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Puerto Rico: Another attempt to sell state-owned telco
Development Business / June 16, 1997

By Larry Luxner

In a surprise move, Puerto Rico's Government Development Bank has announced it will sell 100% of state-owned Puerto Rico Telephone Co. -- in what could be the largest telecom privatization in Caribbean history.

The proposal, which faces bitter union opposition, is a direct consequence of the U.S. Telecommunications Act of 1996. Any eventual sale must be approved by both the Puerto Rico Legislature and the Federal Communications Commission, since Puerto Rico is a U.S. Commonwealth.

"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 has only 3.7 million inhabitants, its phone monopoly ranks as the 12th largest telco in the United States. Based on the 1.6 million lines in service, it is far larger than the national telephone companies of either Bolivia, Ecuador, Peru, Paraguay or the Dominican Republic -- all of which have either been sold off or are in the process of being privatized.

In 1974, the Commonwealth government bought PRTC from ITT Corp. for $165 million, and in 1989 created a subsidiary, Telefónica Larga Distancia (TLD), to compete for a share of the $200 million long-distance market between Puerto Rico and the U.S. mainland.

In 1990, Gov. Rafael Hernández Colón attempted to sell PRTC to Atlanta-based BellSouth International, but the deal was stymied by labor unions opposed to privatization, and by a law that required PRTC to be sold for at least $3 billion and prohibited the buyer from firing any employees for 18 months. Two years later, the government did manage to sell a majority stake in TLD to Madrid-based Telefonica de España for $142 million.

At the moment, Puerto Rico has a teledensity of about 37 lines per 100 inhabitants -- far higher than anywhere else in Latin America, but lower than the U.S. mainland average of 54 per 100.

Not surprisingly, Spain's Telefonica de España -- which has bought up phone companies in Argentina, Brazil, Chile and Peru -- is considered a front-runner for PRTC. So is GTE Corp., which owns the national phone monopolies of nearby Venezuela (CANTV) and the Dominican Republic (Codetel). Other strong candidates include BellSouth, which almost bought PRTC in the 1990 privatization attempt, and Bell Atlantic-Nynex, because of the high volume of calls between Puerto Rico and the New York area.

This time, pro-statehood Gov. Pedro 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. Earnings were down because of a dramatic reduction in intra-island long-distance rates -- a pre-emptive strike against private firms like AT&T, Sprint and TresCom that are gearing up to enter that $230 million market.

"We do not foresee [privatization having] any major impact on consumers such as higher tariffs, because the company has been profitable," said Velázquez. "Basically, whoever buys PRTC is subject to the same federal rules as any company in the United States, since Puerto Rico -- for FCC purposes -- is like any state."

In early April, just days after Rosselló announced the phone company would be privatized, PRTC President Agustín García was forced to resign because of an unrelated tax scandal involving one of the phone company's suppliers. Carmen Ana Culpeper, a San Juan banker, was named as García's replacement.

"I don't believe any so-called scandal or the resignation of Mr. García will have any effect whatsoever on the sale of the PRTC," said company spokesman Pedro Pou. "The company will be sold."

Although Pou says nobody will be laid off as a result of the sale, PRTC's 8,000 employees aren't buying that. The company's two largest unions, the Brotherhood of Independent Telephone Workers and the Independent Union of Telephone Workers -- swear they'll "wage the fight of the century" to stop the privatization from going through.

"There is opposition right now, from both unions," Pou conceded. "It's something we're going to have to work with. Once the selling process gets explained more in detail to the employees, they will be more sympathetic to the sale."

Opposition Sen. Antonio Fas Alzamora has already filed legislation to ban the privatization of PRTC, though the measure will probably die, given the Legislature's dominance by lawmakers loyal to the governor and his pro-statehood party. Meanwhile, Victor García San Inocencio, a representative of the Puerto Rican Independence Party, says the resignation of Agustín García (no relation) is the best thing that could have happened.

"I hope that this is the first step in cleaning the house," he quipped, "not selling it."

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