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Central American telecoms: Privatization stalemate
Business Latin America / October 2, 2000

By Larry Luxner

Despite successful telecom privatizations in El Salvador and Panama, governments in the rest of Spanish-speaking Central America are either unable or unwilling to divest themselves of their state-owned phone companies.

In Costa Rica, labor opposition to privatization has kept the telephone network from making the investments it needs to keep up with an expanding economy. In Honduras and Nicaragua, bureaucratic bungling and the taint of corruption have stymied repeated efforts to sell both countries' inept phone networks. And in Guatemala, legal challenges threaten to derail Telefonos de Mexico's takeover of Telgua -- a $700 million transaction that everyone assumed was a done deal.

Here's a look at telecom developments throughout the region:

COSTA RICA: Last March, a committee of the Costa Rican Congress approved a bill opening up the Instituto Costarricense de Electricidad (ICE) -- which has a monopoly on phone service -- to competition and deregulation. ICE's labor unions immediately took to the streets in protest, temporarily paralyzing the Costa Rican economy. Congress later backtracked and forwarded the proposal to a "mixed committee," where it now gathers dust.

"Companies come here because of political stability and our educated workforce, but we are sorely lacking in telecommunications," says Lynda Solar, executive director of the Costa Rican-American Chamber of Commerce. "You can buy a cellphone, but you can't get a cellular line. ICE has all kinds of restrictions placed on it. There are so many controls and such bureacracy that it becomes an impediment to progress. I know these controls were put in place with good intentions, but now it's a spider web you can't get out of."

Adds Danilo Arias, manager of corporate relations at microchip manufacturer Intel, one of ICE's leading customers: "We hope Costa Rica will return to the path of improving its infrastructure, but that's looking more and more unlikely because of ideological reasons. This will put Costa Rica behind most other Latin American countries. Ironically, this is the opposite of five years ago, when we were ahead of the rest of the region."

Executives and potential foreign investors may gripe, but the reason most Costa Ricans want to keep ICE in state hands is simple: the phones work here, even if new cellular lines are impossible to come by. ICE has close to 700,000 fixed lines in service, translating into a telephone penetration or "teledensity" of nearly 20 per 100 inhabitants.

"The government is trying its best to open up the state monopolies," said Jaime Daremblum, Costa Rica's ambassador to the United States. "We're making an effort in that direction, but everybody has to be patient."

He adds: "It was never our intent to privatize ICE, only to open it up to competition. In other Central American countries, the public is highly dissatisfied with the services rendered by state monopolies, but not in Costa Rica. Our main concern is that those services keep up with the challenges of the new century."

EL SALVADOR: In 1995, state-owned Antel had 175,000 fixed and 50,000 mobile lines. Today, there are 500,000 fixed and over 400,000 mobile lines. By the end of this year, says the government's technical secretary and privatization "czar," Juan José Daboub, El Salvador will boast more than a million lines in service for its six million inhabitants -- a teledensity of over 15 per 100.

What triggered the turnaround was the sale of 51% of Antel in July 1998 to France Telecom for $275 million. The remaining 49% was divided among the government, phone company workers and private stockholders.

Daboub says that prior to the sale, Antel derived 60% of its revenues from phone traffic to and from the United States -- quite substantial given the fact that over a million Salvadorans live and work in the States -- yet there was no competition in the market.

Since the privatization, more than a dozen long-distance providers have blossomed, all of them competing for business, though industry observers expect a shakeout as rates come tumbling down.

"In 1995, to call your brother in the U.S. you had to pay at least $2 a minute. Now, it's between 10 and 20 cents," says Daboub. "In August 1996, local calls were 0.7 cents a minute. Now it's 1.2 cents. To get a line, you used to pay 20,000 colones (about $2,300) in the black market because there were hardly any lines. Today it's free, and you can choose your own number."

GUATEMALA: In November 1998, Luca S.A., a Guatemalan-Honduran investment group, paid $700 million to the Guatemalan government for a 95% share of Telgua. Luca quickly brought in Telmex as its operator, and in April 2000, Telmex acquired an 82% share of Luca for an undisclosed price. Telmex also bought 51% of a holding company that includes Telgua's mobile and directory publishing businesses.

Part of the reason the 1998 sale was so controversial was that no other offers besides Luca's were presented, even though six companies pre-qualified, and at least two showed interest until the week before the sale. The absence of bids, the unexpected announcement of the bidding date, the initial refusal to identify the new owners, and the soft terms of payment, all provoked doubts regarding the transaction's transparency.

In May 2000, a month after Telmex acquired a majority interest in Telgua, the new Portillo government attacked the deal as "harmful to the interests of the state," alleging that "it entails the creation of legal standards that are an affront to the constitution, making the transaction illegal."

The Portillo administration is also critical of Telgua's rate increases and its service, which it labels deficient -- even though the network has grown from 380,000 fixed lines in 1998 to 570,000 fixed lines today. Analysts say Portillo's declaration marks the government's first step toward taking its case before the courts, where it hopes charges against individuals in the Arzú administration will be forthcoming.

Carlos Mendez-Piñata of Coudert Brothers, which represented Telgua during the privatization process, warns that if courts in Guatemala reverse the transaction, similar telco privatizations throughout the rest of Central America could find themselves in deep trouble.

"It's the expectation of a private buyer that they have indeed acquired good title to the relevant company. If there's lingering doubt as to the legal enforceability of such a transaction, then that in turn might dissuade possible buyers from bidding," he said. "It's a pretty fundamental problem if you're not sure you've bought what you think you bought."

HONDURAS: The proposed sale of 51% of Hondutel has been postponed until Oct. 16, marking the third delay this year. The long-awaited auction has drawn the interest of Telmex, France Telecom and Spain's Telefonica -- all of which already have operations elsewhere in Central America -- though Mario Agüero Lacayo, chief of the Honduran government's privatization program at the Ministry of Finance, says "there's no interest by U.S. companies. We don't know why,"

Maybe they've been scared off by Hondutel's long history of corruption and mismanagement. Until the late 1980s, Hondutel was run by the military and dogged by charges of wiretapping. At the moment, Hondutel has 370,000 lines installed but only 260,000 actually in service, translating into a teledensity of 4.3 lines per 100 inhabitants.

In 1999, Hondutel reported revenues of just under $200 million, most of that coming from long-distance phone calls to and from the United States. In addition, Hondutel -- along with some 25 competitors -- offers Internet service for a handful of users.

A 1996 study estimated the book value of Hondutel at $632 million, though Hondutel's director, Roberto Breve, now claims the company is worth $700 million. The government's goal is that under new ownership, Hondutel will boost coverage to 600,000 lines by 2005. Handling the privatization process is British investment broker N.M. Rothschild & Sons Ltd., which will receive a fee of 1.98% of the proceeds when Hondutel is finally sold.

"We'll offer exclusivity for six years for local telephony and long-distance, both national and international," says Lacayo. "We'll also offer PCS and all other value-added services."

Yet El Salvador's Daboub thinks offering several years of exclusivity in order to entice telecom investors is a big mistake. "The idea is to minimize regulation and maximize competition," he said. "We eliminated the word exclusivity from the dictionary. I would not have been involved in the process if we had done it that way."

NICARAGUA: State-owned Enitel has only 155,000 lines serving a population of 4.9 million. That translates into a teledensity of only 3 lines per 100, one of the lowest in the Western Hemisphere.

Previous attempts to privatize Enitel, in 1996 and 1999, proved disastrous, partly because of Nicaragua's reputation for political instability. The latest effort in early September suffered a similar fate. At a Sept. 11 auction in Managua, France Telecom was the only company to present a bid, offering around $60 million for a 40% chunk of Enitel. That was substantially less than the government's minimum asking price of $71 million, a number that was kept secret until the auction itself.

Word is that the privatization process will now start from scratch. The government is once again prepared to offer three years of exclusivity for fixed-line services. A 49% share of stock in Enitel will remain in government hands, while Enitel's 2,300 workers will be given 1%, with the option to buy another 10%.

The license also includes cellular service on a national level. Currently, BellSouth is the only cellular provider in Nicaragua, with just over 80,000 customers in Managua and the Pacific coast region.

"I think Enitel will eventually be sold," says Armando Castillo, president of the Nicaraguan-American Chamber of Commerce. "Our telephone density is very low, so there's a big opportunity for growth."

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