Tough love from Beijing

A lack of bidding derailed the Northrail project and a lack of bidding might just derail the entry of China Telecom as the third telecom player. The Arroyo administration had signed a deal resulting in the China Export-Import Bank extending a $400-million loan for the first section of Northrail, with the Philippine government in turn designating China National Machinery Industry Corp. or Sinomach to do the building. Back in 2012, the Supreme Court ruled the contract void because no bidding had taken place. Since Sinomach is a state-owned enterprise directly managed by the central government, Beijing strongly objected to the Philippine government’s cancellation of the deal.

During his state visit to China, then President Benigno Aquino III tried to reassure Chinese leaders (the president, premier, and party chief all took turns raising the issue) that they could rebid for the project, which Beijing rejected. Instead, Beijing called in its loan (which had been extended with low interest for repayment after 20 years), and even as the case ended up in arbitration, the Philippine government had to scramble, ending up pledging to pay back the loan in installments. In the early days of the confrontation, Manila was worried about the effect on the government’s credit standing should it default on the loan.

Aquino, looking back at the experience, later on said the Philippines could generally afford to be firm because the Philippine economy, unlike perhaps other economies in the region, wasn’t so closely tied to the Chinese economy (he mentioned that there were more Filipino investments in China than Chinese investments in the Philippines).

Now, even as Manila welcomes more Chinese investments, it says it is doing so knowing the messy deals from the Arroyo days, particularly the NBN-ZTE and Northrail messes. The solution, according to the government’s current economic managers, is to tell Beijing to be the one to nominate potential partners. This explains how the government’s preferred investor for the third telecom firm it wants to set up, is China Telecom. The firm, according to the Palace, was picked by Beijing in response to the President’s meetings with Chinese Premier Li Keqiang last November. The President has warned the bureaucracy and the courts that he will tolerate no delays in this regard, although other officials have been trying to soothe concerns over the strategic implications of this move by suggesting bidding is open to all interested parties—except the Palace in turn has said others will be welcome, but only if the China Telecom deal doesn’t push through.

The Beijing-centric nature of the deal is further underscored by the National Transmission Corp. (Transco) announcing it wanted to partner with China Telecom and that it was in talks with the National Grid Corp. of the Philippines (NGCP, which manages the national electric transmission system) to use the electric grid’s interplant transmission infrastructure as the backbone for the third telecom player. But, and here is the Beijing angle, the NGCP for its part says it is eager to enter the industry but not as Transco’s partner: After all, NGCP is owned by two taipans (60 percent) and their partner, the State Grid Corp. of China (the “technical partner,” with 40 percent). NGCP says it is willing to allow use of the grid at a minimum or even zero cost—effectively undercutting Transco trying to get into the action, and laying out a sweet deal for China Telecom if it decides NGCP will be useful.

The previous administration had been bothered by this strategic sector being under heavy Chinese influence: the percentage officially owned by the State Grid, after all, is magnified by the ostensibly Filipino majority being composed of taipans who do business in China, and who are therefore subject to pressure by the Chinese authorities. The solution of the previous government was to insist on Filipinos undertaking technical management of the operations of the grid, which finally took place in July 2016—after the Philippine government declined to renew the visas of 18 Chinese technical experts. But if industry talk is to be believed, even this has been reversed, quietly. Pleading the unreliability of native engineers, the Chinese partner resumed bringing in more Chinese engineers.

Meanwhile, China’s ZTE — remember them? — has been making moves, too, partnering with a Davao-based telco and three other firms to set up a string of 50,000 microcell towers. This suggests a way forward for the China Telecom deal considering how congressional moves to amend the Public Service Act and the Constitution have bogged down. The past Philippine advantage of being free from heavy economic pressure from China is dissipating.