Philippines - Telecommunications Sector Memorandum

LAMGULAll116 wUyY Document of TO BE RETURNED TO REPORTS DESK The World Bank FOR OFFICIAL USE ONLY FILE COPY CONFIDENTIAL Report No. 1127-PH SECTOR MEMORANDUM PHILIPPINES TELECOMMUNICATIONS April 2, 1976 Central Projects Staff East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY CONFIDENTIAL SECTOR MEMORANDUM PHILIPPINES TELECOMMUNICATIONS Table of Contents Page No. 1. BACEORCU olea... ................ ..... 1 2. THE TELECOMMUNICATIONS SECTOR...................... 1 Role of Telecommunications in the Economy.......... 1 Access to Service.................................. 2 Present Organization and Problems of the Sector.... 3 Sector Objectives.................................. 5 Investment Program and Cost...................... 6 Constraints............ .. . .......... ............. 6 3. BANK STRATEGY IN THE SECTOR........................ 8 4. ACTIONS TAKEN OR TO BE TAKEN...................... 9 5. MAP OF THE PHILIPPINES IBRD 12160 ACRONYMS PLDr - Philippine Long Distance Telephone Company BUTEL - Bureau of Telecommunications RETEIO - Republic Telephone Company PHILCONSAT- Philippines Commnications Satellite Corporation NEDA - National Economic Development Authority This report was prepared by C.R. Dickenson and is based on information collected during visits to the Philippines made in April 1973 and August 1975. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. SECTOR MEMORANDUM PHILIPPINES TELECOMMUNICATIONS 1. Background 1.01 In accordance with the Philippine Government's request referred to in the CPP of December 1973, a review of the telecommunications sector, was undertaken in April 1973 and a full report was distributed on June 11 1973. This report defined the problems in the sector which had resulted in uneconomic duplication of facilities, high costs and indifferent standards of service in the more profitable urban areas, with little develop- ment in rural areas. It also outlined possible solutions designed to rationalize and integrate the sector. Copies of the report were made avail- able to the Government. 1.02 A brief updating visit to the Philippines in August 1975 found that little progress had been made since 1973.- Consequently, the East Asia and Pacific Country Programs Department wrote to the Gove-nm13nt on October 15 1975 emphasizing the urgent need for action and suggesting a number of alternative measures designed to improve the exLsting services and provide for optimum development at least cost. 1.03 The December 1973 CPP emphasizes the need for a sound, integrated national program if we are to become involved in the tele.:ommunications sector., Lending of US$20 million in 1975 and US$20 milli)n in 1979 was tentatively included in the lending program. In a SpeciaL Program Paper issued in July 1974 these loans were moved back to 1977 aid 1980. In the absence of any action by the Government toward rationalization of the sector, the proposed loans have now been deleted from the lending program. A positive response to the Bank's recent letter would reoien the case. 2. The Telecommunications Sector Role of Telecommunications In The 7conomy 2.01 The country's geographic features -- eleven major islands and more than 7,000 smaller islands, on which are located the 72 provinces -- create special communication problems. The wide dispersion of the main export items, together with the need for each province to develop industry and its human and natural resources, point up the need for satisfactory countrywide communications. 2.0? More than 50% of the Filipino population depend on agriculture and forestry for their livelihood and a further 12% are-eployed in mining and industry. Over the period 1971-73, agriculture and fcrestry production accounted for 70% of the Philippines' visible exports; miring (mainly copper) accounted for 19% and manufactured goods 11%. Tourism is of growing impor- tance and in 1973 showed a dramatic increase of 65%, triggering the - 2 - construction of new hotels and resort areas. While most of the manufacturing is centered in and around Manila, the potential for development exists throughout the country because its abundant natural and human resources are widely distributed. A successful development strategy requires more of the available investm%nt to be channelled through rural agricultural development and widespread small and medium scale industry. A number of large projects in metals, fertilizer, steel and shipbuilding are also under consideration by Government. 2.03 While the resource-based industries such as lumber and mining tend to be relatively simple in operation, they require adequate tele- communications in order to coordinate transport, arrange for supplies, facilitate deliveries, etc. Manufacturing as it develops involves the co- ordination of a complex series of operations requiring intensive use of telecommunication facilities. Successful development of rural agriculture depends on the farmers being able to obtain supplies and get their products to market -- another area in which telecommunications can play a significant role. The proposals for developing tourism throughout the country require adequate telecommunications in order for the hotels and other facilities to operate effectively with reasonably adequate room occupancies and meet visitors' needs; in fact, there is a significant correlatin between inter- national teleDhone traffic and the number of tourists visiting a country. Finally, the Philippines is wholly dependent on imported oil supplies; hence the efficient and economical use of transportation is of major impor- tance and, given the country's geographic features, this can only be made possible by providing adequate telecommunications. Access to Service 2.04 Compared with services in most other countries it a similar stage of development, the quality and quantity of telecommunica'-ion services in the Philippines are very poor indeed and the spread and c%verage of the existing networks are inadequate for meeting the needs of the economy. 2.05 As no waiting lists are kept for the provincial areas, there is a paucity of data on total demand for telephone facilitie:. In the case of Manila and certain of the other main citi-s served by PLD'2 where apparent demand has been substantially met, the position is distorted by the high subscriber financing charge and the fact that over 60% of the subscribers are connected to party lines. Of a total of 1,500 cities and towns in the Philippines, under 10% have local telephone facilities. There are n-arly 200 towns with populations of over 30,000 which have no local telephone service. Call office facilities are urgently needed both in the main cities and at all locations with population concentrations. The present telephone density of 1.04% is low compared with that in nearby and rimilar countries (3.25% in Malaysia and 4.77% in the Republic of China); 83% of the e:isting telephones are concentrated in urban areas, with 69% in Miaila. ESCA1P statistics show the average urban concentration for a numbir of nearby Asian countries as 63%. Indicative of the Philippines' present lack of develop- ment of long-distance telephohe facilities is the fact that the current number of long-distance calls (about 1.h per subscriber per month) made by -3- those subscribers who have service is among the lowest in the world; comparable figures are 6.7 in Malaysia and 7.9 in the Republic of China. Present Organization and Problems of the Sector 2.06 Franchises for the provision and operation of public and private telecommunication systems in the Philippines have been granted by th-e Congress on mostly a countrywide basis, leading to duplication of the more profitable services and neglect of other areas. Regulatory control over the operation of the various common carriers, recently transferred to a newly created Board of Telecommunications, has been weak with virtually no control or coordination in respect of areas of operation, cooperation in the provision of facilities, the meeting of adequate standards of service, etc. 2.07 As a result of the inadequate legislative framr3work and poor control the telecommunications sector suffers from fragmentation, uneconomic competition, tied procurement, and difficulty in obtaining finances for essential development. No attention has been given to tie need to design networks on a nationwide basis; in consequence, the inteirated communication requirements of the economy as a whole are not taken into consideration, international standards are not being met and satisfactory' interconnection of the ne,tworks has not been effected. In a sector largely based on private ownership of facilities, there is need for both stronger regu- lation and changes in the franchises which should clearly define the areas of operation and responsibility and also provide for proper interconnection of services provided by the common carriers. 2.08 The sector comprises a considerable number of separate entities which own and operate telecommunication facilities. There are about, 70 common carriers providing telephone services and 10 operating telegraph net- works or providing telex service. The major operating entities are: (a) Philippine Long-Distance Telephone Company (PLDT), a privately owned company providing local telephone service to about 250,000 subscribers, or 75% of the total for the country; about 80% of these subscribers are in Manila. PLDT also operates internationEl and long-distance services. The company dominates the sector and has the cream of the business. PLD' re- ceived a loan of US$4.5 million from IFC in 1970. (b) Bureau of Telecommunications (BUTEL), a government- owned network which operates local telephone service in sections of !1anila and in the provinces, inter- national and long-distance services, telex service in some of the main cities and an extensive telegraph network. BUTEL serves about 45,000 telephone sub- scribers, or about 14% of the total number in the Philippines. Financially, the operations are heavily subsidized by the Government and revenues are in- sufficient to meet expenses, excluding depreciation. (c) Republic Telephone Company (R3T-LCO), which operates local telephone facilities in the suburbs of Manila and serves about 5% of the country's total subscribers. (d) Philippines Communications Satellite Corporation (PHILCOMSAT), which owns the highly profitable inter- national satellite communications links. The corporation is 51% Government owned. The remaining 6% of the telephone subscribers in the Philippines are served by some 65 entities, some of which are owned by provincial governments or municipalities and others by private companies. 2.09 Two factories operated by the American Cable and Wire Company and Phelps Dodge produce telephone wire and cables. Assembly of tele- phones and some automatic switching equipment of an obsole3cent type is being carried out by General Telephone and Electronics, Ino. The latter's operation is very limited in scope. 2.10 Set out below are examples of the service failur-s, duplication or inefficient use of facilities and poor service which cha-racterize the sector. (a) The privately owned telephone and telegraph entilies are profit-oriented, whereas those owned by the Goveinment are heavily subsidized; as previously indicated, thi. has resulted in concentration of the private entities in the more profitable areas and services and failure to meet demand in the less profitable ones. (b) Lack of coordination has resulted in uneconomic dupli- cation of facilities and high costs. The services of PLDT and BUTEL overlap in six central offices within Manila, each providing completely separate exchange and distribution networks. PLDT also operates in 13 of the larger cities (more profitable areas) outside Manila. There are l cases of overlapping between carriers out- side Danila. BUTEL has a backbone network duplicating that of PLDT throughout most of the country. Two other carricrs also operate extensive long-distance services, in part duplicating the PLDT and BUTkL networks. (c) Only limited facilities for interchange of local telephone traffic exist between the PLDT and BUTRL networks, and there is-no interconnection of long-distance facilities between BUTEL and PLDT. - 5 - (d) To maximize income for a given investment, all the entities have resorted to extensive use of party lines (about 62% of the total); this contributes to the poor standards of service and produces very high-calling rates and many repeat call attempts. The problem is compounded by tariffs based on flat monthly rentals, hence there is no price mechanism to reduce the number of calls. (e) Although BUT.L operates over 1,300 telegraph ofVices throughout the country, the nine private companLes are in competition with them and with each other in only the more profitable areas. In most cases there is no interchange of traffic between the telegraph networks, necessitating refiling the telegrams and causing delays when use of another system is necessary. Sector Objectives 2.11 It is not possible in the sector's present state of organization and within the existing physical and financial constraint3 to set adequate specific long-range targets for its development. Thus, the priority is for the Government to provice the effective institutional framework which is indispensable for development of the sector. In the letter to the Government dated October 15 1975 referred to in paragraph 1.02, three principal options and a possible means of subsidizing development in the less profitable areas were proposed by the Bank, as furthcr indicated in paragraph 2.19. If one assumes that a clear and positive choice is made, an interim program could be developed consisting of: - Development and implementation of the chosen institutional framework, including elimination of wasteful duplication of services; - Obvious priority investments, including in particular long-distance network penetration into new areas and local exchanges to serve larger numbers of towns, and invest- ments to improve the sector's earning potential as a basis for further expansion; - Preparation of a countrywide telecommunications program based on the needs of the economy as a whole for imple- mentation in the next stage; - Introduction of international competitive bidding (with some local preference) for the purchase of equipient and possible development of more effective local manifacture. 2.12 The time to be taken in developing a suitable institutional framework is clearly the most critical factor for the future of the sector. - 6 - Meanwhile, the telecommunications development now taking place is piece- meal and uncoordinated and is largely restricted to urban areas. The lack of adequate nationwide facilities is thus becoming a major bottleneck in the development of the country. Investment Program and Cost 2.13 As already indicated, no countrywide program has been prepared ,and understandably the investment planning of the various entitics is limited to their own interests and is not related to any coordinated over- all plan based on requirements as a whole. We can, however, speculate on orders of magnitude involved over the coming decade in gradually building more adequate facilities. 2.14 Total investment in public telecommunication facilities in the Philippines in 1973 was aboutp 1.9 billion (US$270 million). A division of this shows PLDT investment as 62% of the total; BUTEL, 19%; PHILCOMSAT, l%; the military services, 4%; R?TELCO, 2%; and others, 9%. Of PLDT's total investment, about 13% is in respect of the long-distance network and 13% in respect of international facilities. In BUTEL's case, no clear division is available but it would appear that about 60% of the invest- ment is in respect of telegraph and long-distance plant. The whole of PHILCOMSAT's investment is for international facilities, whereas RETELCO's investment is in respect of local telephone facilities only. 2.15 If one assumes that the growth in telephone subscribers will be at a rate of 10% per annum, the present 285,000 subscribers will increase to about 7h0,O00 over the next decade. In addition to the h55,000 new lines, there is need to replace worn-out plant and upgrade service by con- version of party lines, so that the probable requirement for exchange equipment and cable would be about 650,000 lines; at a cost, say, of US'600 per line this would involve an expenditure of about US$390 million, which would be in the range of 1.5 times the present total investment in the sector. The actual cost per line will depend, of course, on the policies followed in procurement and might substantially exceed the figure of US$600, which is based on recent experience under international tendering procedures. Telecommunications investment is therefore likely to increase by 150% over the next ten years, even when calculated on the basis of tho most conservative estimates of demand arising during this period. Institutional Aspects and Other Constraints 2.16 The major constraint on the sector's development is the in- stitutional framework. Private industry will understandably wish to continue to concentrate its activities on the more profitable areas such as the main cities or on providing the more profitable services, e.g., the telex service and long-distance and international telephone services. It is therefore unlikely that private industry would be prepared to undertake adequate development in the less profitable areas without some form of subsidy,or a division of services or areas on a basis permitting profitable operations. - 7 - 2.17 Although a number of consultants and experts have recommended creation of a single national and publicly owned corporation operating nationwide services, President Marcos apparently has decided that, insofar as possible, responsibility for telecommunication services should remain with the private sector. Nor apparently has he adopted a proposal by an inter-agency committee, on which NEDA and the Board of Ccnmunications were represented, to at least integrate the long-distance and international networks as a government owned and operated entity. 2.18 The Planning and Project Development Office of the Ministry of Public Works recently produced proposals which, while recimmending a single national t2lecommunications network as the ideal solution, consider the alternative to be organization of the sector on the basis of private management with some government financial support and with a stated intention of providing one homogeneous national network. This would be unlikely to result in early integration and development of the sector. The proposals do not clearly define a satisfactory basis for unification and rational- ization of the sector. They also leave the question of implementation for consideration by private industry and Government task forces which will make their r:3port later this year. 2.19 It is within this context that the Bank has made its latest recommendations which would, it is believed, provide a satisfactory basis for future organization of the sector. These recommendations are as follows: (a) The preferred solution in order to rationalize and improve existing services and provide for optimum development of the telecommunications sector at least cost woild be the creation of a single national and publicly own-d entity. This would obviate the difficulties of interconncction and interface arrangements and would facilitate planning and provision of adequate services for the economy as a wholc. (b) An alternative solution would be that PLDT would retain operation of its existing local networks and continue pro- viding its own long-distance facilities between these local networks, but that development elsewhere in the country, including operation of the long-distance networks, would be the responsibility of a new corporation which would progress- ively invest in and take over the smaller entities in the provinces. (c) If the decision is to retain ownership of the sector sub- stantially in private hands, a second alternative solution would be division of the country on a geographical basis with exclusive franchises granted for specific geographic areas. Although less desirable than full or substantial integration under a national corporation, this would minimize interconnection and interface problems and facilitate - 8 - development of the sector; it would also eliminate overlapping and could provide for a reasonable division of the more profitable services, including long-distance revenues. (This.alternative would require that PLDT sell its existing facilities on the other islands as quid pro quo for taking over the BUTEL facilities in Manila and central Luzon). If this solution were to be adopted, it is important in order to ensure adequate development into new areas and the maintenance of satis- factory standards of service that the Board of Communications be empowered to require the franchise holders to provide adequate services progressively in their areas of franchise in accordance with a national plan and enforce the service standards. All the franchises should also be amended to provide for full interconnection of the networks. 2.20 If none of these proposed solutions is acceptable and it is intended that PLDT should continue providing services in the more profitable urban areas and serve as the main long-distance carrier, then consideration might be given to the possibility of imposing a tax on long-distance traffic which could be used to subsidize sector development in non-profitable areas. 3. Bank Strategy in the Sector 3.01 If agreement can be reached with the Government on a sector strategy providing for a gradual resolution of the institutional issue, considerable benefits could accrue to the Philippines from Bank involvement in the sector. This would facilitate rational organization and development of the sector on the basis of a national plan with full coordination and interconnHction, adoption of accepted modern standards and consequent major improvement of services. A base for development of human and financial resources for future expansion would be created and costly duplication of facili ties and uneconomic competition would be progressively eliminated, resulting in long-term service and cost advantages to all users. Development of the sector would be on a more balanced and nationwide basis, including the provision of much needed facilities in the smaller towns and in rural areas. 3.02 Reorganization of the sector would result in major savings in additional plant and equipment and in more effective use of available funds for development. Additional savings would result from the introduction of international competitive bidding. A combination of these factors would, it is estimated, result in savings of at least 30% of future investment (US$50 million over th2 next ten years). These savings could be applied toward meeting additional demand and serving new areas, thus benefiting all users. 3.03 A master plan and tentative timetable for sector development should be established. Final decisions must, however, depend on the basis of reorganization adopted by the Government. Any one of the three alter- native solutions proposed in paragraph 2.19 would be acceptable to the Bank. - 9 - 3.0 If solution (a) or (b) were to be accepted by the Government, it is proposed that Bank lending should be to the national corporation which would become responsible for a nationwide network or a nationwide network less PLDT's operations. In the event solution (c) is accepted, lending could be considered for one or more of the private entities responsible for specific geographical areas. In any event, possible Bank lending should be directed toward the higher priority services and areas: improvement of existing services, extension of the long-distance facilities and provision of local facilities in areas which now have no service. 3.05 Subject to a satisfactory decision on the future organization of the sector, lending to one or more of the operating entities could proceed. The process of reorganization, rationalization and related institutional improvements can only be achieved over a period of years. 3.06 Two loans, or in the case of alternative (c) a combination of loans, at three to five year intervals would have to be considered before other sources of external finance can be expected to support the expansion of the sector. Total sector investment required over the next decade is estimated at US$400 million. L. Actions Taken or To Be Taken 4.01 Our letter of October 15 1975, was sent to the Government after discussions with the Deputy Director of NMDA and at his request; it is designed to clarify what needs to be done and to approach the problem of sector reorganization squarely and objectively. When Country Programs staff visit the Philippines, they should continue to discuss our position with NEDA. 4.02 The earliest we can expect a final decision on r!organization of the sector will probably be early in calendar year 1976. 'ny decision satisfactory to the Bank should be followed by: - Preparation of an Issues Paper outlining the sco7e of possible lending and a time-phased program for- preparation of a project; - A basic agreement to be reached with the Government, including any necessary guarantee if lending to privately owned entities is contemplated. IBRD 12160 116° 120P 124° MARCH 17 CLASSIFICATION OF PROVINCES BY GEOGRAPHICAL REGIONS I ILOCOS VI WESTERN VISAYAS il fiocos Norte 37: Aklan 2 Abra 38 Capiz 8 30 Ilocos Sur 39 Antique 200 4 Mountain 40 loilo S41 Negros Occidental VII CENTRAL VISAYAS I Pangasinan 431 Negro Ortental 1I CAGAYAN VALLEY '441 Bohol 8 Batanes 4 Siquijor 9 Cagayan VIIIEASTERN VISAYAS 10 KalingaApayao -46 Northern Samar 11 Isabela 47 Samar ' izcay 48 Eastern Samar Apa' RAlWAYS 113 Nueva Vizcay'a 49 Lerre RAIWAY 14 Ouirino 50, Southem Leyte Laoag - - PROVINCIAL BOUNDARIES III CENTRAL LUZON IX WESTERN MINDANAO .. REGIONAL BOUNDAR JES 15 Nueva Ecia 5 Zamboanga del Norte -----2 - INTERNATIONAL BOUNDARIES 1 a52 Zambounga del Sur \2 10 17 Zumbales 53 Basilan 10 18 Pampanga 54, Sulu 19 Bulacan 55' Tawitawi 3( 4 olagn 20 Bataan X NORTHERN MINDANAO \ IV SOUTHERN TAGALOG c56 Surigao del Norte 12 2 Oeon 57! 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