Global Telephony / June 1996
By Larry Luxner
São Paulo may be South America's largest metropolis, and Rio de Janeiro its most famous, but for now the eyes of the world's telecommunications giants are trained on Brasília -- the remote, futuristic capital city where lawmakers and regulators are charting the course of Brazil's soon-to-explode telecom industry.
Last August, the administration of President Fernando Henrique Cardoso approved a Constitutional amendment which allows private companies to provide telecom services throughout this vast nation of 160 million people, while loosening the monopoly of Telecomunicações Brasileiras S.A. (Telebrás), the state entity that owns 27 regional phone companies and controls 92% of Brazil's local traffic and 100% of its long-distance traffic. Exactly which areas will be opened up -- and over what time frame -- is still unclear, but the decision to introduce competition into the Brazilian telecom sector remains one of the most important policy decisions of the Cardoso government.
"We've been studying two kinds of initiatives," said Fernando Xavier Ferreira, the 46-year-old president of Telebrás, in a recent interview in Brasília. "The first is a smaller bill (known as the Ley Minima) that would regulate cellular B-band, data communications, value-added services and satellite transmission in order to avoid questions over legitimacy of the opening of those markets to private capital. Secondly, we're developing a new basic telecom law that will replace the old law issued in 1962. This will establish an independent regulatory commission like the FCC. The Ministry of Communications now performs this function, but it's also the main shareholder of Telebrás, so there's a conflict of interest."
Ferreira, who was executive secretary at the Communications Ministry before moving over to Telebrás earlier this year, estimates that between now and 1999, "the industry has room for investments of $35 billion, and for the 2000-2003 period, another $35 billion, based on the unmet demand we think we have." Cellular service in the B-band alone represents $10 billion, with four million additional cellular lines by the end of 1996 and 10 million by 1999. That will require about $5 billion of investments by Telebrás and $5 billion from the private sector.
In order to remain competitive in an open market, says Savio Pinheiro, director of SP Communications Ltda. in Brasília, Telebrás -- which has 90,000 employees and 1995 revenues of $8.4 billion -- should be reduced from 27 companies into seven or eight regional phone entities. At the moment, its three biggest subsdiaries are the international carrier Embratel, Telesp of São Paulo state and Telerj of Rio de Janeiro state, which together account for 60% of Telebrás' consolidated revenues.
"Before the system is privatized, a number of steps have to be taken, such as merging the companies," said Pinheiro, former country director for Motorola's international corporate relations. "Otherwise, it won't be viable."
Yet veteran Brazilian politician and former ambassador to the U.S. Roberto Campos calls that idea "dangerous," adding that state governors would oppose the plan bitterly. "It would take a very long time, and in the meantime, the companies would depreciate in value," he said in an interview. "It's better to privatize the companies as they are, and let the private companies merge, even if the government has to sell them under value."
At the moment, Brazil's goal is to reach a basic telephone density of 15 per 100 by 1999. Currently, the country has 14.5 million lines in service (a teledensity of 9 per 100). Yet even that ranges dramatically from region to region. In São Paulo, density is 13.6 per 100, while in the impoverished northeastern state of Pernambuco, it's only 3.7 per 100 lines. And 45% of Brazilian businesses are still without phone service at all.
Part of the problem is that Telebrás is limited by law to investing only 0.6% to 0.8% of Brazil's gross domestic product into the telecom system each year. Therefore, the majority of system improvements must come from the private sector. There are a few exceptions, notably Companhia de Telefones Brasil Central -- a private phone company operating in three states and some industrial suburbs of São Paulo -- and Rio Grande do Sul's CRT, a state-owned company not under the Telebrás umbrella.
Without a doubt, cellular telephony represents the biggest opportunities for foreign companies trying to crack the Brazilian telecom market.
In 1990, there were only 11,000 cellular phones operating in Brazil -- a number which has since risen to 2.7 million and should hit 10 million by 2002, by which time Brazil's population will reach 172.5 million. In the past six months, São Paulo, which didn't initiate cellular service until August 1993, issued as many new cellular lines as Chicago has in the past five years.
According to industry sources, the cellular waiting list in metropolitan São Paulo now stands at 500,000. The list would be even longer, if not for the fact that Telesp stopped accepting new names in November 1994. Telesp estimates the true demand waiting for a cellular line at around 1.5 million.
Although the first bids for private exploitation of band-B for cellular telephones were to have been opened in March, disagreements over details, such as whether foreign investors can have a majority interest in a service provider, have delayed cellular privatization, probably until 1997. Equitel executives predict at least two more years before full privatization of fixed phone and data transmission service takes effect.Cellular service under the proposed law will be subject to 15-year concessions renewable through bids. Foreign capital would be limited to 49%, and the head office would have to be in Brazil, although contracts may be drawn up between the Brazilian entity and foreign companies. The Communications Ministry is now preparing cellular regulations in anticipation of passage.
One local industry leader is Equitel, which is based in São Paulo and has a factory and research center in Curitiba, about 250 miles to the south. Although Siemens owns 49% of Equitel's voting shares and 70% of the equity, company officials say they also produce cellular equipment for Motorola, including hand-held and system units.
Equitel executives say Siemens and its main multinational rivals in Brazil -- Ericsson and NEC -- all have substantial financing debt to cover, and they predict all will need more equity from their foreign parents and may have to give up voting power. Recent Constitutional amendments would permit majority participation by foreign partners, but no implementing legislation has been passed.
Meanwhile, some of the world's biggest cellular giants are carving out business opportunities for themselves as thousands of Brazilian households -- tired of waiting for promised improvements in the fixed-line system -- turn to cellular, despite the higher monthly service charges.
"Besides the novelty factor, many paulistas turn to cellular out of desperation and frustration," says one U.S. Embassy official. "A new Telesp cellular line costs R$200, while a fixed phone line from Telesp runs R$1,211 after up to three years on the waiting list. Because of the long waiting list, telephone lines are hot commodities on the resale market, worth up to R$5,000 in some parts of São Paulo."
In April, in what marked its first-ever financing of a Brazilian telecom project, Washington-based Overseas Private Investment Corp. approved up to $100 million in financing towards a joint venture between Comcast International Holdings Inc. and MCom Wireless S.A., a major Brazilian telecom and media group. The venture, known as Mcomcast S.A., will establish a fully digital wireless network in São Paulo, offering value-added services such as call-waiting, conference calling and voice mail. Comcast's partners in the venture are MCom S.A., which operates the largest cable TV systems in Brazil. - comcast is 4th largest cable operator in US, and cable programming.
Likewise, Ericsson Telecomunicações S.A. has won orders this year to supply $400 million worth of AMPS cellular systems, mostly for Telebrás but also for CRT in Rio Grande do Sul and CTBC in Uberlandia. These orders boost the capacity of the Brazilian network supplied by Ericsson to over 1.2 million subscribers, and Ericsson's share of Brazil's wireless market from 26% in December 1994 to 36% today. In February, the Swedish giant landed a $105 million digital switching deal with Telesp, the phone monopoly of São Paulo state.
A few weeks later, Hughes Network Systems Inc., a unit of Hughes Electronics Corp., announced it had been selected along with partner Alcatel to provide a fixed wireless phone system for the densely populated Campos region of Rio de Janeiro state. Hughes says the agreement with Telerj "is the country's first application of large-scale, high-capacity digital wireless local loop (WLL) as a solution to increased demand in Brazil for basic telecom services."
Under the agreement, whose terms weren't disclosed, 20,000 new phone lines will be installed using Hughes' GMH 2000 cellular system, including multi-subscriber and single-subscriber terminals; the initial system should be working by this summer.
Delio Morais, HNS' director of Brazil operations, calls WLL "an attractive solution for wireless loop in urban and suburban areas, opening up phone service to thousands of subscribers with very efficient use of the radio spectrum."
Nynex is also interested in Brazil. In late April, according to Folha de São Paulo, Nynex Chairman Robert Anderson met with Communications Ministry officials to explain the company's strategy to penetrate the Brazilian cellular market. Nynex is part of a consortium that includes Brasilinvest, Cowan, Banco Cidade and other companies bidding for the Band-B tender to be issued later this year. Likewise, Bozano Simonsen and Opportunity banks, teamed with Banco do Brasil and others, are seeking a foreign partner willing to create a consortium to bid for the same tender. O Globo reports that the partners want to invest up to $2 billion in the project, with the foreign company to be selected sometime in May.
Satellite service, however, isn't expected to begin until 1998 -- and then, it'll be a concession through bids for a 15-year maximum, available to Brazilian-majority interests only. Preference will be given to the use of Brazilian-owned satellites, though other satellites operating with Brazilian permission will be allowed. Data transmission, meanwhile, is seen as a "modality" of limited service, according to U.S. Embassy sources. "Authority will be given for an unlimited period for an entity's own use, but, if for more than personal use, it will be granted only to Brazilian-majority companies for 10-year periods."
One area not controlled by Telebrás -- and thus already open to private investment -- is the paging services market. Defined as "a limited service for closed end-user groups" since 1990, the paging market has a subscriber base of around 300,000 customers and revenues of $120 million, according to Latin American Telecom Report. The paging market appears to be concentrated in six cities -- São Paulo, Belo Horizonte, Rio de Janeiro, Curitiba, Campinas and Brasília -- with major providers including Mobitel (Telecom Portugal), PSC (Splice do Brasil-Itatel) and Teletrim (Victori Comunicações-Mtel).
According to the newsletter, Brazil's Ministry of Communications has so far granted 681 paging service concessions, most of them authorized during the previous government; 65% of all paging companies had projects in the 931 MHz band, 34% in the 35 MHz band and 0.5% in the 450 MHz band.
"We believe the Brazilian paging sector will experience strong subscriber and revenue growth over the next five years, based on already existent trends of foreign investment, infrastructure roll-out and improved marketing," says International Technology Consultants, which publishes the newsletter, adding that paging revenues should hit $250 million by the end of 1996.
Even though Brazil's Ministry of Communications says it will insist on 51% Brazilian ownership in telecom services, Communications Minister Sergio Motta was recently quoted as saying that he now thinks it may not be essential to limit foreign capital investment for telecommunications, other than broadcast. He says a strong FCC-type regulatory body could prevent any problems, even with a wholly foreign-owned entity. Motta recently urged the Brazilian Congress to conclude negotiations for an international telecom accord -- including reciprocity and access rules for foreign firms -- by Apr. 30, though those talks have since been extended to Feb. 15, 1997.
"Although Motta says he is speaking for himself and not for Telebrás, this is a sign that the government knows it may eventually have to accept majority foreign ownership in order to attract large amounts of capital into the Brazilian telephone system," according to the U.S. Embassy in Brasília.
Asked about putting limits on foreign companies in the Brazilian telecom sector, Telebrás President Ferreira said he's not sure.
"Personally, I think the Brazilian market is very attractive, and that the Brazilian entrepreneurs should have guaranteed participation. Whether this implies a limit to the participation of foreign capital is another question," he told Global Telephony. "Should Brazil follow the lead of the FCC? Not necessarily. We think the formula for each country must be different, and must take national particularities into account."