Franchise

I have always thought that finite public assets, such as bandwidth, ought to be awarded out by means of public bidding instead of by legislation.

Awarding them out by means of public bidding removes the distortions and moral hazards associated with the present system. Awarding franchises by means of legislation is, to put it bluntly, an open invitation to corruption.

Corruption is a problem more effectively addressed by process engineering than by preaching.

In Singapore, for instance, it was decided long ago that road space was a precious and finite public commodity. Before one could purchase a car, one must have a permit to use road space. The number of such permits are finite and are awarded out by means of public bidding.

Today, the permit costs as much if not more than the vehicle itself. But if foresight did not enable such a process to be installed, rising per capita incomes in this city-state would have clogged the roads and caused vehicles to spill over to the sea. Traffic flow would have completely choked.

If the permit was not awarded out by public bidding, people would have bribed their way to owning private vehicles. The actual revenues generated from issuance of those permits would have lined public pockets rather than improved public expenditure. The whole thing would have ended up a complete mess.

Populists might raise the faux issue that public bidding for a finite public commodity would force up prices and ensure that only the rich would own cars. But if the finite public commodity was distributed by means of a corrupt system, the actual costs would be greater and the public benefits less. The gatekeepers will be unjustly enriched and public services would be substandard.

It is infinitely better to devise a system that ensures that all potential revenues from the sale of finite public assets go straight to the public coffers.

At the House of Representatives, there is a committee that awards franchises for use of finite public assets by means of legislation. One would think that few legislators would want to affiliate with what might seem to be such an innocuous committee. However, by tradition, chairmanship of this committee is one of the most coveted posts in that chamber. Membership in that committee is one of the most desired spoils of power.

Something must be wrong here.

Franchises for finite public assets are precious commodities. They are the basis for profitable enterprises. And yet, when awarded by means of legislation, they are given away free as far as public revenues are concerned.

Among the most desired franchises are bandwidth space for radio and television broadcasts as well as satellite broadband and mobile phone services. Most of these have been awarded out and, as urban legend has it, to the great profit of the well-placed gatekeepers at the time they were handed out.

When a franchise is awarded to a private entity, it is normally considered to be part of the corporate assets of that entity for the life of the franchise. That is the norm. When the entity is sold, the remaining life of the franchise it holds is part and parcel of its price.

In such a normal process, however, the present gatekeepers cannot make the personal profit that their predecessors who granted the original franchise made. In order to generate some illicit income for themselves, they could make the life of the franchise uncertain.

Since, in our system, franchises are awarded by legislation, they could be amended by legislation as well. Or, at least, the present gatekeepers can threaten to amend the terms of the existing franchise — not as a means of improving public benefit but as a weapon to shake down franchise-holders.

There lies the added vulnerability of the present system for awarding franchises. It creates complex uncertainties in doing business. It raises transaction costs unpredictably.

Take the predicament of GV Broadcasting, a radio broadcast business with a respectable Luzon audience. For 25 years, the radio station has been providing its service on the basis of RA 8169 which provided the franchise and RA 8591 which amended it.

Some time ago, a new investor came into the business with capital to improve its facilities with the view of expanding its audience share and improving its programming. Soon after the new investor came in, HB 5028 was filed seeking to repeal the franchise — and, therefore, effectively kill the business.

Notwithstanding the fact that the original franchise explicitly encourages the beneficiary company to sell additional shares to improve its capital base and it service, the bill seeking to repeal the franchise cited the entry of a new investor as the excuse for withdrawing the franchise.

This is curious, to say the least. Very curious, indeed.

Of course, out of the blue, a cabal of brokers descended upon the new (and now threatened) investor offering to fix the problem. For their services, they are charging the new investor a rather hefty sum — a sum nearly equal to the investment itself.

The cabal’s entry into the scene suddenly made the investment a lot more costlier. Copies of the bill seeking repeal of the franchise were sent out to the investor’s counterparties abroad. A thick cloud of uncertainty had, one can imagine, descended upon what had heretofore seemed to be a plain and honest investment.

This incident adds one more reason for changing the system of awarding franchises to public bidding instead of by legislation. That will make our business environment immensely more predictable. And more honest.