Home Latin America III 1998 The Brazilian Telecommunications System:From State Ownership to Privatisation

The Brazilian Telecommunications System:From State Ownership to Privatisation

by david.nunes
Salomao WajnbergIssue:Latin America III 1998
Article no.:15
Topic:The Brazilian Telecommunications System:From State Ownership to Privatisation
Author:Salomao Wajnberg
Organisation:Brazilian Telecommunications Association
PDF size:20KB

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Article abstract

Despite the huge investments made by Telebras in the past three years, the rapid growth in the number of terminals .in operation and the improvements in quality of service, the system is still insufficient. Its recent privatisation, the largest deal in Latin America, is a result of the new political direction to reduce the size of the civil service, deregulate, eliminate monopolies and all restrictions on foreign capital and technology. This move has seen Brazil removing the obstacles of 25 years of state control and monopoly.

Full Article

Historically telecommunication services worldwide, were organised in the form of a monopoly. The conceptualisation of services as a monopoly and the regulation that subsequently arose, were born out of convenience and political action by the Bell Telephone Company which had an objective of protecting its investment through regulation known as “Price Control Barriers and Business Entry”. On the one hand, these regulations diminished the risk for the companies already in the ‘business’, on the other hand they gave society guarantees of non-discriminatory fair pricing and tariffs, supplying universal service to any citizen or enterprise. Under these conditions, the Public Telephone Service allowed the implementation of unified and interconnected networks at national as well as international levels. These networks provide a far greater capacity of transmission, enabling more than just voice transmission which was the original objective. The unnoticeable evolution of digital telephony has completely changed the telecommunications system with the development of new technologies, products and applications at an ever-increasing pace, making it impossible for the heavy structures of mass communications to keep up, be they privatised or state owned. Process of Deregulation Worldwide Restricted by the necessity of long-term planning and investment, public service providers are having great difficulty in catering for and answering to the ever-increasing demands. As a result of the rapid evolution of micro-electronics, potential subscribers to the new services and sophisticated entrepreneurs are adding pressure to the service providers, as they seek to take advantage of the opportunities created by the multiple offers of new systems and equipment. In the face of this scenario, a process of deregulation of telecommunications was initiated by the more developed countries. Today this process is reaching virtually the whole world, and it consists in practice of a series of measures destined to remove obstacles created by excessive and outdated regulation. Clearly, Brazil could not become alienated from this process. The process of state ownership in Brazil was implemented by the government from 1964 with the objective of developing the country by :making the state invest in those economic segments where private initiative would be interested and would not have the financial means. The basis for this policy was the national economic situaton of the time, characterised by small local capital, lack of qualified human resources, poor material infrastructure for R&D and the need for large industrial enterprises and services to support the national economic growth. As in many developing countries, Brazil undertook to expand its economy and industry simultaneously in order to reduce imports and stimulate foreign investment and support for local enterprise. It also tried to raise capital without raising the foreign debt and develop science and technology without reducing resources from productive activities. In 1964 the government implemented the ‘Fistema Nacional de Telecomunicacoes’ (The National Telecommunications Systems). At the time it consisted of hundreds of rural local operators, largely obsolete and practically non-existent as a network. EMBRATEL, the National Telecommunications Fund was created to fund investment in the sector. The Ministry of Communications was set up to regulate it, and Telebras was the holding company of all telecommunications operators formed in each Brazilian state. By the 1970s EMRATEL had already connected the whole country, while Telebras had absorbed and consolidated hundreds of private local operators. It seemed that the combination of auto-financing, high tariffs and state monopoly was the definitive solution to the communication needs of the country. This was all achieved under the protection of an inferred monopoly that became law in the 1988 institution. It was complemented by a series of law amendments that regulated and clearly defined the domain of each operator, thus eliminating any overlapping that would result in direct competition between each operating company. The financial model adopted for telecommunications was built on high tariffs and auto-financing by compulsory sale of shares to the subscribers. Such a closed model may work well in the early stages, but it will eventually lead to fatal, artificial and contentious demand, and to chronic deficiency of investment resources, which, due to cash flow, cannot be resolved by high tariffs. Despite the success of the first 20 years, this monopolistic state model began to gradually stagnate from 1985. This was due to lack of competition, the low investment and the rapid deterioration that followed the democratisation of government. Since the creation of the Telebras system, it developed at an average rate of 15% p.a. and reached in April 1998 in the 23 million fixed and mobile terminals speed through over 4,100 municipalities connected by direct dialling to the national and international networks. Without a doubt the Brazilian communications system constitutes the largest and most complex in Latin America, enjoying one of the highest teledensities in the region, with two lines per 100 inhabitants. Despite the huge investment made by Telebras in the past three years, the rapid growth in the number of terminals in operation and the improvements in the quality of service, the system is still insufficient. Indeed, today there is still a great backlog for voice terminals and professional services. Among the subscribers, there is great frustration with long delays for installation, high level of disconnection, and delayed or incomplete connections which are, in addition, very costly. The monopolistic model used did not service the whole population, as was originally intended, but rather had the opposite effect. The high tariff system, the almost prohibitive joining fees and high taxes all contributed to making communication a privilege reserved for the better off. It was clear that the situation had to be remedied. Joining fees had to be eliminated, demand stimulated and, as it is done throughout the rest of the world, the investment resources would invariably be guaranteed by the private sector. Conclusion In fact, the process of deregulation started with the government of President Collor in March 1990, when a new political direction was clearly stated. The new political direction aimed to reduce the size of the civil service, deregulate, privatise, eliminate monopolies and create a competitive environment by removing all restrictions on foreign capital and technology. In the area of telecommunications the work started to change the existing culture and remove the obstacles by 25 years of state control and the monopoly existence. To reach their objectives, the government has to ensure that the process of deregulation would be gradual and also resolving certain sensitive and interrelated questions, until the monopoly protected by the Constitution of 1988 could be eliminated.

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