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Philippines: Rodrigo Duterte takes aim at the oligarchs

At a cabinet meeting on December 2 in Manila’s Malacañang Palace, Rodrigo Duterte flew into a rage on hearing some bad news.

The president was informed that Manila Water, owned by Ayala Corp, the Philippines’ oldest and biggest conglomerate, had won a 7.4bn Philippine pesos ($145m) arbitration award in Singapore stemming from a dispute over water rates, brought by the companies when his predecessor, Benigno Aquino III, was in power.

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It was the Singapore tribunal’s second such ruling against the government: the conglomerate First Pacific, which runs Manila’s other water company, had already won 3.4bn pesos in a similar dispute in 2018.

After taps ran dry in thousands of Manila households during 2019’s hot season, water became a sensitive issue for a leader who styles himself as a champion of the people. Mr Duterte has, in turn, made it one for the rich men who control the Philippines’ biggest companies — “oligarchs”, as he has begun labelling them, such as Ayala’s chief executive Jaime Augusto Zobel de Ayala and Manuel Pangilinan, his counterpart at First Pacific.

“If Ayala and Pangilinan are your friends, kindly tell them . . . if we see each other, no matter how many bodyguards you have, I can ruin your face, you son of a bitch,” the president declared in a speech that turned into a tirade the day after the Singapore court decision. He accused Ayala Corp of evading taxes, and demanded a renegotiation of the two companies’ water contracts. Both are now under renegotiation, and Manila Water and First Pacific’s Maynilad Water Services have renounced their arbitration awards.

This was one of the most sharply targeted verbal attacks Mr Duterte has unleashed since taking power in 2016 — part of a populist wave across the world — and indicates that he wants to move on from taking on drug dealers to confronting some of the country’s most powerful people in the final two years of his presidency. Some Manila businesspeople see it as a defining power play by a leader seeking to hone his legacy.

Mr Duterte, 74, has since stepped up his verbal attacks on “oligarchs”, delighting his tens of millions of supporters but sending a chill through big business. On February 10, in a move Filipinos saw as an assault on both media and big business by a president who distrusts both, Jose Calida, the solicitor general, filed a supreme court petition calling for the licence of ABS-CBN, the Philippines’ biggest broadcaster, to be revoked.

Businesses and analysts say the attacks bode ill for a country that was until recently one of the region’s fastest-growing economies. “Institutional investors are starting to wonder who is going to be next, after the Ayala and Pangilinan companies,” says Romeo Bernardo, a former under-secretary of finance in the Corazon Aquino and Fidel Ramos presidencies who also sits on several company boards.

Many of those interviewed by the Financial Times say the attacks on the family-controlled companies are ill-judged and that the scrapping of the water agreements and push to strip ABS-CBN of its licence could hurt investor confidence.

Economic growth and foreign investment are already slowing, and Mr Duterte’s signature “Build Build Build” infrastructure programme is running well behind schedule.

“I think there is a short-term shake in investor confidence,” says James Su, an infrastructure analyst with Fitch Solutions in Singapore. “This incident showed they have the ability to use their regulatory power to overrule contracts.”

Ayala’s Manila Water has lost more than a third of its market value since Mr Duterte’s attack on it. Shares of its parent group and real estate, telecoms and other units have also fallen. First Pacific’s shares are down more than 16 per cent over the same period. This month Ayala announced that it had agreed to sell control of its water business to Enrique Razon, a ports tycoon in better standing with Mr Duterte.

Many Filipinos believe the water affair, and the government’s move to shut down ABS-CBN, controlled by the powerful Lopez family, have a political dimension. All three families have in the past supported the Liberal camp of Ms Aquino, associated with the colour yellow, which Mr Duterte swept aside after he took power in 2016.

“The Ayalas and the Pangilinans are known as businessmen who are not aligned with the president — supposed ‘yellow’ oligarchs who support liberal initiatives,” says Richard Javad Heydarian, a political analyst. “They have . . . openly criticised him.”

Mr Duterte’s own broadsides against the oligarchs have boosted his popularity. Since his December 3 speech, a man who was already the most popular president in modern Philippine history has seen his approval rating climb by seven to nine points, according to the country’s two most closely watched polls.

Ayala and First Pacific both declined to comment. Mr Duterte’s office referred an interview request to Menardo Guevarra, justice secretary, who says the renegotiation of the water contracts was about upholding Philippine law, asserting that some provisions of the contracts were illegal or unconstitutional and ensuring the public have a fair deal.

“The president got mad not because the owners were the Ayalas or the Pangilinans, but because of the provisions in the contracts which he found to be onerous,” Mr Guevarra says. “That’s where his anger began; it had nothing to do with the owners.”

Mr Duterte’s criticism of oligarchs has been part of his outsider appeal since his days as a politician in the southern city of Davao, though he himself grew up in a well-to-do political family and trained as a lawyer.

In the Philippines, people sometimes speak of the “10 families” who are said to control the economy and politics, and the Ayalas and the Lopezes typically make the list. Many Filipinos — even those who are critical of the president — believe the conglomerates have grown rich by engaging in rent-seeking behaviour or outright state capture.

At the same time Philippine family companies, from conglomerates such as SM Investments and JG Summit to the emerging fast-food multinational Jollibee Foods, have been an engine of growth in a country with a chronically inefficient state sector.

Ayala’s own history dates back to Spanish colonial rule in 1834, and its holdings range from telecoms company Globe to the lender BPI and Palawan island’s upscale El Nido resorts.

While inner Manila, including the area around the Malacañang palace, is blighted with slums, Ayala’s land division was the leading developer in the Makati business district, where a park and an avenue bear the family name, and Bonifacio Global City, a high-rise neighbourhood that is home to many international outsourcing and call centres.

The water contracts that provoked Mr Duterte’s wrath were drawn up under the Ramos presidency in 1997, an era when privatisation and “public-private partnerships” were popular in the Philippines and globally.

With advice from the International Finance Corp, the World Bank’s private sector arm, the government put out tenders for water concessions in Manila to address the state’s failure to provide the capital with an adequate service.

But crucially the development of water resources remained under state control. More than two decades later, greater Manila still depends on a single dam at Angat, north of the city, to supply water for more than 15m people.

After foot-dragging by several governments, work is progressing on a second dam project at Kaliwa, which the Duterte government plans to finance with Chinese loans.

When drought hit the Philippines in 2019, the water companies had to ration supplies, and Mr Duterte, say analysts, found an easy target in the companies.

“Duterte doesn’t see the Ayalas and the Pangilinans as national champions, he sees them as big businesses squeezing the poor,” says Eduardo Araral, an associate professor at the Lee Kuan Yew School of Public Policy, National University of Singapore. “He is a lawyer, and saw some justification for taking them down, especially after the Singapore arbitration awards.”

Mr Duterte’s feud with ABS-CBN goes back even further. In May 2016, on the eve of his landslide victory, the station failed to air one of his campaign ads. It has declined to say why. But since then Mr Duterte has repeatedly railed against the network, threatening to make sure it loses its franchise when it comes up for renewal on March 30.

The station has also reported critically on extrajudicial killings during his “war on drugs”, his trademark policy that has resulted in more than 5,500 deaths, according to official figures.

In what appeared to be a thinly veiled threat, Mr Duterte in December said of the Lopez family’s stake in ABS-CBN: “If I were you, I’d sell it.” The comments were seen in Manila as an invitation for more sympathetic owners of the broadcaster to step forward.

Mr Heydarian believes the president is seeking to promote a new class of rich men who support him, whom he dubs the “Dutertegarchs” — analogous to the “Boligarchs” who grew rich under Venezuela’s late president Hugo Chávez.

Despite his stated hatred of oligarchs Mr Duterte has courted alliances with some, including Dennis Uy. A contributor to the president’s 2016 campaign, Mr Uy led the Mislatel consortium that in 2019 won the licence to run the Philippines’ third telecoms network, since renamed Dito Telecommunity. Little known outside Davao before Mr Duterte’s rise to power, Mr Uy appeared for the first time on Forbes’ list of the richest Filipinos in 2019, with a net worth of $660m.

In November he bought a 45 per cent stake in Malampaya, the country’s largest gasfield, from Chevron for an undisclosed sum.

As Mr Duterte’s attacks on the water companies escalated, he praised the billionaire Manuel Villar, whose wife is the pro-Duterte senator Cynthia Villar, leading some to suggest that the family’s Prime Water business might be seeking to enter the market in Manila. Mr Villar described this as “speculation” in Philippine media, and said he and the president did not discuss it. Both Mr Uy and Mr Villar declined interview requests.

When asked about the water dispute, the justice secretary Mr Guevarra voiced confidence that the new contracts could be drawn up in a way “that would eliminate unlawful provisions”. And he dismissed the notion that voiding the old agreements would hurt the country’s investment climate.

“Maybe in the short term, it will have a chilling effect on foreign investors, when you think a government is interfering in contractual relations and changing the rules of the game midstream,” says Mr Guevarra. “But in the long run, when you have a contract that’s equitable and fair to both sides, foreign investors will see that contract as a more stable one than a contract that is highly profitable to investors, but subject to potential abrogation anytime.”

Many companies might draw a different conclusion. “This is a government that doesn’t respect contracts, so how can you do business with it?” says one senior fund manager in the Philippines. “[It] doesn’t respect arbitration awards, even China will notice that.”

Some believe the clashes between the Duterte administration and businesses in the Philippines will accelerate the process of cash-rich conglomerates seeking new places to put their money. “Big business groups view this [the water contracts] with alarm,” says Mr Bernardo, the former finance official, whose directorships include two Ayala-controlled companies, Globe and BPI. “It will reinforce what they want to do anyway: diversify outside the country.”

Before the water dispute came to a head, Ayala was putting money into a range of businesses, from Malaysian real estate to an automotive technology company in Germany, solar panels in the US, and two companies controlled by Myanmar-born tycoon Serge Pun.

Back in Manila, Ayala is hammering out details of a water agreement with its new shareholder Mr Razon set to join the business.

“The game plan for many of these businesses is to ride out the rant, then quietly fix things behind the scenes,” says Ronald Mendoza, dean of Manila’s Ateneo School of Government. “But by then your stocks have fallen.”

Additional reporting by Guill Ramos
ABS-CBN: why popular broadcaster is in president’s sights

Rodrigo Duterte’s war on the families behind Manila’s water concessions is mostly happening above the heads of ordinary Filipinos. But the president’s threat to take ABS-CBN, the country’s largest broadcaster, off air is causing millions to take notice.

The network is the country’s most viewed, thanks to shows like its nightly Tagalog-language newscast TV Patrol and the long-running police drama Ang Probinsyano. But ABS-CBN has long been a target of the Duterte administration, with the president threatening to allow its franchise to expire when it comes up for renewal on March 30 — a decision now in the hands of Congress. This month Jose Calida, the solicitor general, called on the supreme court to revoke ABS-CBN’s broadcasting licence, accusing it of “highly abusive practices”.

Some of the accusations against ABS-CBN have a familiar ring: as in the case of Rappler, the news website facing legal action by Philippine authorities, Mr Calida has accused the network of evading taxes and breaking the law by using Philippine Depositary Receipts, a security several other media companies have deployed to address a constitutional ban on direct foreign investment in the sector.

Mr Duterte’s spokesman says the palace had nothing to do with Mr Calida’s petition. Few in Manila believe that, and the supreme court is packed with the president’s nominees.

ABS-CBN denies the charges. “We have all the government and regulatory approval for our services,” says Kane Errol Choa, the company’s head of communications.

Unlike Ayala and First Pacific, which have kept quiet after being attacked by Mr Duterte, ABS-CBN is covering its legal battle as news. Mr Calida last week asked the supreme court to impose a gag order to stop the station and its executives from discussing the case. The court has yet to decide on whether it will grant the order.

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