Salomao Wajnberg Issue: Latin America I 1999
Article no.: 11
Topic: Brazilian Telecommunications: The Privatisation Process
Author: Salomao Wajnberg
Title: President
Organisation: Brazilian Telecommunications Association, Brazil
PDF size: 24KB

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Article abstract

Since 1990 Brazil has undergone a series of major transformations which have greatly increased interest from potential investors into the Brazilian telecommunications sector. One of which was the privatisation of Telebras, the largest telecommunications privatisations in history. Here, Mr. Wajnberg discusses the sale of the control of the Telebras system. Despite the challenges, including the recent devaluation of the Real, he remains upbeat about the future prospects for the country.


Full Article

Brazil is the largest and most powerful economy of South America. It has a population of 160 million consumers, a territory of 8.2 million km2 which is larger than Western Europe, the 8th largest economy in terms of GDP and an abundance of natural resources. The potential for growth and development in general is enormous. However, until 1990 the Brazilian economy was dominated by highly projectionist govemment policies, market reserves and a set of trade barriers and non-trade barriers strongly favouring the substitution of imports for national products independent of practical considerations of cost and technology. The result was high prices and technological obsolescence in many sectors of the economy. The state monopoly for telecommunications at the time, Telebras, was profitable, reaching 25% profits as compared to a world average of 8% to 12%. However, this profitability hid fundamental problems such as the inability of the system to meet the needs of the nations for telecommunication services. The profitability in reality was to a great extent due to Telebras’ high tariffs restraining a demand it could not supply. Waiting lines were in the millions and the cost of a telephone line in the parallel market was several thousand dollars. Major Transformations Since 1990 Brazil has undergone a series of major transformations which have greatly increased interest from potential investors into Brazil and the Brazilian telecommunications sector: · Open economy: Changes in the constitution and new laws passed by the Brazilian congress have eliminated market reserves, established protection for intellectual property and prohibited discrimination against foreign firms, thereby encouraging the entrance of new investment with new technology to the market. · Economic stability: The introduction of the plano Real tied to a fixed exchange rate has resulted in a virtually non-inflationary economy. · Political stability: The re-election of President Cardoso by a large margin points towards continuity in the government’s commitment to privatisation and an economic model based on an open competitive economy. · Irreversible trend towards global integration: The laws, regulations and constitutional changes introduced by Congress, and supported by the great majority of the people, make it virtually impossible to reverse the current policies on privatisation and the globalisation of the economy as a whole. Overview of Brazilian Telecoms Until recently 95% of the Brazilian telephone system was under the responsibility of the state monopoly Telebras, which was itself a holding for 21 state companies in addition to Embratel, a long distance company. Upon assuming the Presidency in 1994, the Cardoso government set forth a program aimed at: · intense investment in the sector; · privatisation; and, · introduction of a competitive model. The investment in Telebras from 1995 through to and during 1997 was in the order of US$18.6 billion, far above that of any previous period. Telephone penetration rates of 9.2 fixed lines per 100 inhabitants in December 1995 rose to 10.8 in August 1997, by which time congestion rates had fallen to 5.6%, the lowest in history. Still this was far below the government’s plans to invest US$33.4 billion in three years. The government firmly believes that a modern communications system is vital to the country’s development. It was thought that the only alternative to a monopoly in order to obtain acceptable standards of quality and price for the Brazilian end user was the creation of a competitive market. This concept was realised in the privatisation of the system. Three Phase Process The government created a three phase process. Phase 1 It licensed Band ‘B’ cellular telephone operators to compete with the state owned cellular Band ‘A’ companies, allowing them to bid for licenses in a public auction. The Band ‘A; and ‘B’ companies can compete freely in cellular communications until the year 2001 at which time Personal Communications Services (PCS) licenses will be issued for the eight cellular regions. Phase 2 The complete privatisation of the Telebras system administered by the government. This was done by dividing the holding company into twelve companies, three of which were regional fixed line telephony companies (Telesp, TeleNorte Leste, and Telecentro-Sul), one was the long distance operator (Embratel) and eight were cellular telephony companies. On 29th July 1998 the Federal Government sold voting shares of the Telebcis System equivalent to 19.3% of total capital, and 51.8% of voting stock, thus transferring the control of these twelve companies to the highest qualified bidders. Phase 3 The government is currently in the third stage, distributing the rights licenses, through auction, to construct four ‘mirror companies’ to compete with Embratel and three privatised fixed line companies. The results of each of these three phases is described in greater detail below. Licensing of the Cellular ‘B’ Band In order to guarantee competitiveness in the Cellular Telephone field the government allocated half of the cellular frequency range (Band ‘A’) to the Telebras companies and sold the remaining half (Band ‘B’) in a public auction to private companies. For this purpose only, a ‘specific law’ was issued by the Brazilian Govemment, allowing private companies to participate in an auction for the right to operate cellular telephony in the ‘B’ band frequency. For Band ‘B’ the country was divided into ten cellular regions. The ‘B’ Band process, managed by the Ministry of Communications (MINICOM) was long and cumbersome. It began on December 30, 1996 with the publication of the tender specifications and ended only in November 1998 with the award of Region 6. The process involved lengthy legal battles about technicalities during which the MINICOM sought to disqualify some of the competing parties. The Ministry was finally defeated in the Brazilian Superior Courts of Justice. The general law for telecommunications, the ‘LGT Law’, was issued one year after the ‘specific law’. It substituted the thirty years old Brazilian Code for Communications thereby ending the state monopoly on fixed telephone communications, and simultaneously creating ANATEL, the regulatory agency for newly formed telephone companies. ANATEL is similar to the US Federal Communications Commission (FCC) in structure and powers, and became operative in January 1998. ANATEL’s board consists of five directors: Renato Guerreiro, Luiz Perrone, Luis Tito Cerasoli, Antonio Carlos Valente da Silva, and Jose Leite Pereira Filho. Sale of Control of the Telebras System The sale of the control of the Telebcis system was one of the largest privatisations in history and involved years of preparation. It was carried out on schedule despite strong opposition from the left and a virtual war of legal actions, waged until hours prior to the auction. The tender specifications for the privatisation of Telebras were issued on 10th June and the consortium proposals were opened on 29th July 1998 in a special session at the Rio de Janeiro Stock Exchange. In this particular case the privatisation process was managed not only by the MINICOM, which was responsible for the Band ‘B’ process, but also by the National Bank for Economic and Social Development of Brazil (BNDES). The BNDES is a large institution owned by the federal government with extensive experience in the field of privatisation in virtually all areas. The Minister of Communications at the time, Mendonca de Barros, was the former President of the BNDES. The policy itself came from MINICOM, but the process implementation was administered by the BNDES with the technical support from ANATEL. The cellular operations of the Telebcis system were regrouped into eight regions which have the same boundaries as the ten ‘B’ band regions outlined above, except that for the Sao Paulo region both the city of Sao Paulo and the rest of the state were included in one region, and that the Rio Grande do Sul area (belonging to CRT, and not to Telebras) was not auctioned. Consequently, there were only eight ‘A’ Band regions as opposed to the ten ‘B’ Band regions in the previous auction. The fixed telephone network was regrouped into four companies, three regional companies TI, T2, and T3, and the long distance company, Embratel. Stock Exchange Auctions The minimum bid for all Telebras system shares owned by the Government was fixed at US$7.1 billion (R$13.5 billion) on 11th June. On 29th July the sale of these shares achieved US$11.6 billion (R$22.1 billion), 63.7% more than the minimum price, exceeding even the government’s most optimistic expectations on overprice. BNDES selected international consulting companies to assess the value of each of the twelve companies to be auctioned: TI, T2, T3, Embratel and eight cellular ‘telcos. The results of the reports of these companies were made available in special ‘Data rooms’ at a Telebras site in Brasilia. The competing companies could gain access to these rooms by paying a fee and signing strict non-disclosure agreements. This information served as the basis for the business plans prepared by each of the bidding companies. The Mirror Companies As mentioned previously, competition is the Government’s basic strategic pillar for achieving its targets: system growth, a high quality service and minimum cost for the Brazilian end user. In order to assure competitiveness in the Fixed Telephony arena, the Government is in the process of auctioning licenses for four companies which will operate within the same boundaries as the Fixed Telebras companies. These so-called ‘Mirror Companies’ are: · TI Mirror for Sao Paulo state to compete with Telesp; · T2 Mirror for the states of Rio de Janeiro, Minas Gerais, Espirito Santo, Bahia, Sergipe, Alagoas, · Pernambuco, Paraiba, Rio Grande do Norte, Ceara, Piaui, Maranhao, Para, Amapa, Amazonia, e Roraima, to compete with Tele Norte Leste; · T3 Mirror for Brasilia (Federal Capital) Pelotas (City in RGS), and the states of Goias, Mato Grosso, Rondonia, Acre, Mato Grosso do Sul, Parana, and Santa Catarina to compete with Tele Centro Sul; and, · Embratel Mirror for Long Distance and International calls. In order to further increase the level of competition, Embratel and the T 1, T2, and T3 fixed regional companies will be allowed to compete for regional long distance calls. According to the original bid calendar established in ANATEL’s Act, 628 proposals were due on 3rd November 1998. As the government’s main goal is to increase competition, ANATEL will be granting the mirror companies certain advantages which are not available to the existing operating companies. These advantages will compensate for the fact that the former Telebras companies are already operating in the market, while the mirror companies will need to start from scratch. The advantages are: · The outcome of the bidding will depend less on price compared to that of previous auctions since the price will only count for 30% of the total rating. The remaining 70% will be based on technical ability, the latter being a function of coverage and telephone density to be achieved by the mirror company. · There is no set time frame for the license, which is a practice that differs to previous systems. Competitors from the former Telebras system are subject to renewal of licenses every 15 years. · The mirror companies are free to set their own tariffs while the competitors i.e. an existing telephone company is obliged to follow ANATEL’s regulation ceilings. · The price for licensing of all frequencies that one would need to run the project (through December 31, 2001) is included in the total license price offered by the mirror company, while the competitor has to pay for these licenses in addition to the price of the actual bid. · No minimum price is fixed in the mirror companies auction, while there was a minimum price fixed for the Telebras and cellular ‘B’ band auctions. ANATEL is going to provide a ‘Reference price’ as an indication of the government expectation on the licenses prices. · The mirror companies will be able to choose freely which cities they wish to attend (within the general goals committed in the bid proposals), while the competitor is subject to rigid ANATEL coverage specifications. The mirror companies will · also be subject to much lower telephone minimum density targets than the density targets assigned by ANATEL to the ex-Telebras companies. Furthermore, a major advantage for the Mirror Companies is that they will be able to design their solutions utilising the most advanced technology without restrictions surrounding the installed base. They will be uninhibited in selecting the most cost effective solutions and will be able to obtain a lower overall operating cost with a relatively higher return on their investments. Conclusion At the end of January 1999, the Real installed a floating exchange regiment as a result of a speculative attack against the currency. Thereafter the Real was devalued. In the short run, companies of all industries are currently withholding investments waiting for the currency to stabilise. There are still some remaining Mirror Company authorisations and the devaluation of the Real has spurred last minute interest in potential investors, including some first-line foreign telephone companies. The devaluation might just make the initial price much more attractive to foreign investors, because the local cost of the build out, in dollars, will be cheaper.