Area Development / November 1997
By Larry Luxner
Telecommunications -- ranging from basic phone service and cellular telephony to Internet access and next-generation Personal Communications Services (PCS) -- is undoubtedly the hottest growth market in Latin America.
South America's phone companies will add 17 million conventional phone lines and 16 million cellular lines by 2000, translating into investments of nearly $40 billion, says Pyramid Research Inc. Growth will be led by Brazil, whose Ministry of Communications has called for the addition of over 10 million lines by 2000, and nearly 16 million cable subscribers by 2003. But interest isn't confined to Brazil; lucrative opportunities also abound in Argentina, Colombia, Ecuador, Paraguay, Peru and Uruguay.
"Private investment will fuel rapid adoption of leading-edge technologies through-out the region," says Pyramid's Latin America research director, Catherine Forster Connol-ly. "Many of these countries will go abroad to seek foreign investment and create attractive joint-venture opportunities for global players to extend their reach into the region."
According to the Washington-based Strategis Group, the Latin American/Caribbean cellular market alone will quintuple over the next five years, reaching 45 million subscribers and generating $20 billion in annual sales by 2000, hitting $30 billion by 2002.
The Strategis study says over 65% of Latin America's cellular/PCS subscriber base is still centered in three nations: Brazil, Mexico and Argentina. In fact, the region's top three cellular markets by 2002 will be São Paulo (4.5 million subscribers); Mexico City (3.8 million) and Buenos Aires (3.0 million).
In Mexico and Argentina, says Strategis, the licensing of PCS "will inject new levels of competition in these markets and contribute to expanding the subscriber base." The study anticipates annual cellphone unit sales will jump from 5.7 million in 1997 to 13.4 million units over the next five years.
Technologically speaking, by 2002 around 60% of Latin America's digital cellular subscribers will be using time-division multiple access (TDMA) technology, while most of the rest will be using code-division multiple access (CDMA). GSM, an industry standard common in Europe, Africa and the Far East, is only starting to take root in Latin America.
Here's a look at what's happening in telecommunications throughout the region:
ARGENTINA: The 1990 selloff of state-owned Entelco spawned two new phone companies: Telefónica de Argentina, owned by Spain's Telefónica (in the northern half of the country), and Telecom Argentina, owned by France Telecom and Stet (in the southern half). Since then, Telefónica has doubled its subscriber base to 3.1 million, while boosting digitalization to 74%. Last year, it spent $1.2 billion on improvements, and this year will invest another $1 billion. Likewise, Telecom now has 2.6 million lines and a digitalization rate of 85%. Both companies are pouring their profits into massive cellular networks as they prepare for the lifting of their respective monopolies on basic phone service next year.
At least 17 companies are now bidding for PCS licenses, though the most prominent among them, AT&T, recently pulled out for undisclosed reasons. Meanwhiel, AT&T and SatLink S.A. are joining forces to give Argentine customers fast access to the Internet. Under the arrangement, AT&T will give SatLink dedicated lines while SatLink -- which began operations in 1992 -- will be the only firm authorized to offer Internet access via AT&T. Separately, AT&T has introduced a new callback service that cust the cost of a phone call to the U.S. to 79¢ a minute -- 35% cheaper than the competition.
BOLIVIA: Entel, the phone company capitalized by Italy's Stet International in September 1995, is working on improvements from the laying of a fiberoptic line between La Paz and Potosí to the installation of 2,200 pay phones around the country.
Stet, which paid $610 million for a 50% share of the state-owned company, won six years of exclusivity and a 40-year concession to operate regional and international long-distance, promising to double the number of access lines by 2002. At the moment, Bolivia has under 5 lines per 100 people, one of the lowest teledensities in South America.
BRAZIL: Long called a "sleeping giant," Brazil is by far Latin America's most important telecom market. In July, President Fernando Henrique Cardoso signed the General Telecom Law, which authorizes the privatization of Brazil's state-owned Telebras monopoly (estimated value: $35 billion), as well as the creation of the Agencia Nacional de Telecomunicações (Antel), an FCC-like entity that will regulate all aspects of telecom except radio and TV broadcasting.
The Telebras family includes 27 regional telcos -- one for each state, plus Brasília -- as well as long-distance carrier Embratel. Current plans call for the selloffs to begin in early 1998, with the 27 "Baby Bras" to be reorganized into four regional operating companies; Embratel will be privatized separately. That will dramatically boost Brazil's current teledensity of 10.2 fixed lines per 100 inhabitants. An added benefit for Brazilians: the black market for phone lines should gradually disappear, with the waiting time for a phone shrinking from years to a few weeks.
Separately, a consortium led by BellSouth International has paid a whopping $2.5 billion for the right to operate a cellular network in the São Paulo metropolitan area. In forking up so much cash (340% over the government's base price), it easily outbid other heavyweights of the telecom world including AT&T, Motorola and France Telecom. The consortium plans to spend $500 million to build and operate the network, to be based on all-digital CDMA technology supplied exclusively by Northern Telecom.
"This is, without question, a landmark award for us," says Charles C. Miller, president of BellSouth International. "São Paulo is one of the most densely populated cities in the world, with only 12 phone lines per 100 people. The growth potential for this market is simply staggering." With this latest coup, the $19 billion BellSouth now has a presence in every South American country except Bolivia, Paraguay and the three Guianas.
CHILE: Chile, which enjoys Latin America's healthiest economy (over 7.5% GDP growth last year), also has the region's most advanced telecom infrastructure.
Industry leader CTC (Compañía de Telecomunicaciones de Chile) says Chile's telecom industry will generate $3.95 billion in annual income by 2002, more than double today's $1.8 billion. In addition, teledensity should rise from 16 per 100 to 26 per 100 within five years, while domestic long-distance traffic will jump 17% a year and overseas long-distance by 20% annually.
Startel, Chile's largest wireless network operator, has launched digital PCS service in the Santiago metro area, with plans to extend digital cellular services to the rest of Chile in the next few years. Since June 1996, Startel -- a $700 million venture between long-distance rivals VTR and CTC -- has paid Sweden's Ericsson $97 million to upgrade and expand Startel's existing analog 800-megahertz AMPS network.
Meanwhile, Ericsson has signed a $110 million contract with Startel competitor Entel to supply equipment for a GSM-1900 cellular system -- the first major contract for a GSM system anywhere in Latin America. The Entel system, to be up and running by year's end, will operate in the same 1900-megahertz frequency as in the United States, where Ericsson installed the first GSM system in late 1995. GSM is the industry standard in Europe and has been adopted for use in more than 100 countries.
COLOMBIA: After years of delay, the government of President Ernesto Samper is opening Colombia's long-distance market to competition. Companies wanting to compete against long-time monopoly Colombia Telecom will be required to pay an entrance fee of $150-200 million. Long-distance consortia must include a strategic international partner which has handled at least four million minutes of international long-distance traffic in the past 12 months, and a local partner which has at least 150,000 installed lines. In the first two years of operations, long-distance tariffs will be regulated, though by 2000, operators will be able to set tariffs without established floors and ceilings. Companies expected to bid for a license include MCI, Bell Canada, Italy's Stet and Global One (a consortium of Sprint, France Telecom and Deutsche Telekom).
Meanwhile, a newly formed venture, Capitel, has begun carrying local phone calls in Bogotá -- marking the inauguration of competition in Colombia's local access market and effectively ending the monopoly long enjoyed by state-owned Empresas de Telecomunicaciones de Bogotá (ETB). Capitel is a strategica alliance between Ericsson, Northern Telecom, Siemens and Colombia Telecom, the national long-distance company. The Capitel network, valued at $513 million, plans to install 550,000 lines.
COSTA RICA: The Costa Rican Institute of Electricity (ICE), which runs the phone company here, recently invited local and foreign companies to participate in a $543 million turnkey expansion project of the national telecom grid. The objective is to meet demand during the period from 1998 to 2003, and to modernize the network.
On Sept. 9, Costa Rican President José María Figueres inaugurated the teleport facility of American TeleSource International (ATSI) in San Antonio, Tex. The teleport, which serves as a telecom gateway between the U.S. and Costa Rica, was constructed through a joint agreement between ATSI and government-owned Radiografica Costarricen-se S.A. (Racsa). The Costa Rican network has also been connected to ATSI's teleport in Mexico. The new facility will serve the needs of Racsa and other private companies in Costa Rica requiring voice, fax and data communications between the countries.
CUBA: Italy's Stet International has agreed to pay $25 million to New York-based ITT Corp. for a 10-year right to use assets within Cuba. Since 1960, ITT has had a $131 million claim registered within the U.S. Foreign Claims Settlement Commission arising from the Cuban phone company's expropriation by the Castro regime.
Stet has a 29.3% direct investment in Cuba's state-controlled joint venture, Etecsa, which manages the island's telephone system. It purchased its shares in Etecsa from Mexico's Grupo Domos for $580 million, after Grupo Domos bailed out, citing its own financial woes and the threat of U.S. economic sanctions.
DOMINICAN REPUBLIC: Well over a million Latins surf the Internet regularly, with thousands more being connected daily in top markets from Argentina to Venezuela. Yet nearly all hemispheric Internet traffic -- including e-mail messages between adjacent countries -- must be routed through a Network Access Point (NAP) in Virginia. Not only does that slow transmission times, it also makes Internet access very expensive.
That's finally changing with inauguration of Latin America's first NAP in Santo Domingo. The Latin Internet Exchange (LIX) is an alliance between Washington-based CAIS Internet and GTE Codetel, the phone monopoly of the Dominican Republic.
"If you're in Venezuela and want to access an Argentine Web site, you have to do it through the USA," says Sandy Fitchet, vice-president of marketing at CAIS. "Now we'll be able to keep traffic within the region, allowing faster access at lower cost."
Ernst Burri, president of GTE Codetel -- which is pouring $6 million into online ventures this year -- said the new LIX "will dramatically improve how Internet traffic is handled in this fast-growing sector of the world, while lowering costs for Internet service and creating new growth opportunities for regional businesses."
ECUADOR: The partial privatization of Ecuador's state-owned Emetel -- delayed because of political upheavals earlier this year -- is now set to take place Nov. 20. Olga Vaez, spokeswoman for the state privatization agency Conam, says only three entities, GTE Corp., Italy's Stet International and Spain's Telefónica, have purchased the $30,000 tender document. Up for grabs are 35% slices of Emetel Norte and Emetel Sur, the two regional operating companies into which Emetel is being split by law; the state will keep 55%, and Emetel employees will have options on the remaining 10%.
Conam's president, Rodrigo Paz, says that although the legitimacy of the process has come under fire, Emetel's sale is irreversible because the name and credibility of the Quito government are at stake. "The bidding process and the operations will be totally transparent," he said. "We have come up with a legal framework appropriate for averting doubts regarding the sale of this important company."
In 1996, Emetel had operating profit of $113 million, net profit of $101 million, assets of $1.4 billion and liabilities of $314 million.
EL SALVADOR: The Salvadoran government plans to sell a 51% share of Antel, with 25% remaining in government hands, 10% going to the workers and 14% to local investors. A likely candidate for control of Antel is Telefónos de Mexico, according to industry observers. The idea is to divide Antel in two companies, with the minimum bid for each of the halves at around $150 million. Labor unions and opposition parties continue to challenge the constitutionality of the sale.
Possible bidders include BellSouth, GTE Corp., Chile's CTC, France Telecom, Italy's Stet and Spain's Telefónica. Antel could be particularly attractive to U.S. companies, since long-distance traffic between the U.S. and El Salvador currently exceeds 144 million minutes annually -- the largest volume of traffic produced by any country in Central America.
GUATEMALA: Guatemala, with 11 million inhabitants the largest country in Central America, has a phone penetration of only 3%, with an estimated waiting list of nearly one million lines.
As such, state-owned Empresa Guatemalteca de Telecomunicaciones (Guatel) is seeking a strategic investor to buy between 51% and 95% of the shares of a newly formed entity to which Guatel will have transferred substantially all of its assets and operations. The shares of this company will be sold through an auction process.
Five companies have been prequalified to bid: France Telecom, GTE, Southwestern Bell Corp., MCI and Telefónos de Mexico. Bidding should take place before year's end.
GUYANA: Guyana Telephone & Telegraph, the phone monopoly serving South America's only English-speaking nation, is 80% owned by Atlantic Tele-Network of the U.S. Virgin Islands. Last year, GT&T generated over $100 million for ATN from phone sex and other audiotext services, but the parent firm concedes its dependency on audiotext is cause for concern, now that other countries are jumping on the phone-sex bandwagon.
ATN bought its 80% chunk of GT&T from the Guyanese government in 1991 for $16.5 million. Since then, it has invested about $90 million in the company, increasing the number of lines from 13,000 to around 60,000.
HAITI: The poorest nation in the Western Hemisphere, Haiti also has its lowest teledensity -- about 0.8 per 100 inhabitants. Haiti's president, René Préval, wants to privatize Teleco -- the only state entity making money -- though the plan is unlikely to succeed given fierce labor opposition.
HONDURAS: Lawmakers have proposed that 47% of state-owned Hondutel be sold to a private firm, 4% offered to workers, and the remaining 49% to be retained by the government for two years, then sold on local or international stock markets. Honduran President Carlos Roberto Reina, who says the telco (run by the military) is worth over $750 million, has ordered a feasibility study on privatization, though Hondutel's 7,500 workers recently went on strike to protest the idea.
MEXICO: Mexico's long-distance telephone market officially opened Jan. 1, 1997. Since then, former state monopoly Telmex (Telefónos de Mexico S.A.) has captured 52.8% of ballots returned by callers choosing a long-distance carrier in Mexico City, which accounts for one-third of the country's total lines. Alestra, the AT&T joint venture, obtained 25.6% of ballots, followed by Avantel (MCI-Banamex), with 21.0%.
Telmex, for its part, plans to install one million lines over the next 12 months, on top of the 9.0 million lines already in service. Teledensity has jumped from 5 per 100 to 9 per 100 since phone service was privatized in 1991. The company may soon be divided in two, leaving Telmex with the local market and LADA with long-distance operations. This way, LADA would become just another client of Telmex for interconnection services.
Meanwhile, Mexico's Ministry of Communications and Transport has issued the regulations for communications via satellite and the tender for acquisition of the public-sector enterprise Satelites Mexicanos. This will effectively privatize three Mexican satellites: Morelos I and II (already in orbit), and Morelos III, to be launched next year.
PANAMA: In May, the Panamanian government sold a 49% controlling interest of state-owned Intel to Britain's Cable & Wireless, which had submitted the winning bid of $652 million. This marks Central America's first successful telecom auction (C&W's only competitor, GTE Corp., bid $452 million). Under the 20-year concession, Intel must lower long-distance tariffs and invest a substantial amount in new phone lines and public phones. Service must also improve dramatically. The U.S. Embassy in Panama City says C&W will invest around $900 million between now and 2003, when Intel loses its monopoly and any company is free to offer basic telephone service.
Guillermo Inchausti, CEO of BellSouth's operations in Panama, says C&W will lose 50% of its domestic long-distance business and 75% of its international long-distance business in 2003. Therefore, he assumes the company plans to recoup the great majority of its investment over the next six years. He also predicts the company will immediately dismiss 1,000 Intel workers.
Though some industry observers felt C&W paid too much for Intel, the embassy says it's a win-win situation. "Panama's infrastructure and investment climate are enhanced significantly as a result of the privatization," says the embassy. "Over the next six years, Panama's telecom sector will receive massive new investment and go from inadequate and expensive to state-of-the-art and cheap."
PARAGUAY: Experts say Paraguay needs at least $1 billion in new investment to meet current demand for basic phone service; nevertheless, there are no immediate plans by the government of President Juan Carlos Wasmosy to privatize state-owned monopoly Antelco. On the other hand, the Paraguayan regulatory agency Conatel recently qualified six consortia to present bids for Paraguay's B-band cellular license.
"With a population of only five million, Paraguay's second cellular license attracted a surprising, impressive group of foreign investors," said one observer, noting the high number of Japanese, Korean and other Asian companies bidding. At the moment, Telecel is Paraguay's sole cellular service provider. Begun in 1992, Telecel -- owned 84% by Millicom -- has over 40,000 subscribers in Asunción, Ciudad del Este and Encarnación.
PERU: Telefónica del Perú, most of which was purchased by Spain's Telefónica for $2 billion in 1994, planned to invest $550 million this year, down from the $700 million spent in 1996. General manager Manuel García said that of the total, $400 million would go for fixed telephone lines, $80 million for cellular and the rest on other business.
Since its privatization, the company -- which made an after-tax profit of $343 million last year (up 17% from 1995 profits) -- has managed to boost Peru's teledensity from 4.7 to 5.9 per 100. In July 1996, the Fujimori government raised nearly $1.1 billion in its global share offering of a 23.5% stake in Telefónica del Perú, marking the largest offering in Peruvian history.
Meanwhile, Peruvian regulatory agency Ospitel has ordered Telefónica del Perú to allow Tele 2000 -- a cellular operator controlled by BellSouth -- to connect to Telefónica's national cellular network. Telefónica is appealing the order, though the Fujimori government is expected to auction off a provincial cellular band later this year, which might permit Tele 2000 to build its own network anyway -- even before getting a nationwide license.
PUERTO RICO: Gov. Pedro Rosselló has signed into law a bill authorizing the sale of the Puerto Rico Telephone Co., the island's most lucrative public corporation. Rosselló says he wants to sell PRTC because Washington's Telecommunications Act of 1996 eliminates the agency's virtual monopoly on the island, making it less competitive.
"The new act opens the market to competition, and PRTC -- being a government-owned company -- is subject to so many government rules and regulations that it will not have the same ability to compete as do private companies entering the local market," said Juan Velázquez, PRTC's vice-president for regulatory affairs.
Even though Puerto Rico, a U.S. Commonwealth, has only 3.7 million inhabitants, its phone monopoly has 1.6 million lines -- ranking it far larger than the national telephone companies of Bolivia, Ecuador, Peru, Paraguay or the Dominican Republic. At the moment, Puerto Rico has a teledensity of 43 lines per 100 inhabitants -- far higher than anywhere else in Latin America, but lower than the U.S. mainland average of 63 per 100.
Rosselló isn't putting a minimum price on PRTC, though analysts say the company could fetch anywhere from $2.2 billion to $3.4 billion (based on an industry guideline of $2,000-3,000 per line). Last year, PRTC's revenues exceeded $1.1 billion, and profits came to $106 million. Although the government promises nobody will be laid off as a result of the sale, PRTC's 8,000 employees aren't buying that. PRTC's two largest unions swear they'll "wage the fight of the century" to stop the privatization from going through.
SURINAME: This Dutch-speaking republic on South America's northeastern shoulder is gradually deregulating telecom services. In August, Northern Telecom signed a $10 million contract to upgrade the network of Suriname's Telesur. The month before, Phoenix Wireless Group sold its AMPS-based local loop system to International Communication Management Services, a private operator offering fixed wireless, mobile telephony, Internet access and overseas long-distance throughout Suriname.
Open-market competition is designed to bring basic phone service to rural areas throughout Suriname, where current teledensity is 15 lines per 100 inhabitants.
URUGUAY: Uruguay's state-owned phone monopoly, Antel, has slashed national nad overseas long-distance rates by as much as 37% and 58% respectively. The increases, which took effect earlier this year, are expected to offset a projected $22 million drop in revenues.
Earlier this year, Antel -- which is building a 30-story office tower for itself in downtown Montevideo -- ordered a wirleess local loop system from Japan's NEC Corp. Under the deal, NEC will install 43,000 lines and 578 base stations. Rather than be used as a mobile telephone network, as in some countries, in this application the system will be used to link houses to a local telephone exchange. With a 13% penetration rate, Uruguay will get a fast and efficient way of connecting many homes.
VENEZUELA: Venezuela enjoys the distinction of having South America's highest cellular penetration rate. Yet cellphones have become so popular in Venezuela that the system suddenly appears in danger of breaking down -- or so claims regulatory agency Conatel. The agency recently issued a decree prohibiting Venezuela's two cellular providers -- Movilnet and Telcel -- from adding new lines, though it was forced to back off in the face of enormous protest from both companies.
Telcel is a venture between BellSouth International and Venezuela's Grupo Cisneros, while Movilnet is run by phone monopoly CANTV, which is controlled by GTE Corp. About 200,000 customers have been added by both companies in the last four months, triggering some customer complaints. Responding to Conatel's threat to cancel the concessions unless service gets better fast, Movilnet President Guillermo Olaizola cited his company's recent switch to digital technology as the reason for the problems, adding that Movilnet is spending $120 million this year on improvements.
Fast-growing Telcel faces similar problems; with a 64% market share, the company is now implementing CDMA cellular technology at a cost of $160 million; a trial has been finished in the Caracas suburb of Guarinas.