It’s rent-seeking, pure and simple

According to Wikipedia, in economics, rent seeking occurs when an individual, organization or firm seeks to make mo-ney by manipulating the economic and/or legal environment rather than by trade and production of wealth. In the modern use of the term, rent-seeking is more often associated with government regulation and misuse of governmental authority.

Wikipedia continues to explain that rent-seeking generally implies the extraction of uncompensated value from others without making any contribution to productivity… by imposing burdensome regulations or other government decisions that may affect consumers or businesses.

A glossary of political economy terms in the website of Auburn University provides examples of rent-seeking behavior to include “all of the various ways by which individuals or groups lobby government for taxing, spending and regulatory policies that confer financial benefits or other special advantages upon them at the expense of the taxpayers or of consumers or of other groups or individuals with which the beneficiaries may be in economic competition.

Economist.com’s example of rent seeking: lobbying the government for tax, spending or regulatory policies that benefit the lobbyists at the expense of taxpayers or consumers or some other rivals. Whether legal or illegal, as they do not create any value, rent-seeking activities can impose large costs on an economy. I might add, it goes against the basic principle of providing a level playing field for business competitors.

The recent sale of CURE, an upstart telecom company controlled by former Trade Minister Roberto “Bobby” Ongpin to Smart Communications, the wireless unit of PLDT for P419 million is a good example of pure unadulterated rent-seeking. In olden times when Mr. Ongpin was a cabinet member of Mr. Marcos, that would have been called “crony capitalism”.

CURE stands for Connectivity Unlimited Resource Enterprise, one of the four telecom companies awarded a 3G license by the NTC in December 2006. It obtained an allocation of 10 megahertz in the 2100 mhz band and was expected to launch its commercial service in May this year, the deadline or risk losing the license.

Philippine Business Magazine, a publication of the Makati Business Club observed that when CURE was “awarded a license to operate 3G (third generation) mobile telecommunications services, the news was met with raised eyebrows. The question in many people’s minds was, how did CURE earn its place among the ranks of telco giants Smart Communications, Globe Telecom, and Sun Cellular?” How indeed?

Former Finance Usec. Eric Recto, a nephew of Bobby Ongpin and CURE’s president told Philippine Business that their “investor group is led by [former trade and industry minister] Roberto Ongpin and Craig Erlich, the chairman of the GSM Association, the international association of GSM operators. Erlich was also responsible for starting up the cellular provider Sunday in Hong Kong some years ago.”

Recto elaborated that “CURE’s initial capitalization was P120 million, but as of end-January 2006 we have expanded the capital base to over P400 million. By August, we expect CURE’s capitalization to hit P1 billion, in time for the awards of the equipment supply contracts, which we are currently processing.”

That gives CURE a pretty good reason for being. But we all know you need more than pedigree and the intention to spend a lot of money on CAPEX to get something as rare and as valuable as a 3G license from the NTC, specially for a new company with no track record. I read the whole interview and Mr. Recto did not tell us anything more. CURE must have very influential anonymous backers… you know… our usual suspects!

Now we have confirmed our worse suspicions. It would seem CURE’s business model was a lot simpler than Mr. Recto made us believe. It was just get a government license and flip it to Smart. You don’t need the legendary business management savvy of Recto’s uncle to do that. What you need is good connectivity and not in the technical telco sense of it either.

I don’t blame SMART for jumping on the opportunity to get the very valuable license and thus, the 3G frequencies of CURE. The deal effectively gave Smart an unfair advantage over rivals Globe Telecom and Sun Cellular of the Gokongwei group, both 3G licensees. The question now is, can CURE pass on those frequencies and license just like that?

Telecom industry sources are saying that Smart’s CURE acquisition violated the NTC rules on the spectrum. Smart will now have an undue advantage in terms of having the most frequencies — 37.5 megahertz—while the other carriers like Globe and Sun Cellular only have 10 mhz each. There is also the view that under NTC rules, assigned frequency cannot be sold by a carrier.

As it was explained, each 3G channel granted to the telecom companies can serve at least 25 million subscribers, or a total of 225 million subscribers for the four operators. Smart got frequency channels 1, 2, and 3; Digitel, channels 4 and 5; Globe, channels 6 and 7; and CURE, channels 8 and 9. The 3G technology offers increased bandwidth for mobile phone users, making enhanced multimedia applications accessible to users at faster speeds.

One story I got is that Mr. Ongpin spent a bundle on the start-up costs of CURE and decided to flip it only after realizing he had to minimize his losses. I guess, if they did their feasibility study well, the CURE people would have known from the start that their business model was too much for a new player. The NTC roll-out requirements were too demanding in terms of capital outlay. Under the rules, CURE must establish fixed telephone landlines within the areas to be assigned by NTC within tight deadlines. And the competitors have had a substantial head start in terms of infrastructure and market.

Now it looks like CURE got that license only to turn around and sell it to Smart, a deal typical of influence peddlers way down the stature of a Bobby Ongpin. CURE paid government P65 million for the license and sold it for P419 million in less than two years. Not a bad return on investment, until you consider start-up costs and whatever else it took to get that 3G license over more worthy applicants. Even if Mr. Ongpin lost money on CURE, it still involved pure and simple rent-seeking. I expected more from Mr. Ongpin.

Then again, what else is new? Ate Glue’s realm is all about everyone just looking out for him/herself? But I’ve always held Mr. Ongpin in very high regard. He doesn’t have to resort to high power rent-seeking to succeed in business. He has proven himself. His lifetime achievements stand out and attest to his world class abilities to create and produce something of value.

Every time I go to Tagaytay Highlands, for instance, I stand in awe of Mr. Ongpin’s vision and tenacity to have carved out that beauty from bare mountains that had nothing before but wild grass and a picturesque view. I listen with admiration to stories from the older employees of how Mr. Ongpin personally and meticulously supervised everything as the Highlands took shape. And I keep telling myself if Bobby O was still calling the shots there, the public facilities would be better maintained.

I just find it disappointing that Bobby O’s lifelong reputation as a top notch business manager was put at risk in a “quickie” deal like this. So it seems in the end, it’s all about money. But Bobby O should realize that unlike a good reputation, he can’t take it with him… just look at that sorry mess over the estate of the late Chito Madrigal... heirs fighting over her money.

Ongpin’s CURE turned out to be more like the same old corrupting disease plaguing our business sector… How definitely sad!

Success  

Confucius says: If you don’t succeed, re-define success.

Boo Chanco’s e-mail address is [email protected]