A China-backed consortium faces the prospect of a protracted legal battle after winning its bid to become the Philippines’ third telecoms provider.

The Philippine government last week gave the nod to a bid by the Mislatel Consortium – in which China Telecom would have a 40 per cent stake – to provide a mobile and broadband service network, after disqualifying the only two other bidders.

The Sear Telecom Consortium was disqualified for not submitting a 700 million pesos (US$13.14 million) “participation security” payment beforehand, while the Philippine Telegraph and Telephone Company (PT&T) lost out for providing incomplete documents.

Both losing bidders immediately appealed against their disqualifications, but were rejected by the National Telecommunications Commission (NTC) on Tuesday. Presidential spokesman Salvador Panelo issued a statement last week insisting the bidding process was “transparent, fair, public and open”.

Meanwhile, controversy is growing over the circumstances in which Mislatel was awarded the contract and the company’s links to President Rodrigo Duterte.

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Mislatel, which stands for Mindanao Islamic Telephone Company, has an alliance with China Telecom, Chelsea Logistics Holdings and the Udenna Corporation run by Davao-based tycoon Dennis Uy – who donated 31 million pesos to fund Duterte’s presidential campaign.

Its winning bid follows a meeting between Duterte and China’s Premier Li Keqiang last year in which the Philippine president sought Chinese investment in the sector. That move, characterised by Duterte as a way to improve the country’s internet connectivity by challenging the duopoly enjoyed by Globe Telecom and PLDT-Smart, prompted concerns in some quarters over the wisdom of giving China access to vital telecoms infrastructure.

Both disqualified bidders have signalled they will not go down without a fight and the controversy is now widely expected to reach the courts.

TWO ISSUES

Their arguments centre on two issues involving Mislatel. First, whether it misrepresented itself by claiming to have an existing and valid congressional franchise, and second, whether it committed a breach of contract against a partner whose parent firm happens to be one of the losing bidders.

Mislatel’s bid rested in part on the 25-year franchise it obtained from Congress in 1998 to operate wire and wireless telecommunications systems. Under Philippine law, a telecom provider has to obtain such a franchise before it can acquire a licence from the NTC.

The law granting the franchise to Mislatel had a clause that automatically revoked the franchise if Mislatel failed to begin operations by 2001. Yet, based on Securities and Exchange records obtained by This Week in Asia, it is unclear whether Mislatel has ever been fully operational.

Its 2015 financial statements show its total assets consist mainly of 18.4 million pesos in cash, zero sales and cost of sales, and a lone expense of 24,434 pesos from paying taxes, which it also declares as its “total comprehensive loss”. As for property and equipment, it declares a value of 1 peso due to “accumulated depreciation” of 78,400 pesos.

Based on Securities and Exchange records obtained by the This Week in Asia, it is unclear whether Mislatel has ever been fully operational

Mislatel stated in its 2015 financial statement (the latest publicly available): “For 2015 and 2014, the company posted a net loss with no taxable income. The company also failed to generate a gross income which is the basis for the 2 per cent Minimum Corporate Income Tax resulting in zero income tax payable for the years 2015 and 2014.”

Its financial statement for 2010 tells a similar story, except that its total assets then were only 1.1 million pesos in cash. Again, its operating expenses were only 58,443 pesos, consisting of local business taxes, its NTC licence, and some travel expenses. Its only declared asset was 78,400 pesos worth of office furniture and equipment. It had zero sales and zero inventory.

The law that granted Mislatel the franchise also required it to place 30 per cent of its outstanding capital stock on the stock market “within five years from the commencement of its operations”; and to “maintain all its stations, lines, cables, systems and equipment for the transmission and reception of messages, signals and pulses in a satisfactory manner at all times”.

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However, Mislatel’s owners as of 2015 remained the same as its 1997 incorporators: Marte Lascano, 25 per cent; Romeo Sabillo, 25 per cent; Howard Evangelista, 20 per cent; Winsberg Austria, 20 per cent; and Mariano Pamintuan Jnr, 10 per cent. The initial paid-up capital in 1997 was 3.75 million pesos.

This Week in Asia tried to reach Mislatel for comment but its listed phone numbers appeared not to be operational.

BREACH OF CONTRACT?

The Sear Telecom consortium may also decide to sue Mislatel for breach of contract. One of Sear’s consortium partners is TierOne Communications International, Inc. TierOne has a subsidiary, DigiPhil, which claims it signed on May 30, 2018, an exclusive partnership contract with Mislatel which gave it “exclusive rights” to Mislatel’s frequencies.

Sear Telecom has claimed Mislatel “unilaterally terminated” this contract to partner with Udenna, Chelsea and China Telecom. It also claims Mislatel has not returned a 10 million pesos payment from DigiPhil.

Mislatel, for its part, has not denied having had a contract with DigiPhil and terminating it. But it has said that it was only “meant for small projects. A simple reading of the contract shows that it makes absolutely no reference to the third telco bid”.

Even before the bidding took place, a fourth potential bidder, NOW Telecom Company, had filed a lawsuit against the NTC. It accused the state agency of resorting to “moneymaking schemes” by inserting new last-minute requirements such as hiking the “participation security” from 500 million pesos to 700 million pesos. NOW Telecom did not join the bidding.

The NTC did not reply. However, Eliseo Rio Jnr, the acting secretary of the Department of Information and Communications Technology (DICT), rejected the insinuation. He said: “DICT and NTC take exception to Now Telecom’s allegation that this initiative is a moneymaking scheme. All the above-mentioned fees are … to attract possible participants while ensuring that the winner will be able to withstand intensive competition against the entrenched duopoly.”