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Central America: Backtracking on privatization?
Latinamerica Press / September 1, 2000

By Larry Luxner

SAN JOSÉ, 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 telephone and Internet 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 sits gathering dust.

In neighboring Nicaragua -- as well as Honduras -- bureaucratic bungling, worker opposition and the taint of corruption have stymied repeated efforts to sell both countries' inept, state-owned phone companies. After years of delays, Hondutel and Nicaragua's Enitel are now set to be privatized in September, though there's no reason to believe the auctions won't be postponed yet again.

And in the most disturbing example of all, Guatemalan President Alfonso Portillo has declared illegal his predecessor's 1998 sale of Telgua to Teléfonos de Mexico -- a controversial, $700 million transaction that remains the largest privatization of any kind in Central America's history.

What's going on here? Why is Central America bucking the worldwide rush to privatization, and why do so many people here get emotional at the very thought of selling off the state-owned phone company?

That's a question Lynda Solar has been asking for years now.

"Companies come here because of political stability and our educated workforce, but we are sorely lacking in telecommunications," says 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, like it was doing until a few years ago. 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," Jaime Daremblum, Costa Rica's ambassador to the United States, told Noticias Aliadas. "We're making an effort in that direction, but everybody has to be patient. People have to understand that Costa Rica is a democracy, and that there is a legal process for the goals we have established."

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 in Costa Rica, ICE has been a very good institution. Our main concern is that those services keep up with the challenges of the new century."

To be fair, there have been a few success stories.

In 1995, El Salvador's state-owned phone monopoly, 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 $575 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.

"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."

Average Honduras and Nicaraguans can only dream of such service. In Nicaragua, Enitel (Empresa Nicaragüense de Telecomunicaciones) 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. Earlier this year, Enitel President Jorge Solis Farias was forced to resign, in order to prepare his defense against corruption charges. Solis was sanctioned by the Comptroller's Office for irregularities while he was head of the state-run Petronic oil company in 1998.

The latest auction, set for Sept. 11, has attracted at least three foreign operators hoping to snatch up a 40% stake of Enitel: Avantel (a U.S.-Mexican joint venture partly owned by WorldCom), Telmex and France Cable and Radio, a unit of France Telecom.

Whoever wins will get 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%.

In nearby Honduras, the sale of 55% of Empresa Hondureña de Telecomunicaciones (Hondutel) will supposedly take place a week after the Enitel sale. 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 constant charges of wiretapping. At the moment, Hondutel has 370,000 lines installed but only 260,000 actually in service, translating into a teledensity of only 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.

"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."

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.

"This is primarily a capitalization process rather than an outright sale," says Rothschild's Mexico City representative, Christian Pedemonte. "The operators will be injecting money in a company that they will control. Number two, it's an underdeveloped market, so the prospects for growth through expansion of the network are very strong. Thirdly, the transaction comes with mobile PCS licenses, so there's a lot of business potential there. Fourthly, it has an exclusivity period until the year 2005."

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."

Honduran President Carlos Flores promises that besides selling off 55% of Hondutel to a strategic investor, his government will auction the remaining 45% on the local money markets at some undefined point in the future. Analysts say the winning bidder will have to invest at least $500 million in Hondutel.

What really troubles observers most, however, is the situation in Guatemala, with 11 million people Central America's most populous country.

In November 1998, Luca S.A., a Guatemalan-Honduran investment group, paid $700 million to the Guatemalan government for a 95% share of Telecomunicaciones de Guatemala (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. The latter immediately announced that the system would be operated by Telmex, whose earlier $540 million bid had been rejected by the government.

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." He said the 1998 privatization by Portillo's predecessor, Alvaro Arzú, "entailed 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. 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.

Yet Carlos Mendez-Piñata of Coudert Brothers, which represented Telgua during the privatization process and continues to represent Telgua, disputes charges that the phone company is somehow deficient. He says that in November 1998 -- at the time of the transaction -- Telgua had 380,000 fixed lines and 3,000 pay phones in service throughout Guatemala. Today, it oversees a network of 570,000 fixed lines and 10,000 pay phones.

"It's two years after the fact, but Telgua is hopeful this issue will be resolved amicably," says Mendez-Piñata, who is based in New York.

The courts must first decide whether or not the privatization was legal before charges may be filed, says Vice President Francisco Reyes. He wouldn't comment on the administration's intent, but conceded it might seek an indemnity. However, the current government hasn't ruled out legal actions similar to the ones involving the selloff of Guatemala's formerly state-owned electric and railway companies, among others.

Mendez-Piñata warns that if courts in Guatemala reverse the Telgua 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."

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