SERVICE TO THE LAST MILE
Sponsorship Speech Committee Report No. 78/Senate Resolution No. 213
Session Hall, Senate of the Philippines, Pasay City
May 16, 2017

Delivered by Hon. SHERWIN T. GATCHALIAN, Senator of the Republic:

Good afternoon, Mr. President and esteemed colleagues.

I have the honor to present Part One of this Report containing a summary of the most significant findings that were culled from three, long and intense public hearings conducted by the Committee on Economic Affairs, jointly with the Committee on Trade, Commerce and Entrepreneurship, on Proposed Senate Resolution No. 213 which I filed on October 25, 2016. This resolution directed the appropriate Senate committee to conduct an inquiry, in aid of legislation, to generate evidentiary data to establish the economic effects upon the consumer, as well as the national economy, of the present model of operation and regulation of the telecommunications industry. The purpose of conducting this inquiry is to decipher the most befitting legislative policy that will embody a key economic reform in the telecommunications industry that protects the interests of the consumer in the midst of a rapidly evolving telecommunications ecosystem. The issues discussed in the public hearings were delimited by the following points of inquiry: REGULATION, COMPETITION and SPECTRUM MANAGEMENT.

Pursuant to Republic Act No. 7925, otherwise known as the "Public Telecommunications Policy Act of the Philippines", it is the National Telecommunications Commission, or the NTC, which has jurisdiction over the supervision, adjudication and control over all telecommunications services throughout the country. The NTC has further made it its mission to "proactively and continually create a responsive regulatory environment for a viable, affordable, reliable and accessible telecommunications and information infrastructure and services to ensure the welfare and protection of our people.

However, despite efforts at making the telecommunications industry an open, competitive and dynamic sector of the Philippine economy, the Philippines was recently ranked to have the slowest internet speed in the whole of Asia Pacific. This was revealed in the latest "State on the Internet Report" of Akamai, the global leader in content delivery network services, for the Fourth Quarter of 2016. We have already been overtaken by India which was previously ranked to have the slowest average connection speed in the Asia Pacific Region. In the same State of the Internet Report, Akamai revealed that South Korea was again the top country in the world with the fastest average connection speed. The gap between South Korea (with a 26.1 average Mbps) and the Philippines (with a 4.5 average Mbps) -- is almost 22Mbps. And yet, despite having the slowest average connection speed in the region, the Philippines has some of the most expensive internet connections in the world.3 It was precisely this inequitable context - pervading our everyday lives as consumers of telecommunications services in the country - that prompted us to conduct this legislative inquiry.

Does the present model of operation and regulation of the telecommunications industry promote the paramount welfare of the consumer? It was brought to light during the public hearings that the NTC is organizationally handicapped as a regulator to ensure that consumers are given genuine options, quality services and reasonable prices by the existing telecommunications companies or the so- called telcos. First, the NTC's present organizational and legal framework affects its independence as a regulator. It should be reorganized and given fiscal autonomy to enable it to freely create an environment of regulatory certainty and operational conditions that are necessary to promote the paramount welfare of consumers. Second, there is an urgent need to depoliticize the appointment of its commissioners. The complex and rapidly evolving nature of the industry requires officials who are qualified and fully capable of formulating and deploying policies for the sustainable development of the industry. The commissioners should also have a fixed term of office in order to eliminate their vulnerability to all forms of pressure that may constrain or discourage them from implementing plans of action that promote the rights and welfare of the consumer. This will prevent the recurrence of instances in the past where some NTC officers would be threatened with lawsuits whenever they engaged, or were poised to engage, in activities that were detrimental to the bottom-line of the telcos. The NTC must be empowered and strengthened to be able to shield its officers from such threats of litigation and harassment.

We proceed to the second point of inquiry whether the present system of operation and regulation of the telecommunications industry allows the realization of the policies and objectives under the Philippine Competition Act. As the issues were intertwined, it was discussed whether the Co-Use Agreement of the 700-Megahertz spectrum by Globe and Smart has any economic effect on the consumer in terms of prices, options and quality of services. It was also heavily debated whether the joint acquisition effectively diminished, or eliminated, the viability for a potential third player.

Our present system does not guarantee a competitive environment by the mere entry of a third player. The capacity of such third player to bring in real competition against the existing duopoly is contingent on various factors such as- the availability of spectrum, capitalization, an incentive systems for new players. During the public hearings, an NTC official pronounced that the currently available spectrum allocations are sufficient for the entry of a viable third player into the telecommunications industry. In fact, this claim has been consistently reiterated by the NTC during the first Telco Summit held in March.

I beg to disagree that the present available spectrum allows the entry of a viable third player into the telecommunications industry. Spectrum is a frequency of electromagnetic radiation in the range at which radio signals are transmitted. It is the means by which telcos deliver services to their subscribers. It is a scarce public resource. The Supreme Court itself held that it is "a finite resource that is part of the national patrimony and the use thereof is a privilege conferred upon the grantee by the State and may be withdrawn anytime, after due process xxx." To rephrase, the Filipino people own the spectrum, and may only allow its use by the private sector if permission is granted by Congress.

I am showing you these pie charts which illustrate the current state of spectrum allocation in the telecommunications industry. The charts were illustrated by Democracy.Net.PH, based on data given by the NTC in reply to an FOI request on telco frequency allocations. The frequencies in the 900 MHz and 1800 MHz bands are the bands used by non-LTE cellular phones for calls and texts. They are the so-called "workhorse call and text frequencies". On the other hand, the 700Mhz, 850Mhz, and 2500Mhz up to 3400 Mhz bands are frequencies that can be used only by LTE-enabled cellular phones.

During the third public hearing, the Radio Spectrum Planning Division of the NTC manifested that the earnings from these "workhorse frequencies" represent 55% of the telcos total income. The representative of the Philippine Coalition of Consumers in the same hearing countered that these "workhorse frequencies"actually bring in 77% of their total earnings. Until these numbers are rebutted, these workhorse frequencies appear to be the bread-and-butter frequencies of the duopoly. We can see from these charts that these bread-and-butter frequencies in the 900Mhz and 1800 Mhz bands - or the workhorse spectrum for GSM calls and SMS - are now 100% occupied by Globe and Smart. Nothing, or 0%, of these workhorse bands is available for any new potential, viable player in the industry.

Simply put, there is not enough spectrum for a third player to enter and compete viably. The monopolization of the "workhorse frequencies" by Globe and Smart makes it impossible for a third player to viably compete against them. Given prevailing conditions, the hypothetical third player will be limited to data-driven services, and will not be able to provide services for calls and texts at par with the array of services offered by the duopoly. To be sure, the controversial Co-Use Agreement of the 700Mhz spectrum by Globe and Smart has resulted in a "spectrum split" between the duopoly - further crowding out other viable players in the telecommunications industry.

This brings us to another issue discussed in the public hearings: Does our present system of spectrum allocation provide the most efficient method of assignment for purposes of allowing the entry of new competitors in the telecommunications industry?

Republic Act No. 3846, otherwise known as the "Radio Control Law of the Philippines", was enacted in 1931 and it empowers the NTC to control the allocation of spectrum. There are two basic principles for spectrum allocation and assignment that the NTC must follow under RA 7925. One, allocation should be given to the best- qualified applicant; two, when demand for specific frequencies exceed availability, an open tender bidding process shall be used.

We have uncovered, however, during the public hearings that in 1999, instead of conducting a spectrum auction, the NTC merely assigned spectrum frequencies in the 1800 Mhz workhorse bands to Globe and Smart. The NTC reasoned that conducting a rigorous auction at that time would have delayed the roll-out of telecommunications infrastructure by the two telcos and prevented them from responding adequately to the then growing demand for their services due to the emerging popularity of SMS.

Eighteen years later, or on May 27, 2016, the NTC again approved a Co-Use Agreement executed between Globe and Smart on the 700Mhz frequencies which were previously owned by Vega Telecom- a subsidiary of San Miguel Corporation. The May 27 approval was stamped by the NTC only three days after the receipt of the May 24 joint letter-request of Globe and Smart for the co-use of the frequencies. The NTC approved the co-use, believing that it would substantially improve the services of Globe and Smart by expanding the functionality of their existing network of cell sites and allowing existing cell sites to decongest in-use frequencies in order to deliver improved services to consumers. It has been a year since the approval of the Co-Use Agreement, and these improved services have not been felt by us consumers.

Such failure of the NTC in the past to properly govern our publicly-owned spectrum has resulted in the private trading of frequencies. Private corporations have treated spectrum allocations as their property, resulting in relatively easy and effective "spectrum trading" via corporate mergers and acquisitions - as in the recent case of the joint acquisition of the700Mhz frequencies.

The damage caused by such "spectrum trading" to the industry is immense. When the NTC approved the Co-Use Agreement, it did not only limit the available spectrum that may be allocated to a potential third player. It severely restricted such third player's ability to expand since its limited spectrum allocation will now require more capital investment as more cell sites are needed to create the same capacity as the existing duopoly. The new player will now need more time to build and expand its network, incur higher cost, have little incentive to reduce prices, and will not be able to attract new customers.

I believe that one of the committee's most important findings from this legislative inquiry is the role that spectrum allocation plays in the telecommunications industry. The amount of spectrum rights allocated to a telecommunications company determines the number of subscribers it can sustain, the capitalization it needs to infuse, the quality of service it can provide, or the rates it can offer. Consequently, a company's spectrum allocation can eliminate its competitors with not enough frequencies, as well as potential players who know that the available spectrum will not pave the way for a level-playing field.

The public hearings gave away the solution to this spectrum dilemma. And it is not far from obvious. To open the telecommunications industry to

competition and give way to a viable third player, we need a more transparent system of spectrum allocation, assignment, re-allocation and re-farming, as well as the development, promotion, and deployment of a competitive selection process in the allocation of our publicly-owned spectrum. There seems to be no other visible way. Our efforts at relaxing Constitutional restrictions to allow foreign firms to enter the telecommunications industry will be merely illusory if these firms do not have enough frequencies that will enable them to offer real competition and give consumers the best value for their money.

I will be discussing the complete policy recommendations and proposed legislative agenda on spectrum management, as well as competition and regulation, on the second part of my presentation. At this juncture, Mr. President, I conclude the presentation of the summary of our key findings.

Thank you, Mr. President.