellular operator, it is required to install 400,000 lines in order to
keep its PA.

The companies are the following:

1. The Philippine Long Distance Telephone Company (PLDT)

 

Founded on November 28, 1928, the Philippine Long Distance Telephone
Company (PLDT) is the dominant telecommunications entity in the country. PLDT’s
charter, which extends until 2028, authorizes it to provide virtually every type of
telecommunications service. PLDT is headed by Antonio 0. Cojuangco Jr., whose
family is majority owner of the company.

PLDT installed one million lines in 1995 as part of its “Zero Backlog Program”
which is an ongoing response to the growing competition fi'om other companies. The
Zero Backlog Program is a PhP72 billion effort to respond to the new competition (Jara,
July 26, 1996). Two years earlier, PLDT installed 199 km of underground conduits and
constructed 1,197 manholes to accommodate 188,800 pairs of feeder and distribution
cables and 120 km routes of fiber-optic cable. As of December 31, 1996, the number of
telephone lines in service throughout the PLDT system was 1,518,739 which is
approximately 85 per cent of all telephone lines in the country. Between 1993 and 1996,
PLDT added 818,224 net lines, of which 321,879 were installed in 1996 alone. The
Company aims to expand its network to approximately 3.2 million lines, fully digitalized,
by the year 2001 .

PLDT’s IGFs provide access to 229 destinations worldwide via an earth station in

Pinugay and through 18 existing fiber-Optic submarine cable systems. The company also

83

launched several service lines, such as Videocon, allowing video and audio
teleconferencing; the 1-800 toll-free numbers; the PLDT calling card which is linked to
computer databases worldwide; and a microwave long-distance network connected to 84
exchanges owned and Operated by government agencies.

PLDT’s national long-distance network links 598 points in 508 municipalities
throughout the country. The company’s MCI 105-15 and Sprint 105-16 switches were
activated to augment the existing AT&T 105-12. It has also upgraded its 4,000 multi-
coin and cardphones to digital units, which are in place in Metro Manila.

PLDT will use a $54.6 million loan from the Export-Import Bank of Japan to
finance another project which will install and operate a complete switching system for
171,950 lines at 48 stations and a microwave transmission system to establish new lines
for 224 stations, as well as the construction of the Outside Plant Network, (OPN) for
120,000 lines. The contracts were awarded to Japanese firms Mitsui and NEC for the
transmission system, and Marubeni and Kyoma Exco for the OPN project.

The PLDT Company Profile (1997), states: “To meet the challenges and exploit
the opportunities presented by the competition and dynamism in today’s Philippine
telecommunications market, PLDT is undergoing a dramatic transformation at all levels
of its operations, with an emphasis on improved productivity and market
responsiveness.” One of the things PLDT has done is to streamline its human resources,
cutting back to 18,273 employees in 1996 from 20,312 in 1994. It has digitalized 80 per
cent of its switches which would now give the Company the capacity to provide
broadband and other value-added services. Company reports indicate that the average

number of troubles per 100 working lines decreased significantly from 17.83 in 1993 to

84

6.68 in 1996; and the response or per cent of troubles cleared within 24 hours increased

from 78.80 per cent in 1993 to 97.80 per cent in 1996.

2. Eastern Telecommunications Philippines, Inc. (ETPI)

ETPI is another existing IGF licensee since 1989, with approximately 3,000
telephone lines set up for its customers. British firm Cable and Wireless (C&W) owns 40
per cent of ETPI. The network has traditionally been devoted to overseas calls and has
18 direct and 36 indirect interconnection agreements with foreign telecommunications
companies. ETPI is also a co-owner of four-analog and two digital submarine cable
systems: Philippine-Singapore (Phil-Sin); Taiwan-Luzon (Tai-Lu); Okinawa-Luzon-
Hong Kong 1 and 2; Guam-Philippines-Taiwan (GPT); and the Brunei-Malaysia-
Philippines (BMP). Under E0. 109, ETPI has to install 300,000 landlines in three years;
and under BO. 59, ETPI already has interconnection arrangements with PLDT.

In July 1992, PLDT filed a petition with the Supreme Court, and in August 1992
the Court barred ETPI from Operating as an IGF, since its franchise was limited to non-
voice message handling. ETPI appealed against the decision in November 1992, and
won the case two years later. ETPI operates in Service Area II, covering Region II and
NCR-A which includes Manila, Navotas and Kalookan. While other companies have to
install their lines from 1995 to 1998, ETPI’s roll-out period is fi'om 1997 to 1999 due to

the legal concerns it had to settle before being able to start operations in its service area.

85

 

(Maj orTel )

Philcom, the third IGF licensee, also secured its provisional authority to operate in

1989. It is part of a worldwide group of telecommunications companies that will set up a
digital fiber-Optic submarine cable that will directly link Thailand, Hong Kong, and
Vietnam. The project, called TVH cable system costs US$166 million. Philcom is the
co-owner of two local exchanges, namely, Agusan Telephone Company and Datelco
Corporation, and is seeking to buy three or four additional telephone companies as part of
is program to install its share of 300,00 landlines. Philcom is installing its requirenments
through its subsidiary MajorTel and shares Service Areas IX and X with Piltel. As of
yearend 1996, the Company has lagged in its roll-out compared to other companies,
having only installed 84,362 lines out of its required 300,000 lines.

Philcom is also installing a second IGF to handle voice and non-voice traffic.

The Enrile and Yuchengco families are among the prominent families who own

Philcom/Maj orTel.

4. Globe Telecom GMCR, Inc. (Globe Telecom)

Globe Telecom obtained an approval from the Board of Investors (BOI) to
undertake the construction of its cellular mobile telephone system (CMT S) project worth
$90 million. The company is the surviving entity from the merger of Globe-Mackay and
Clavecilla Radio Systems Corporation. The Ayala group holds a 38 per cent share in the
company. Other stockholders include the Social Security System (SSS), Insular Life

Insurance, and Singapore Telecom.

86

Being both a CMTS and an IGF, Globe Telecom is obligated to provide 700,000
telephone lines. As of yearend 1996, Globe has reportedly installed only 112,000 lines,
representing only 16 per cent of its total commitment (Market Reports, June 2, 1997). It
has about 60,000 subscribers accounting for five per cent of the market. Globe is
responsible for Service Areas V and XI.

Globe’s gateway switch will provide international trunks, operator-assisted
national long-distance calling, and intelligent networks; while the local toll will provide

local lines, trunk lines, and payphone systems.

5. Bayan Telecommunications Holding Cogppration/ International Communications

Comration (Bayantel/ICC)
Bayantel/ICC Telecoms is the fifth franchise holder of an IGF. It installed

330,000 lines in two years, thus being one year ahead Of the three-year schedule for
companies to roll out their landlines and therefore becoming the second-largest carrier in
the country . Bayantel/ICC is in charge of installing lines in Region V and in NCR-B
(Quezon City, Valenzuela, and Malabon).

In 1990, the Lopez family bought ICC, then an inactive company established in
1961 which held a 1967 franchise to operate a local communications system (T iglao,
December 2, 1993). That same year, Bayantel obtained authority to Operate a satellite-
based network. In 1992, they gained a further 25-year franchise for international
services. In 1993, they added Eastern Visayas Telephone Company (Evtelco), a small
private operator in central Philippines and also Radio Communications Philippines, Inc.

(RCPI), a provider of telex, telegraph, and related services. ICC is managed by Bayantel

87

which is majority-owned (69 per cent) by BenPres Holdings Corporation of the Lopez
family. The Company plans to have an additional 60,000 direct, local exchange

subscribers nationwide by mid-1997.

6. Digital Telecommunications Cogppration (Digitel)
Digitel commenced operations in January 1992. In February 1993, Digitel was

awarded an exclusive 30-year contract to manage, operate, develop, and rehabilitate
certain telecommunication facilities owned by the DOTC which had a total line capacity
of 62,661 lines covering 156 towns and cities in Luzon, collectively the DOTC system
(Digitel, October 1996). The USD149 million lease contract is Digitel’s early attempt at
acquiring profitable service areas. In February 1994, the Company was granted a
franchise to provide domestic and international telecommunication services nationwide.
Pursuant to its national franchise, Digitel initiated in 1995 a ten-year strategic program to
expand and upgrade its existing fixed telephone network and the DOTC system. The
Company’s IGF became operational in December 1995 and as such needs to install
300,00 lines.

As of September 1996, Digitel’s telecommunication network (including the
DOTC system) consisted of 563 PC0 lines and 157 regional and local exchanges, having
a total capacity of 134, 412 lines, of which 70, 251 were connected to subscribers; a fully
digital backbone transmission system covering substantially all of Luzon ; and an IGF.

As of December 31, 1996, Digitel reported a total of 204,184 fixed line
telephones systemwide or about 68 per cent of its target of 300,000 lines. As mentioned

earlier, Digitel is not part of the SAS but as an IGF, it has to fulfill its obligation like the

88

other companies. The engineering designs for Digitel have been provided by Japan’s
Nippon Telegraph and Telephone (NTT).

Digitel’s share capital was originally owned by a group of local businessmen and
British partners, of which C&W had 11.6 per cent interest. After a bust-up between these
two groups, the Gokongwei family through its JG Summit Holdings Corporation invested

P200 million (Philippine pesos). JG Summit currently owns 57 per cent of the company.

7. Capitol Wireless, Inc. (Capwire)

Capwire is originally an international record carrier (i.e., permitted to offer
international telecommunications services, including voice) and now also has an IGF
franchise. As an IGF, Capwire must install 300,000 lines. Capwire’s sister company,
Philippine Telephone and Telegraph (PT&T) is the entity responsible for installing the
telephone lines. Around 50,000 lines have been installed as of 1996, or approximately
16.7 per cent of the total 300,000 requirement (Market Reports, June 2, 1997).
Capwire/PT&T’s service area consists of Region IVa, or the provinces of Aurora,
Laguna, Quezon, Marinduque, Rizal, and Romblon.

The company is affiliated with Republic Telecommunications Corporation
(Retelcom), together with Telectronic Systems, Inc., A2 Communications, and Korea
Telecom. The consortium, owned 60 per cent by the Santiago family and 20 per cent
each by A2 Communications and Korea Telecom, has upped its capital to USD73
million. It plans to upgrade Capwire’s 600 calling stations nationwide, making them the

only company at this point besides PLDT to possess a national backbone network.

89

8. Isla Communications Company (Islacom)

Islacom is both an IGF and a CMTS provider and is committed to installing a
total of 700,000 lines. It is majority-owned (70 per cent) by Citadel Corporation of the
Delgado Company, and the other major owners are Shinawatra of Thailand and Deutsche
Telekom of Germany. According to NTC data, Islacom has installed only 16,000 lines as
of yearend 1996, which is only about 2.3 per cent of its total commitment of 700,000
lines. Islacom has two service areas: Service Area VII (Region VI--Negros Occidental,
Aklan, Antique, Capiz, Iloilo; Region VIIa--Negros Oriental, Siquijor,) and Service Area

VIII (Region VIIb -- Bohol, Cebu, and Region VIII-Samar).

9. Smart Communications, Inc. (Smart)

Smart obtained its P.A. on December 28, 1994 to install, operate and maintain a
Local Exchange Network. Under the SAS, SMART is mandated to provide 700,000
fixed phones in Regions 1 and 3, and NCR-D (Pasay City, Las Pifias, Parafiaque, Pateros,
Taguig, Muntinglupa). In 1996, it rolled out 161,000 lines (NT C data) or 23 per cent of
the total 700,000.

Smart was organized in January 1991 and obtained its franchise from Congress in
April 1992 (F emando, 1997). In May 1993, it became the first company to be awarded a
cellular license in the liberalized industry. The company has since then obtained an IGF
license in May 1994; a Paging license and a Local Exchange Carrier license in December
1994; and an Interexchange Carrier license in March 1996.

TO further enhance its central switching capacity for both landline and cellular

networks, Smart completed the eastern leg Of its nationwide digital link. The PhPl.6

9O

billion backbone is designed to accommodate traffic generated by the company’s
growing subscriber base and can handle 10,000 simultaneous calls from Manila to Cebu,
for example (Smart, October 4, 1997).10

Considering the immense capital investment needed to install telephone lines,
(estimated to be USDl,OOO-2,000 per line) it should not be surprising that the companies
have fallen behind schedule for fulfilling their respective obligations. Only Bayantel/ICC
was able to install and even exceed its requirement ahead of schedule. Digitel reported
the next largest number of lines installed. Table 3 summarizes the number of telephone
lines required per company as prescribed in ED. 109, the lines installed as of 1996, and

the performance as expressed in percentage.

Table 3. The Philippine Basic Telephone Pppggm, status as of yearend 1996.

 

 

 

 

 

 

 

 

 

Telecommunications Lines Required Lines Installed as of Performance in
Carrier Under BO. 109 end 1996* Percentage vis-a-
vis lines required
under BO. 109
Bayantel/ICC 300,000 330,000 100.00
Smart 700,000 161,7000 23.10
Capwire/PT&T 300,000 50,000 16.7-
Globe Telecom 700,000 112,000 16.0
Piltel 400,000 20,000 5.0
Islacom 700,000 16,000 2.3
filcom/Majofiel 300,000 3,830 1.3
Extelcom 400,000/a O 0.0

 

 

 

 

 

 

 

'° “Smart completes P1.6 B digital backbone.” October 4, I997.
http://www.smart.com.ph/news/97 10.htm.

91

Table 3 (cont’d).

 

 

 

 

 

ETPI 300,000/b 0 0.0

Digitel 300,000/c 204,1 84 68. 1

PLDT 0/d 81 8,224 n.a.

All Carriers 4,400,000 867,714 19.7

Excluding PLDT

All Carriers 4,400,000 1,685,938 38.3
excluding PLDT/e

 

 

 

 

 

 

Source: NTC data.
*Installed but not necessarily subscribed lines.
/a Extelcom does not have a service area yet.

/b ETPI’s roll-out period is 1997-1999, while the others have 1995-1998.

/c Digitel does not have a service area.

/d Only new entrants have specific requirements to be met by 1998, in accordance with
RA. 7925.

/e Same as /d.

One result of the E.O.s is that national/average telephone density increased from
1.3:100 in 1992 to 1.82100 in 1993; to 1.67:100 in 1994; to 2.2:100 in 1995; to about
4.0:100 in 1996 (Business World Online, February 26, 1996; Datapro Reports on
International Telecommunications 1994; PETEF, 1996). This is due in part to PLDT’s
expansion projects which installed more than one million lines through its “Zero Backlog
Project”, as well as efforts by other companies like Digitel (installed 100,000 lines),
Bayantel/ICC (330,000 lines), among others (Business World Online, January 2, 1996
and April 24, 1996). The above table shows what the telecommunication entities have
done relative to the expected company and national targets. The table that follows

provides an insight on status of telephone penetration, as a result of the reforms,

particularly 13.0. 109.

92

Table 4. Telephone Di_stribption by Region: Comparative Summarv for 1993 gpg

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1996.

Region Installed Lines Per cent Telephone Density Per cent
growth growth
from from
1993 to 1993 to
1996 1996

1993 1996 1993 1996

THILIPPINES 941,632 3,252,842 256 1.41 4.66 230

NCR 603,996 1,937,460 221 623 20.8_3_ 2993

CAR 9,260 37,683 307 0.73 2.77 279

I(ILOCOS) 24,361 148,793 511 0.63 3.62 475

II (CAGAYAN 6,042 14,353 141 0.23 0.52 126

VALLEY)

111 (CENTRAL 57,936 233,899 304 0.85 3.19 27?

LUZON)

IV (SOUTHERN 57,483 380,044 561 0.62 3.82 516

TAGALOG)

v (BICOL) 9,850 78,850 700 0.23 1.72 648

VI (WESTERN 33,836 112,166 231 W 1.79 214

VISAYAS)

VII (CEN’FRAL 53,596 121,392 126 1.06 2.25 112

VISAYAS)

VIII (EASTERN 9,150 24,354 166 0.27 0.67 148

VISAYAS)

IX (WESTERN 12,002 33,662 180 0.44 1.13 157

MINDANAO)

x (NORTHERN 17,999 92,666 418 0.46 2.20 37—

MINDANAO)

XXI (SOUTHERN 35,682 109,466 207 0.72 2.02 181

MINDANAO)

XII (CENTRAL 1,950 18,200 833 0.09 0.74 722‘

MINDANAO)

(ARMM) 8,600 9,672 12 0.43 0.45 5 ,

Source: National Telecommunications Commission as cited in Market Reports

 

(Philippines «Telecom Overview), June 2, 1997.

The data shows that there is a marked increase in the number Of telephone lines in
the regions, as a product of the reforms. Except for the Autonomous Region of Muslim

Mindanao (ARMM), there has been over 100 per cent increase in growth from 1993 to

93

1996, both in number of lines and in teledensity. The figures indicate that there has been
substantial progress in telephone installation, especially when compared to what the
regions had prior to the reforms. Nevertheless, the work is far from done, and companies
have to continue installing lines in the countryside in line with the Government’s
universal service objectives. It is interesting to note, however, that the teledensity figures
in the regions are very low compared to the national average of 4.66:100 persons, while
that of NCR (Metro Manila) at 20.83:100 persons is almost five times more than the
national teledensity. This is evidence that almost all telecommunications development
in the past has been concentrated in Metro Manila which is the country’s political and

economic center.

4. 2.4 Impact on Cellular Telephony

Between 1993 and 1996, CMTS registered an average increase of 150 per cent
(Market Reports, June 2, 1997). Operators of mobile cellular phones posted a spectacular
95 per cent rise annually in the number of subscribers from 34,100 in 1991 to more than
493,000 in 1995 (Asia Pulse, 1997). Factors that spurred the growth were the country’s
rising Gross Domestic Product, inadequacy of fixed telephone lines, lower costs of
handsets and lower subscription fees. In 1991, cell phone units sold for about PhP60,000;
four years later in 1995, prices dropped to the PhP10,000 range; and in 1996 there were
units as low as PhP4,000 the prices of which still continue to decline (Pesayco, 1995).
The rapid growth of cellular telephones in the Philippines has also been driven by
people’s response to the frustration of waiting for years to get a telephone installed as

well as the unsatisfactory telephone service, if there was one. This rise in cellular use can

94

also be attributed to the innovations and market development thrusts by Piltel and
Extelcom (Tolentino in Datapro Reports International). It is no secret that Filipino
consumers use cellular phones as a substitute for fixed lines or as complementary to their
existing local service, if any. In January 1996, 26 per cent of the total telephone
subscribers (fixed line subscribers plus cellular subscribers) were CMTS users (ITU
World Telecommunication Indicators Database, as cited in the 1997 ITU Asia-Pacific
Telecommunication Indicators).

AS of year end 1995, there were five CMTS operators in the Philippines compared
to only two in 1991. By the end of 1996, there were approximately 818,000 subscribers,
compared to 1995’s 493,484 cellular subscribers, which was already a marked increase
from 200,409 subscribers in 1994 (Business World Online, February 26, 1996; 1997 ITU
Asia Pacific Telecommunication Indicators).

CMTS operators have two intertwined challenges. Under ED. 109, each cellular
operator is required to put up 400,000 land lines over a three-year period in order to keep
their CMTS licenses. Another is to push and promote their lucrative but quite
competitive cellular service in order to stay in business and reap the profits necessary to
substain both the local and cellular services.

This section describes briefly what the entities have accomplished thus far,

particularly in terms of cellular telephone penetration and growth.
1. Pili ino Telecommunications Co ration iltel

The PLDT subsidiary Piltel had 202,358 cellular subscribers by yearend 1995,

which is 56.42 per cent of the market (BusinessWorld Online February 26, 1996). By

95

February 1997, subscription increased to 357,000 second only to Smart’s 362,000. Piltel
also has a paging system (Beeper 150) to complement its cellular phone (Mobiline).
With 150 cell sites in 1995, Piltel takes the market lead in having the widest coverage
area nationwide (Moreno, 1996). Piltel uses NAMPS technology, and is planning to
migrate its subscribers to CDMA technology in the near future.

PLDT owns 40 per cent of Piltel.

2. Express Telecommunications Company (Extelcom)

 

In 1995 Extelcom had 100,126 cellular telephone subscribers, or 20.29 per cent of
the market making it the third biggest CMTS provider behind Piltel and Smart. It has
two Motorola switches: one in Eastern Manila, and the other in Mindanao. Extelcom had
close to 50 cell sites in 1994, and uses the Narrow Band Advance Mobile Phone System
(NAMPS) which will be upgraded to Advanced Mobile Phone Service (AMPS).
Extelcom complements the marketing of its cellular telephone with its paging systems
called Easycall.

Investments made by Extelcom have reached USD90 million in addition to the

USD67 million for 1994. Bayantel bought 46.62 per cent of Extelcom in 1997.

3. Smart Information Technologies (Smart)

Smart obtained its cellular license in May 1993 and launched operations in
February 1994. Its 43 cell sites in 1994 grew to 100 cell sites the following year. In
1995 Smart captured 24.32 per cent of the cellular telephone market, or 120,378

subscribers. By December 1996, subscription grew to 308,000, and by February 1997, it

96

rose to 362,000 against Piltel’s 357,000, making Smart the current CMTS leader (Dela
Cruz, 1997).

Ericsson (Sweden) provides Smart’s switching equipment; Alcatel and Digital
Microwave Corporation supply microwave radios; and Nokia (Finland) supplies mobile
telephones. Presently, Smart’s cellular technology is anchored on what is known as the

total access communication system (TACS), a European analog technology.

4. Isla Communications Company (Islacom)

Islacom was granted a license to install and operate a nationwide GSM digital
cellular network in September 1993. Commercial operations began in Cebu (V isayas
region) in July 1994 and in Metro Manila in February 1995. By the end of 1995, Islacom
had 30,000 subscribers who account for 6.1 per cent of the total cellular subscriber base.
For 1996, Islacom planned a USD60 million investment to expand its GSM network
nationwide to increase the number of cell sites fi'om 60 to 104 (OPTEL Ltd., 1996). The
company aims to get 20 per cent market share of the country’s total cellular subscriber

market in the next three years.

52.910422191292112

Like Islacom, Globe obtained a nationwide GSM digital cellular license in
September 1993. Of the five companies granted cellular licenses, Globe commenced
operations starting with 50 cell sites only in September 1994. During the last quarter of
1994, Globe acquired 2,500 subscribers or 1.4 per cent of the Philippine cellular market

at that time (OPTEL Ltd., 1996). The following year, the company had a total of 41,000

97

subscribers, or 8.3 per cent of the total cellular subscriber base. Considering that GSM
digital cellular technology is currently expensive to operate and maintain, Globe’s initial
strategy has been to focus on business and high-end individual users. When the GSM
infrastructure and handset costs go down in the future, Globe will then pursue the mass
market (OPTEL Ltd., 1996).

Table 5. Cellular Mobile Telephone Service Log 1995 and 19964

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Launch System No. of Subscribers
Date

1995 1996
Pilipino Telephone Corp. (Piltel) 1989 NAMPS“ 202,358 330,000
Smart Communications Corp. (Smart) 1994 TACS 120,378 308,000
Express Telecommunications Co., 1991 NAMPS 100,126 101,000
Inc. (Extelcom)
Globe Telecom 1994 GSM 41,000 44,000
Isla Communications Co., Inc. 1994 GSM 30,000 35,000
(Islacom)
TOTAL 493,862 81 8,000
Sources: Philippine Electronics and Telecommunications Federation Facts and

 

Directory, 1996-1997; 1997 ITU Asia Pacific Telecommunication Indicators.
*to be upgraded to CDMA

Like other telecommunication service, the cellular industry has its share of
problems. In 1996, delayed billing and fraudulent transactions cost Globe PhP441
million. Piltel has been battered by problems of illegal cloning of its mobile phones

which led to a ten-fold increase in provisions for doubtful accounts of PhP886.35 million

in 1996 (Espina, 1997).

98

4. 2.5 Impact on other Telecommunications Services and Facilities

Paging. Paging companies offer alphanumeric, numeric, and roaming services in
the Philippines. There are consumers who use pagers as a supplement to either their
cellular phone or fixed line telephone, or both. For consumers who have limited access
to a cellular phone or a fixed line telephone, pagers can serve as their initial point of
contact for those who wish to communicate with them. The caller can be contacted by
the receiver when the latter is able to access a telephone.

Price wars and the need for instantaneous communication have spurred demand
for nationwide paging services, now offered by at least ten companies, up from only two
in 1992. By 1996, eight companies provided paging services to 324,816 subscribers,
majority of whom are in the Metro Manila area, and a lesser number in the provinces
(Miranda, 1996). Easych led with 37 per cent market share (118,755 subscribers),
followed by Philippine Wireless-Pocketbell with 35 per cent market share (112,945
subscribers), and Piltel with 15 per cent market share (47,494 subscribers). Five
emerging players share between them 13 per cent of the market (45,622 subscribers):
InfoPage, PowerPage, Islacom, DigiPage, and StarPage. Other entrants to the paging
market include Smart, Globe Telecom, Bayantel/ICC, and Multi-Media. The paging
companies have already tapped or are negotiating with foreign companies for technical
expertise, hardware, software, and other components necessary for them to be a viable
business.

Satellite Communications. Until 1989, two carriers operated in the Philippines,

namely, Philcomsat and Domsat. Philcomsat is an exclusive provider of international

satellite services while Domsat offered only domestic service. At that time, Domsat was

99

heavily indebted and unable to meet demands for additional service. But financial
backing from several investors a few years later has made Domsat a viable company,
now able to improve and expand its service.

Other companies to whom NTC has granted provisional authorities (P.A.s)
include Liberty Broadcasting Network, Inc., Clavecilla Radio Systems Corporation, ICC,
Capwire, and PLDT to provide either very small aperture terminal (V SAT) services or
carrier’s carrier type services (NTDP, Revised 1993).

In granting P.A.s to these companies, NTC overruled the objections citing the
country’s need for improved communications capacity, both along trunk routes and in
remote areas. » All of the orders granting P.A.s expressed the hope that satellite
communications would significantly contribute to the extension of telecommunications
services and relieve existing difficulties with the primarily terrestrial network.

The current demand for international satellite service exceeds the capacity of
Philcomsat, which is the Philippine signatory to Intelsat and Inmarsat and the sole
provider of satellite services to all telecommunications entities since 1969. International
long distance services have routing of their own IGF (i.e., transpacific fiber optic cables),
but their calls must go through the international gateway center of Philcomsat. In a bid to
break-up the monopoly of Philcomsat on international services, DOTC issued a circular
on July 1, 1994 (DOTC DC 94-277— International Satellite Communications Policy)

which thereafter allows all enfranchised telecommunications firms direct access to all
international fixed satellite systems (“Philippinesz Satellite Monopoly Dismantled,” July
4, 1994). As a step further towards liberalizing the country’s satellite industry, the DOTC

proposes the immediate privatization of Philcomsat by auctioning the Govermnent’s 40

100

per cent share. The revenue will be used to restructure Philcomsat to make it a more
efficient and viable organization.

An initiative to launch the first-ever Philippine satellite into orbit started in 1993
when the government called upon the private sector to help put up the said project. The
private sector-led consortium called Philippine Agila Satellite Inc. (PASI) was formed.
PASI’s members included Clavecilla Electronics and Telecommunications Company,
Digitel, Domsat, ETPI, Extelcom, Islacom, Liberty Broadcasting Network, Inc., Philcom,
PLDT, Piltel, and Smart (PASI, 1997). But in 1994 PLDT, an original PASI member,
broke away following differences with Domsat on financing matters (Jara, June 12,
1997). PLDT formed the Mabuhay Philippines Satellite Corporation (MPSC) with other
members PT Pasifik Satelit Nusantra, Piltel, Republic Broadcasting System, Philippine
Communications Satellite Corporation, Cable Entertainment Corporation, and Philippine
Satellite Corporation. PLDT owns 56 per cent, Chinese investors (China Everbright
group) own 28 per cent, Piltel owns 6 per cent, Indonesia’s PT Pasifik Satelit Nusantra
owns 5 per cent, Republic Broadcasting System, Inc. (GMA-7) owns 2 per cent,
Philippine Satellite Corporation owns another 2 per cent, and Cable Entertainment
Corporation owns 1 per cent (Jara, August 21,1997). MPSC planned to launch
“Mabuhay-1” but was renamed “Agila-II” during the ceremonial inauguration of MPSC’S
Satellite Control Center in 1996. PASI lost its right to the Agila name after it failed to
provide an interim satellite in time for the Asia -Pacific Economic Cooperation (APEC)
Summit in November 1996. PASI’S bid to launch two satellites was hampered when it
failed to finalize the USD322-million financing for the project (Market Reports, July 23,

1996). MPSC was able to provide its interim satellite in place of the expected PASI

101

satellite, and since President Ramos chose the name Agila for the first F ilipino-owned
satellite in space, the MPSC in effect earned the name Agila-I for the satellite used during
the APEC meeting.

The contract between the Domsat-led PASI and DOTC stipulates that PASI will
provide two fiee transponders to the Government in exchange for DOTC’S efforts to
secure the l6l-degree orbit that will be occupied by PASI’S main satellite.

After a series of delays, the USD243 million Agila II was launched into space on
August 20, 1997 from the Xichang Satellite Launch Center in southwestern China.

For its part, Philcom acquired an initial 1/8 transponder space from an American
satellite called Teledata Remote Surveillance Systems (TRSS). The satellite is owned by
the National Space Administration formerly operated solely by the US. military.

Philcom is also establishing a domestic satellite network with a substation in
Cavite and 11 remote stations scattered across the country at a cost of USD6.7 million.
The company’s growing voice and data services has experienced such tremendous
growth that it estimates saving hundreds of thousands of dollars which would otherwise
be paid to Philcomsat.

In October 1991, Capwire signed a memorandum of agreement creating a
Philippine Satellite Project (Philsat) joint venture with the DOTC to own and operate 56
earth stations. These earth stations will be tied to an additional 30 stations wholly owned
and Operated by Capwire. The network will be used to provide carriers’ carrier services
to other telecommunications operators as well as to MTPO public calling offices and

rural exchanges.

102

Capwire now operates a network of more than a hundred earth stations to provide
voice and data communications links to other carriers.

Mobile Radio. A viable alternative to pagers, cellular phones, and
conventional UHFN HF radios is the digital, two-way Trunked Mobile Radio (TMR).
Introduced in the Philippines in October 1993 by Contel, an affiliate of Concepcion
Industries, the system uses the Motorola Smart Trunking System. The system entitles
users to a private group talk free of interference. This private nature of the system makes
it ideal for security purposes and emergency situations.

Record Carrier Services. Radio Communications Philippines, Inc. (RCPI) is an
affiliate of Bayantel/ICC. It hiked its capitalization from $3.5 million to $35 million to
upgrade its offices nationwide and to construct more PCOs and satellite disks. Liberty
Broadcasting Network, Inc. (LBNI) is one of the first companies authorized to construct
a network for domestic services. It has branched into providing nation-wide Very Small
Aperture Terminals (V SAT) systems, trunked radio systems, wireless, data networking,
fax messaging, and eight-channel UHF pay-TV broadcast stations. The company
remains active in data communications and intends to go into rural wireless data
networking systems.

VSAT Operators. The NTC has licensed Globe Telecom, Bayantel/ICC, and
LBNI to provide VSAT or very small aperture terminal service. In 1996, Globe Telecom
had 339 stations and 90 subscribers; Bayantel/ICC had 133 stations and 103 subscribers;
and LBNI had 9 stations and 29 subscribers. An additional 250 VSAT stations are

expected to be installed from 1995 to 2000 (Market Reports, July 23, 1996).

103

Public Radio Repeater and Trunk Operators. There are ten licensed operators
of radio trunking systems. By 1996, six companies had an estimated subscriber base of
16,127 up from 5,982 in 1994. The leading companies are Liberty Broadcasting
Network, Inc. (LBNI), with 31 per cent market share or 5,000 subscribers; Radiomarine
with 23 per cent market share or 3,667 subscribers; Radiophone with 17 per cent market
share or 2,800 subscribers; and Cororna, Omninet, and Romasanta account for the
remaining 20 per cent or 4,660 subscribers.

Other T elecom Service Operators. Information is limited, if any, regarding other
telecom service operators, such as the country’s five international records carriers, six
domestic records carriers, 12 public coastal stations, and five radiotelephone operators.

Data about their projects and investments is scant.

4.2.6 Domestic Ownership Issues

The move to deregulate the telecommunications industry invited a rush of eager
investors from the Philippine business community, of which the so-called big players
scrambled to position themselves for the opportunity to break into PLDT’S monopoly.
The new players are well-established in their various business interests but have little, if
any, experience in the telecommunications industry. Property and manufacturing
conglomerate Ayala Corporation (controlled by the Ayala family) owns 44 per cent of
Globe Telecom. The Eugenio Lopez clan owns Bayantel through Benpres Holdings and
also owns ABS-CBN, one of the country’s biggest broadcast networks, controls Manila
Electric Company (MERALCO), and took part in the privatization of the Manila

Waterworks Service System (MWSS). Shopping mall, manufacturing, petrochemical,

104

and airline tycoon John Gokongwei owns 57 per cent of Digitel. Smart is 63 per cent
controlled by a group of Filipinos with 37 per cent held by property mogul Metro Pacific,
a local subsidiary of the Indonesian-owned, Hong Kong-based First Pacific Group.

A close and careful examination of the ownerships of the various
telecommunications companies reveals intricate relationships linking almost all the firms
together.11 The Cojuangco family owns PLDT, but has an interlocking directorship with
international gateway operator Philcom, where the Enrile family holds 20 per cent
through its holding company Jaka. Through Jaka, Philcom is linked to Philcomsat. Jaka
holds 7 per cent interest in Philcomsat.

Philcomsat held 42.62 per cent of cellular company Extelcom afier it bought
Marifil Holdings Corporation in June 1994 for P600 million. In 1997, however,
Bayantel/ICC acquired this equity (http://www.bayantel.com). Republic Broadcasting
System (RBS), parent company of broadcast station GMA-7, bought 12.38 per cent of
Extelcom. Bayantel/ICC is the telecom arm of Benpres Holdings Corporation of the
Lopez family, who also owns ABS-CBN Broadcasting Corporation. ABS-CBN and
GMA-7 are the largest broadcast stations in the country, and are each others’ strongest
rivals, whose parent companies are now linked through respective shares in Extelcom.

The original shareholders in Philcomsat included Roberto Benedicto, Jose Africa,
and Manuel Nieto (the group collectively known as “BAN”) who altogether hold 27 per

cent interest in the firm.

 

11 Bertrand O. Pesayco documents in an article a lecture given by Alfredo C. Panizales, Domsat executive
vice president and general manager on May 19, 1994 during the Mobile and Satellite Communications
Conference “94 held at the Hotel Inter-Continental Manila in Makati, Philippines. (“The race for
telecommunications is on, but will the ownerships be different?” in Business World Anniversary Report
1994 Philippines, Inc. Manila: Business World Publishing Corporation.)

105

BAN also has interests in Domsat, OWNI, ETPI, and formerly in PT&T of the
Santiago family (who bought out BAN a few years ago).

Cojuangco-led Piltel is linked to LBNI through Telesat. Telesat uses LBNI’S
franchise so Piltel, who owns 67 per cent Of Telesat, can operate satellite networks.

British firm C&W is a strategic partner of ETPI and OWNI, holding 40 per cent
equity in each firm. C&W used to have 11.6 per cent interest in Digitel but eventually
sold out. C&W has likewise entered into a partnership with International Container
Terminal Services, Inc. (ICTS), the country’s largest container handling facility, in
Telecommunications Technologies Philippines, Inc. (TTPI).

In 1996, Smart acquired 9.8 per cent of ETPI. The shares purchased by Smart
represent the entire holding of Universal Molasses Corporation (UNIMOLCO), a
company controlled by Roberto S. Benedicto in ETPI. These shares were released from
sequestration by the Philippine Government under a Compromise Agreement signed by
Benedicto and the Presidential Commission on Good Government in 1990 (Smart,
August 1, 1996). Under the terms of that Compromise Agreement, Benedicto ceded 10.2
per cent of his original 20 per cent holdings in ETPI to the Government but retained 9.8
per cent. UNIMOLCO’S 9.8 per cent shares are part of the 49.8 per cent total equity
interest that the Benedicto-Africa-Nieto (BAN) Group has agreed to sell to Smart under
a binding and exclusive Agreement signed in March 1996.

ICTS is owned by a group of local companies led by A. Soriano Corporation, the

holding company of the Soriano family, and Enrique Razon of Razon Industries, Inc.

106

JG Summit Holdings Corporation owned by the Gokongwei family is linked to
Benpres Holdings, Inc. of the Lopez family through a partnership in PCIBank. The
Gokongwei group holds 57 per cent interest in Digitel. Among the companies of Benpres
are Bayantel/ICC, Evtelco, RCPI, and broadcasting firm ABS-CBN. In April 1994, ICC
entered into an agreement with Globe Telecom of the Ayala family to put up a USD100-

million nationwide digital transmission network or backbone facility.

4. 2. 7 Foreign partnerships/in vestors.

To attract investments in the sector, the Government offers incentives such as
three per cent duty on imported capital equipment, tax credit on domestic capital
equipment and spare parts, additional tax deduction for labor expense, and employment
of foreign nationals (Market Reports, July 23, 1996). Telecommunications development
requires extensive capital, as well as business and technical know-how. Based on the
goal to reach a teledensity of 10:100 by the year 2000, the country needs five million
lines. Each line costs approximately USD1,500-2,000. In effect, at least USD7.5 billion
is needed to accomplish the goal. To fulfill service obligations, almost all the companies
teamed up with foreign partners:

'0 ETPI, with Cable and Wireless (40%)

o ICC, with NYNEX (25%)

o Globe Telecom, with Singapore Telecom through its wholly-owned subsidiary

Singapore Telecom International (3 8%)

o Capwire, with Korea Telecom (20%)

o Islacom, with Shinawatra of Thailand (33%) and Deutsche Telecoms

107

0 Smart, with First Pacific of Hong Kong (28%) and NTT of Japan (12%)

o Digitel, with Telia Sweden (10%) and Jasmine International of Thailand

(2.5%)

Table 6. Philippine Telecommunications Companies and their Foreigp Stratggic

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners
Telecommunications Foreign Partner Foreign Equity
Carrier (%)
PLDT None Traded on New
Foreign Institutional Investors York StOCk
Exchange
PhilCom 0 None12
_Piltel 0 None
Islacom o Shinawatra International 33.00
(Thailand)
Deutsche Telekom (Germany)
Smart First Pacific (Hong Kong) 28.00
NTT (Japan)
12.00
Globe Telecom 0 Singapore Telecom International 38.00
(Singapore)
FRetelcom Holdings 0 Korea Telecom (South Korea) 20.00
(Capwire, PT&T,
Pocketbell)
Bayantel (ICC, RCPI, o NYNEX Network Systems Co. 25.00
Retelco, NagaTel) (USA) and Telecom Holding Co.
(Thailand)
TJigitel o Telia (Sweden) 10.00
0 Jasmine International (Thailand) 2.50
Piltel c Kuok Group 10.00
0 American International Assurance 12-00
0 Capital Research
__ 10.00
ETPI 0 Cable and Wireless (U .K.) 40.00
Extelcom o Millicom International (USA) 3W
- Torsten Press 3.00
o Hennitage l 3 .00

 

 

 

 

 

 

Source: OPTEL Ltd.,1996.

 

'2 Comsat (USA ) was the foreign partner up to 1996. Its 16.8 per cent was bought by Filipino investors.

108

Digitel’s erstwhile partner Cable & Wireless has fully divested from JG Summit
(Digitel’s holding company).

As the above table indicates, new investments in the Philippine
telecommunications industry have generally been made by other companies within the
Asian region. Companies from neighboring countries can have an advantage over those
outside the region: they are possibly already familiar, or because of proximity can easily
become familiar with the complex political, cultural, and economic environment in the
Philippines. This knowledge, among many other factors, enables these neighboring Asian
companies to make investment risks in the Philippines.

The telecommunications climate in the Philippines has rendered a rush of
investments and partnerships (Datapro Reports on International Telecommunications,
1994). In 1993 alone, Philcom increased its capital stock from USD20 million to USD36
million and per Share value from USD.036 to USDO.36. Digitel increased its paid-up
capital to USD58.2 million. Record carriers RCPI and Islacom increased capital from
USD35 million to USD72 million. PLDT has earmarked USD400 million annually to
upgrade and increase its number of service lines. In 1994, Benpres Holdings Corporation
programmed PhP27.08 billion (approximatelyUSDl billion) in capital expenditures for
its various telecommunications projects, which includes PhP520 million (U SD19 million)
capital call by RCPI payable until January 1995 to upgrade equipment (Paras, 1994).
Globe invested PhP3.0 billion in 1995 and an additional PhP4.0 billion in the next five

years (BusinessWorld Online, February 26, 1996).

109

4.3 Performance

4. 3.1 Government Targets and Indicators

In the NTDP document, strategies are outlined as to how the Government plans to
respond to the needs of and targets of the telecommunications sector where performance
is concerned. The Government “shall implement simpler and more effective regulations
which shall focus on operators’ compliance with performance commitments rather than
on numerous ex ante controls. [T]hus the approval process for service expansion
initiatives by the carriers will be streamlined” (NTDP, revised 1993).

The NTDP document suggests that a practical set of quality indicators with
minimum standards be instituted in NTC’S monitoring process. The quality indicators

must consider and satisfy the following requirements:

0 The indicators must relate to the subscribing public’s perception of quality;

0 Standards of performance for each indicator must be set by the NTC in concert
with operators and other interested parties to ensure that a suitably high
proportion of subscribers will be satisfied with the service, and recognizing that in
some cases, time will be needed to enable operators to reach final objectives; and

o The administrative burden and costs incurred by the operators, other interested
parties, and the NTC to measure adherence to the standards must, to the extent
possible, be minimized.

The DOTC and NTC differ in their stand regarding the frequency of monitoring company
performance. While NTC monitors quarterly, DOTC has been pushing for more frequent

checking and balancing, proposing a monthly schedule instead.

110

4.3.2 Selected performance indicators
As minimum requirements, and consistent with the development targets set out in

the NTDP, the following performance indicators Shall be used by the NTC:

1. Service Application Resmnse, expressed as the percentage of applications for
service received during the last 12 months which were served within four weeks.

2. Monthly Trouble Rate, expressed as the number of subscriber trouble complaints
per 100 stations in service.

3. Trouble Resmnse, expressed as a percentage of the subscriber trouble complaints
that were cleared within two days.

4. Billing Complaint Rate, expressed as the number of subscriber billing complaints
per 100 main stations in service per month.

5. Effective Calling Rate, (for toll service), expressed as the percentage of toll trunk
seizures resulting in an answer signal during the busy hour.

6. Toll Transmission Qualig, expressed as the percentage of transmission
measurements meeting both loss and noise limits.

Data needed to derive the first four of these indicators shall be routinely collected by all

operators. At the time this research was being done, there was no systematically

available summary of these indicators. The other indicators require service observations

and/or test calls, for which it will be necessary to develop standard methods of

measurement and evaluation.

The NTDP also mentions possible sanctions against operators who are unable to
fulfill service commitments. The suggestions include graduated financial penalties, not
transferable to service users; reduction in geographic coverage of an operator’s CPCN;
and suspension or cancellation of the operator’s CPCN.

The ITU World Telecommunication Indicator Database provides a summary of

major performance indicators for the Philippines in the table that follows. The 1996

ll]

figures are estimates or projections from DOTC, NTC, PETEF, company reports, and
other sources. Not all indicators are available for 1996.

What has the performance been? Table 7 shows that there has been an increase in
every indicator except telecommunications staff (PLDT) which started to decline in 1995.
In three years (1993 to 1996), the nationwide telephone density grew 230 per cent, from
1.4 to almost 4.7 . Telephone installations in the National Capital Region (NCR) also
known as Metro Manila, grew 200 per cent from a 6.9 teledensity to 20.8 telephone lines
per 100 persons. Only 14 per cent of the country’s 70 million population resides in
Metro Manila, but 70 per cent of all the fixed-line telephones are found here. The
Government’s nationwide teledensity target of 9.3 or about 5.5 million telephone lines is
difficult to meet because of delays in telephone installations.

Table 7 shows that the combined performance of telecom firms under the
Government’s three-year roll-out program is less than 40 per cent of the target as of
yearend 1996.

In contrast, between 1993 and 1996, CMTS and radio paging services registered
the greatest increases of 150 per cent and 83 per cent, respectively. Competition in both
services intensified as the five CMTS providers and 11 paging operators introduced more
affordable units and increasingly efficient services through very well crafted advertising
and aggressive marketing.

The telecom industry has also shifted most operations from analog to digital,

permitting high-speed and noise-free transmission of messages.

112

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113

According to the ITU (1997 ITU Asia Pacific Telecommunication Indicators), the
top 25 fixed line operators, including 15m—ranked PLDT, have enjoyed an average annual
growth rate in terms of new lines installed of 12.7 per cent and a growth in labor
productivity (main lines per employee) of 13.9 per cent per year.

The data on main telephone lines shows that there are increases from year to year,
but the rise in cellular subscription has been very significant, as shown in the following

tables.

Table 8. Change in number of main lines, 1993 to 1996.

 

 

 

 

 

 

Year No. of Main Lines Difference from Per cent Increase
(cumulative) previous year

1993 859,762 1997175 30.15

1994 1,109,652 249,890 29.06

1995 1,409,639 299,987 27.03

1996 1,787,000 347771 24.64

 

 

 

 

Sources: 1996 ITU World Telecommunication Indicator Database; 1997 ITU Asia ‘
Pacific Telecommunication Indicators.

Table 9. Change in number of cellular subscribers. 1993 to 199;

 

 

 

 

 

Year No. of Cellular Difference from Per cent Increase
Subscribers previous year
(cumulative)
1993 101,738 49,738 95.65
1994 200,409 98,671 97.00
1995 492,736 29,2327 145.87
1996 959,024 466,288 94.63

 

 

 

 

 

 

Sources: 1996 ITU World Telecommunication Indicator Database; 1997 ITU Asia
Pacific Telecommunication Indicators.

The surge in cellular subscription can be attributed to several reasons. Cellular
technology allows service to be readily available and therefore free the customer from

long waiting periods as traditionally experienced with PLDT. The continued decrease in

114

 

equipment costs and service fees make cellular service more affordable. The severe
trafi'rc situation in metro areas has firrther fueled people’s need to have a means of

communicating with the office or home, hence the practicality of cellular telephones.

4.4 Regulation

As mentioned earlier in this chapter and in the previous one, the DOTC serves as
the policy-maker while the NTC exercises regulatory and quasi-judicial functions in
telecommunications. R.A. 7925 stipulates that the DOTC shall not exercise any power
which will tend to influence or effect a review or a modification of the Commission’s
quasi-judicial functions. NTC is the principal administrator of R.A. 7925 which applies
to all public telecommunication entities in the Philippines. NTC supervises, adjudicates,
and oversees telecommunication services in the country. Although independent in terms
of carrying out its powers, the NTC remains under the administrative supervision of the
DOTC.

As indicated in Section 6 of the Act, DOTC and NTC shall be jointly responsible
in four areas: 1) development and maintenance of a long-term strategic national
development plan as a guide to industry and potential investors, and the Commission; 2)
research and development activities; 3) representation and promotion of Philippine
interests in international bodies and negotiation of rights and obligations; and 4)
operation of a national consultative forum.

The rise in the number of telecommunication companies in the Philippines is a
challenge to a regulatory system whose role has traditionally been as an

implementor/enforcer of rules and regulations relative to rates, frequencies, CPCNS, and

115

franchises, in a market dominated by a single provider. The multi-operator environment
demands that a regulatory body like NTC must be capable of addressing the issues that
come along with such a scenario, as well as carrying out the reforms efficiently. In
addition to its existing functions, the Commission is responsible for further steps to
implement the Act. These include measures on market entry, pricing policy, inter-
operability of telecommunications services and equipment in conformity with
international standards, interconnection and corresponding charges, trade practices,
access to services, consumer protection, as well as fees and charges for costs and
expenses related to regulation and supervision of telecom operations.

The telecommunications industry generally welcomes the Act as the key
instrument for providing direction for the sector. However, the Act is expected to be
revised as part of the next phase of liberalization and as an effort to keep up with
technological, business, political, and socio-cultural developments in the Philippines and
elsewhere. Pending legislation, as of mid-1997 include (Market Reports, June 2, 1997):

0 House Bill No. 7615, proposing to amend R.A. 7925 by prohibiting transfers

of controlling interest, whether by transfers of sale of shares of stock, or by an
increase in capitalization, without Congressional approval. As of mid-1997,
this House Bill is was pending approval for a second reading in the House
Committee on Transportation and Communication. The Committee reasons
that a franchise is a special privilege granted by the Government, through
Congress, to an individual or group of individuals for their exclusive exercise
or use. The privilege is granted based on the integrity, financial capability, as
well as future investment plans of the franchise holder. To allow the transfer
of controlling interest without Congressional approval could result in the
franchise falling into the hands of new owners who may not be Similarly
qualified. Under such circumstances, it could encourage the application for
franchises by dummy representatives who would peddle the franchises once

they were granted. A counterpart Senate Bill No. 1580, was approved on third
and final reading in January 1997.

116

0 House Bill No. 2410 proposes to reorganize the NTC by clearly defining and
delineating its powers so that it can function outside the sphere of political
influence. This House Bill aims to make NTC a truly collegial body.

0 House Bill No. 2430 aims to prohibit and penalize cellular phone cloning and
other similar fraudulent schemes acquiring illegal cellular phone service. This
high-technology fraud is a “new crime”, since there is at present no law
specifically prohibiting and penalizing such fraud.

0 Senate Bill No. 1504 proposes to penalize officers and personnel of
telecommunications entities that refuse or fail to interconnect their facilities to
those of other telecommunications operators. Since business relies heavily on
telecom services, this Senate Bill is designed to maximize the use of telecom

facilities, improve the quality of services, and help spur rapid economic
growth.

0 House Bill No. 4729 aims to promote the cable television services industry as
a separate and distinct from the broadcast mass media industry, in which
foreign partnership is prohibited under the Philippine Constitution. This
House Bill also proposes to allow up to 40 per cent foreign investment in the
cable industry. Both this and the Senate version, Senate Bill No. 1365, were
both pending with their respective Transportation and Communication
Committees as of mid-1997.

4.5 Emerging Issues and Concerns

Interviews with key government, industry, and academic officials helped identify
some of the most urgent issues and concerns about the telecommunications sector. The
interviewees often talked about the same issues and concerns.

One issue is interconnection. Since interconnection agreements in the Philippines
are done on a bilateral basis, each company has to make individual negotiations with each
of the other companies. Having completed the roll out of its 330,000 required minimum
local exchange lines ahead of the 1998 deadline, Bayantel’s major concern now is the
long, drawn-out process of interconnection arrangements with PLDT. Bayantel claims

that PLDT’s interconnection rates are too high, and that the latter is not providing enough

117

interconnection facilities. PLDT, being the dominant incumbent with a nationwide

backbone, naturally would want to seek the most advantageous arrangement when a

company negotiates for interconnection. The new players have been clamoring for NTC

to take a more active role in facilitating interconnection in order to lessen delays, but the

Commission has assumed a minimum intervention policy, and claims it is expected to

intervene only during a deadlock. Delays have also been attributed to shortages in the

world supply of fiber optic cable and other equipment used for interconnection.

E0. 59 stipulates penalties for violating interconnection rules, but none of these

penalties have yet been imposed. The sanctions, as stated in Section 13, include:

1.

Imposition of such administrative fines, penalties, and sanctions as may be
allowed or prescribed by existing laws;

Suspension of further action on all pending and future applications for
permits, licenses, or authorizations of the violating carrier or operator and in
which particular case, the NTC Shall be exempted from compliance with the
provisions of Executive Order No. 26 dated 7 October 1992 on the period for
the disposition of cases or matters pending before it;

With the approval of the President, directive to the appropriate government
financial or lending institutions to withhold the releases on any loan or credit
accommodation which the violating carrier or operator may have with them;

Disqualifying of the employees, officers, or directors of the violating carrier
or operator from being employed in any enterprise or entity under the
supervision of the NTC; and

In appropriate cases, suspension of the authorized rates for any service or
services of the violating carrier or operator without disruption of its services to
the public.

In May 1996, the then DOTC secretary said that the DOTC was more inclined towards

extending support to telecom firms rather than effecting penalties, if the companies might

fail to meet the three-year deadline for installing LEC networks (Jara, May 23, 1996).

118

Alongside the concern about interconnection are concerns about interconnection
charges. PLDT has been criticized for the high access fees it imposes on other
companies. PLDT charges USDO.35 per minute to interconnect incoming calls from the
US. that it handles through its network for rival IGF operators, but only pays USD0.09
per minute to other telecom companies offering the same service. The new companies
have been asking the NTC to get a ceiling for interconnection charges, however, R.A.
7925 states in Article VI, Section 18:

“The access charge/revenue sharing arrangements between all
interconnecting carriers shall be negotiated between the parties and
the agreement between the parties shall be submitted to the
Commission. IN the event the parties fail to agree thereon within a
reasonable period of time, the dispute shall be submitted to the
Commission for resolution.”

A third issue is the universal service strategy itself, the service area scheme
(SAS). The idea of dividing the country into 11 service areas and assigning each to a
telecommunications company assures -- at least in principle - that local service will be
developed in the entire country. Theoretically also, each provider must deploy its
minimum requirement of 300,000 lines or 400,000 lines or 700,000 lines depending on
the franchise, by 1998. A few of the telecom companies are reportedly falling behind in
their own roll-out schedules, opening up the possibility that the projected total number of
lines may not be met by 1998, or service areas may be given to another company that has
proven its ability to meet targets.

However, it is difficult, if not impossible for a new company to enter the local
exchange market and get its own service area, or get a nationwide license instead of a

service area assignment. An example is Bell Telecoms (BellTel) which applied for a

CPCN to become an integrated telephone network, next to PLDT. BellTel, owned by the

119

Puyat-Reyes, Madrigal, Ortigas, Maramba, and Bayot families originally proposed to
invest USD3.9 billion and install 2.6 million lines nationwide, of which one million lines
would be put up in one year (Market Reports, July 23, 1996). The company believes that
rather than having multiple telecommunications providers in various provinces, there
should just be two major competitors aside fi'om PLDT serving on a nationwide-basis.
However, eighteen companies opposed BellTel’s application. NTC Commissioner
Simeon Kintanar denied the application despite a recommendation for approval submitted
by the NTC’s two deputy commissioners F idelo Q. Dumlao and Consuelo Perez. Bell
Telecoms brought the case to the Supreme Court.13

The implementation of the service area scheme addresses the country’s need for
universal service and it presents a sense of direction for telecommunications
development. However, looking at the telecommunications situation more closely
reveals a rather fragmented strategy. For example, Digitel is leasing for 30 years, with an
option to buy any time, the Tranche 1 telephone lines put up in Regions 3, 4, and 5 under
the National Telephone Plan started in 1988. Digitel won the bid to lease the facility
before the SAS was implemented, and hence was not given an area. Operating the facility
is to a great degree like providing for a service area. However, under the SAS, there are

companies tasked to develop local exchange service in the same regions where the

 

'3 In mid-1997, the Supreme Court overturned Mr. Kintanar’s decision and ordered the NTC to decide on
the BellTel case as a collegial body. NTC’s next step was to meet and decide on the case. NTC Deputy
Commissioner F idelo Q. Dumlao was tasked to draft the guidelines to define issues such as who is
supposed to initiate the en banc meetings, the frequency of these deliberations and changes, if any, in the
flow of documents within the Commission (BusinessWorld Online, May 20, 1997
http://bworld.com.ph/Corporate World/Corpbriefs.html). But four companies, Globe, Bayantel/ICC,
Islacom, and Smart submitted a motion for reconsideration regarding the Supreme Court ruling. In their
petition, the four companies said that granting BellTel’s application for a nationwide authorization goes
against “ethical fairplay,” “will violate the service area scheme,” and is “antibusiness as it will scare away
investments” (Jara, Marifi S. “NTC asked to defer ruling on BellTel plea,” Business World Internet
Edition. June 24, 1997. http://bworld.com.ph).

120

Tranche 1 is. So it is possible to have three providers in at least the major towns and
cities in Regions 3, 4, and 5. Aside from PLDT, each region would have two other
providers, one assigned through the SAS, and Digitel, the company leasing the Tranche.
Region 3 would have Smart (given service area); Region 4 includes PT&T (given
service area); and Region 5 is served by Bayantel (given service area). The other
example is SubicTel, which was given exclusive license to provide local service for the
Subic Bay Metropolitan Authority (SBMA) locale, a rapidly developing business,
convention, and tourist area converted from the former Subic Naval Base. Under the
SAS, the Subic area, which is in Region 3, should be covered by Smart. Additionally,
there are the small private telephone companies all over the country that continue to serve
their respective areas but may not necessarily be interconnected with the major
companies. Up to now, the MPTO is still setting up public calling offices which will
eventually be privatized, as prescribed in R.A. 7925.

The implementing guidelines for ED. 109 cite penal provisions in Article VI,
Sections 30 and 31 for those who violate the Order, but like BO. 59, none have yet been
imposed.

The fourth issue is rates and metering. There is a proposed increase in national
direct dialing (NDD) rates to make domestic operations more efficient. While other
utilities have been regularly raising prices, the last time there was an increase in basic
phone rates was in 1983. Individual companies are submitting petitions to the NTC, and
they propose approximately 20 per cent increase in NDD rates and 20 per cent decrease

in international direct dialing (IDD) rates.

121

PLDT is also seeking rate increase for basic phone charges, from PhP267.47 to
PhP3 87 .50 for residential use, and from PhP576.78 to PhP756.80 for business phones. It
is also proposing a call metering system to compensate for international call rate
reduction. With the call metering system, PLDT will charge PhP0.50 per minute in
excess of allotted monthly free minutes. Various groups oppose PLDT’s rate rebalancing
and metering proposal, including Globe Telecom, ETPI, PAPTELCO, the local
government units of Cavite City, Zamboanga City, Cebu City, and Iloilo City, Alliance of
Homeowners Association of Northern Quezon City, Telecom Users Group of the
Philippines, Philippine Internet Service Organization, Philippine Network Foundation,
and the Philippine Council for the Advancement of Science and Technology Research
and Development (http:l/www.sequel.net/~ck).

The move to restructure rates is a result of the reduction in international
accounting rates advocated by the US. Federal Communications Commission (FCC), and
this is bound to affect Philippine telecom revenues. Declining accounting rates means
the US. carriers will reduce the amount it remits to their partners abroad. Currently, the
accounting rate between the Philippines and the US. is US$1.00 per minute or processed
call, which is split between the corresponding companies (presently, PLDT and US.
companies). The proposed per minute reduction from USD1.00 to around USDO.38
would result in an industry-wide revenue loss, mostly affecting PLDT at this point.
Therefore, the local companies are responding to this issue by decreasing IDD rates and
increasing NDD rates as part of the revenue restructuring scheme.

Reporting performance on roll-outs and its meaning is the fifth issue. For

example, when a telecommunication company rolls-out 10,000 local exchange lines, this

122

does not automatically mean that there are 10,000 new paid subscriptions right away.
This is important in the overall accuracy in assessing and monitoring the Philippine
telecommunications sector.

Sources in industry, government, and academe all agree that they foresee mergers
and acquisitions and alliances occuning, and that only three to four major players who
adopt an integrated approach to telecommunications will be able to survive and provide
telecommunications services alongside PLDT. “Criteria for survival” primarily include
financial capabilities, management expertise, leading-edge technology, and a well-trained
workforce, among other things. Size alone will not determine success. Rather, a
company which “embodies the goal of productivity; take stock of the effects of
regulation, technologies, and changes in consumer demand; requires a firm to use
internationally accepted indicators of productivity; and is complemented by strong
commitment to succeed will determine whether a company will continue flourishing after
the turn of the century” (Chua, 1996 as cited in Perez, 1996).

Size may not be the sole determinant of success, but strategic collusions and
alliances seem to be the trend, for example, Smart’s 9.8 per cent buy-in into ETPI in
August 1996, and Bayantel’s 46.62 per cent acquisition of Extelcom. Geographically,
it makes sense for Smart and ETPI to pool efforts and resources Since their service areas
are contiguous to each other. ETPI has the experience in international
telecommunications, while Smart has been successful in its cellular phone business.
Smart expects the 9.8 per cent stake in ETPI to increase to 49.8 per cent (Dela Cruz,
1997). With its equity in Extelcom, Bayantel expands into the CMTS business which

would broaden their customer base for its IGF services.

123

PLDT is finding ways to manage the competition it faces and the effects of an
impending cut in US. telephone rates by reducing staff and restructuring local and
overseas call tariffs (Aglay, 1997). The company has been gradually reducing its staff
of almost 18,000, aiming to cut staff to 15,000 by the year 2000. Despite the emerging
competition, PLDT posted a net income of PhP6.44 billion in 1996, up from PhP5.751
billion in 1995 while its revenues increased to PhP28.616 billion from PhP25.252 billion.
International long distance calls accounted for 55 per cent of PLDT’S revenues in 1996,
while 16 per cent came from local long distance calls, and 28 per cent from local calls.

PLDT has remained the dominant carrier, having an established operational
nationwide backbone servicing other telecommunication companies. With increasing
telecommunication activity, a single backbone is no longer enough. Nine companies
organized Telecoms Infrastructure Corporation of the Philippines (Telicphil) to construct
a USD149 million backbone facility which will rival PLDT’S. The backbone project,
also known as the National Digital Transmission Network, will use Synchronized Digital
Hierarchy (SDH) technology and build transmission networks nationwide. It will use a
combination of digital microwave radio, land-based fiber optic cable, and submarine
fiber-optic cable systems. Telicphil’s alliance of major equity holders includes
Bayantel/ICC, sister companies Capwire and PT&T, Islacom, Smart, Extelcom, ETPI,
Philcom, and Piltel. However, companies are Slowly pulling out of the project, such as
Piltel, Philcom, and Islacom, reportedly for financial as well as management reasons.

The sixth pertinent issue is technology. Wireless local loop (WLL) and PCS/PCN
are seen as the potential technologies to be used to accelerate local exchange installation.

WLL uses radio frequencies to connect a telephone network instead of fiber optics or

124

even cop
\I'LL: F
System.
(Business
In
and comr
Increasing
boundarie
Internet is
is regulate
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addresses
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even copper cable. Four companies have already been granted licenses for the use of
WLL: PLDT, Digitel, Philcom/Majortel and South Cotabato-based Marbel Telephone
System. NTC plans to limit use of fiequencies to local exchange carriers only
(BusinessWorld Online, November 26, 1996).

In line with the issue of new technology, the growing convergence of computers
and communication calls for a re-evaluation and possible revision of existing laws.
Increasing digitalization Speeds up information, but can also begin to blur the traditional
boundaries separating voice from data communications. Based on R.A. 7925, the
Internet is considered as a value-added service. While the telecommunications industry
is regulated by the NTC, Internet service is not.

The Philippine Constitution specifies that mass media ownership is limited to
Filipino citizens, while telecommunications which is defined as a public utility, require
capitalization and ownership to be 60 per cent Filipino and no more than 40 per cent
foreign-owned. It distinguishes between mass media and telecommunication companies
with the assumption that the latter, in serving as carriers of specific messages to specific
addresses or recipients, are acting as public utilities. But the Internet as a
communications medium, carries in great degree, news and information in digital form to
recipients, as well as “broadcasting” of news in text, voice, and video on the World Wide
Web (Hebrona, 1997). As such, the Internet would be hard to categorize either as mass
media or telecommunications. Currently, telecom firms in the Philippines are required
to seek prior approval from the NTC before they can provide value-added services,
Internet included, to ensure that there is no cross-subsidization from a firm’s other

services.

125

 

Tec
subscribers
use electror

their calling

 

cloned pho1
. 1
connecuons.
therefore an
company an
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technology
subscribers 1
also pending
penalize cell

cellular phon

Technology and monitoring-related problems faced by CMTS providers and their
subscribers include cellular cloning and other forms of phone fraud. Criminal syndicates
use electronic devices to “tap” numbers off the airwaves and use the cellular phones for
their calling purposes (Asia Times, 1996; Perez, 1996). Some even sell the rights of the
cloned phone, usually one based on analog technology, and make money on illegal
connections. Others apply for a cellular phone using fictitious names and addresses,
therefore any bill sent to the supposed subscriber gets returned to the cellular phone
company and remains unpaid. In these and other cases, cellular companies reportedly
lose an estimated USD1.9 million in collectibles each month due to illegal charges made
by various criminal syndicates. In response, cellular companies that are still using analog
technology are installing fraud prevention devices, as well as starting to migrate
subscribers to the more secure digital technology-based cellular service. Legislation is
also pending in Congress such as House Bill No. 2430 which aims to prohibit and
penalize cellular phone cloning and other similar fraudulent schemes acquiring illegal

cellular phone service.

126

This cha

5.1

‘1’“

1
service)
Telecom
service
competit

T
Private 5
dGVelopn
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(DOTC 1
Philippin
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families,

CHAPTER FIVE

SUMMARY AND CONCLUSIONS

This chapter addresses the research questions raised in Chapter One.

5.1 RQl: What impact has the changes in the market structure of
telecommunications in the Philippines had on service and competition?
When and why (economic, political, cultural, domestic, and foreign forces)
was competition introduced?

With the introduction of major reforms in 1993 through BO. 109 (universal
service) and ED. 59 (interconnection) and in 1995 through R.A. 7925 (Public
Telecommunications Policy Act of the Philippines), the Philippine telecommunications
service provision has moved from virtual monopoly to that of a more open and
competitive environment.

The institution of these reforms proves the Government’s commitment to let the
private sector be the “engine of growth” in telecommunications and to spearhead the
development, financing, and operation of services and facilities. Paving the way for these
reforms were earlier liberalization efforts like Cellular Mobile Telephone System Policy
(DOTC Department Circular 92-269) enacted in November 1992 which encouraged the
Philippine business community to participate in the lucrative cellular and IGF businesses.
They responded by pouring in domestic and private foreign capital, the latter coming

fiom newly-formed alliances and partnerships. Certain Filipino families or groups of

families, through their business firms or holding companies, created new companies or

127

revitaliz:
connecte
interests.
from the
enterpris.
P.
provided
orders a1
market, 1
Bayantel
Philcom/
0Perators
telephony
and Smar
T]
requiring
goals by
allowed I
Universal
implemer
Hmrlhne
diSCuSSiOl

The idEa

revitalized existing ones. These families are generally considered as the rich and well-
connected elite, and they have extensive, successful, and well-established business
interests. Although they glean much business experience and management expertise
from their respective organizations, it is interesting to note that most of these families’
enterprises are not in telecommunications or communications-related fields.

Prior to these reforms, PLDT was the dominant operator in the services it
provided, most notably in local and long distance telephone service. The executive
orders allowed eight more international gateway facility (IGF) providers to enter the
market, bringing the total to nine companies including PLDT. These providers include
Bayantel/ICC, Capwire/PT&T, Digitel, ETPI, Globe Telecom, Islacom,
Philcom/MajorTel, and Smart. The two cellular mobile telephone service (CMTS)
operators that existed before 1993, Piltel and Extelcom continue to provide only cellular
telephony, and they now have three other competitors, namely Globe Telecom, Islacom,
and Smart who are also the three companies that have both IGF and CMT S licenses.

The Government further defined private sector participation in ED. 109 by
requiring all the new IGFS and CMTS providers to contribute to the universal service
goals by establishing local lines. The IGFs and CMTS companies all have licenses that
allowed them to operate nationwide, and they are permitted to do so provided they fulfill
universal service obligations. An important issue was raised regarding how to effectively
implement the goal of setting up more than four million telephone lines in a short, three-
year time period. The Government and the private sector thus held consultations and
discussions from which they devised a strategy called “service area scheme” (SAS).

The idea of the SAS was for CMTS providers and IGF operators to install 400,000 and

128

300,000
demand 1
only the '
The servi
country i
is part of
\\
least two
various 8.
assigned
11 is also
or IGF p
Private T
013€r21tor :
However.
up laIldlir
case, the 1
A]
Private in
capital re
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300,000 landlines in specific areas nationwide, respectively, in order to address the
demand for much-needed telephone lines. To ensure that lines will not be concentrated in
only the profitable urban areas, a ratio of urban lines to rural lines (10:1) was instituted.
The service areas combined profitable and unprofitable cities and provinces, dividing the
country into 11 areas. The profitable Metro Manila was divided into four, each of which
is part of a bigger service area

With the implementation of the SAS, each province or city theoretically has at
least two local exchange caniers or basic telephone providers, if not more. There are
various scenarios with the SAS. In an area where PLDT is already present, the company
assigned to cover that particular area provides new competition; hence a duopoly ensues.
It is also possible that an area could have PLDT, the new operator who is a major CMTS
or IGF player, and small company who is a member of the Philippine Association of
Private Telephone Companies (PAPTELCO). Another arrangement would be the new
operator and the PAPTELCO member, in areas where PLDT does not provide service.
However, it is conceivable that the new company would be solely responsible for setting
up landlines, especially if it is an unserved area where no service has ever existed. In this
case, the new company is a monopoly, up until another operator(s) if any, enters the area

Almost all of the new operators linked up with foreign business partners, whether
private investors or major telecommunications companies, or both. Given the high
capital requirements, technology, and management needed for telecommunications
development, the new operators recognized that it would be extremely difficult to meet
the Government’s landline quota on domestic capital alone. It was imperative for them to

- raise start-up capital and escrow requirements by inviting foreign investors and

129

telecomI
software
the IGF:
same car

C
instance.
increase
took pla
mainly t.
DOTC-11
Philcom:
telecom:
DC 94-;

1rurther 1

PhllCOms

telecommunication companies to invest as much as 40 per cent, as well as provide
software, hardware, technical expertise, training, and management know-how. Among
the IGFs, though, PLDT and Philcom/MajorTel do not have any foreign partners; the
same can be said about Piltel among the CMTS operators.

Changes and developments in other services and facilities must also be noted. For
instance, the paging market now has at least ten companies operating which is a marked
increase from the original two (Pocketbell and EasyCall) that operated before the reforms
took place. The first F ilipino-owned satellite was finally launched, after delays due
mainly to financing, ownership, and other management concems. There were also two
DOTC-led initiatives in international satellite service: one was the breaking up of
Philcomsat’s monopoly on international services by allowing all enfranchised
telecommunications firms direct access to all international fixed satellite systems (DOTC
DC 94-277- International Satellite Communications PolicY); the other step towards
further liberalizing the satellite industry is the proposed immediate privatization of
Philcomsat.

Like many other countries that introduced competition in telecommunications, the
developments in the Philippines resulted from a variety of factors over periods of time.
Chapter Three discussed the initial efforts to liberalize and deregulate
telecommunications started around 1988 during the Aquino government and which were
further strengthened in 1993 (E.O. 59 and 109) and 1995 (R.A. 7925) under the Ramos
administration as explained in Chapter Four. Promoting competition in

telecommunications has been part of a broader government policy to liberalize some of

130

the key SE
identified 1

A .
telephony
telecomm
Considerir.
25 years, i
95 per cer
urban area
communic
sole provic

Th.
telecomml
telecomml
addition 10

Th
foreign in‘
Various CC
Nations (1
ngmg 1:

Philippine

the key sectors in the economy. Telecommunications was one of the many sectors
identified for deregulation.

A viable telecommunications network has been sorely needed to serve basic
telephony needs of Filipino consumers. The increasingly sophisticated
telecommunication needs of the business community also had to be addressed.
Considering that the teledensity has not risen above 1.0 for every 100 persons in the last
25 years, it was indeed time for changes to occur. Prior to 1993, PLDT controlled about
95 per cent of installed landlines in the country, most of which were concentrated in
urban areas. With the increase in population and subsequent increase in need for
communication, it was obvious that dominant incumbent PLDT could no longer be the
sole provider.

The geographic make-up of the Philippines also calls for more widespread
telecommunications coverage. With the advances in wireless technology, the new
telecommunication players have been able to provide cellular and paging services, in
addition to the local lines being established.

The availability of sound telecommunications has also been a prerequisite when
foreign investors decide on whether to set-up businesses in the country or not. With the
various economic and business activities through the Association of SouthEast Asian
Nations (ASEAN), and APEC, telecommunications becomes a vital component in a
growing inter-regional trade and investment. Relative to its neighboring countries, the
Philippines is once again becoming an increasingly attractive and viable alternative site
for foreign corporations to set up regional headquarters or offices, especially with all the

telecommunications installation and upgrading being done throughout the country.

131

5.2 R1

Le
been han-
regulator}!
Philippine
primarily
President,
by Congre
Departing;
Telecom
the Munic

Cr
telecomm,
entire tele
under the
broadcast.
am vai

lImplement

5.2 RQ2. What impact has the regulatory framework had on the introduction
of competition? What are the forces (economic, political, cultural, domestic,
and foreign) that influenced its development? Is the regulatory structure
adequate/inadequate?

Let us first recall the regulatory framework in the Philippines. Regulation has
been handled by basically the same branches of government since the first radio
regulatory office was established in 1927. In the 1980s and through the 1990s, the
Philippine Government’s involvement in policy and regulation continues to be carried out
primarily through the different departments and agencies under the Office of the
President, which is the Executive Branch of government, and through legislation passed
by Congress, the Legislative Branch. The offices under the Executive Branch include the
Department of Transportation and Communications (DOTC), the National
Telecommunications Commission (NT C), the Telecommunications Office (Telof), and
the Municipal Telephone Projects Office (MTPO).

Created in 1979, the DOTC serves as the policy-making body for
telecommunications; responsible for the promotion, development, and regulation of the
entire telecommunications sector. The NTC is an agency with quasi-judicial powers
under the DOTC and functions as the regulatory arm for telecommunications, radio, and
broadcast. It is also the primary irnplementor of R.A.7925. Telof is DOTC’S operating
arm, providing limited telephone and telegraph services in rural areas. The MTPO is the
implementing arm for the Government’s municipal telephone program.

In addition to these agencies, the National Economic and Development Authority
(NEDA) formulates the country’s overall economic policies and development strategies.

The DOTC policies are prepared within this general framework. The Department of

132

Trade
formul

investi

teleco
could
locali

1995

that

dire
1m;
DO

tel:

der

to

th:

pr

Trade and Industry (DTI) and the Board of Investments (BOI), an agency of DTI,
formulate policies regarding investments in the country. They identify preferred areas of
investment which may qualify for incentives.

Congress is the only entity empowered to grant a franchise, without which no
telecommunications company can operate. Prior to R.A. 7925, local government units
could also grant local franchises for telecommunications operators servicing their
localities. However, this power was revoked when R.A. 7925 was signed into law in
1995.

As the Legislative Branch of government, Congress has the power to enact laws
that serve as the legal fiamework for telecommmrications, the most recent of which is
R.A. 7925.

Congress legislates laws, called Republic Acts (R.A.); DOTC issues policy
directives through Department Circulars (DC); and the NTC promulgates the
implementing guidelines for RAS and DCs through Memorandum Circulars (MC). The
DOTC and NTC usually initiate the President’s issuance of EOS affecting
telecommunications.

The Ramos Government understood that if it wanted to see telecommunications
develop and improve, it had to provide a regulatory environment that would allow entities
to challenge PLDT and add to PLDT’s efforts as well. The issuance of E.Os. 59 and 109
paved the way for new players to come into the market because these directives assured
them that they had a chance to compete and that PLDT can not prevent them from
providing services and facilities. BO. 109 also specified universal service obligations, or

landline requirements for CMTS and IGF providers as a condition in order for them to

133

 

keep

telecc
screer
obtair
busim
attrac1
impor

additil

provic
CMTS
local 1
becorr
lIISleat
It is r:
comm
Oppon
OWHEr

I’alSIng

dECish
PIESid.

diSmiS

keep their licenses. Given the substantial capital required for virtually all
telecommunications services and facilities, E.O. 109’s landline stipulations serve as a
screening mechanism for potential and aspiring telecommunication entities who want to
obtain CMTS and IGF licenses. Those who can afford to raise the capital are the “big
businesses” in the Philippines, or the rich and established families. AS a means of
attracting investors, the Government also offers incentives such as three per cent duty on
imported capital equipment, tax credit on domestic capital equipment and spare parts,
additional tax deduction for labor expense, and employment of foreign nationals.

However, there have been concerns about who should and who should not
provide telecommunications in the country, and who should make these decisions.
CMTS and IGF entities have nationwide licenses for these services, but can only provide
local telephone service in their particular service area. BellTel applied for a CPCN to
become an integrated telephone network, next to PLDT and get a nationwide license
instead of a service area assignment. BellTel’s case is the most controversial one so far.
It is reported that although BellTel’s application was approved by the two NTC deputy
commissioners, the commissioner overruled the approval and denied the company the
opportunity to be a nationwide local exchange provider. This is despite the fact that the
owners of BellTel are among the richest families in the Philippines who are capable of
raising the funds and contracting the necessary expertise.

The NTC is still not totally independent, and as a quasi-judicial body, its
decisions can be appealed to the Supreme Court. Agency heads are appointed by the
president, subject to approval by Congress, and have no fixed tenure. The president can

dismiss regulators unilaterally. In addition. NTC formulated the implementing

134

guid

C&III

their
prere

laws

telec
some
gove
NTC
the 1\
ensui
DOT
titties

invar

C0111}:
NTC

teleq

effeet

CleCisi

guidelines for the two E.O.s and is also mandated to implement R.A. 7925. Whether it
can uphold and enforce penalties stated in the guidelines is another issue.

Congress continues to maintain influence over regulatory agencies by controlling
their budgets, including salaries, and other expenses; granting franchises which are
prerequisite to obtaining a provisional authority then a CPCN from NTC; and legislating
laws important to telecommunications.

The DOTC spearheads policy-making while the NTC regulates and supervises the
telecommunications sector. There have been impressions that DOTC and NTC are
sometimes at odds with each other. While the DOTC may insist, for example, that
government should play a more active role in speeding up interconnection agreements,
NTC chooses to let the discussions between the carriers take its course. The DOTC and
the NTC have not established, nor is there adequate legislative provision for a means of
ensuring policy guidance from DOTC to NTC. This is also affected by the fact that the
DOTC leadership changed hands three times during the Aquino years, and also three
times so far under the Ramos administration. When the leadership changes, there are
invariably changes in policies, and subsequently implementation by the NTC.

The NTDP notes that the NTC is understaffed and underequipped to deal with the
complex issues facing the sector. Industry sources would say that there is a need for
NTC to train its staff members to keep them abreast with the rapid developments in
telecommunications as well as to re-train or refresh them on the basics.

The NTC needs to be strengthened to allow it to fulfill its assigned functions
effectively. A bill is currently in Congress that hopes to create NTC as a collegial

decision-making body and add much-needed staff resources. At present, there is one

135

CO

on

irn]

reg;
Scn'
poli
‘wifl
accr

exp:

rEVis

deVe

5;3

cenL

commissioner and two deputy commissioners; the commissioner usually has the final say
on decisions.

With a growing multi-operator environment, challenges are likewise emerging for
the Philippine regulatory system whose role has traditionally been as an
implementor/enforcer of rules and regulations relative to rates, frequencies, CPCNS, and
franchises, in a market dominated by a single provider. Much is now expected from a
regulatory body like NTC such as the capability to address issues and carry out reforms.
Some of the Commission’s new functions include measures on market entry, pricing
policy, inter-operability of telecommunications services and equipment in conformity
with intemational standards, interconnection and corresponding charges, trade practices,
access to services, consumer protection, as well as fees and charges for costs and
expenses related to regulation and supervision of telecom operations.

The telecommunications industry generally welcomes the Act as the key
instrument for providing direction for the sector, keeping in mind that is subject to future
revision to accommodate the technological, business, political, and socio-cultural

developments in the Philippines and elsewhere.

5.3 R03. What impact has the new competitive environment had on the
performance of the telecommunications sector? What are the factors
affecting this performance?

In three years (1993 to 1996), the nationwide telephone density grew 230 per
cent, from 1.4 to almost 4.7 telephone lines per 100 persons. BO. 59 and ED. 109 have

triggered a “roll-out fi'enzy” among telecommunications service providers in order to

136

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occr
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regil
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fulfill their local exchange obligations. However, telephone installation has mostly
occurred in the National Capital Region (NCR) also known as Metro Manila, where
teledensity grew from 6.9 to 20.8 telephone lines per 100 persons. Only 14 per cent of
the country’s 70 million population resides in Metro Manila, but 70 per cent of all the
fixed-line telephones are found here.

There has been a marked increase in the number of telephone lines in the regions,
as a product of the reforms. Except for the Autonomous Region of Muslim Mindanao
(ARMM), there has been over 100 per cent increase in growth from 1993 to 1996, both in
number of lines and in teledensity. There are more telephones now compared to what the
regions had prior to the reforms. It is interesting to note, however, that the teledensity
figures in the regions are below 4.0:100 compared to the national average of 4.66:100
persons, while that of NCR (Metro Manila) at 20.83:100 persons is almost five times
more than the national teledensity. This is evidence that almost all telecommunications
development in the past has been concentrated in Metro Manila which is the country’s
political and economic center.

The increases are not due to the new companies’ efforts alone. PLDT has been a
major contributor to the sector’s growth, particularly through the company’s expansion
efforts like the “Zero Backlog Project” which installed more than one million lines. In
fact, based on the data available, the new providers have fallen behind schedule for
fulfilling their respective obligations, except for Bayantel/ICC. Only Bayantel/ICC was
able to install and even exceed its requirement ahead of schedule. Digitel, Smart, and

Capwire/PT&T reported the next largest number of lines installed. For these and the

137

 

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immens
2,000 r
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other companies, the number of lines installed does not necessarily and immediately
mean that all these lines have been subscribed to.

These delays should not be surprising, considering among other things, the
immense capital investment needed to install telephone lines, (estimated to be USD1,000-
2,000 per line). In addition, the original time line of five years was shortened to three
years ending in 1998, as stipulated in R.A. 7925. From an operator’s standpoint, this
imposes additional pressure to raise the necessary capital, purchase the hardware and
software, install the telephone lines, and market their services to the consumers. There
are Government requirements and deadlines to meet, there are other Operators to compete
with, and there are potential and existing customers who expect quality
telecommunications service more than ever before.

Despite the stringent demands, the new operators have certain advantages over
PLDT such as implementing the latest telecommunications technology like digital
switches in their networks as these are built. Digital technology also allows the operators
to offer their subscribers a choice of optional services, like Direct Distance Dialing, Call
Waiting, Abbreviated Dialing, Do Not Disturb, Three Party Conference, and Call
Forwarding. This has forced PLDT to embark on expanding and modernizing its own
network. In 1991 only 21 per cent of the company’s lines were served by digital
switches. By the end of 1995, this had increased to 60 per cent. PLDT expects to have a
fully digital network by the end of 1997. Full digitalization of the transmission network,
however, is only expected to be achieved by the year 2000.

Interconnection is a prime issue that affects telecommunication perfOrmance.

Since interconnection agreements in the Philippines are done on a bilateral basis, each

138

 

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the men
and tht
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company has to make individual negotiations with each of the other companies. Among
the new operators, Bayantel/ICC completed installing its required landlines ahead of time
and thus needed to interconnect with PLDT as quickly as possible. PLDT, being the
dominant incumbent with a nationwide backbone, naturally would want to seek the most
advantageous arrangement when a company negotiates for interconnection.
Bayantel/ICC encountered an uphill climb in making arrangements with PLDT, the
former claiming that the latter charged too much and did not provide enough
interconnection facilities. Interconnection issues with PLDT have hampered the quality
service Bayantel’s facility is capable of but could not provide.

All the other operators are still rolling out their quotas, and it is still too early to
tell if the service area scheme will indeed accomplish the universal service goals, and
what kind of competition (perfect competition, oligopoly, duopoly) will evolve in the
various areas in the country.

In light of competition fi'om other operators, PLDT has stepped up on improving
other key performance indicators. The company has streamlined its human resources;
significantly decreased the average number of troubles per 100 working lines from 17.83
in 1993 to 6.68 in 1996; and increased responses to troubles within 24 hours from 78.80
per cent in 1993 to 97.80 per cent in 1996.

In contrast to the 40 per cent landline rollout as of 1996, CMTS and radio paging
services registered the increases of 150 per cent and 83 per cent, respectively between
1993 and 1996. Competition in both services intensified as the five CMTS providers and
11 paging operators introduced more affordable units and increasingly efficient services

through very well crafted advertising and aggressive marketing.

139

 

 

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additir
Calls,

6-8 0 /

C0”us

By the end of 1996, there were approximately 818,000 CMTS subscribers,
compared to 1995’s 493,484 cellular subscribers, which was already a marked increase
from 200,409 subscribers in 1994. Increased disposable income particularly in the cities,
increased mobility, and increased need for immediate communication, are some of the
many reasons for the high demand for cellular telephone service. Even with the
deployment of landlines, consumers continue to avail of CMTS due to its availability and
affordability.

However, CMTS providers and subscribers have their share of technology and
monitoring-related problems including cellular cloning and other forms of phone fraud
which greatly affect cellular service and the company’s overall performance. In
response, Congress is working on legislation, specifically House Bill No. 2430 (pending)
which aims to prohibit and penalize cellular phone cloning and other Similar fraudulent
schemes acquiring illegal cellular phone service.

There are eight new IGFs, and the surge to be a player in this market is
understandable considering it is the most profitable telecom segment. Currently,
international calls are more expensive than on domestic long-distance and local calls. In
addition, the sizable Filipino community abroad ensures a steady stream of international
calls. On the downside, however, international accounting rates have been decreasing by
6-8 % for the past five years and is expected to decline further.

Domestic and international developments concerns are forcing the Philippine
telecommunications entities to consider pooling resources, if they have not started doing
so, by possibly merging, swapping shares, acquiring, or aligning into some form of

collusion that would be most strategic and advantageous to the companies involved,

140

 

either
more 1

player

without jeopardizing services to consumers. This could lead to lesser, but bigger and

more integrated companies in the future, possibly an oligopoly of three or four strong

players, PLDT included.

141

 

A8161):

“Asia e
Asia P1

Ashley

Baer, 1

Bauer,

Bernt,

NFC a

CHAPTER SIX

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PHILIPPINE GOVERNMENT DOCUMENTS

Republic of the Philippines. Congress of the Philippines. 1995. Republic Act No.
7925. An Act to Promote and Govern Philippine Telecommunications and
the Delivery of Public Telecommunications Services. Approved March 1; in

effect March 15.

. 1995. The President’s 1994 Socio-Economic Report.

 

. 1995. Medium-Term Development Plan. 1993-1998.

 

. National Economic Development Authority. 1993.
Philippine Development Report 1987-1992.

 

. Department Transportation and Communication. 1993.
National Telecommunications Development Plan.

 

1993. Executive Order 59. Prescribing the Policy
Guidelines for Compulsory Interconnection of Authorized Public
Telecommunications Carriers in Order to Create a Universally Accessible
and Fully Integrated Nationwide Telecommunications Network and Thereby
Encourage Greater Private Sector Investment in Telecommunications.

 

148

 

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1993. Executive Order 109. Policy to Improve
Provision of Local Exchange Carrier Service.

 

PHILIPPINE PRIVATE SECTOR DOCUMENTS

Annual Reports of the new and existing telecommunications companies

INTERNET

hgp://bworld.com.ph
thjpz/lwww.pldt.com.ph
hgpzl/wwwsmartcomph
hgpzl/wwwbayantelcomph
http://www.globe.com.ph
hgp://www.pdi.com.ph
hgp://www.philstar.com.ph

149

APPENDIX A

DOTC Department Circular 92-269 (November 1992) -
Cellular Mobile Telephone System Policy

150

Republic of the Philippines
DEPARTMENT OF TRANSPORTATION & COMMUNICATIONS
OFFICE OF THE SECRETARY

Department Circular No. 92- 269
Subject: Cellular Mobile Telephone System Policy

The Scope of this policy shall only cover the Cellular Mobile Telephone System
(CMTS).

The government favors an open and competitive environment for services such as CMTS
Subject to availability of radio spectrum. It is recognized that the radio spectrum is a
limited resource, and that it must be used as efficiently as possible in conformity with
international telecommunications conventions to which the Philippines is a signatory.
The Government shall be guided by these principles in the formulation of the CMT S

policy.

To ensure the orderly development of the CMTS providing for a nationwide coverage, to
optimize the utilization of radio frequency spectrum allocation allowing for flexibility to
service providers and users and to provide healthy competition among authorized service
providers, DOTC hereby promulgates the following policy directives:

ARTICLE I - MARKET ENTRY

Section 1. Duly franchised operators may enter the CMTS market on a nationwide or
regional basis, subject to the availability of radio frequencies as determined by the
National Telecommunications Commission (NTC).

ARTICLE II - NETWORK INTERCONNECT ION AND
TECHNICAL STANDARDS

Section 2. All CMTS service providers shall design their CMTS networks and
systems in order to adhere to international technical recommendations as required by the
NTC. -

Section 3. All Public Switched Telephone Network (PSTN) service providers shall
be required to interconnect to the CMTS service providers, and the latter to each other in
a non-discriminatory manner and subject to reasonable compensation, under penalty of
sanctions that shall be imposed by the NTC.

ARTICLE III - SYSTEM AND TECHNOLOGY UPGRADES

Section 4. The NTC shall reserve appropriate frequency bands both for analog and
digital Cellular Mobile Telephone Service. Cellular systems operating outside these

151

frequency bands may be allowed, subject to availability of frequency spectrum specified
by international telecommunications conventions.

Section 5. During the period of transition from analog to digital CMTS, the analog
CMTS service providers who wish to migrate tot he digital system shall make provision
for the protection of the existing analog CMTS subscribers so that they will not be
disadvantaged.

ARTICLE IV - POLICY IMPLEMENTATION

The NTC is hereby directed to:

a) ensure that all CMTS service providers provide sufficient interconnecting circuits
to each other.

b) ensure that the PSTN operator provide sufficient interconnecting circuits to bed
able to render acceptable service, and to put in place an adequate traffic
measurement system that will be subject to a quarterly review by the parties
therein.

c) ensure that all agreements between and among the CMTS service providers and
the local PSTN carriers are non-discriminatory.

d) intervene and thereby impose the necessary actions and sanctions in the event that
the CMTS service providers and the local PSTN carriers fail to reach an
interconnection agreement.

e) prepare and issue the necessary implementation guidelines to the CMTS Policy
within a period of 30 days from the issuance hereof.

In this connection Department Circular No. 90-253 is superseded and any other
memorandum orders, pursuant to said circular or otherwise in conflict with this
Department Circular are hereby deemed revoked, amended or revised.

This Department Circular shall be effective upon the publication hereof.

(Sgd.) JESUS B. GARCIA, JR.

Secretary
1 1/1 1/92

152

APPENDIX B

BO. 59 (February 1993) -- Prescribing The Policy Guidelines For Compulsory
Interconnection Of Authorized Public Telecommunications Carriers In Order
To Create A Universally Accessible And Fully Integrated Nationwide
Telecommunications Network And Thereby Encourage
Greater Private Sector Investment In Telecommunications

153

MALACANANG
Manila

EXECUTIVE ORDER NO. 59

PRESCRIBING THE POLICY GUIDELINES FOR COMPULSORY
INTERCONNECT ION OF AUTHORIZED PUBLIC
TELECOMMUNICATIONS CARRIERS IN ORDER TO CREATE
A UNIVERSALLY ACCESSIBLE AND FULLY INTEGRATED
NATIONWIDE TELECOMMUNICATIONS NETWORK AND
THEREBY ENCOURAGE GREATER PRIVATE SECTOR
INVESTMENT IN TELECOMMUNICATIONS.

WHEREAS, in recognition of the vital role of telecommunications in nation-
building, it- has become the objective of government to promote advancement in the field
of telecommunications and the expansion of telecommunication services and facilities in
all areas of the Philippines;

WHEREAS, there is a need to enhance effective competition in the
telecommunications industry, in order to promote the State policy providing the
environment for the emergence of communications structures suitable to the balanced
flow of information into, and out of, and across the country;

WHEREAS, there is a need to maximize the use of telecommunication facilities
available and to encourage investment in telecommunications infrastructure by service
Provider duly authorized by the National Telecommunications Commission (N TC);

WHEREAS, there is a need to ensure that all users of the public
telecommunications service have access to all other users of the service whenever they
may be within the Philippines at an acceptable standard of service and at reasonable cost;

WHEREAS, the much needed advancement in the field of telecommunications
and expansion of telecommunication services and facilities will be promoted by the
effective interconnection of public telecommunications carriers or service operators.

WHEREAS, the Supreme Court of the Philippines, in the case of Philippine Long
Distance Telephone Co. v. The National Telecommunications [GR No. 88404, 18
October 1990, 190 SCRA 717, 734], categorically declared that "Rep. Act. No. 6849, or
the Municipal Telephone Act of 1989, approved on 8 February 1990, mandates
interconnection providing as it does that all domestic telecommunication carriers or
utilities... Shall be interconnected to the public switch telephone network ";

154

WHEREAS, under Executive Order No. 546 dated 23 July 1979, as amended, the
NTC has the power, as the public interest may require, "to encourage a larger and more
effective use of communications facilities, and to maintain effective competition among
private entities whenever the NTC finds it reasonably feasible" ; and

WHEREAS, there is a need to prescribe the consolidated policy guidelines to
implement Rep. Act No. 6849 and Executive Order No. 546, as amended.

NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Republic of the
Philippines, by virtue of the powers vested in me by law, do hereby order:

Section 1. The NTC shall expedite the interconnection of all NTC authorized
public telecommunication carriers into a universally accessible and fully integrated
nationwide telecommunications network for the benefit of the public.

Section 2. Interconnection between NTC authorized public telecommunications
carriers shall be compulsory. Interconnection shall mean the linkage, by wire, radio,
satellite, or other means, of two or more existing telecommunications carriers or
operators with one another for the purpose of allowing or enabling the subscribers of one
carrier or operator to access or reach the subscribers of the other carriers or operators.

Section 3. Interconnection shall be established and maintained at such point or
points of connections, preferably at the local exchanges level and at the junction side of
trunk exchanges as are required within a reasonable time We and shall be for sufficient
capacity and in sufficient number to enable messages between the system of the parties
involved in the interconnection.

Section 4. Interconnection shall permit the customer of either party freedom of
choice on whose system the customer wishes his call to be routed regardless which
system provides the exchange lines connecting to the local exchange. Such a choice may
be done initially through the use of distinct carriers access code assigned to the relevant
connectable system and ultimately, the local exchange providers upgrade to stored-
prograrn-controlled (SPC) exchanges, comparatively efficient interconnect (CEI) or equal
access pre-programmed option.

Section 5. Interconnection shall be mandatory with regard to connecting other
telecommtmications services such as but not limited to value-added services of radio
paging, trunking, radio, store and forward systems of facsimile or messaging (voice or
data), packet switching and circuit data switching (including the conveyance of messages
which have been or are to be transmitted or received at such points of connection),
information and other services as the NTC may determine to be in the interest of the
public and the attainment of the objective of a universally accessible , fully integrated
nationwide telecommunications network.

Section 6. Interconnection shall be negotiated and effected through bilateral
negotiations between the parties involved subject to certain technical/operational and

155

traffic settlement rules to be promulgated by the NTC; Provided, that if the parties fail to
reach an agreement within ninety (90) days from date of notice to the NTC and the other
party of the request to negotiate, the NTC shall, on application of any of the parties
involved, determine the terms and conditions that the parties have not agreed upon but
which appear to the NTC to be reasonably necessary to effect a workable and equitable
interconnection and traffic settlement.

Section 7. Interconnection among public communications carriers shall be
effected in such a manner that permits rerouting of calls from an international gateway
operator which is rendered inoperative, whether in whole or in part, in the event of strikes
or lock-outs, disasters, calamities and similar causes, to another international gateway
operator not so effected. A public telecommunications shall be allowed such permits to
operate an international gateway as may be necessary to service its own network
requirements; Provided, that its subsidiaries shall not be given a permit to operate another
international gateway.

Section 8. In prescribing the applicable technical/operational and traffic
settlement rules, NTC shall consider the following:

8.1 The technical/operational rules Should conform with the relevant
recommendations of the Consultative Committee on International
Telegraph and Telephone (CCITT) and the International
Telecommunications Union (ITU).

8.2 For Traffic settlement nrles:

(a) Either meet-on-the-air and/or midpoint circuit interconnection
between parties;

(b) For local exchanges point of interconnection, settlement shall be
on the basis of volume of traffic on the local connection based on
per minute with day and night rate differential. In case of store and
forward services for facsimile, data and voice mail, settlement
shall be on the basis of equivalent monthly trunk line charges as
generally charged by the local exchange carrier (LEC) to its
customer owning a PABX.

(c) For junction exchange point of interconnection, settlement Shall be
on the basis of volume of traffic carried over:

(i) Short haul connection not exceeding 150 kilometers; and
(ii) long haul connection exceeding 150 kilometers.

Similarly, a per minute rate shall be evolved with day and night
differential. The determination of the per minute rate is based on the

156

principle of recognizing recovery of the toll related cost and fair return of
the investment of the facilities employed in making the toll call exchange
between the systems.

(d) Subsidies which shall be approved on the basis of sound public
policy shall be allowed in two (2) ways:

(i) for operator assisted calls - an operator surcharge kept by the
system that employs the operator; and

(ii) access charge - the principle of access charge is an assistance to
the unprofitable rural telephone development, remote pay
stations, etc., thereby assuring the universal service obligation
of the PSTN operators. The introduction of the access charge
that will be passed on to the subscribers of the PSTN.

Section 9. Interconnection shall at all times satisfy the requirements of effective
competition and shall be effected in a non-discriminatory manner.

Section 10. The Points of Connection between public telecommunications carriers
shall be defined by the NTC, and the appointment of costs and division of revenues
resulting from interconnection of telecommunications networks shall be approved or
prescribed by the NTC.

Section 1 l. Interconnecting parties shall share the cost of interconnection in
accordance to with their respective responsibilities, maintain and operate their facilities
and comply with their obligations as agreed upon and approved by the NTC, or as
prescribed by the NTC.

Section 12. Interconnection and revenue sharing agreements approved or
prescribed by the NTC may be revoked, revised or amended as the NTC deems fit in the
interest of the public service.

Section 13. In the implementation of this Executive Order, the NTC may, after due
notice and hearing, impose the following penalties in case of violation of any of the
provisions hereof;

13.1 Imposition of such administrative fines, penalties and sanctions as may be
allowed or prescribed by laws;

13.2 Suspension of further action on all pending and future applications for
permits, licenses or authorizations of the violating carrier or operator and
in which particular case, the NTC shall be exempted from the compliance

with provisions of Executive Order No. 26 dated October 1992 on the
period for the disposition of cases or matters pending before it;

157

 

13.3 With the approval of the President, directive to the appropriate
government financial or lending institutions to withhold the releases on
any loan or credit accommodation which the violating carrier or operator
may have with them;

13.4 Disqualification of the employees, officers or directors of the violating
carrier or operator from being employed in any enterprise or entity under
the supervision of the NTC and

13.5 In appropriate cases, suspension of the authorized rates for any service or
services of the violating carrier or operator without disruption of its

services to the public.

Section 14. The NTC is directed to promulgate the implementing rules to this
Executive Order within ninety (90) days from the date of effectivity hereof.

Section 15. All Executive Orders, administrative orders, and other issuances
inconsistent herewith are hereby repealed, modified or amended accordingly.

Section 16. This Executive Order Shall take effect immediately.

DONE in the City of Manila, This 24th of February in the year of Our Lord, Nineteen
Hundred and Ninety-Three.

(Sgd.) FIDEL V. RAMOS
President of the Philippines

By the President

Antonio T. Carpio
Chief Presidential Legal Counsel

Certified True Copy
Aurora T. Aquino
Director IV
03/02/93

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APPENDIX C

DOTC Department Circular 93-273 (June 1993) —
Domestic Satellite Communications Policy

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Republic Of the Philippines
DEPARTMENT OF TRANSPORTATION & COMMUNICATIONS
OFFICE OF THE SECRETARY

Department Circular No. 93-273

Subject: DOMESTIC SATELLITE C OMMUNCA TIONS POLICY

The 1987 Constitution fully recognizes the vital role of communications in nation
building. It also contains the following provisions:

a) ARTICLE 11 Sec. 20. The State recognizes the indispensable role of the
private sector, encourages private enterprise, and provides incentives to
needed investments.

b) ARTICLE XII Sec. 19. The State shall regulate or prohibit monopolies
when the public interest so requires. No combination in restraint of trade
or unfair competition shall be allowed.

0) ARTICLE XVI Sec. 10. The State shall provide the policy environment
for the full development of Filipino capability and the emergence of
communication structures suitable to the needs and aspirations of the
nations and the balanced flow of information into, out of, and across the
country, in accordance with a policy that respects the freedom of speech
and of the press.

In the fulfillment of its mandate, the Department of Transportation and Communications
(DOTC) shall establish and administer a comprehensive and integrated program for
communications.

Satellite communications, an important telecommunications technology may, if harnessed
correctly, contribute significantly to the extension of all manners of communications
services to the people of the Philippines, many of whom now do not have access to any or
most of these services.

The thrust of the government is the promotion and development of a robust domestic
satellite services industry through a dynamic, healthy and competitive environment.
Certain aspects of satellite communications make it uniquely capable of satisfying some
of the special requirements of the country, especially the development of areas which are
difficult to serve through terrestrial facilities.

The focus of this policy statement is domestic satellite communications. It embraces the
activities of present and future domestic satellite services.

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This policy is the culmination of an extensive public examination of satellite
communications policy and regulatory issues, during which the public and industry have
had several opportunities to offer comments and suggestions.

Based on the foregoing, the DOTC hereby promulgates the following policy directives:

Section 1.

ARTICLE I
DEFINITION OF TERMS

The following definitions shall apply within the context of this policy:

a)

b)

d)

g)

h)

Satellite carriers’ carrier services - Satellite communications
services provided by a satellite carrier to a carrier, usually a
terrestrially-based carrier.

Space segment lessee - Any entity authorized by the National
Telecommunications Commission (NT C) to lease space segment
capacity.

PSDN — Public Switched Data Network. A data network operated
by an enfranchised telecommunications carrier that is authorized to
provide data and other related telecommunications services to the
public.

PSTN — Public Switched Telephone Network. A telephone
network operated by an enfranchised telecommunications carrier
that is authorized to provide telephony and other related
telecommunications services to the public.

Receive-only satellite earth station — A satellite earth station
designed to receive satellite signals. Such stations may be used to
receive date, such as stock market prices or newswire services, or
television programs.

Redistribution of satellite TV programs — The act of receiving
satellite TV programs and retransmitting same through any mode,
i.e., tape, wire or wireless for public viewing.

Satellite communications — Transmission, emission and/or
reception of radio signals involving one or more space and earth
stations.

Satellite communications service provider - Any entity authorized

by NTC to provide satellite communications services, either as a
carrier’s canier and/or common carrier.

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i) Satellite earth station — A station in the satellite service located
either on the earth’s surface or within a major portion of the earth’s
atmosphere and intended for communications.

j) Space segment — Composed of orbiting satellite and the associated
equipments used to track, monitor and control the operation of the
satellite. The term does not include ground equipment such as
earth stations.

k) Space segment provider — An owner or operator of in-orbit
communications satellite system, which leases or sells
communications capacity to duly authorized space segment
lessees.

ARTICLE H
MARKET STRUCTURE

Sec. 2. Duly enfianchised satellite communications service providers may provide
satellite communications services subject to the limitations of their respective franchises
and appropriate authorizations from the NTC. Satellite communications services
providers may be allowed to specialize in any facet of satellite communications services
or to offer a wide variety of satellite communications technologies and services. The
deployment of new services and new tariffs corresponding to the new services shall be
subject to the approval of the aforementioned agency.

ARTICLE III
MARKET ENTRY

Sec. 3. Authorizations for the provision of satellite communications services are
not to be limited to those satellite service providers currently possessing provisional
authorities (PA) or certificates of public convenience and necessity (CPCN). Any
qualified applicant may apply for a CPCN/PA to install, operate and maintain any
satellite related services. New PAS or CPCNS may be granted to communications service
providers whose franchises allow the provision of satellite communications services.
Such authority shall be subject to the NTC’s usual evaluation of legal, financial, technical
capabilities and the economic viability of the applicant and the sector itself.

Sec. 4. Private entities or corporations requiring satellite communications services
may be authorized by the NTC to own and operate their own private satellite networks,
only if the satellite communications service providers do no have adequate facilities,
available at fair and reasonable rates, to meet their requirements. Satellite station
terminal equipment, however, shall be included in the list of authorized customer
premises equipment (CPE) under NTC Circular No. 1-04-88.

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ARTICLE IV
INTERCONNECTION

Sec. 5. All PSTN and/or PSDN service providers shall be required to interconnect
with the satellite communications service providers, if so requested by the latter, or vice-
versa, in a non-discriminatory manner and subject to reasonable terms and conditions,
under penalty of sanctions that shall be imposed by the NTC. Non-discriminatory
interconnection shall mean the interconnection of satellite networks to the PSTN and/or
PSDN, or vice-versa, adhering to the interconnection standards, on the basis of equal and
fair interconnection settlements.

ARTICLE V
BROADCAST SERVICE

Sec. 6. A terrestrially-based radio and television broadcast station who desire to
supply or extend their station’s signal within their network, or to other broadcast stations,
or to cable television systems and TVROs, may obtain space segment capacity directly
fi'om space segment providers upon prior NTC authorization.

Sec. 7. Radio and television broadcast stations may provide additional news and
entertainment information services as part of their sub-canier broadcasting signal. These
stations shall, however, seek authorization fi'om the NTC before providing such
additional services.

ARTICLE VI
SATELLITE TELEVISION

Sec. 8 Owners and operators of TVROs who shall provide commercial
redistribution of television or other information received from satellites must obtain a
TVRO license from the NTC< as well as any other authorizations as may be required.

See. 9. Non-profit entities and individual owners not providing commercial
services using the television program or other information received from satellites need
not obtain a TVRO license from the NTC. However, they shall be required to register
their TVROs with the NTC.

Sec. 10. Authorized owners and operators of satellite television shall comply with
intellectual property rights and other applicable laws. It is also the policy of the
Government to respect the legal rights of owners, producers and authorized distributors
of such programs.
ARTICLE VII
DEDICATED SPACE SEGMENT

Sec. 11. The DOTC supports the concept of an economically viable, dedicated
domestic satellite space segment for the Philippines or participation in a consortium with
nearby countries with similar needs.

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ARTICLE VIII
GOVERNMENTAL CONCERNS

Sec. 12. The DOTC shall pursue the policy of democratization in the ownership
and operation of satellite services and Operations. It shall discourage the crossing over of
entities engaged in the ownership, control and operation of broadcast and
telecommunications facilities on the one hand, to the ownership, control and operation of
the print media business, and vice versa.

Sec. 13. The DOTC shall recommend to appropriate Government departments the
promulgation of fiscal policies towards the encouragement of investments in the sector
for the development of satellite telecommunications infrastructure.

Sec. 14. The DOTC shall encourage Goverrunent departments to use commercial
communications service providers, including satellite service providers, to supply their
telecommunications requirements, rather than construct their own networks.

See. 15. The DOTC shall coordinate with other government departments to
examine how satellite communications may be used in innovative ways to meet the social
development, social welfare and educational needs of the nation.

Sec. 16. The DOTC shall institute appropriate measures to facilitate access to
official development assistance funds by the private service providers, for investment in
the nation’s telecommunications infrastructure.

Sec. 17. The nation’s satellite communications facilities shall be used to promote
the integrity, interest and welfare of the nation in accordance with its laws and policies.

ARTICLE IX
POLICY IMPLEMENTATION

Sec. 18. The NTC shall, after the effectivity of this Circular, perform the
following:

a) within fifteen (15) days promulgate the guidelines, rules and
regulations implementing the policies hereof.

b) within fifteen (15) days, promulgate a streamlined procedure for
the grant of permits and licenses to TVROS.

c) act on any pending requests for provisional authority to provide
satellite communications services and/or obtain pemrits and/or

licenses for satellite communications facility based on the policies
set forth.

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(1) ensure that PSTN and/or PSDN Operators provide sufficient
interconnecting circuits upon request by satellite communications
service providers, in order to provide adequate service.

e) ensure that all agreements between satellite communications
service providers and PSTN and/or PSDN operators are non-
discriminatory, fair and reasonable as to their terms and conditions.

f) intervene and thereby impose the necessary actions and sanctions
in the event that the satellite communications service providers and
the PSTN and/or PSDN Operators fail to reach an interconnection
agreement within thirty (30) days from date or request.

g) promulgate within thirty (30) days appropriate settlement
procedure to adequately compensate the local PSTN and/or PSDN
operators through the implementation of fair and equitable access
charge or revenue sharing arrangements.

h) impose or apply actions and sanctions in accordance with law.
ARTICLE X
FINAL PROVISIONS
Sec. 19. Any existing department orders, circulars, memorandum, issuances and or

rules and regulations inconsistent with this Circular are hereby repealed or modified
accordingly.

Sec. 20. In the event that any provision of this Circular is declared unconstitutional
or void in accordance with law, the validity of the other provisions shall not be affected
by such declaration.

Sec. 21. This Circular shall take effect fifteen (15) days after its publication in the
Official Gazette or any newspaper of general circulation, provided further, that at least
three (3) certified copies thereof shall be filed with the University of the Philippines Law
Center.

(Sgd.) JESUS B. GARCIA, JR.

Secretary
06/ 1 4/ 93

165

APPENDIX D

BO. 109 (July 1993) Policy to Improve the Provision of
Local Exchange Carrier Service

166

MALACANANG
Manila

EXECUTIVE ORDER NO. 109

POLICY TO IMPROVE THE PROVISION OF
LOCAL EXCHANGE CARRIER SERVICE

WHEREAS, local exchange service is fundamental to the goal of providing
universal access to basic and other telecommunications services;

WHEREAS, during the development phase, cost-based pricing of services such
as national and international long distance and other telecommunications services may be
employed to generate funds which may then be used to subsidize the local exchange
service;

WHEREAS, while the telecommunications sector as a whole is profitable, the
profit mainly come from the toll services particularly from the international long distance
service; and

WHEREAS, there is a need to promulgate new policy directives to meet the
targets of Government through the National Telecommunications Development Plan
(NTDP) of the Department of Transportation and Communications (DOTC), specifically;
(I) to ensure the orderly development of the telecommunications sector through the
provision of service to all areas of the country; (2) to satisfy the unserviced demand for
telephones; and (3) to provide healthy competition among authorized service providers.

NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Republic of the
Philippines, by virtue of the powers vested in me by law, do hereby order:

~ Section. 1. Definition of Terms. The following definitions shall apply within the
context of this policy:

(a) Basic Telecommunications Service - refers to local exchange Residence
and business telephone service and telegraph service without additional
features;

(b) Cost-based pricing - refers to a system of pricing in which the actual cost
of providing service establishes the basic charge to which a fixed mark-up
is added to collect a standard charge to all users without discrimination;

(c) Local Exchange Carrier Service - refers to a telecommunications service,
primarily but not limited to voice-to-voice service, within a contiguous

167

 

geographic area furnished to individual subscribers under a common local
exchange rate schedule;

(d) Value-based pricing - also, known as value of service pricing refers to a
system of pricing where cost of service establishes the minimum charge
and a variable mark-up is added to collect revenue from those who value
the service more highly; and

(e) Universal Access - refers to the availability of reliable and affordable
telecommunications service in both urban and rural areas of the country.

Section 2. Objective. The objective of this policy is to improve the provision of
local exchange service in unserved and underserved areas as defined by the National
Telecommunications Commission (NTC), thus promoting universal access to basic
telecommrmications service.

Section 3. General Policy. The Government shall pursue the policy of
democratization in the ownership and operation of telecommunication facilities and
services.

Section 4. Cross Subsidy. Until universal access to basic telecommunications
service is achieved, and such service is priced to reflect actual cost, local exchange
service shall continue to be cross-subsidized by other telecommunications services within
the same company.

Section. 5. Service Packaging. Authorized international gateway operation shall
be required to provide local exchange service in unserved and underserved areas,
including Metro Manila, within three (3) years from the grant of an authority from the
NTC, under the following guidelines:

(a) Authorized gateway operators shall provide a minimum of three hundred
(3 00) local exchange lines per international switch termination;

(b) At least one (1) rural exchange line shall be provided for every ten (10)
urban local exchange lines installed;

(c) The establishment of Public Calling Offices at the rural barangay level
shall be given an appropriate credit by the NTC towards the obligation to
provide local exchange service. The above figures are derived fi'om the
following factors: number of exchange lines, number of international
switch terminations, traffic, grade of service and demand.

(d) No permit for an international gateway facility shall be granted an

applicant unless there is a clear showing that it can establish the necessary
foreign correspondence ships; and

168

(e) Carriers already providing local exchange service in accordance with
Section 5(a), (b) and (c) shall be authorized to operate an international
gateway subject to applicable laws.

Section 6. Subsidigry. The subsidiaries of a public telecommunications carrier
operating an authorized international gateway shall not be allowed to operate another
gateway in accordance with the Executive Order No. 59 (1993). For this purpose, a
telecommunications company shall be considered as a subsidiary if any Of all of the
following conditions exists:

(a) The two companies share the services of key operating and
management personnel;

(b) The shareholdings of one company, together with the shareholdings
of its stockholders, in the other company aggregate more than
fifty percent (50%) of the outstanding capital stock of the latter
company; or -

(c) One company and its stockholders have a combined exposure in the
other company in the form of loans, advances, or asset-lease
equivalent to more than fifty percent (50%) of the capital accounts
of the other company.

Section 7. Cellular Mobile Telephone System. Authorized international gateway
operators may also be authorized to provide Cellular Mobile Telephone System (CMTS)
service and other non-basic telecommunications services which are possible sources of
subsidy for local exchange carrier service.

Section 8. Non-Basic Services. Authorized providers of other nonbasic
telecommunications services which are possible sources of subsidy shall be required to
provide local exchange carrier service in accordance with guidelines, rules and
regulations prescribed by the NTC.

Section 9. Duration of Services. The obligation to provide local exchange canier
service shall remain in force for as long as the service providers described in Sections 5,
7 and-8 hold their authorizations to provide their respective non-basic services.

Section 10. Other Requirements. The foregoing provisions shall be without
prejudice to the other requirements for the grant of franchises and Certificates of Public
Convenience and Necessity.

Section 11. Interconnection Reguirement. All telecommunications service

networks shall be interconnected in a non-discriminatory manner in accordance with
Executive Order No. 59 (1993) and its implementing guidelines.

169

Section 12. Financial Reporting Requirements. The internal subsidy flows shall be
made explicit in the financial reporting system of the telecommunications service
providers.

Section 13. Policy Implementation. The NTC is hereby directed to promulgate the
guidelines, rules and regulation to implement this Executive Order within thirty (30) days
from the effective date of this Executive Order.

Section 14. Violations. Any violation of this Executive Order shall be subject to
the same penalties provided for in Section 13 of Executive Order No. 59 (1993).

Section 15. Transitory Provisions. Existing telecommunications service providers
described in Sections 5, 7 and 8 shall have a period of five (5) years to comply with the
above requirement to provide local exchange service.

Section 16. Pending Applications. Telecommunications service providers with
existing and pending applications for International Gateway Facility, Cellular Mobile
Telephone System (CMTS) and other Value Added Services (V AS) providers need not
revise their applications with the NTC. However, upon issuance of the Provisional
Authority or CPCN, as the case may be, they shall be given a period of this (3) months
within which to submit and file the necessary applications for local exchange service in
accordance with the provisions hereof.

Section 17. Remaling Clause. All executive orders, administrative orders and
other executive issuances inconsistent herewith are hereby repealed, modified or
amended accordingly.

Section 18. Effectivigy. This Executive Order shall take effect immediately. Done

in the City of Manila, this 12th day of July in the year of Our Lord, Nineteen Hundred
and Ninety-Three.

(Sgd.) FIDEL V. RAMOS
President of the Philippines

By the President

Teofisto T.Gingona, Jr.
Executive Secretary

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APPENDIX E

R.A. 7925 (March 1995) -- An Act to Promote and Govern the Development of
Philippine Telecommunications and the Delivery
of Public Telecommunications Services

171

 

{fl- _ In 1.. T u.‘ a» - s
l

Republic of the Philippines
Congress of the Philippines

Metro Manila
Third Regular Session

Begun and held in Metro Manila, on Monday the twenty-fifth day of July, nineteen
hundred and ninety-four.

Republic Act No. 7925

AN ACT TO PROMOTE AND GOVERN THE DEVELOPMENT OF
PHILIPPINE TELECOMMUNICATIONS AND THE DELIVERY
OF PUBLIC TELECOMMUNICATIONS SERVICES.

Be it enacted by the Senate and House of Representatives of the Philippines
in Congress assembled:

ARTICLE I. GENERAL PROVISIONS

SECTION 1. Short Title. - This act shall be known as the "Public
Telecommunications Policy Act of the Philippines.

SEC. 2. Scope and Application. - This Act shall apply to all public
telecommunications entities in the Philippines.

SEC. 3. Definitions and Interpretations. For purposes of this Act, the following
terms shall be used:

a) Telecommunications - any process which enables a telecommunications entity
to relay and receive voice, data, electronic messages, written or printed matter, fixed or
moving pictures, words, music or visible or audible signals or any control signals of
any design and for any purpose by wire, radio or other electromagnetic, spectral.
optical or technological means.

172

 

b) Public telecommunications entity - any person, firm, partnership or
corporation, government or private, engaged in the provision of telecommunications
services to the public for compensation.

c) Broadcasting - an undertaking the object of which is to transmit over-the-air
commercial radio or television messages for reception of a broad audience in a
geographic area.

d) Franchise - a privilege conferred upon a telecommunications entity by
Congress authorizing that entity to engage in a certain type of telecommunications
service.

e) Local exchange operator - an entity providing transmission and switching of
telecommunications services, primarily but not limited to voice-to-voice service, in a
geographic area anywhere in the Philippines.

f) Inter-exchange carrier - an entity, sometimes referred to as carrier's carrier or
national backbone network operator, authorized to install, own and operate facilities
which connect local exchanges within the Philippines and to engage in the business
of inter-exchange national long distance services.

g) International carrier -- an entity primarily engaged in the business of providing
transmission and switching of any telecommunications service between the
Philippines and any other point of the world to which it has an existing
correspondent or prospective interconnection agreements.

h) Value-added service provider (VAS) - an entity which, relying on the
transmission, switching and local distribution facilities of the local exchange and inter-
exchange operators, and overseas carriers, offers enhanced services beyond those
ordinarily provided for by such carriers.

i) Public toll calling station - a non-exclusive facility at which the public may by
the payment of appropriate fees, place as well as receive telephone calls and/or
telegrams or other messages.

j) Mobile radio telephone system - a wide area mobile radio telephone system
with its own switch, base stations and transmission facilities capable of providing high
capacity mobile telecommunications by utilizing radio frequencies.

k) Interconnection - the linkage by wire, radio, satellite or other means of two or
more existing telecommunications carriers or operators with one another for the
purpose of allowing or enabling the subscribers of one carrier or operator to access
or reach the subscribers of the other carriers or Operators.

173

 

 

 

ARTICLE II. POLICY AND OBJECTIVES

SEC. 4. Declaration of National Policy - Telecommunications is essential to the
economic development, integrity and security of the Philippines, and as such shall be
developed and administered as to safeguard, enrich and strengthen the economic,
cultural. social and political fabric of the Philippines. The growth and development of
telecommunications services shall be pursued in accordance with the following policies:

a) A fundamental objective of government is to develop and maintain a viable,
efficient, reliable and universal telecommunication infrastructure using the best available
and affordable technologies, as a vital tool to nation building and development;

b) The expansion of the telecommunications network shall give priority to
improving and extending basic services to areas not yet served. For this purpose,
government shall promote a fair, efficient and responsive market to stimulate the
growth and development of the telecommunications facilities and services, with
emphasis on the accessibility by persons to basic services in unserved and
undeserved areas at affordable rates;

c) The radio frequency spectrum is a scarce public resource that shall be
administered in the public interest; and in accordance with international agreements
and conventions to which the Philippines is a party and granted to the best
qualified. The government shall allocate the spectrum to service providers who will
use it efficiently and effectively to meet public demand for telecommunications
service and may avail of new and cost effective technologies in the use of methods
for its utilization;

(1) Rates and tariff charges shall be fair, just and reasonable and for this purpose.
the regulatory body shall develop tariff structures based on socio-economic factors
and on financial, technical and commercial criteria as measures to ensure a fair rate
of return and as a tool to ensure economic and social development;

c) Public telecommrmications services shall be provide by private enterprises. The
private sector shall be the engine of rapid and efficient growth in the
telecommunications industry;

f) A healthy, competitive environment shall be fostered, one in which
telecommunications carriers are free to make business decisions and to interact with
one another in providing telecommunications services, with the end in view of
encouraging their financial viability while maintaining affordable rates;

g) A fair and reasonable interconnection of facilities of authorized public network

operators and other providers of telecommunications services is necessary in order
to achieve a viable, efficient, reliable and universal telecommunications services;

174

 

 

 

h) The government shall give all the assistance and encouragement to Philippine
international carriers in order to establish interconnection with other countries so as
to provide access to international communications highways on a competitive
basis;

i) For efficiency, practicability and convenience, but with due regard to the
observance of due process at all times, regulation of telecommunications entities
shall rely principally on an administrative process that is stable, transparent and
fair, giving due emphasis to technical, legal. economic and financial considerations;

j) No single franchise shall authorize an entity to engage in both
telecommunications and broadcasting. either through the airwaves or by cable;

k) Ownership of public telecommunications entities to as wide a number of
people as possible, preferably to its customers, in order to encourage efficiency and
public accountability and to tap personal savings shall be encouraged;

l) The development of a domestic telecommunications manufacturing industry to
meet the needs of the Philippines and to take advantage of export opportunities shall be
promoted without preventing, deterring or hampering the goal of full universal service;
and

m) Human resources skills and capabilities must be harnessed and improved to
sustain the growth and the development of telecommunications under a fast
changing telecommunications environment.

ARTICLE III. ADMINISTRATION

SEC 5. Responsibilities of the National Telecommunications Commission. - The
National Telecommunications Commission (NT C) shall be the principal administrator of
this Act and as such shall take the necessary measures to implement the policies and
objectives set forth in the Act. Accordingly, in addition to its existing functions, the
Commission shall be responsible for the following:

a) Adopt an administrative process which would facilitate the entry of qualified
service providers and adopt a pricing policy which would generate sufficient
returns to encourage them to provide basic telecommunications services in
unserved and underserved areas;

b) Ensure quality, safety, reliability, security, compatibility and inter-operability
of telecommunications facilities and services in conformity with standards and
specifications set by international radio and telecommunications organizations to
which the Philippines is a signatory;

175

c) Mandate a fair and reasonable interconnection of facilities of authorized public
network operators and other providers of telecommunications services through
appropriate modalities of interconnection and at a reasonable and fair level of
charges, which make provision for the cross subsidy to unprofitable local exchange
service areas so as to promote telephone density and pride the most extensive
access to basic telecommunications services available at affordable rates to the
public;

d) Foster fair and efficient market conduct through, but not limited to the
protection of telecommunications entities from unfair trade practices of other carriers;

e) Promote consumers welfare by facilitating access to telecommunications
services whose infrastructure and network must be geared towards the needs of individual
and business users;

f) Protect consumers against misuse of a telecommunications entity's monopoly or
quasi-monopolistic powers by, but not limited to, the investigation of complaints
and exacting compliance with service standards from such entity; and

g) In the exercise of its regulatory powers, continue to impose such fees and
charges as may be necessary to cover reasonable costs and expenses for the
regulation and supervision of the operations of telecommunications entities.

SEC. 6. Responsibilities of and Limitations to Department Powers. - The
Department of Transportation and Communications (DOTC) shall not exercise any power
which will tend to influence or effect a review or a modification of the Commission's
quasi-judicial functions. In accordance with the Commission, however, the Department
shall, in accordance with the policies enunciated in this Act be responsible for:

a) the development and maintenance of a long-term strategic national
development plan for telecommunications to serve as a guide to the industry and potential
investors as well as to the Commission;

b) the coordination of research and development activities in government with the
work of other institutions in the field of telecommunications;

c) the representation and promotion of Philippine interests in international bodies
and the negotiation of the nation's rights and obligations in international
telecommunications matters; and

d) the operation of a national consultative forum to facilitate interaction amongst

the telecommunications industries, user groups, academic and research institutions
in the airing and resolution of important issues in the field of communications.

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ARTICLE IV. TELECOMMUNICATIONS ENTITIES

SEC. 7. Categories of Telecommunications Entities. - A telecommunications
entity shall be authorized to operate in one or more of the telecommunications categories
mentioned in this Act provided each category is covered by its franchise.

SEC. 8. Local Exchange Operator. - A local exchange operator shall:

a) provide universal basic telephone service to all subscribers who applied for
such service within a reasonable period and such standards as may be prescribed by the

Commission and at such tariff as to sufficiently give it a fair return on its '

investments.

b) be protected from uncompensated by-pass or overlapping operations of other
telecommunications entities in need of physical links or connections to its
customers in the area except when it is unable to provide within reasonable time and
at desired standards, the interconnection agreements required by such entities.

e) have the first option to provide pay telephone services or public calling stations
in the area covered by its network.

d) be entitled to a fair and equitable revenue sharing arrangements with the inter-
exchange carrier or such other carriers connected to its basic network.

SEC. 9. Inter-Exchange Carrier. - The number of entities allowed to provide
inter-exchange national long distance services may be limited, but as a matter of policy,
where it is economically viable, at least two (2) carriers, shall be authorized: Provided,
however, That a local exchange carrier shall not be restricted from operating its own
inter-exchange carrier service if its viability is dependent hereto. Such inter-exchange
carrier shall have the following obligations:

a) it shall interconnect with other networks in the same category and with local
exchange carriers or other telecommunication entities, upon application and within a
reasonable time period, and under fair and reasonable level of charges in order that
domestic and international long distance services are made possible; and

b) it shall have the right to establish and operate its own tandem switching
facilities to which intemational calls or overseas carriers have to course their messages or
signals.

SEC. 10. International Carrier. - Only entities which will provide local
exchange and services can demonstrably show technical and financial capability to install
and operate an international gateway facility shall be allowed to operate as an
international carrier.

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VI

 

‘1

The entity so allowed shall be required to produce a firm correspondent or
interconnection relationships with major overseas telecommunications authorities or
carriers within one (1) year from the grant of the authority.

The international carrier shall also comply with its obligation to provide the local
exchange service in unserved or underserved areas within (3) years from the grant of the
authority as required by existing regulations: Provided, however, That said carrier shall
be deemed to have complied with the said obligation in the event it allows an affiliate
thereof to assume such obligation in the event it allows an affiliate thereof to assume such
obligation and who complies therewith.

Failure to comply with the above obligations shall be a cause to cancel its
authority or permit to operate as an international carrier.

SEC. 1 1. Value-added-Service Provider. - Provided that it does not put up its
own network, a VAS provider need not secure a franchise. A VAS provider shall be
allowed to competitively offer its services and /or expertise, and lease or rent
telecommunications equipment and facilities necessary to provide such specialized
services, in the domestic and/or intemational market in accordance with network
compatibility.

Telecommunication entities may provide VAS, subject to the additional
requirements that:

a) prior approval of the Commission is secured to ensure that such VAS offerings
are not cross-subsidized fi'om the proceeds of their utility operations;

b) other providers of VAS are not discriminated against in rates nor . denied
equitable access to their facilities; and

c) separate books of accounts are maintained for the VAS.

SEC. 12. Mobile Radio Services. - In a local telephone exchange area, more than
one duly enfranchised provider of mobile radio services, distinct and separate from the
local exchange carrier, may be allowed to operate. However, such entities shall secure
prior authority from the Commission and in addition, comply with the conditions
imposed on VAS and with the norms on radio frequency spectrum utilization.

The operator of a mobile radio telephone system shall comply with its obligations
to provide local exchange service in unserved and underserved areas in accordance with
existing regulations. Failure to comply with this obligation within three (3) years from
grant of the authority Shall be a cause to cancel its authority or permit to operate a mobile
radio telephone system.

SEC. 13. Radio Paging Service. - Duly enfranchised radio paging services
involving either voice or data messages, shall be allowed to compete freely in rates,

178

FT).

 

 

number of operators, or variety of operating modalities, subject only to norms on radio
frequency spectrum utilization.

ARTICLE V. OTHER SERVICES AND FACILITIES

SEC. 14. Customer Premises Equipment. - Telecommunications subscribers shall
be allowed to use within their premises terminal equipment, such as telephone, PABX,
facsimile, data, record, message and other special purpose or multi-fimction
telecommunications terminal equipment intended for such connection: Provided, That the
equipment is type-approved by the Commission.

SEC. 15. Radio Frequency Spectrum. - The radio frequency spectrum allocation
and assignment shall be subject to periodic review. The use thereof shall be subject to
reasonable spectrum user fees. Where demand for specific frequencies exceed
availability, the Commission shall hold Open tenders for the same and ensure wider
access to this limited resource.

ARTICLE VI. FRANCHISE, RATES AND REVENUE DETERMINATION

SEC. 16. Franchise. - No person shall commence or conduct the business of
being a public telecommunications entity without first obtaining a franchise.

The Commission, in granting a Certificate of Public Convenience and Necessity
(CPCN) may impose such conditions as to duration and termination of the privilege,
concession, or standard or technical aspects of the equipment, rates, or service, not
contrary to the terms of the franchise. In no case, however, shall the CPCN be shorter
than five (5) years, nor longer than the life of the franchise. A CPCN expiring at the same
time as the fianchise shall be deemed to have been renewed for the same term if the
fianchise itself is also renewed or extended.

Expansion and financing of network and services, utilizing equipment compatible
with or homologous to existing or previously approved plant and facilities, in order to
service additional demand in the same areas where the previously approved network and
services have been installed, shall not require any approval by the Commission.

The upgrading of existing plant and network facilities including the financing
thereof, for the purpose of retiring or replacing obsolete or outmoded equipment with
state of the art equipment and technology in order to improve the quality or grade of
service being rendered to the public within the same areas covered by the existing plant
and facilities previously approved, shall likewise not require the approval of the
Commission.

179

 

The Commission, however, shall not grant a subsequent CPCN for another
segment of service or extend the area service coverage of an entity which has failed to
satisfactorily comply with its commitments to the Commission to provide a particular
service in the original area coverage under an earlier authorization.

SEC. 17. Rates and T arififs‘. - The Commission shall establish rates and tariffs
which are fair and reasonable and which provide for the economic viability of
telecommunications entities and a fair return on their investments considering the
prevailing cost of capital in the domestic and international markets.

The Commission shall exempt any specific telecommunications service from its
rate or tariff regulations if the service has sufficient competition to ensure fair and
reasonable rates of tariffs. The Commission shall, however, retain its residual powers to
regulate rates or tariffs when ruinous competition results or when a monopoly or a cartel
or combination in restraint of free competition exists and the rates or tariffs are distorted
or unable to function freely and the public is adversely affected. In such cases, the
Commission shall either establish a floor or ceiling on the rates or tariffs.

SEC. 18. Access Charge/Revenue Sharing - The access charge/revenue sharing
arrangements between all interconnecting carriers shall be negotiated between the parties
and the agreement between the parties shall be submitted to the Commission. In the event
the parties fail to agree thereon within a reasonable period of time, the dispute shall be
submitted to the Commission for resolution.

In adopting or approving an access charge formula or revenue Sharing agreement
between two or more carriers, particularly, but not limited to a local exchange,
interconnecting with a mobile radio, inter-exchange long distance carrier, or international
carrier, the Commission shall ensure equity, reciprocity and fairness among the parties
concerned. In so approving the rates for interconnection between the telecommunications
carriers, the Commission shall take into consideration the costs of the facilities needed to
complete the interconnection, the need to provide the cross-subsidy to local exchange
carriers to enable them to fulfill the primary national objective of increasing telephone
density in the country and assure a rate of return on the total local exchange network
investment that is at parity with those earned by other segments of the
telecommunications industry; Provided, that international carriers and mobile radio
operators which are mandated to provide local exchange services shall not be exempt
from the requirement to provide the cross-subsidy when they interconnect with the local
exchanges of other carriers. Provided, fizrther, that the local exchanges which they will
additionally operate shall equally he entitled to the cross-subsidy from other international
carriers, mobile radio operators, or inter-exchange carriers interconnecting with them.

SEC. 19. Uniform System of Accounts. - The Commission shall require
telecommunications entities to set up a uniform system of accounts which shall be one of
the bases in establishing rates and tariffs. Where a single entity spans more than one
category of telecommunications service, a separate book of accounts shall be maintained
for each category or specialized classification.

180

 

ARTICLE VII. RIGHTS OF TELECOMMUNICATIONS USERS

SEC. 20. Rights of End Users - The user of telecommunications service shall
have the following basic rights:

a) Entitlement of utility service which is nondiscriminatory, reliable and
conforming with minimum standards set by the Commission;

b) Right to be given the first single-line telephone connection or the first party-
line connection within two (2) months of application for service against deposit, or
within three (3) months after targeted commencement of service in the barangay
concerned per the original schedule of service expansion approved by the
Commission, whichever deadline comes later;

c) Regular, timely and accurate billing. courteous and efficient service at utility
business offices and by utility company personnel; and

d) Thorough and prompt investigation of, and action upon complaints. The utility
shall endeavor to allow complaints to be received over the telephone and shall keep
a record of all written or phoned-in complaints.

ARTICLE VIII. TELECOMMUNICATIONS DEVELOPMENT

SEC. 21. Public Ownership. - In compliance with the Constitutional mandate to
democratize ownership of public utilities, all telecommunications entities with regulated
types of services shall make a bonafide public offering through the stock exchanges of at
least thirty percent (30%) of its aggregate common stocks within a period of five (5)
years from effectivity of the Act or the entity's first start of commercial operations
whichever date is later. The public offering shall comply with the rules and regulations of
the Securities and Exchange Commission.

SEC. 22. Privatization of Existing Facilities. - The Department shall, within
three (3) years from effectivity of this Act, privatize all telecommunications facilities
currently owned and/or operated by the government for public use, plus those facilities
currently being planned under various bilateral funding arrangements. Unless otherwise
authorized by law, privatization of telecommunications facilities as well as construction
of telephone infrastructure shall be made through public bidding.

SEC. 23. Equality of Treatment in the Telecommunications Industry. - Any
advantage, favor, privilege, exemption or immunity granted under existing franchises, or
may hereafter be granted, shall ipso facto become part of previously granted
telecommrmications franchises and shell be accorded immediately and unconditionally to
the grantees of such franchises: Provided, however, That the foregoing shall neither apply

181

 

to nor affect provisions of telecommunications franchises concerning territory covered by
the franchise, the life span of the franchise, or the type of service authorized by the
franchise.

ARTICLE IX. FINAL PROVISIONS

SEC. 24. T ransitory Provision. - All telecommunications services deregulated
hereby and which are operating at the effectivity of this Act, may continue to have their
rates and tariffs approved by the Commission until the end of the calendar year of the
effectivity of this Act. Existing franchises that are not operating or without pending
applications for certificates of public convenience at the time of effectivity of this Act are
deemed revoked.

All interconnection agreements previously entered into between
telecommunications carriers shall remain in full force and effect but the parties shall.
within six (6) months from the effective of this Act, review their access charging/revenue
sharing formula and submit to the Commission an amendment thereof, if necessary, in
order to comply with the guidelines on the access charging/revenue sharing formula
contained in Section 18 of this Act.

SEC. 25. Separability Clause. - Any portion or provisions of this Act that may
be declared unconstitutional or invalid shall not have the effect of nullifying other
portions or provisions hereof as long as such remaining portions or provisions can still
subsist and be given effect in their entirety

SEC. 26. Repealing Clause. - All laws, ordinances, rules, regulations and other
issuances or parts thereof, which are inconsistent with this Act are hereby repealed or
modified accordingly.

SEC. 27. Eflectivity Clause. - This Act shall take effect fifteen (15) days from the
date of its publication in at least two (2) newspapers of general circulation

Approved,

(Sgd) JOSE DE VENECIA, JR.
Speaker of the House of Representatives

(Sgd.) EDGARDO J ANGARA
President of the Senate

182

I

This Act which is a consolidation of Senate Bill No. 11 and House Bill No. 14028
was finally passed by the Senate and the House of Representatives on February 20, 1995.

(Sgd.) CAMILO L. SABIO

Secretary General House of Representatives
(Sgd.) EDGARDO P. TUMANGAN
Secretary of the Senate

APPROVED: March 1, 1995

(Sgd.) FIDEL V RAMOS
President of the Philippines

 

Note: Published in the Philippine Journal and Malaya in their respective issues on
March 7, I 995.

183

 

l'lij- .- " ' I

 

APPENDIX F

List of Resource Persons Interviewed in the Philippines

184

LIST OF PERSONS INTERVIEWED
JANUARY-FEBRUARY 1997
MANILA, PHILIPPINES

 

 

 

 

Name ] Title I Organization
PRIVATE
Jones T. Campos Director, Public Relations Globe Telecom
Group
Alfredo B. Carrera Assistant Vice President Philippine Long Distance

Telephone Company

 

Ramon G. Duremdes,
Jr.

Head, Business & Services
Development Department

Smart Communications, Inc.

 

Emilio P. F estejo

Executive Vice President and
Chief Subscriber Services
Officer

Express Telecommunication
Co., Inc. (Extelcom)

 

 

 

 

 

 

 

 

 

 

Maria Mercedes F. Vice President, National Bayan Telecommunications
Garcia Carrier Relations Holdings Corporation
(Bayantel)
Arne Larsson Adviser to Business Manager, Digital Telecommunications
Business Division Philippines, Inc. (Digitel)
Epitacio Marquez President and Chief Operating Capitol Wireless, Inc.
Officer (Capwire)
Antonio A. Ong Director Philippine Agila Satellite,
Inc. (PASI)
Vice President, Government Philippine Global
Relations Communications, Inc.
(Philcom)
Alfredo Panizales Executive Vice President and The New Domestic Satellite
General Manager Philippines, Inc. (Domsat)
Richard H. Pratte Assistant Vice President, Eastern Telecommunications
Carrier Relations Philippines Inc. (ETPI)
Rogelio V. Quevedo Legal Counsel Bell Telecommunication
Philippines, Inc. (Bell
Telelcom)
Marilyn Eleanor P. President Philippine Wireless, Inc.
Santiago (Pocketbell) and
President and Chief Operating Philippine Telephone and
Officer Telegraph (PT&T)
Eric J. Severino Senior Vice President, Digital Telecommunications

 

Business Division

 

Philippines, Inc. (Digitel)

 

185

 

 

LIST OF PERSONS INTERVIEWED (cont’d).

J ANU ARY-F EBRUARY 1997
MANILA, PHILIPPINES

 

Deborah Anne N. Tan

Manager — Investor Relations

Pilipino
Telephone
(Piltel)

Corporation

 

Orlando Vea

President

Smart Communications , Inc.

 

Alfredo O. Velez

Head of Strategic Planning
and Business Deveopment

Isla Communications Co.,
Inc. (Islacom)

 

John W. Young

Senior Vice President and
Assistant General Manager

Digital Telecommunications
Philippines, Inc. (Digitel)

 

Ricardo C. Banagale

 

Executive Director

 

Philippine Electronics and
Telecommunications
Federation (PETEF)

 

GOVERNMENT

 

Ranier Angeles

Department

of Transportation
and Communication (DOTC)

 

 

Simeon Kintanar

 

Commissioner

 

National
Telecommunications
Commission (NTC)

 

 

186

 

PERSONS CONTACTED IN 1995
MANILA, PHILIPPINES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name I Title [ Organization
PRIVATE
Arsenio R. Afable Jr. Assistant Vice President, Philippine Communications
Marketing Satellite Corporation
Benedict Buhain Director, Business Globe
Development
Jesus Renato T. Carpio Interconnect/National Carrier Bayantel/ICC
Relations
Ramon O. Cojuangco, President Piltel
Jr
Giselle Garcia Public Affairs Associate Smart
Conrado A. Hernandez Fixed Network Division Islacom
Wilson C. Morrell President Philippine Association
of Private Telephone
Companies
Raymundo P. Reyes Vice President, Traffic Radio Communications of
Operations and Corporate the Philippines, Inc.
Development
William L. Velasco Vice President, Operations Capwire
Lea M. Wong Manager, Employment and Philippine
Training Global Communications, Inc.
CONSULTANTS
Dr. Jose Azarcon Consultant
Mr. Lincoln Drilon, Consultant

 

 

 

187

 

PERSONS CONTACTED IN 1995 (cont’d).
MANILA, PHILIPPINES

 

GOVERNMENT

 

Ofelia Datuin-Astrera

Jr. Geodetic Engineer

Department of
Transportation and
Communication, Municipal

Telephone Projects Office

 

Nelson P. Beniabon

Chief, Advanced Technology
Division

Philippine Council for the
Advanced Science and
Technology Research and

 

 

 

 

 

 

Development
Edgar L. Doria Infrastructure Staff National Economic and
Development Authority
Josefina Trinidad- Undersecretary for Department of
Lichauco Communications Transportation and
Communication (DOTC)
ACADEME
Florangel Rosario- President Asian Institute of Journalism
Braid

 

Juan F. Jarnias

Professor Emeritus, Institute

University of the Philippines

 

 

of Development Los Bafios
Communication
Felix Librero Professor University of the Philippines
Los Bafios
Rex L. Navarro Directror, Institute of University of the Pfilippines

Development Communication

Los Bafios

 

 

Ramon Tuazon

 

Associate Director

 

Asian Institute of Journalism

 

188