Home Latin America IV 1999 The Economic Context of Competitive Telecommunications in Brazil

The Economic Context of Competitive Telecommunications in Brazil

by david.nunes
R. Marc Burbridge Issue: Latin America IV 1999
Article no.: 8
Topic: The Economic Context of Competitive Telecommunications in Brazil
Author: R. Marc Burbridge
Title: Professor, Global Economics
Organisation: Business School of Sao Paulo, Brazil
PDF size: 36KB

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Article abstract

Despite the general disbelief and political opposition, Brazil managed to privatise the government’s monopoly of public communications and create a competitive market for these services. The devaluation of Brazil’s currency reduced what the country may have gained from the sale. Despite this, the money captured from the sale has helped stabilise the economy. The government, which no longer has to sustain a bloated monopoly, has greater leeway to invest in social projects. The Telecommunications companies no longer absorb public funds; they pay taxes and generate jobs. The modernization of the phone system is bringing a whole new layer of the population into the economy, and into the world of communications, and accelerating Brazil’s insertion into the global economy.

Full Article

A little more than 5 years have passed since Brazil’s then Minister of Telecommunications, the late Sergio Motta, announced his plans to have US$33.4 billion pumped into Brazil’s telecommunications sector, to more than double its size, to privatise the government’s monopoly of public telephone services and introduce competition. Few of us who worked in the sector at the time were not amazed. At that time, Telebras, the government’s telephone monopoly, invested approximately US$3 billion per year and there was no more government money to be had. The privatisation of the sector and introduction of competition would bring in investors, but political opposition to it was strong, almost violent. The route chosen by Minister Motta, and the Brazilian government, complete privatisation of the system, was audacious and risky, but, as it turned out, it worked. The Minister’s plan is the keystone of the world-class communication system being created in Brazil. Politically, the decision to upend the existing system in the name of modernization and growth was not easy. The government needed the backing of Congress for the constitutional reforms that it hoped would transform Brazil into a first world country, but those that supported the status quo, including the maintenance of the Telebras government monopoly, had strong political backing. Despite the political difficulties, as most today would agree, a programme of privatisation and the introduction of competition was the only way out of the quagmire in which Brazil’s communications were buried following decades of market reserve and protective policies. It was quite a battle, but privatisation of the Telebras system is now complete. Although there are still a few diehards that would like to revert the process, there is no turning back, no U-Turn. Now that the system has been privatised and competition is growing within the market, it would be interesting to take stock of the process and the results. Could it have been done better? Are the goals being met? Are we better off for it? Where would we be if privatisation and competition had been delayed or had not happened? To measure results, to make comparisons, we need a point of reference. If Brazil had not decided to privatise, or had delayed it, what would the consequences have been? The Brazilian Government would not have received billions of dollars from the sale of Telebras. These funds have played a fundamental role filling budgetary gaps, stabilizing the economy and helping control inflation. Some critics argue, however, that much of the benefit obtained by the privatisation was destroyed by the maxi-devaluation of January 1999 and that the Real, Brazil’s local currency should have been allowed to float prior to the privatisation. Since all of the foreign bidders prepared their bids in US dollars and then converted to Brazilian currency (the Real), had the government allowed the exchange to float before the privatisation, the value of the bids in Real might have been substantially higher, by perhaps 70% to 80%. The privatisation rules only called for bidders to make an initial down payment of 40%. The balance due was payable over a two to five year period. Since subsequent payments were all scheduled for after January 1999, the Real had been devalued then, the buyers received a de facto dollar discount of close to 40 %. It may still be too early to say that all of the investors got a good deal, but they certainly had channelled a far better deal than expected. So, what was the situation in Brazil when Sergio Motta laid out his plans to revolutionize the telecommunications sector? Brazil had a working telecommunications system that covered the principal cities and towns and, for the most part, users could communicate reasonably well. The users, though, were few and privileged. Less than 10% of the population had a phone. The telephone companies had enormous, growing, lists of those waiting for a phone. You could wait years until a new phone line was delivered. Those that could not wait for the telephone company paid thousands of dollars, in the secondary market, for existing lines. The problem was by no means confined to individual users; business communications were in an equally sorry state. Telephone lines were hard to get and most were bought on the secondary market. High-speed communications, except for a few privileged firms with their own private networks, were expensive and hard to get. True, if the rules on private networks had been liberalized, if Telebras had brought in new technology, significant growth in business communication could have been achieved. Still, this could not have resolved the problem; neither the Telebras system nor the government itself could invest enough to keep up with the booming demand of a society in the process of globalization. It was clear that the system had to be changed to solve the problem since, as it was, demand was growing faster than the solution. As Fidel Castro once said, “Globalization is as inevitable as gravity”. Had the Brazilian government not undertaken the privatisation of the telecommunication sector they would have most certainly been condemning the Brazilian economy to further stagnation and technological decay. Had they moved more cautiously they would have further hindered Brazil’s participation in the global economy. The error, if there was one, was not in the act, but in the timing and coordination of other actions such as the floating of the currency. The anchoring of the Real to a relatively fixed dollar exchange had clearly been of major importance in Brazil’s fight against inflation, but its usefulness had begun to wane. Had the government the courage to float the currency prior to privatising the Telebras system the results could have been significantly better. Conceivably, had their timing been better, both the exchange crisis following the float and the subsequent loss of confidence in the economic reforms may have been avoided. Survival in a globalized economy implies giving free rein to competitive development. Given this, Brazil, like Europe and the rest of the world, had few options when it came to its telecommunications system. Brazil needed to privatise the system, either as a whole or in parts and then open up its telecommunications services to effective competition. The problem was not Telebras; the problem was the monopoly and the lack of competition. To facilitate the growth of effective competition, it was decided to break the Telebras system into smaller, easier- to-compete-with parts by creating separate regional companies for fixed and cellular operations. The plan called for the government to auction authorisations for companies, called “mirror companies,” to compete with each of the companies resulting from the Telebras break-up. Evaluating the privatisation, after the fact, we see that Brazil will get less from the Telebras sale than expected. The devaluation of the Real only accounts for part of the difference. Funds were lent to purchasers by Brazil’s own Development Bank, BNDES, at an annual rate of 15%, well below the rates available from Brazil’s commercial banks. In effect, this means that the buyers are being subsidized by the Brazilian taxpayer. Despite this, the consensus is that Brazil made a good deal. The public coffers no longer sustain a bloated, inefficient, monopoly. Instead of draining public resources the telephone companies now pay taxes, create more jobs, buy more goods from local industries and, by supplying a rapidly expanding number of businesses and individuals with telecommunications services, are creating new economic opportunities. Several billion dollars in yearly savings can now be channelled into social and infrastructure programmes. Immediate financial gain is not the identification for the Telebras privatisation, but rather the greatly improved quality, variety and availability of telecommunications services to the public. Brazil is in the midst of a quiet revolution driven by the economic awakening of the lower classes. Despite some real concerns with unemployment, there is little doubt that the country’s economy will continue to expand and extend its integration with the global economy. Quality communications of all types are needed to help the country’s economy grow and to facilitate the effective integration of obviously excluded populations in its development. Substantial progress is being made and will continue to be made for years. The number of cellular telephones in service more than doubled within the last year and competition is driving down the price of both the phones and the service, making them accessible even to the lower income population. With the introduction of pre-paid service the use of cellular is exploding. The mirror companies, created to compete with the privatised “baby Telebras” companies in the fixed phone market, will start to operate in December 1999. These are planning to use wireless, WLL, technology that will help them expand quickly without the need to physically wire the greater part of their networks. The government has actively been stimulating the entry of new players and greater competition and investment in trunking, paging, cable TV and virtually all other forms of communications.New regulations for trunking, paging and cellular will be published, for public comment, in December, 1999. The new regulations are intended to increase competition among these three services. Methods of stimulating competition among wired and wireless broadband carriers, including telephone companies and cable TV, are also being studied. Brazil’s telecommunications regulatory agency, Anatel, hopes to foster competition between disparate technologies, attract new competitors and create wider ranging competition in the sector. Within two years, the current limitations on free competition in telephony will be lifted. This is likely to provoke consolidations of the market, invasions of adjacent markets and, perhaps, the entry of still other global players waiting on the sidelines for an appropriate opportunity. Most of Brazil’s population has lived on the margins of economic development, isolated from all but their immediate neighbours and with only limited access to telephone services. During the year 2000, the promise to these people of Brazil’s telecommunications revolution will begin to be fulfilled through the widespread expansion of affordable access which competition will bring. The year 1999 brought an explosion of mobile, cellular, services. The year 2000 should bring a comparable explosion of fixed services to the average Brazilian. Many people who, today, rely on public payphones will acquire home phones and connect to the global network. At the same time, there will be an unprecedented offering of affordable broadband access (Internet, interactive TV, etc.) for both business and household use. The availability of competitive alternatives to existing local and long distance services should force service improvements and price reductions by the end of year 2000. Most of Brazil’s new telephone owners will not realise it, but the competitive model that got them their home phone is fundamental to their country’s economic development, perhaps even to the new job they get tomorrow, and to Brazil’s insertion into the global economy. Without a world class communications system many investors will not, indeed cannot, operate in Brazil Without world class communications systems, and access to global communications, Brazilian business cannot compete in world markets and cannot develop efficiently. Without low cost, widespread, mass access to phone service, consumer demand is stifled and economic growth, employment and stability prejudiced. In the globalized information driven economy, cheap labour and natural resources do not guarantee economic well-being. Technology and information gives a country its economic edge, but it is communications and the widespread integration and flow of technology and information throughout the whole of society, which generates economic power. Conclusion We are optimistic about Brazil. The Brazilian government, through Anatel and the Ministry of Communications, has done an exceptional job of creating a competitive system; the improvements in the sector have been astonishing. It is almost as though Brazil is starting from scratch. Everything is new, there is little dead weight and, in the very recent past, it has been relatively easy to innovate. The renovated regulatory structure has had a profoundly positive effect on competition and growth.

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