Home Latin America IV 1999 The New Era in the Brazilian Telecommunications Market

The New Era in the Brazilian Telecommunications Market

by david.nunes
Wob GerretsenIssue:Latin America IV 1999
Article no.:13
Topic:The New Era in the Brazilian Telecommunications Market
Author:Wob Gerretsen
Organisation:Intelig Telecommunications Ltd., Brazil
PDF size:32KB

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Article abstract

The Brazilian Government innovated, compared with other parts of Latin America, when it set the rules for privatisation and the introduction of competition in the public telecommunications market. In other countries, the government-owned public telephone operators maintained their monopoly for five or more years after privatisation, delaying and compromising the development of a fully competitive market. Brazil’s decision to open the market, through “mirror” companies, shortly after completing the privatisation process, attracted foreign capital and will hasten the development of the sector.

Full Article

Brazil is an interesting and promising market for telecommunications services. Such is the size of the Brazilian market that, when privatisations there, in Latin America’s most populous country, were announced, companies from all over the world recognized the enormous opportunity that entry into this segment represented. Brazil’s potential for business expansion is based not only on the call volume a country of 160 million inhabitants can generate, but also on the need for better technology and services tailored for an expanding economy. The Brazilian government chose a path to the privatisation of telecommunications different to that trodden by other Latin American countries. Argentina, Mexico, Venezuela and Peru chose, for instance, when privatising their telephone companies, to grant them a monopoly for a period of at least five years. In this way, they gave them precious time to consolidate and restructure. This model was not adopted by Brazil which decided to sell concessions for “mirror” companies. These companies were planned to “mirror” the operations of existing operating companies and compete against them. Each mirror company was licensed to operate the same range of services, in the same geographical region, as the company with which it was competing. Brazil’s privatisation of the government monopoly of public telephone services, the Telebras System, began in 1998. Subsequent to the privatisation, in 1999, the government invited bids for the four competitor (mirror) companies concessions. In 2002 the market will be opened to additional competition and the era of the multiplication of mirror companies will arrive. The advantage of the Brazilian model is that the privatised companies will not have enough time, without competition, to consolidate their position prior to the start of the mirror operations. In other countries in the region, investors have had competitive advantages compared to new companies that are only licensed several years later. In the case of Argentina, for example, the government granted an eight year monopoly to each of the companies and is only now moving on to the second phase of opening the market to competition. In the case of Intelig, Brazil’s long distance mirror company (*), for example, eight years to begin building the company would perhaps have been too long. Such a long period would have jeopardized the successful sale of concessions and, consequently, the attempt to bring an end to the existing monopoly. Intelig is laying nothing less than 13,500 km of optic fibre to consolidate the infrastructure it needs in Brazil to provide differentiated service. Capital expenditures of US$1.9 billion over four years will be needed to build the company from scratch. This is a great challenge, but Intelig’s controllers, National Grid, France Telecom and Sprint, decided to face it; they knew that they would need to build a first-rate task force to achieve the aims stipulated by the government. By the end of 1999, Intelig will be employing 800 people. Brazil’s plan to transform a state monopoly into a private monopoly, and then quickly create competition to break the monopoly, was a critical factor in awakening the interest of the foreign investors whom we can see operating in Brazil today. The Brazilian method of privatisation is definitely more audacious than that commonly seen in Latin America. Beginning in 1997, with the start of competition in the cellular market, Brazil accepted the risk of adopting a system of privatising telecommunications untried elsewhere, which envisaged almost immediate, though controlled, competition. This, in fact, is the key word: control. Competition could not be completely freed at once. The government was aware that a period of limited competition was necessary, as was permitted. Control was a fundamental mechanism for the success of Brazil’s privatisation in the telecommunications area. This model has made it possible for competition in Brazil to have time – until 2002, according to the regulating authority – for Anatel to structure itself in such a way as to compete with the privatised companies, which hold the advantage of having a massive base of existing customers. Had it been otherwise, in 2002, the telecommunications market would be visibly structured around strong, consolidated ex-state owned companies and competition would be fragmented and uneven leaving no hope of achieving large-scale operations. In a fragmented market, there would be no justification for capital investments such as those being currently made; Intelig is spending US$1.9 billion to build a network of the latest generation, capable of beating the competition on quality and productivity. In the case of competition in long-distance phone services, the area in which Intelig is about to start operating, Brazil has long had a mature market compared to the rest of Latin America and the rest of the world, in terms of tariffs. The international minute rate of roughly US$0.05 was a reality in Brazil long before privatisation. The United States, for instance, took nearly ten years to reach this level. Brazil was fortunate in having a good quality tariff structure with prices controlled in accordance with exchange rates. The model, however, needs to be reviewed with respect to access charges, which are still very high. Looking at this scene there is something we can say. Intelig is being built in an atmosphere that is both propitious and prosperous where already, thanks to the opening up of the market to foreign suppliers years earlier, we can count today on the presence of the biggest infrastructure suppliers. Most of our purchases are being made in Brazil. Brazil is gaining with the privatisation of telecommunications. However, a future challenge for the Brazilian government will be to find ways to make the market more competitive for the companies that are arriving in terms of interest rates and access charges. In a few years’ time, the world will see telecommunications in Brazil as an example of competition and development. Conclusion The Creation of the mirror companies is bringing benefits to Brazil. With the arrival of Intelig, Brazilian consumers will be able to see, in the mirror, a better and clearer image of what can be done in terms of telecommunications. Wait and see the new way of doing telecommunications that we are bringing to Brazil. There is no doubt this revolution is going to go down in history!

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