If occupying and building artificial islands within Philippine territory were a commercial deal, we would have done a valuation – what did they gain in exchange for what we gave up? Well, we have not given anything up yet, but we haven’t exactly been paid at all, either.
In an actual business valuation of a private company (which is done when an investor is coming in, or when the business is about to be sold), we look at a few things, such as physical assets, profitability and sustainability, cash flow and liquidity, and its market and intellectual properties.
The other thing that is quite important though is establishing the value of the business after the investor comes in or after it is bought, in the hands of the buyer. There could be a huge strategic value to the buyer’s business, and there could be a lot of synergies. As the seller, you would want to share in the value of that synergy. As a negotiator, if you can estimate in dollar terms what the strategic value of your business is to the investor, you can have leverage in negotiating for a better price.
The Jollibee-Mang Inasal deal fascinated people because Jollibee bought its Mang Inasal stake (the initial 70 percent) at three times what was offered by one potential buyer. The synergistic value to Jollibee was obvious because before the deal, Mang Inasal stores were already side by side with Jollibee’s. (And Jollibee loves to do that with McDonald’s.) The combined Jollibee-Mang Inasal offering was a bigger draw, and more importantly, the revenue is now in the same pocket after the deal. (Now, I suddenly miss that palabok, and that spiced chicken barbecue over rice, but that is not the point here.)
So, theoretically, if the value of your standalone business is 100, and to the buyer, with synergies and all, it is worth 1,000, you know you can get a bit more even if you are already offered 300.
The situation of the artificial islands built by China as being within Philippine territory (or most of it are) is already official as ruled upon by the UN Arbitral Court at The Hague. Just a brief refresh: the UN Tribunal has said that China has no historical rights because while they have always claimed it historically, other claimant states, especially the Philippines, do not agree with China’s claims.
To top it all, there is the international Law of the Sea that shows that China is way off the mark. Vietnam is about a bit more than the benchmark, at 200 miles away from the Spratlys, and Malaysia has an overlapping claim with the Philippines. To be fair, we only claim about seven “islands” out of the hundred there, but we want our 200-mile exclusive economic zone respected.
Assuming that occupation is consensual and not by coercion, they would need to give compensation to the Philippines for the tons of fishes, the oil and natural gas that are in there. (The US Energy Information Administration (USEIA) estimates that the South China Sea contains approximately 11 billion barrels of oil and 190 trillion cubic feet of natural gas in proven and probable reserves.)
You can count and conclude that the strategic value to China is bigger because they have bigger ships for fishing, more fishermen out of their much, much bigger population, better-equipped to extract the oil and natural gas in the area, and – very important to them – the military positioning and defense that the South China Sea offers.
Economically, and militarily, they simply have more at stake there than the Philippines, with one big “but”. The territory, within the 200-mile exclusive economic zone, is ours.
Sure, it is encouraging that investments, financing, and tourists are coming in or are promised by China. Allow me though to sound a little bit ungrateful here just to bring in a point. The investments have dividends for the investors, the trade deals benefit both countries, and the financing helps in the trade and even gets Chinese companies a piece of the action, and Chinese tourists know it is more fun in the Philippines. My point is, these are hardly compensation for the West Philippine Sea.
The reality is, they will not remove that structure they already built. This cuts out our work for us: we need to put in the Code of Conduct that is not inconsistent with the international Law of the Sea, secure just compensation for the Philippines, secure at least co-use and co-exploration, and rule against militarization of the islands. Let’s make it consensual and be mindful of what should be outside the commerce of men, like the preservation of marine life.
Regarding the Scarborough (Panatag) Shoal, which is figuratively a stone’s throw away from Subic, I guess we cannot be blamed for being suspicious about negative pregnant statements. When China said there were no radar systems there, could they mean that some other system was being developed there instead? After all, they did insist in the beginning that the artificial islands in the Spratlys were for marine research, and not to support a sturdy, permanent aircraft carrier with multiple runways.
I would believe the President when he said that he made no secret deal regarding Panatag, or the Spratlys for that matter, because what comes first in the job description of the President, as a civilian, is to lead the military in defending Philippine territory. We can start by sending erring anti-narcotics policemen to man a post in the Panatag Shoal. If their blood spills there during a standoff, they would have died not as villains, but as heroes.
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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He also chairs the Tax Committee of the Management Association of the Philippines (MAP). Email your comments and questions to aseasyasABC@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.