Big Bang, Motorola Wants Out - Honduras Telecom

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002250

SIPDIS

SENSITIVE

STATE FOR EB/CIP
GUATEMALA FOR COMMATT:MLARSEN

E.O. 12958: N/A
TAGS: ECPS EINV KPRV HO
SUBJECT: Big Bang, Motorola Wants Out - Honduras Telecom
Highlights

REF: A) 02 Tegucigalpa 02043 B)02 Tegucigalpa 02563 C) 02

Tegucigalpa 03151


1. (U) Summary. Within the next week, President Maduro is
expected to make a "Big Bang" announcement on the opening of
the telecommunications market to private carriers wishing to
enter into joint ventures and begin servicing communities as
sub-contractors of Hondutel. Two American companies already
in business with Hondutel have recently had mixed results in
investment disputes with the state-owned monopoly. AT&T
succeeded at having their circuits reconnected, but the
company, along with Sprint, still does not have approval to
locate phone booths in public locations including call
centers. Domestically, Hondutel and the two cellular
service providers, Celtel and Megatel, are having
difficulties reaching an agreement amongst themselves on
connection rates. Motorola wants to sell its shares as
technical advisor to the European firm, Millicom, but has
not yet succeeded in securing approval for the sale from
Conatel. End Summary.

--------------
Big Bang Announcement - Opening the Market
--------------


2. (U) The announcement of the opening of the
telecommunications sector, originally scheduled for April
25, then August 11, is now scheduled to occur before the end
of September. President Maduro is expected to announce the
official opening of the telecommunications market for joint
ventures with Hondutel, Honduras' state-owned telephone
monopoly. Under the proposed program new carriers, both
foreign and domestic, will be able to register with
Honduras' regulatory body, Conatel, as sub-contractors for
Hondutel. (Note: Though full privatization is not
anticipated until December 2005, this is seen as a positive
step towards the liberalization of the telecom sector. End
note.)

-------------- --------------
American Company Investment Disputes with Hondutel
-------------- --------------


3. (U) The U.S. telecommunications company Sprint approached
the Embassy in mid-May requesting assistance with its
international calling booths that were removed from
Hondutel's public calling centers. Sprint notified Embassy
officials that AT&T had its phone booths removed as well.
AT&T representatives also requested assistance after being
notified of Embassy advocacy on behalf of Sprint. Embassy
and State EB/CIP officers raised the American companies'
concerns with Hondutel's President, Alonso Valenzuela on
multiple occasions.


4. (U) Valenzuela, along with a team of Hondutel attorneys
responded to the complaints by noting that according to
Honduran law, as Honduras' state-owned monopoly, Hondutel
has exclusive rights to all public telephones and calling
centers unless otherwise stipulated by private agreement.
In an effort to prepare for privatization in 2005, Hondutel
claims it is trying to 'get its house in order' by
rectifying all outstanding irregularities such as the
unauthorized use of public call centers by third party
companies. Unfortunately, to date, neither Sprint nor AT&T
have been able to provide copies of the requested
documentation showing authorization to use the calling
centers, nor have they registered as a sub-contractor with
Conatel. Therefore the Embassy considers this issue closed.
Any and all companies wishing to open their own calling
centers will be allowed to do so after the big bang
announcement and the program goes into effect.


5. (SBU) AT&T raised its additional dilemma regarding an
unresolved payment dispute in the amount of USD 7.3 million
dating back to the 1980's. When negotiations between AT&T
and Hondutel broke down, AT&T decided to stop payments to
Hondutel from August 2002 through April 2003 to recover
funds it claims Hondutel owes (Hondutel in return claims
AT&T owes it USD 12.8 million). In May 2003, as a response
to the six months of non-payment, Hondutel shut off all AT&T
circuits, both incoming and outgoing. Partially as a result
of Embassy and Department advocacy, Hondutel and AT&T
returned to the negotiating table which led to the eventual
reconnection of AT&T circuits in August. AT&T agreed to pay
the six months of service from August to April, with the
understanding that both parties would continue negotiations
on the 20 year old settlement dispute.


6. (SBU) As an additional part of the agreement, both
Hondutel and AT&T agreed to speak with their respective
governments concerning the need to move rates closer to
costs and regional averages. Hondutel states that it
understands the need to reduce rates but indicates the GOH
is not yet supportive of this position. However, Hondutel
has agreed to approach the GOH on the matter. AT&T has also
forwarded a letter to the Embassy detailing AT&T's position
and the importance of getting rates closer to costs.
Comment: US - Honduran settlement rates of USD 0.23 per
minute contribute to extraordinarily high per minute call
rates. The GOH understands the impact on competitiveness
and the investment climate but is likely to resist giving up
too much Hondutel revenue at this juncture as the GOH is
trying to reduce its budget deficit and reach agreement with
the IMF on fiscal targets. A gradual approach will be
needed. End Comment.

--------------
Cellular Service Providers
--------------


7. (U) On April 25, 2003, the Swedish-Honduran consortium
Megatel-EMCE won the bid for a cellular service contract,
the second such existing contract in Honduras (refs b,c).
The only other cellular provider, Celtel, has been operating
in Honduras since 1996. Though Megatel's contract
stipulates the company must be fully operational by June
2004, the company has stated it will begin operations before
Christmas 2003. Conatel confirmed the projected early start-
up date, but noted problems emerging between Celtel, Megatel
and Hondutel related to connection rates. There also
appears to be some discontent with Hondutel and Celtel
regarding international connection rates. Eighty percent of
current cellular users buy prepaid cards in lieu of signing
a contract with Celtel. In order to make it feasible for
these users to receive or complete international calls,
Hondutel and Celtel (and presumably Megatel should they use
the same pricing structure) would need to reduce
international call rates by 20 cents per minute. Per
Hondutel, the current international rate to the U.S. is 84
cents per minute. Due to tariff pricing issues, all three
companies are having difficulty reaching interconnection
agreements.

--------------
Motorola Wants Out
--------------


8. (SBU) As part of a worldwide corporate move, Motorola has
decided to relinquish its role of operator in foreign
markets, opting instead to be solely a provider of equipment
and accessories. When Motorola informed GOH officials and
Conatel of its desire to sell its shares as technical
advisor to the European firm, Millicom, a surprising refusal
was handed down by Conatel officials stating Motorola is
technically the main concessionaire of the 10-year contract
published in 1996, not the technical advisor, therefore
Motorola can not sell out its shares.


9. (SBU) Rocafuerte Inc. (which later became Celtel) won the
bid for the 10-year cellular contract in 1996. When the
contract was officially published in Honduras' federal
register, La Gazetta, in June of 1996, Motorola Inc. was
listed as the main concessionaire instead of Rocafuerte Inc.
In order to correct the error in concessionaire, in 1999,
Conatel issued a resolution changing Celtel as the main
party, and, at the same time extended the contract from the
original 10 years to 25 years. Apparently, for political
reasons, the attorney general's office sued the board
directors who issued the resolution, stating they had acted
in a way exceeding their authority. The resolution has
remained in judicial limbo ever since. Now that Motorola
wants to sell its shares to Millicom, Conatel is reluctant
to give authorization for the sale since it was never
clarified that Motorola is actually the technical advisor,
not the main concessionaire.


10. (SBU) Conatel officials indicated that Celtel / Motorola
has two options. The first option would be for Celtel to
submit the contract to congress for rectification. Celtel
chooses not to pursue this option as a change in
concessionaire, though obvious, would be considered a
fundamental change to the contract, therefore giving
congress the ability to change anything else in the contract
it chooses. As Celtel believes some members of the congress
may have outside economic interests in cellular service,
they are leery of submitting the contract for open
rectification. The second option is to wait until the
Supreme Court rules on the legality of the 1999 resolution.
Conatel officials claim once the case is decided it can go
ahead and issue authorization for the sale.

Pierce