Home Latin America IV 1999 Competition Drives Telecommunications Investment and Growth in Brazil

Competition Drives Telecommunications Investment and Growth in Brazil

by david.nunes
Pedro MaisonnaveIssue:Latin America IV 1999
Article no.:9
Topic:Competition Drives Telecommunications Investment and Growth in Brazil
Author:Pedro Maisonnave
Organisation:Globalsta1; Brazil
PDF size:32KB

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Article abstract

Brazil’s energetic position in favour of competition in the telecommunications sector has attracted unprecedented foreign investment. The sale of the Telebras system, itself, generated close to US$20 billion for the country’s coffers. The need of the privatised local operating companies and their newly created competitors to build competitive operations, however, is prodding them to invest almost twice that amount each year in expansion. The systems built by these companies, using innovative technologies such as satellite based communications systems, will reach hitherto isolated populations and open them to economic development.

Full Article

Among the world’s developing economies, Brazil is one of the 3 most attractive opportunities for the telecommunications industry if not the leading one; India and China are the other two. A series of measures by the Brazilian Government – the privatisation of its telephone monopoly, the granting of concessions that allow companies to compete for public telephone business, the opening of the public telecommunications service sector to international investments and, most important, the introduction of competition, have completely revolutionized the hitherto stagnant industry. Due to the liberalization of the sector, billions of dollars have poured into the industry from abroad, fuelling a state-of-the-art reconstruction of the country’s communications infrastructure. Brazil is rapidly evolving; the relatively backward infrastructure and dearth of service offerings of the recent past is being transformed into one of the leading examples of telecommunications technology on the planet. It is no accident that in the last three years close to US$100 billion has been injected into the Brazilian economy by telecommunications related sources via direct investments in network infrastructure, in manufacturing capacity for telecommunications equipment, by telecommunications service-providers, equipment manufacturers and providers of services to the carriers. Another US$100 billion will be invested by the year 2004. This is a direct reflection not only of the importance of the Brazilian market but, also, of the fierce competition in the market driving service providers to render more and better services. The privatization of the Telebras System in 1998 injected more than US$20 billion into the government’s coffers. When Telebras was auctioned, the competition between some of the world’s biggest telecommunications groups drove the price for the system to unexpected heights. The winning bidders paid almost 64% more than the minimum prices set by the government. Another US$40 billion poured into the economy during 1998 as the telecommunications sector geared up to provide the enormous variety of services and products that the newly competitive market demanded. Despite the massive devaluation of Brazil’s currency, the Real, in January of 1999 and. the consequent economic uncertainty, telecommunications companies made massive investments in Brazil all through the year. These investments were driven, in part, by the contractual obligations assumed as part of the purchase deal for the privatised companies but mostly in preparation for competition in the most attractive market of the next five years. Historically, the lack of competition in Brazil’s telecommunications market resulted in low levels of investment; indeed, the same could be said for most of Latin America. Geographical factors, such as great size, mountains, immense stretches of uninhabited territory and difficult demographics, all contribute to a high cost of system expansion. Statistically, from the point-of-view of coverage, Brazil can be thought of as a country of large cities separated, on average, by 400 miles. Statistically, US is a country of medium sized cities 80 miles apart, while the European continent can be thought of as an array of small cities only 10 miles apart. The relatively sparse population concentration in Brazil adds significantly to the cost of expanding traditional communications. Thus, just like the rest of the continent, much of Brazil lacks the communications systems needed for economic development and expansion. Only 13 Brazilians per one hundred have a telephone. Neither fixed nor cellular telephone networks reach into Brazil’s vast, isolated, non-urban areas. Brazil is a country with continental dimensions. Historically, a good part of its rural economy has been linked to agricultural and cattle-breeding businesses. Today, Brazil has the second largest national agribusiness sector in the world. Agribusiness now generates 35% of Brazil’s Gross National Product and, together with the food industry, is responsible for 28% of employment and 36% of exports. Naturally, the tendency is to expand this production to ever more distant areas, but to do this, a safe, cheap and efficient way of maintaining contact with the world, with the markets and with suppliers is needed. Strong economic development in Brazil’s rural areas is pushing significant growth of cities in the interior of the country whose economy depends upon agriculturally related businesses. Communications technologies that allow good, cost effective, communication links between the rural producer, the rural entrepreneur and the world are of vital importance to the continued rapid growth of the sector. Unfortunately, traditional telecommunications systems cannot effectively meet the needs in these areas. The cost of bringing service to these areas, through traditional fixed or wireless solutions, would be high and the return on investment slow and uncertain; to put it bluntly, no one will risk it for years to come. It is here that competition between newer technologies promises the best results. The Brazilian Government, by opening the telecommunications market to various forms of competition, allowed new solutions and new technologies to come to the fore. These promise quick, economically viable, deployment of a wide range of telecommunications services in even the most remote regions of the country. In cities and better developed rural areas, wireless technology – still cellular for the most part, but WLL will soon be playing an important role – is rapidly bringing service to people who only a few years ago considered having a telephone to be an impossible dream. In Rio de Janeiro, after a year of explosive growth, there are now more cellular than fixed phones. Competition-driven heavy investment and aggressive marketing are expanding cellular services so rapidly that Brazil is well on its way to becoming one of the world’s cellular leaders. The mission of breaking the isolation of vast areas of undoubted economic potential, however, will fall to satellite technologies. In areas without communications, regions effectively cut off from the rest of the world, economic growth has been severely impaired. For these regions, investments in heavy, localized infrastructure does not pay. Technology gives us new responses to the problem, Low Orbit Satellite telephony is quick to deploy, affordable and provides the user with the mobility cellular has made us all accustomed to. Satellite telecommunications systems economically resolve the problem of providing services throughout isolated regions without having to install or maintain an extensive and costly physical inftastructure. These telecommunications systems are currently the most cost effective way to connect far away farms to urban centres or foreign markets to the Internet, keep cargo ships in permanent contact with their home offices and allows truckers to call home, and do it affordably. Businessmen, engineers and others who work, live or travel through “out of coverage” areas can keep in touch with the rest of the world. It no longer matters where their business or pleasure takes them, be it a far away mining operation, an unexplored area, the middle of the ocean, or simply a small isolated beach on the coast of Brazil. The Globalstar low orbit satellite system, now being implemented in Brazil, started operations in mid-November 1999. It answers many of the needs of the growing rural and remote economy. The system, with its smaller, simple to use, no echo, mobile handsets, is as convenient to use as a normal, terrestrial cellular phone network. When all of Globalstar’s 52 satellites are in place, their inclined orbits will let handset users throughout the world maintain simultaneous contact with up to three satellites, for dependable, “shadow-free”, continuous calling. In other words, business can be done at any time and, above all, at any place – communications without the need to wait for years. The democratisation and the universalisation of communications is a major necessity in today’s society. Telecommunications has become an essential factor of productivity everywhere, not just in the capital cities or large demographic concentrations. LEO solutions bring these tools to every inch of territory of this promising land.> Conclusion Much attention has been drawn to the fact that telephony, an essential service, is now being taxed in Brazil as though it were a luxury or superfluous item. Brazil’s Minister of Communications, Pimenta da Veiga, in still another effort at stimulating the growth of telecommunications services, has called for a reduction of the applicable tax rates. He is working with Congress to reduce the rate of the ICMS tax on telecommunications, a value-added tax on sales and services, which in certain states reaches 42%, to more manageable levels.

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