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Regulatory capture

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Calixto Chikiamco 081417

Introspective

Regulatory capture, according to Wikipedia, is “a form of government failure that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.

When regulatory capture occurs, the interests of firms or political groups are prioritized over the interests of the public, leading to a net loss to society as a whole. Government agencies suffering regulatory capture are called ‘captured agencies.’”

The theory of regulatory capture, developed by George Stigler and the Public Choice School of economics, posits that concentrated interests in the industry being regulated with high stakes in policy outcomes focuses their energy into influencing regulators at the expense of the general public.

Based on its performance, we could say that the National Telecommunications Commission is one such “captured agency.” Its mandate is supposed to be regulating public telecommunications services and managing the radio spectrum for the public good. However, has public telecommunications services improved? Have they become more affordable?

The Akamai Technologies Global State of the Internet Report for the first quarter in 2017 states that the Philippines has the worst Internet connection speed in Asia. The average internet connection speed is only 5.5 mbps versus Thailand at 16.9 mbps and Vietnam at 9.5 mbps. The average peak connection speed is only 45 mbps versus 66 mbps in Indonesia and 184.5 mbps in first place Singapore.

In terms of 10 mbps broadband adoption, the Philippines ranks last in the Asia Pacific region, with only 11% adoption.

On mobile broadband specifically, i.e. Internet speed provided by the telecommunicaitons duopoly, the Philippines ranked close to the bottom in terms of long term evolution (LTE) availability and speed, according to Philippine Star, citing a research firm Open Signal’s The State of the LTE November 2017 report.

The Philippines placed 69th out of 77 countries in the Open Signal’s report. LTE or long term evolution is supposed to deliver the fastest mobile Internet connection. However, for the Philippines, availability was only 58.83%.

In terms of speed, the Philippines registered an average download speed of 8.24 mbps, ranking the country 74th out of 77 countries. However, the 8.24 mbps is a slowing down from June when the country registered 8.59 mbps. Clearly, despite the rationalization that the anti-competitive buyout of the San Miguel spectrum by the duopoly would improve service and speed, the consumer experience hasn’t seen any benefit.

The bad experience of the Philippines with respect to broadband and mobile Internet just shows the effect of “regulatory capture.” It was the National Telecommunications Commission (NTC) which blessed the purchase by the duopoly of the spectrum held by San Miguel, effectively terminating the possibility of a third telco player. It even gave the duopoly one year to improve service and yet, despite strong evidence that the Philippines continues to lag behind its neighbors in terms of mobile Internet speed and availability, the NTC hasn’t called the telcos to account.

One can even say that the bad consumer experience for the public and the rose-glove attitude to the telcos represent a continuity of policy.

The National Telecommunications Commission has been headed by Commissioner Gamaliel Cordoba since 2009. Yes, you read that right, there has been no leadership changes in the NTC since the time of former President Gloria Macapagal-Arroyo, despite growing public complaints about access and affordability of Internet in the country.

One would think that former President Benigno S. C. Aquino III, a political opponent of Arroyo, would purge an Arroyo appointee. Well, it didn’t happen. One would also think that President Rodrigo Duterte, a political opponent of the Yellows, would clean the NTC, but that hasn’t happened. In fact, Cordoba is on the short list of candidates being considered to replace former Department of Information and Communications Technology (DICT) Secretary Rodolfo Salalima. It’s a testament to the power of the telco industry that it retains a friendly regulator despite changes in the administration.

Another instance of how the NTC is friendly to the companies it’s supposed to regulate is its attempt to sabotage Republic Act 10929 or the “Free Internet Access in Public Places Act.” RA 10929 was signed into law on Aug. 2, 2017 by President Rodrigo Duterte. The objective of the Act is for government to establish a program to “provide free access to Internet service in public places throughout the country,” including national and local government offices, public basic education institutions, state universities and colleges and Technical Education and Skills Development Authority (TESDA) technology institutions, public hospitals and health centers, public parks, public plazas, libraries and barangay reading centers, public airports and seaports and public transport terminals.

However, the intent of the law to allow as many private players, particularly ISPs or Internet Service Providers, to participate in the program is being sabotaged by the National Telecommunications Commission.

In the draft Implementing Rules and Regulations, NTC introduced the term “Internet Technology Solution Provider,” a term not mentioned in the law. As defined by the draft IRRs, an ITSP is one that supplies and delivers the “backend and transport network to the access points.” What this means is that participation in the program is limited only to telcos since only they have the backend (backbone) and transport network to access points (middle mile).”

However, this attempt to sabotage the intent of the law by the NTC is not surprising because it’s a captured regulator. RA 10929 is clearly a threat to the telcos. One of the beautiful parts of the law is that “Internet service providers shall be allowed to acquire and utilize Internet connectivity directly from satellites and other emerging technologies to ensure universal coverage, which when used to provide internet connectivity shall be considered value-added services.”

Satellite technologies bypass the need to lay down expensive fiber (reportedly P100 million a mile in capex and other regulatory costs), especially in an archipelago like the Philippines where one would also have to lay undersea fiber optic cables in order to connect the islands. ISPs or middle mile and last mile providers would no longer have to pay exorbitant fees to the telcos to get Internet. They can directly access it from satellites with just a satellite receiver link.

The moves of the NTC are counter to the Duterte administration’s policy to improve telecommunications services. No less than President Duterte said he wants a third player to come in to provide competition to the existing duopoly. The administration, through the Bases Conversion Development Authority and DICT, recently partnered with Facebook to construct and launch a third landing station, called the Luzon Bypass Infrastructure, for which the DICT will get 2 Terabits per second (Tbps) of spectrum capacity, more than the combined capacity of the duopoly.

Furthermore, the House of Representatives recently passed House Bill 6557 or An Act Promoting Open Access in Data Transmission, Providing Additional Powers to the National Telecommunications Commission. This bill mandates an open access approach to regulation of the data transmission industry. It will penalize companies refusing to interconnect.

Also, another House bill, the Public Service Act (PSA)Amendment, already passed the House on 3rd and final reading. The PSA Amendment will remove telecommunications and transport from the list of “public utilities” where foreigners are prohibited from owning more than 40%. Passing this important bill will enable the third telco, if foreign, that Duterte wants to invite to provide competition to the existing players.

The PSA Amendment is pending in the Committee of Public Services chaired by Senator Grace Poe. It is scheduled to be heard as soon as the Senate is finished with the tax reform bill and the 2018 budget.

Change is indeed coming. It’s coming despite, or because of, our political democracy. The politicians have heard the clamor of the people for better telecommunications and transport services and are responding. There’s no need to declare a Revolutionary Government.

What could subvert change, however, are fifth columnists or captured regulators within the bowels of government.

There’s no need to sweep away Constitutionally-independent institutions like the judiciary and the Ombudsman for President Duterte to achieve his goal of enriching the lives of ordinary Filipinos.

What he does need to do is to clean his own house and put the fear of God in those who allow themselves to be captured and be the agents of the industries they are regulating.

 

Calixto V. Chikiamco is a board director of the Institute for Development and Econometric Analysis.

idea.introspectiv@gmail.com

www.idea.org.ph

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