"I know what I believe. I will continue to articulate what I believe and what I believe - I believe what I believe is right." Rome, 22 July, 2001


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We must begin with the fact that telecommunications are without a doubt one of the driving forces behind the economic development of our countries. For this reason, the demand for improving the infrastructure of these services has notably increased. For decades telecommunications all through Latin America were state-owned through public companies. Their development levels have been inferior to those of more developed countries. The rapid technological development of this industry is at a global level. Its rapid growth in economic terms (103% in 1994) and the impossibility for the State to adapt to these changes whether technological or economic in nature, has brought about as a consequence, the transformation of this industry and the need for its privatization, deregulation and globalization. These changes have been taking place in Latin America since the mid 1980's and have been accompanied by a series of political and economic changes.

Chile privatized the "Compania Telefonos de Chile" as part of a political scheme in which the transfer of companies that had been in State hands to private sector companies was being sought. The development of this industry in Chile has been so successful that at present it is now among the countries that are interested in "exporting" their know-how and investing in foreign countries.

The need for economic development in which telecommunications have a direct influence has forced countries like Mexico (1990), Argentina (1990), Venezuela (1992) and Peru (1994) to privatize their companies too. Presently, the advantages of transferring communications to the private sector are undeniable, to such an extent that countries in Latin America that have not privatized are in the process of doing so.

Although the common goal is the same, different countries have undergone different processes and mechanisms for transferring telecommunications to the private sector and thus obtaining greater competitiveness for improving their services. Each country that has privatized has enriched itself from the experience of its predecessors and has improved its regulatory framework.

In general terms, we can say that the efforts of these privatizations in the telecommunication sector have been very positive. The industries have quickly demonstrated improved services and technological advancement to the benefit of their users.

The regulatory problems of the controlling entity is also being solved globally. The UIT has had an important role in promoting the internationalization of the norms regarding telecommunications.

ARGENTINA

Year of Restructuring: 1991

Scheme: Privatization through the sale of 60% of the stock of the companies created by law.

Concessions were awarded in exclusivity for between 6 and 10 years.

Cellular phone services were open to free competition from the beginning.

Restructured Companies: ENTEL was divided into two companies (by sectors, north and south) and were acquired by the following companies:

1. TELECOM-STET (Italy) /FRANCE TELECOM

-Perez Compac 25%

2. TELEFONICA-TELEFONICA DE ESPANA

-Perez Compac 14.6%
-Techint 5%

In almost four years, nearly all of the Argentina public companies have been transferred to the private sector. In Argentina, there were differences in methodologies and privatization modes. The Argentina process seems to be antagonistic toward cases like the one in the United Kingdom where democratization of property was achieved. In Argentina, an accentuated concentration of property occurred in a reduced number of economic agents.

To conclude, we can note that in the global system of privatizations, the lack of official concern for diversifying the property of privatized companies has allowed for the concentration and centralization of capital which in turn goes against the purpose of privatization, which has as its essence the free competition in the marketplace.

In the telecommunications sector, 60% of the stock was sold to international operators and the remaining 40% was divided among the workers belonging to the telephone company cooperatives and the public in general.

The price for the privatization was 1,672 million dollars for the whole company. Thus $1,003 was paid for 60% of the stock. 214 million dollars was paid in cash, 380 million was financed and the rest was paid in foreign debt bonds.

This process was characterized by its speed (which was completed in only a few months).

**It is important to point out that at the moment legislation is underway that intends to regulate telecommunications in general in the post-privatization era.

BOLIVIA

Year of Restructuring: 1995

Scheme: Capitalization. The right to contribute to ENTEL's capital was sold. (ENTEL being the state company.) Equivalent to 50% holding with the right to administrate the company. The remaining 50% is being divided among Bolivians to promote widespread share holding.

Cellular communications are offered at a national level by ENTEL. While in La Paz the TELECEL Bolivia company has a monopoly on this service until July of this year when new concessions will be awarded.

Restructuring Company: ENTEL by STET (Italy)

The Bolivian government considered in all its process of privatizations the following criteria: objective data including investment plans, financial indicators, experience in project financing, quality as operators, and the consideration of a partner that will make the biggest capital contribution to the company. Before the restructuring process, Bolivia had the lowest line density in Latin America - four lines per 100 households. The target is to raise line density to 16 per 100 households within ten years.

ENTEL has a variety of services including the long-distance monopoly, and a local service license with competition since most local traffic is handled by 22 cooperatives sprinkled throughout Bolivia.

BRAZIL

Until recently a constitutional prohibition was in place for the participation of private companies, local or foreign, in the rendering of telecommunications services. Recently, this prohibition was overruled through the modification of Article 21 of the Constitution. Nevertheless, the text of the reformed article states that only congress will be able to regulate the topic of telecommunications within the constitutional context, through the issuance of a law. Because of this, the constitutional monopoly shall be in place until such time as Congress expedites a law that establishes the conditions under which participation will be granted capital in this sector. At the moment, a legislation project presented by the Executive power exists, but a legal framework is not yet available.

It is worthwhile to point out that the Telecommunications Law of the Government contains limitation on the participation of foreign investment in the Brazilian telecommunications sector. This limits foreign participation to 49%. At the moment an alternate text has been presented which contemplates the participation of foreign investment in function of reciprocity, that is, considering the limitations which Brazilian companies might have in the telecommunications sector of other countries.

COLOMBIA

Year of Restructuring: In process

Scheme: Telecom and the Bogata Telephone Company must be privatized within the next 2 years.

At the moment 2 concessions for long distance services (national and international) for a renegotiable 10 year term with a Government commitment not to award new licenses. The party awarded the concession shall have to pay the Colombian Government an annual fee equivalent to 2% of the gross income of the company.

In 1995, the Government awarded six cellular communications concessions through an international auction process in which international operators associated with local investors participated.

A monopoly exists in Columbia for long distance services, the same which is provided by Telecom, the State company. Local telephone service is provided by several companies in each city. Recently the Government has initiated a process through which it will associate with suppliers of telephone equipment in order to install and operate local networks.

CHILE

Year of Restructuring: 1988

Scheme: Privatization through the sale of stock in companies created by law.

Competition exists in cellular communications and soon personal and digital services will be offered.

Restructured Companies: The Compania de Telefonos de Chile was sold.

COMPANIA DE TELECOMUNICACIONES DE CHILE to Telefonos de Espana

ENTEL to STET (Italy)

The price paid was 478 million dollars ($1,400 per line).

In Chile, free competition exists in the national and international long distance telephone service. Presently there are no less than six companies (many of these with foreign capital that provide the service).

In the local telephone sector, competition also exists, although approximately 80% of this market is controlled by one company which has Telefonica de Espana as a shareholder.

The awarding of concessions to operate telecommunications services requires that the concessionees be companies constituted in Chile and domiciled in this country requiring that the concessionees of public telephone service establish a multi-carrier system that allows the user to choose national and international long distance service with the company of their choice.

Chilean law allows the same company to provide local and long distance telephone service if and when it does so through independent subsidiaries constituted as open chartered companies.

ECUADOR

Year of Restructuring: In process

Scheme: Privatization by means of the sale of 35% of the stock (and control) of each of the two companies resulting from the subdivision of EMETEL.

Several important points:

In Ecuador a legal reform was undertaken which resulted in the expedition of a Reformatory Law to the Telecommunications Law in which the procedure for the privatization of telecommunications was established.

Process for Privatization:

1. The State Communications company EMETEL (Empresa Ecuatoriana de Telecomunicaciones) will be transformed into a chartered company. (At the moment the title of transformation in the Mercantile Register is pending registration.)

2. Once converted into a chartered company (private law) it will be subdivided into two companies, one for each region of the country. The companies that result from this subdivision will operate under an exclusive regime within their region for which the concession was granted for a period of five years. It is important to point out that the two-company scheme was established in order to prevent the occurrence of the State monopoly becoming a private monopoly since the regulations give the possibility that after 5 years the two companies will compete on a national level.

3. Parallel to this, the following steps have also been taken within the process: 3.1 The interested operators have been convened to participate in the process by presenting their credentials for pre-qualification. These documents must be presented before November 29, 1996. The prerequisites for qualification are the following:

Bidders must be experienced network operators with demonstrated efficiency

Art. 49 requirements for Qualification

Technical and service:

Number of local lines in the network

Average repairs in 24 hours

Average international incoming calls

Average of new customers served in 30 days

Dialing tone delay

3.2 Emetel's evaluation and the way in which the company will be divided is almost ready.

3.3 The Bid documents (bases, contract, etc.) are ready. The Joint Ventures that participate, led by an international operator must sign a purchase-sale contract before presenting their offer in such a way that once the winners are established, only the information pertaining to the bid shall be included. A minimum referential price shall exist. 3.4 The two highest bidders for each of the companies shall have the option of increasing their bids in the second round. 3.5 The concession shall necessarily include an expansion plan that considers network expansion, social proposals, efficiency in completing calls and repair service, and a short period for satisfying new customers' needs.

MEXICO

Year Of Restructuring: 1990

Scheme: Privatization through the sale of stock for the majority share holding of TELMEX.

Companies that were privatized: Companies that participated in a joint Venture:

Southwestern Bell

France Cable & Radio

Mexican Partner

Price Paid: 1,734 million dollars ($1,489 per line)

Several important points:

The case of Telmex is atypical of telephone companies in Latin America, because it was not nationalized and has always had private investors. The patrimonial participation of the State began in 1963 through credits that were later capitalized in a series of preferential stock emissions. In 1972 the State represented 49% of the capital.

Two key political elements were present: workers rights were guaranteed and national capital majority control was also guaranteed. The Mexican partner maintains 51% and the international operators the remaining 49%.

By 1989 it was determined that Telemex required an investment of 10 billion dollars that the State could not front and so the privatization process was begun.

PERU

Year Of Restructuring: 1994

Scheme: Privatization of the local and long distance telephone service through the sale of 35% of the stock of ENTEL and 20% of the Stock of ("Compania Peruana de Telefonos CPT) and the right to subscribe in the capital increase of CPT until it has 35% of its shares (with the control of the companies). They hold a 20 year lease, with exclusivity for 5 years.

The cellular telephone and public service are provided under the free competition regime by Telefonica. Cellular 2000 also provides these services and therefore competition exists.

Telefonica del Peru also holds licenses (without exclusivity to operate cable and paging services.

Restructured Companies: ENTEL and Compania Peruana de Telefonos CPT were sold to TELEFONICA DE ESPANA.

Telefonica de Espana paid U.S. 2,002 million dollars. 1,391 million were paid for the shares, U.S. $610 million will be invested in the privatized company. (U.S. $13,300 per line)

The State will offer the companies workers 10% of the remaining shares, and will sale the remaining 55% in the stock market.

The telecommunications law and its regulations exemplify the principle of free competition in the provision of telecommunications services, allowing free access to private investment, national as well as international, to these activities. The Constitution also allows this principle.

The highest price ever paid for a telecommunications company was paid for ENTEL. The reason for this payment was that Telefonica established in its offer a management fee that gave them the possibility of making a higher offer and still doing great business for the company.

VENEZUELA

Year Of Restructuring: 1991

Scheme: Privatization through the sale of 40% and the control of the Compania Anonima Nacional Telefonos de Venezuela, CANTV, it was leased for 35 years extendable by an additional 20 years.

11% was sold to the worker. The remaining 49% will be sold in the Caracas Stock Exchange between 1996 and 1997.

The concession of the mobile cellular service previously awarded to Bell South Enterprises (1.991) under an exclusive regime.

Restructured Companies: CANTV was sold to a Joint Venture led by GTE (General Telephone and Electronics)

The following companies participated in this Joint Venture:

GTE 51%

ATT 13%

Telefonica de Espana 13%

Electricidad de Caracas 13%

Consorcio Inversionista Mercantil 10%

The consortium led by GTE paid U.S. $1.885.000.000 dollars for 40% of the stock (U.S. $3,000 per line).

Previous experiences were taken into consideration. The price paid for an installed line was the highest to date, more than $2,370 dollars per installed line compared to $1,900 dollars in Mexico.

The labor theme was handled appropriately in order to prevent social problems with this group. The sale of shares was offered to this group. The international operators were pre-qualified, and the rule that they would lead the joint venture was established. This guaranteed a clearer control structure and better access to technology than that which occurred in Chile, Argentina or Mexico.

An expansion and service quality improvement plan was established along with a method for the periodic revision of tariffs. The exploitation of non-basic services was opened to free competition as in the case of Chile. A regulating entity was duly created, separate from the corresponding Ministry. In brief, the positive experiences were reused from the privatization process in Chile, Mexico and Argentina as well as those in the United Kingdom.

This article is produced by Interlaw, Ltd., An International Association Of Independent Law Firms In Over 75 Commercial Centers. Member firms are represented in Europe, the Americas and throughout the Asia-Pacific region. More information on this topic may be obtained from the Interlaw Secretariat.

Interlaw Ltd. is not in any way affiliated with the Lectric Law Library or the authors of any other content contained therein, and does not endorse any materials appearing on this site which are not specifically identified as originating with Interlaw, Ltd. or its members. This document should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult an attorney concerning any legal questions you may have.

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