HONDURAS TELECOMMS UPDATE OCTOBER 2004

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 002427

SIPDIS

STATE FOR EB/IFD, IO/EDA, WHA/EPSC, EB, CBA, AND WHA/CEN
STATE FOR IO/EDA (CCHANG) AND DRL/IL
TREASURY FOR DDOUGLASS
COMMERCE FOR AVANVUREN, MSIEGELMAN
DOL FOR ILAB
STATE PASS AID FOR LAC/CAM

E.O. 12958: DECL: 10/28/2014
TAGS: EFIN ECPS EINV PGOV ELAB KJUS KMCA HO UNDP
SUBJECT: HONDURAS TELECOMMS UPDATE OCTOBER 2004

REF: 04 TEGUCIGALPA 2312

Classified By: Classified by EconChief PDunn for reasons 1.4(b,d).


1. (C) Summary: On October 12, EconChief met with Jose Renan
Caballero, Chief Telecommunications Advisor on the
President,s Modernization Commission, to discuss recent
developments in the telecommunications sector. Caballero was
candid regarding Alcatel, Communitel, Megatel, the new
telecommunications law, and his views of the future of the
sector in Honduras. Over the last two weeks, Post has also
met with representatives of Motorola to discuss Motorola,s
participation in Honduras, Communitel regarding its
continuing struggle to begin operations, Lucent on its
proposed donation of telecomms infrastructure, and Project
Finance Advisors (PFA) to discuss its feasibility study on
creating a fibre-optic backbone for the Honduran telecomms
sector. This cable incorporates all of these views to
present a snapshot of the telecomms sector in Honduras. The
Alcatel/UNDP procurement issue will be reported septel. End
Summary.

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Communitel: Champing at the Bit
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2. (C) Communitel is a consortium, made up of Airway and
Motorola, that is in the process of securing permission to
provide fixed wireless services in Honduras as a sub-operator
to state-owned Hondutel. (Note: By law, Hondutel has a
monopoly on fixed-line services throughout the country until
December 2005, though it has recently been approving
investments by &sub-operators8. End Note.) Communitel is
eager to get moving on its project, but its request has been
bound up in red tape for nearly eight months. Post has been
active in urging GOH progress on the case. According to
Caballero, Communitel,s license has now been approved by GOH
telecomms regulators Conatel. What remains in dispute is the
fee Communitel will be asked to pay for the spectrum. Post
is in regular contact with Hector Nunez, General Manager for
Communitel, who provided much the same readout. According to
Nunez, technical experts within Conatel were recommending a
spectrum fee of approximately USD 817,000 per year, whereas
cellular service provider Megatel pays only USD 19,000 and
fixed wireless service provider Multifon pays only USD
10,000. Nunes said that the proposed fee, if approved,
&would be another way of saying no to our project.8
According to Caballero, Conatel director David Matamoros is
seeking a reasonable fee that recognizes the value of the
spectrum while not being as prohibitively high as that being
proposed currently.

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Megatel Sale: Not (only) Windfall Profits for the Elites
-------------- --------------


3. (C) Megatel is the second-largest provider of cellular
phone service in Honduras. Established about a year ago,
Megatel grew quickly to approximately 80,000 subscribers, and
succeeded in driving down prices for cellular service by
injecting badly needed competition into the market previously
dominated by Celtel. Megatel was formed by a consortium that
included a Swedish telecomms company and local business
tycoons Miguel Facusse and Fredy Naser. Megatel acquired
spectrum rights for approximately USD six million, under a
concession that reportedly prohibited re-sale for a period of
five years. Despite this prohibition, Naser and Facuse
announced in July 2004 that they were selling out to
Americamovil (the cellular service arm of Carlos Slim,s
Telmex) for USD 60 million. According to Caballero, such a
sale was inevitable, since given its small size and
consequent lack of economies of scale, Megatel could not
compete over the long term without the backing of a much
larger firm with lower procurement costs.


4. (C) Asked if the sale price did not represent windfall
profits, Caballero told us he thought the sale price
reasonable, and said the sale was legal following the notably
quick alterations to the concession agreement pushed through
Congress to facilitate the deal. The sale price, he said,
includes the entire firm, not just the spectrum, and so the
proper baseline is not the USD six million often cited in the
press. One should add to that figure, he said, some USD 13
million in infrastructure (supplied by Ericsson),
installation of approximately 120 cellular towers costing an
estimated USD six million, and the revenue stream from 80,000
subscribers, which even at only USD 15 per month is over USD
14 million per year. Totaling that, and adding something
more for an established brand-name, Caballero found that a
price of USD 50 to 60 million is not unreasonable. Plus, he
added wryly, there were the payments necessary to get
approval for the sale from Congress in record time, including
all necessary changes to the original concession agreement.

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New Telecomms Law: Sounds Good, But Let,s See It
-------------- --------------


5. (C) Caballero said the Modernization Commission and
regulatory authorities are crafting a new telecommunications
law, which was completed in draft on October 12 and is now
circulating for comment with a view to formally introducing
it before Congress goes out of session at the end of October.
The new law will set maximum fees for services that are not
currently regulated (such as installation fees) and these
regulations will apply sector-wide. More interesting, it
reforms the licensing process, such that a firm, once granted
an operating license, will be free to propose offering any
service directly to regulators for approval. (Note:
Currently each new service first requires a new concession
from Congress. End Note.) Caballero explicitly recognized
that free access to the WiFi spectrum in the U.S. had led to
an explosion of new technologies. Nevertheless, he said,
while the new Honduran law leaves the WiFi spectrum free,
that free-spectrum model will not be applied to any other
bands. In response to points raised by EconChief, Caballero
emphasized that the new law will be technology neutral.
Caballero will provide Post with a copy of the draft law.

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Sector Future: Strong, But Not As Strong as Figures Imply
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6. (C) In December 2005, Hondutel will lose its monopoly over
fixed-line telephone services. It is currently anticipated
that Hondutel will be privatized thereafter, but a previous
attempt to privatize Hondutel in 2000 failed when no bidders
would meet the minimum (reserve) price. Hondutel
infrastructure is aging and inadequate, and there is some
doubt about whether a future privatization effort will be
successful. Hondutel has been plagued by repeated GOH's
raids of its profits to subsidize other GOH operations,
robbing Hondutel of the money needed to invest in
improvements, a fact Hondutel's labor union has repeatedly
bemoaned to LabAtt. (Caballero mentioned Telefonica de
Espana as a potential suitor, noting that they are flush with
cash and active in nearly every country in the region except
Honduras.) Hondutel is also one of the largest employers of
technical and white-collar workers in Honduras, and there are
limited opportunities for them in other sectors. The
rightsizing that would be needed to make Hondutel an
attractive target could prove to be too politically painful
to carry out, further jeopardizing any future privatization.


7. (C) Hondutel has begun authorizing &sub-operatorships8
to entice new entrants into the fixed-line services sector in
the run-up to de-monopolization. To date, 37 licenses have
been approved. However, Caballero said that figure is
somewhat misleading since permission for interconnectivity )
the key next step ) has been requested in only 18 cases, and
only 5 of those firms have actually begun offering services
to the public. In his view, this implies that the majority
of sub-operatorships were obtained for speculative purposes,
by investors who do not intend to provide services themselves
but hope to re-sell the concession for a profit in the
future. Those who are serious entrants, on the other hand,
upon receiving permission to interconnect, have only 90 days
to begin to offer services. Since it often takes six months
or more to install the network architecture, firms are placed
in the awkward position of initiating capital expenditures
before receiving interconnectivity licenses. Caballero cited
Communitel as an example, saying that they have already begun
work on their main building in Tegucigalpa. According to
Caballero, the 13 remaining firms have applied for
interconnectivity in the last 90 days, but have not yet begun
operations. Asked why there seems to be a sudden rush into
the market, he told us that there is a race for market share.
Once some entrants move forward none wants to be last, so
all are rushing to get in now. Caballero agreed, however,
that eventually there will need to be a consolidation of the
market in Honduras; the market simply is not big enough to
justify 37 separate fixed-wireless service providers.

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Motorola: A Foot in the Door
--------------


8. (C) On October 8, EconOffs met with Motorola officials
John Magee, Director for Central America and Caribbean, and
David Archilla, Area Sales Manager for Central America and
Caribbean, to discuss ongoing projects. In addition to being
a supplier to the telecommunications industry here and an
occasional consortium partner (as in the Communitel effort),
Motorola is also engaged in an Inter American Development
Bank project associated with the Chiminike Children,s Museum
to provide communications links to 100 remote centers
throughout Honduras. The required satellite dish has now
been set up and test communications have been established
with about half of the sites. Motorola has requested that
the Ambassador attend the project inauguration in November.
Privately, Motorola admits the project is a loss-leader, but
they hope the good will and name recognition engendered will
assist them in expanding their market base in Honduras.


9. (C) Motorola is also pushing forward with a USD five
million sole source supply contract to the Ministry of Public
Security for emergency communications. The contract was
approved in 2003, but must still be approved by both the
Minister and the President. According to Magee, the approval
from the Minister has not been forthcoming, despite clear
recognition by the communications experts at the ministry
that the new system is needed. Police forces currently use a
ten-year-old outdated Motorola system with insufficient
capacity, and for which it is increasingly difficult to find
spare parts. Furthermore, the current system operates in the
800 MHz band, while the new equipment could operate in the
700 MHz band, which is rapidly becoming a suggested world
standard for emergency operations. Post has requested
additional information on this contract from Motorola, and
upon receipt will make appropriate inquiries.


10. (C) On October 14, Managing Director Richard Rubin and
Senior I.T. Specialist Martin Morell of Project Finance
Advisors, LLC (PFA) updated EconChief on the status of PFA,s
proposal to build a fibre-optic backbone for the Honduran
telecommunications sector between the capital Tegucigalpa,
the business center San Pedro Sula, the north coast city of
Puerto Cortes, and thence connecting directly to the subsea
international cable. The pre-feasibility study for this
project, financed by the U.S. Trade Development Agency (TDA)
with a USD 300,000 grant, revealed strong economic and market
justifications for such a project. The backbone would
provide services to the service providers, and therefore
would not incur the &last mile8 costs of installation,
billing, or marketing. Rubin said PFA has approached a
number of major telecommunications firms within Honduras and
elsewhere in the region and found interest in both joining
the consortium and/or using the service. According to
Morell, the fibre-optic cables themselves would be strung
along the poles and rights-of-way owned by the parastatal
electricity company ENEE, yielding a cheaper and faster
installation than would be possible with buried cables.
According to Rubin, ENEE would like to be a member of the
consortium as well, but is currently prohibited by its
authorizing legislation from owning any assets outside of the
energy generation, transmission, or distribution sectors.
PFA will provide additional information on this project once
the full study is made available in about a month.

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Lucent: Looking for Our OK to Give It Away
--------------


11. (C) On October 7, EconChief met with Carlos Aviles,
Senior Manager for Lucent in Latin America, and Juan Carlos
Galan, New Business Manager for Lucent, to discuss a pending
Lucent proposal to donate USD five million worth of
CDMA-based switching technology to Honduran state telephone
monopoly Hondutel. Similar offers have been made by and
accepted from Ericsson and Siemens, each of which has already
launched GSM-based demonstration projects in more remote
regions along the borders with Guatemala, El Salvador, and
Nicaragua. Lucent wishes to compete on an equal footing,
defend its existing market share, and prevent de facto
lockout of CDMA technologies in the Honduran market. Lucent
officials requested that the USG publicly endorse the
donation as transparent and entirely above-board.In
particular, Lucent requested that the U.S. Embassy provide a
cover letter endorsing the donation, thereby protecting them
somewhat from any potential future allegations of improper
behavior. Post has requested (reftel) L/EB concurrence that
the proposed donation does not violate FCPA, and requested
suggested wording on a brief cover letter to Hondutel
endorsing the donation.

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Bio Information: Jose Renan Caballero
--------------


12. (C) In August 2004, Caballero became the Advisor on
Telecommunications on the President,s Commission on the
Modernization of the State. From 2003 through August 2004,
Caballero worked for the Nasser Economic Group,s
telecommunications arm in Nicaragua (Note: This is the same
group that was for a time a member of the founding consortium
of Megatel. End Note.) From 2002 to 2003, he was the Deputy
Director of state telecommunications firm Hondutel. Prior to
that, Caballero was from 1999 until 2002 the Managing
Director and Country representative for Sprint (later Global
One) in Honduras. From 1993-1999, he held a number of
middle-management positions in Hondutel. In the early 1990s,
Caballero received a Master,s degree from a U.S. university
(NFI),prior to which he worked as an engineer in Hondutel
from the mid-1980s onward. Caballero is in his late 40s and
is married.

Palmer
Palmer