ANDEAN FTA ANALYSIS: TELECOMS AND NON-FINANCIAL

C O N F I D E N T I A L SECTION 01 OF 03 BOGOTA 004839

SIPDIS

SENSITIVE

STATE PLEASE PASS TO USTR BENNETT HARMAN

E.O. 12958: DECL: 04/29/2014
TAGS: ECON ETRD CO FTA
SUBJECT: ANDEAN FTA ANALYSIS: TELECOMS AND NON-FINANCIAL
SERVICES IN COLOMBIA


Classified By: DCM Milton Drucker for reasons 1.5 (b and d)


1. (C) SUMMARY: Telecoms and other non-financial services
account for 59 percent of Colombia's GDP. Despite two waves
of liberalization, regulatory barriers still protect
state-owned service providers from private and foreign firms.
Barriers to foreign providers of professional services are
fairly restrictive, with licensing, residency and nationality
requirements, as well as ill-defined economic need tests.
Colombia is likely to continue liberalization and seek
improvements in services regulation to compensate for market
failures, externalities and asymmetries. In the long run,
services liberalization could increase GDP and national
welfare by an estimated 10 and 15 percent respectively. This
is the fifth in a series of sector briefs developed in
preparation for the Andean FTA. The summaries are based on
in-depth studies which are available from USAID Bogota. END
SUMMARY.

Background


4. (U) Services as a percentage of GDP increased from 49
percent in 1990 to 59 percent in 2001. Liberalization of
trade in services, however, has been slower than in goods.
USAID estimates further liberalization of the sector could
increase GDP and national welfare by 10 and 15 percent
respectively. An initial stage opened the economy to foreign
investment, allowed private companies to provide public
infrastructure services like telecommunications (3 percent of
GDP),energy, gas and water (3 percent of GDP),and
privatized public companies. In the latter 1990's, a second
stage gradually increased competition in these sectors as
well as in social and government services (21 percent of
GDP),transportation, and gas. Foreign investment in
services was nearly 62 percent of total foreign investment
over the last decade.


5. (SBU) Barriers to trade in services include quantitative
restrictions, price controls, discriminatory standards,
licenses, and discriminatory access to distribution networks.
The GOC designs and implements policy and regulates,
supervises and controls the market. The Colombian
Constitution does not require regulators to be independent
from the executive branch in carrying out these functions.


6. (U) Since 1994, Colombia has posted a US$ 1.5 billion
annual trade deficit in services. Exports of travel services
amounted to US$ 962 million in 2002, and include tourism,
health and education (foreign patients and students treated
and studying in Colombia). Exports of transportation and
communication services together amounted to US$ 800 million
in 2002. In 2002, 24,669 temporary workers were allowed
from Colombia into the United States, mainly specialists,
corporate transfers, and recognized athletes and artists.
Likewise, 67,544 business people entered the United States in

2002.

Barriers to Professional Services


7. (U) Professional services are the most restricted.
Residency requirements restrict foreign trade of such
services, while accreditation and license requirements
restrict temporary professional services. Economic needs
tests are required when foreign professionals operate
temporarily. These restrictions apply to accounting,
bookkeeping, auditing, architecture, engineering, urban
planning, medical and dental services, among others.
Accreditation and degree homologation mechanisms, as well as
regulations that restrict prices, income, and advertising
also inhibit trade. Colombia argues that regulation is
necessary to counter asymmetric market information and
externalities.


8. (U) Health service providers must register with regulatory
authorities, which impose strict parameters on costs and
service quality. Foreign educational institutions must have
resident status before operating. Legal services are limited
to firms licensed under Colombian law. Foreign law firms can
operate only under joint venture and under the licenses of
Colombian lawyers. A commercial presence is required for
information-processing services. Tourism services must be
registered and licensed by authorities.
Barriers to Telecommunications Services


9. (SBU) Colombian telecom reforms have sought to promote
competition in an existing environment of natural monopoly,
and with some success. Reforms have eased access to
essential networks for market providers. However the tariff
regime continues to cross-subsidize local telephony with
higher long-distance fees, and higher income households
subsidize telephone services for lower income households.
Cross-subsidies control prices and limit competition,
creating an important market entry cost. Local prices are 25
percent under the international average and long-distance 35
percent above average, creating distortions that inhibit the
entrance of new competitors. Altogether, Colombia's
regulatory structure produces an estimated 34 percent
over-cost in telecommunications.

10. (U) Other barriers to telecommunications services include
commercial presence and licensing requirements for both
foreign and local operators. The Telecommunications
Regulatory Commission (CRT) may establish economic need tests
for the approval of licenses for the provision of voice,
facsimile, e-mail, and other value-aggregate services.
However, parameters that determine "economic need tests" are
not clearly established.


11. (U) Most restrictions on foreign telecom services have
been lifted, though concessions are only granted to firms
legally set-up in Colombia. Foreign investment is allowed in
telecommunications firms, but under WTO rules Colombia limits
foreign investment in these firms based on an economic needs
test. Colombia permits 100 percent foreign ownership of
telecoms, but high license fees form a significant barrier to
entry. A prohibition on long-distance "call-back" services is
the only specific discrimination against foreign providers.

Barriers to Energy Services


12. (C) Energy generation was liberalized through
privatization in the 1990's. However, energy distribution
and transmission are less open due to crossed subsidies, the
deterioration of state-owned distributors, and decreasing
demand. Under the current price structure, higher-income
households and industrial and commercial consumers provide a
20 percent subsidy for poor households, limiting competition
and creating distortions. As a consequence, household energy
consumption is 10 percent larger than industrial energy
consumption. Although the cost of energy generation is lower
in Colombia than in most Latin American countries, prices for
industrial energy consumption are on average 30 percent
higher than in those countries. Additionally, the strong
dependency of regulatory entities (CREG) on the government
results in a lack of incentives to open to competition that
would affect the already deteriorated public distribution
companies.

Barriers to Audiovisual, Television and Radio Services


13. (C) The independent National TV Commission (CNTV)
formulates TV policy, regulates market structure, and
oversees content. CNTV has created a model of open TV where
private programmers use state-owned channels under exclusive
agreement. CNTV gives concessions for cable and subscription
TV under regional licensing agreements, but new licenses are
subject to economic need tests, which are not clearly defined
and lack transparency. CNTV requires 50 percent national
content for programming and 70 percent for prime time, while
foreign artists in national productions are limited to 10
percent of staring roles. CNTV is widely considered one of
the GOC's more bureaucratic institutions.


14. (U) Radio broadcasting is licensed through auctions to
private operators. The Communications Ministry licenses,
regulates, and oversees radio stations, and operates the
national radio broadcast station. Colombia restricts foreign
participation in state TV (40 percent) and in radio stations
(25 percent). All films are taxed to finance the national
Cinema Development Fund, which promotes national film
productions.

Barriers to Transportation Services


15. (U) In spite of liberalizing reforms, maritime and air
cabotage services (transport between two points in a country)
remain strongly restricted, as are transborder transportation
services. Land cargo transport companies must have a
commercial presence in the country and be licensed.
Likewise, only Colombian residents can provide domestic or
international air transport. Colombia's law permits
international cabotage companies to provide services "only
when there is no national capacity to provide the service."
Maritime companies may not lease foreign flagged vessels,
unless they show there are no Colombian vessels that meet
their needs. Colombian nationals must own at least 60 percent
of maritime agencies. The captain, officers, and 80 percent
of the crew of Colombian vessels must be Colombians. This
also applies to foreign vessels that stay in Colombian waters
longer than six months. All airlines are obliged to hire 90
percent Colombian personnel, and Colombian pilots must
command commercial flights.


16. (C) Getting to the Table: What GOC Needs to Do


A. Provide Colombian supervisory authorities with greater
independence from policy-making institutions to avoid the use
of regulatory barriers to protect state-owned companies.
Without greater independence, supervisory authorities will
continue to lack legal, budgetary and technical autonomy, and
the GOC and Congress will continue to interfere in their
regulatory decisions.


B. Unify regulatory oversight to avoid inefficiency. The
Superintendent of Industry and Commerce oversees all sectors
but energy utilities, which are inefficiently overseen by the
Public Services Superintendent.


C. Determine clear regulatory parameters of economic need
tests, which are an instrument that limit competition in
various sectors.


17. (C) Overall GOC Demands on Services


A. Colombia will press the U.S. to ease visa restrictions for
workers and students seeking U.S. educational services. Visa
policy is non-negotiable, but the increase in trade will
prompt increased legitimate travel plans and therefore more
visas. GOC would gain political cover with estimates of
increased travel for legitimate business.


B. Similarly, because small and medium enterprises cannot
afford a permanent presence abroad, the GOC may press for
improved access of temporary workers to the U.S.

18 (C) GOC Positions on Services Products


A. The GOC hopes to improve accreditation under reciprocal
agreements. However in Colombia professional accreditation
is granted by the government, but in the U.S. it is the role
of professional associations. The GOC might agree to define
economic need tests for the temporary movement of
professionals.


B. Colombia may lift restrictions on transportation and
cabotage services under a condition of reciprocity, though
9/11 related policies may hamper liberalization.


C. Colombia might replace price-controlling and
competition-limiting cross-subsidies in favor of direct
subsidies to guarantee universal coverage for certain
services. However, fiscal difficulties limit the GOC's
negotiating capacity.


D. GOC may liberalize the energy market, but this would
require privatizing state-owned energy distributors that have
largely failed, but have been protected by the CREG through
biased regulation.
WOOD