Home Latin America II 1999 The Restructuring of the Telecommunications Sector in Panama

The Restructuring of the Telecommunications Sector in Panama

by david.nunes
Dr. Juan R. PorrasIssue:Latin America II 1999
Article no.:8
Topic:The Restructuring of the Telecommunications Sector in Panama
Author:Dr. Juan R. Porras
Title:Not available
Organisation:Porras y Asociados, Panama
PDF size:24KB

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Article abstract

The restructuring of Panama’s telecommunications sector has been through a tortuous path. However, the country has already experienced some of the benefits of liberalisation; full digitalisation, increase in teledensity and lower rates. Here, Dr. Porras takes us through the country’s liberalisation process, and looks at some of the challenges faced. He is optimistic that these developments will have a positive impact on the society, and they will be more evident when full competition in basic and international service starts in 2003.

Full Article

Panama is a tiny country with a small population of 3 million people. Lying in the southern junction of the Central American Isthmus and the immense South America, Panama in 1994 was lacking in basic telecommunications services such as cellular service, Internet, Integrated Services Digital Network (ISDN) as well as value added communications services such as pager service, dedicated lines and digitalisation. The country’s teledensity was low indeed. On 1st September of that year the newly elected President and Head of the Government took possession. Prior to the installation of the new government, I had presented to the President Elect a plan to restructure the telecommunications sector. The plan received his approval, but the submission was pending the government structures, such as the Cabinet and the National Assembly. The President appointed me as Director of ‘lnstituto Nacional de Telecomunicaciones’ (INTEL), the government monopoly servicing telecommunications in the country. INTEL was a highly profitable enterprise, as most monopolies are. Its basic concept was fixed cheap local rates, subsidised by expensive international rates. This formula had worked in a rather acceptable way for the government as most of the profits where transferred to the central budget while very little was reinvested in the improvement and expansion of service and its infrastructure. The Fragile Situation Technology and illegal competition had started to undermine this ‘golden egg goose’ as it was called. As soon as I assumed the management of INTEL, a study was instigated to determine the loss of revenue on the Institution’s income due to the Callback operators. The study showed a loss of more than 20% on international revenues. Furthermore, these Callback operators were starting to become invisible by working directly from the US, not having physical presence in Panama. The plan I had presented to the President called for the following: · To obtain the support of the Telecommunication Union by presenting the plan to them first of all, gaining their confidence. The rights of the workers were guaranteed, and a package of financial benefits assisted in obtaining their support. · To install pay phones widely and to open the cellular and Internet services in order to cover the unsatisfied demand. To open to competition and thus reaping the benefits thereof, such as lower rates and improved service. Using all media available to explain these benefits of the plan to the public to gain their support, or at least to avoid rejection in the streets, which was usual in other countries that tried to implement a restructuring process. · To lobby the Ministers of the Cabinet and the leaders of the Legislature in order to explain the benefits of the project to the Country and the financial impact on the budget. Three bills were also presented to the Cabinet: · To enable the Executive Branch to form a corporation and to transfer all of the assets and liabilities of INTEL, the latter to be named INTEL S.A. (S.A. stands for corporation); · To regulate all of the telecommunication activities; and, · To create the Regulatory Board and to establish its functions as well as its operating rules. (This Board supervises the telecommunications, electricity and water public services). Parallel to the above, complicated and lengthy negotiations were conducted with the Telecommunication Union, which crystallised with the signature of the first major collective agreement. Legal Structure After a tortuous path through the Legislative Branch which included many negotiated and some unexpected amendments to the Bills introduced by some legislators, the three laws were approved by a vast majority of votes from both government and opposition legislators. In a massive public act, the bills were signed into laws by the President, as an example of consensus between all the parties concerned. Salomon Brothers was selected at a public bid as the investment banker to advise the government, and the pre-qualification conditions of the prospective buyers of 49% of the capital shares of INTEL S.A. were established. Another 49% would remain the property of the Government and 2% would be granted to the company’s worker’s trust. Pre-Qualification GTE and SBC were pre-qualified. Telefonica de Espana was rejected, as were other European operators that had indicated interest, such as STETS and France Telecom, for reasons of still being controlled by a government at the time of the pre-qualification. I accepted the argument: we should not sell assets of the government to companies controlled by other governments. However, I opposed these rejections, for at the time of the pre-qualification these proponents had almost completed their privatisation processes (today only France Telecom is still controlled by the French government). The estimated loss of revenue from the sale of the 49% due to the diminished competition was approximately US$100 million. Crisis Management A sudden crisis exploded when SBC announced their withdrawal from the process due to their interest in concentrating in the Brazilian privatisation. An emergency meeting was held with the President and the Minister of Planning, and I presented them with the different alternatives to confront the situation. We could not afford to continue the process with only one prospective bidder. This would mean a very low price and possibly a challenge by the opponents of the project later down the line, thus jeopardising its transparency. (I had advised GTE in the past, before my appointment as chief of the project and this could lead to damaging speculations). Salomon Brothers was summoned, I made numerous calls and trips to try to sell the strategic positioning to other potential operators. Finally Cable and Wireless (C&W) decided to pre-qualify in the reopened process shortly after Richard Brown assumed the leadership of the said company, and they were successfully admitted. ‘Due Diligence’ and ‘Homologation’ (is the process between all the pre-qualified proponents and the Government by which they agree on all of the contracts, concessions and regulations that would govern the operations of the winning participant). C&W almost dropped out of the ‘homologation’ because of the Ministry’s negotiating team lack of patience. Since GTE had already completed its due diligence and homologation they were becoming impatient and started to pressure the Ministry. The pressure was passed over to C&W, who threatened to abandon the due diligence if some of its proposals were not admitted. I even had to intervene with the President to avoid C&W abandoning the negotiations and leaving us alone with GTE again. Patience proved its benefits and C& W satisfactorily finalised and filed the bond for the bid. The Dice Rolled: GTE vs C&W The dice rolled and the highest offer in a closed envelope made C&W the winner with a US$652 million, making it the highest price paid per line in the world at that time. GTE’s offer was US$450 million. Salomon Brothers recommended minimum price was US$400 million. When the President had asked my opinion I had told him not to let the 49% go for less than US$500 million and this was the official minimum acceptable price established by the Government. US$652 Million in a Huge Cheque On 20th May 1997, C&W paid by means of a huge cheque (physically measuring 2′ x 4′) for its 49% of the shares of INTEL S.A. In exchange C& W received the share certificate representing 245 million class ‘B’ shares. A management contract was also signed and C& W assumed full control of the company as well as the right to appoint the majority of the members of the board of directors. Prior to that I was the CEO of INTEL S.A., a very sophisticated concession agreement with the Government granting INTEL S.A. (later to be renamed C&W Panama, S.A:) temporary exclusiveness in basic and international service for five years. As counter balance for this temporary exclusivity, the company was to meet certain quality standards and goals within specific time frames, in order to prepare for total competition in the year 2003. Cellular Service Bloomed Cellular service bloomed in a duopoly environment: ‘Band B’ was included in the package to C&W and ‘Band A’ was sold in an international public bid to Bell South. Each paid US$72.6 million for their concession. Rates started at US$0.60/min and today the lowest are at around US$0.10/min. Cellphones are being given away in every re-seller store and pre paid cards have made cellular service available to many people that do not even enjoy credit. The telecommunications explosion includes more than 28 Internet Service Providers (ISPs) with rates as low as US$25 per month for unlimited access. These rates are even lower than some in the US. Many value added service companies are offering all kinds of services in open competition such as beeper, direct lines, Very Small Aperture Terminal (VSAT), teleports, Global Mobile Personal Communications by Satellite (GMPCS). The Negative Impact People are angry at the new rate structure. It changed the nature of the unlimited fixed basic rate, subsidised by very high international rate structure, to a higher fixed rate or a lower basic rate plus a per minute rate. (cross subsidies are no longer permitted by the law, supervised by the regulatory board.) The above is one of the many negative impacts of the project. My original proposal called for the consumers to have the option to change to the metered rate, only after competition starts in 2003. I had also proposed a placing of shares to the public from the Government’s 49%, two years after the initial sale to C&W, in order to establish a market and also to allow locals at popular level as well as institutional investors to become payers. The idea was to erase the wrong perception that a valuable ‘National Asset’ had been given away to a foreign investor. Phase two of the project has not been implemented yet. The Challenge of the Year 2003 C& W is facing a difficult challenge: Competition in 2003 is a tremendous driving force and this company has demonstrated capacity to fulfil the very high quality standards set forth by the concession agreement, duly supervised by the regulatory board, which has imposed very costly fines on occasions where C&W has not complied. Benefits of Liberalisation The country has received the benefits of liberalisation due to the implementation of the restructuring project: · full digitalisation; · increased satisfaction of demand from 11 to 14 lines per 100 people; · almost 10,000 new pay phones equipped with the prepaid card technology; · capable of direct dialled calls to anywhere in the world; · 20% lower international rates; · lower cellular rates; and, coverage of almost 90% of the populated territory. Conclusion Also, response time to repairs and new installations has been reduced considerably, lower damage repetitive rate, many new and creative value added services provided by competitive companies or in association with independent operators are in place. I am very optimistic regarding the positive impact the society will receive from the restructuring project, and this will be more evident when competition in basic and international service starts in 2003, lowering rates and bringing telecommunications services to excellence.

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