TELECOMMUNICATIONS, THE FTA, AND THE NEED FOR

C O N F I D E N T I A L SECTION 01 OF 03 BOGOTA 000224

SIPDIS

STATE PLEASE PASS TO USTR: KENNETH SCHAGRIN

E.O. 12958: DECL: 01/07/2015
TAGS: ECON ECPS CO FTA
SUBJECT: TELECOMMUNICATIONS, THE FTA, AND THE NEED FOR
PRIVATIZATION

REF: A. REFTEL A: BOGOTA 12921

B. REFTEL B: BOGOTA 12925

C. REFTEL C: BOGOTA 10132

Classified By: Deputy Chief of Mission Milton K. Drucker for reasons 1.
4 (b) and (d).


1. (C) Summary. While the telecommunications chapter in the
Andean Free Trade Agreement (FTA) should conclude at the next
round, Colombia will be unable to fully enjoy the benefits of
the chapter without either privatization or joint ventures as
well as more autonomy for the Colombian Regulator (CRT).
Nevertheless, significant opposition to privatization exists
from various sectors in Colombia. In general, the sector
enjoyed a good year in 2004, especially in the wireless area,
but continued growth faces important structural obstacles.
End Summary.

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Background
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2. (C) The telecommunications sector as a percentage of GDP
reached 2.8 percent for 2003 and is expected to grow to 3
percent of GDP for 2004. There are only three long distance
operators, two state-owned and one 50 percent state-owned,
three cellular operators, two private and one state-owned,
one private trunking operator, and over a hundred local
landline operators, many of which are unauthorized. All
three long distance operators are losing market share to the
cellular operators, and industry experts state that as
individual companies, none of them are able to compete
against the capital-rich private carriers. Corruption
continues to be a major problem for the state-owned
companies. This compelled the Colombian negotiating team to
request U.S. assistance, in the form of a side letter, in the
telecommunications chapter of the FTA. In the face of a free
trade agreement (FTA) with the U.S., industry experts claim
Colombia's telecommunications sector needs to privatize to
gain more capital and provide better infrastructure, reduce
corruption, lower international phone charges and compete
more effectively.

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Where The Telecommunications Sector Is Heading
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3. (U) Over the last two years Colombia has experienced the
rapid growth of mobile and internet networks. According to
the Regulatory Commission on Telecommunications, in 2003
mobile and internet users increased by 33 percent and 60
percent, respectively, from 2002. In mid 2004, the number of
mobile users surpassed the number of landlines. From 2000 to
2003, the overall penetration of mobile and internet services
for every 100 Colombians increased from 5.3 percent to 13.9
percent and from 2.1 percent to 6.24 percent, respectively,
while landlines remained at 17 percent. Earnings generated
by mobile and internet networks represented 28 percent of
total earnings for the telecommunications sector for 2003.


4. (C) The boom of mobile communications continues with the
recent sale of BellSouth (Latin America) to Telefonica. The
two main mobile service providers, Telefonica and Comcel,
control more than 80 percent of the Colombian mobile market.
The other mobile company is Colombia Movil or "Ola", which is
jointly owned by Empresas Publicas de Medellin (EPM) and
Empresas de Telecomunicaciones de Bogota (ETB),both owned by
municipal governments. According to industry experts, Ola is
in dire straits with its former president under investigation
for mismanagement of funds, unsatisfied customers due to an
increase in dropped calls and an unsustainable business plan.
Another player in the mobile market, but without a mobile
license, is Avantel, a U.S. trunked operator. Avantel uses
technology similar to Nextel and had been in the Colombian
market since 1998. Without a mobile license however, the
other mobile operators refuse to interconnect with Avantel,
causing Avantel to drop in market share from 7 percent to 1.5
percent. On December 16, President Uribe signed Decree 4239,
granting full interconnection rights to trunking operators,
including Avantel. Although this is good news for Avantel,
the conditions and enforcement measures will be the key test
for Avantel's success. According to the Colombian
Association for Cellular Operators (ASOCEL),Sprint-Nextel
will buy Avantel if Avantel achieves the same access given to
mobile operators.

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A Voice of Reason
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5. (SBU) A major blow to the state-owned companies came when
Colombia's national telecommunications company,
Telecomunicaciones de Colombia, declared bankruptcy in 2003.
The end result was a "leaner" new company called Colombia
Telecomunicaciones or "Telecom", which currently does not own
the assets of the bankrupt company, but utilizes them to
ensure continuity of phone service to over 900
municipalities. Its president, Alfonso Gomez, realizes the
challenges Telecom faces and told econoff that Telecom will
focus on Internet and Voice over Internet Protocol (VoIP)
services. The young and innovative president also
understands that the capital-strapped state company cannot
compete head to head with the private telecoms. (One saving
grace that these state-owned telephone companies have is
time; the expiration date for the exorbitantly priced long
distance license fees (USD 150 million) is 2008, Reftel B).

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Talk of a Merger
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6. (SBU) Gomez met in late November to discuss a merger with
the other two long distance operators, Orbitel (which is
owned by the Medellin city government) and ETB (owned by
Bogota's city government). Following the merger meeting,
then-Vice Minister of Communications, Maria Paula Duque, said
"with the entry of multinationals and soon the FTA, the
state-owned telephone companies have realized that the only
way to compete in the future is to have better economies of
scale." Although her statement is correct in principle, the
idea of having an even larger state-owned player in the
telecommunications sector is worrisome to foreign investors
as well as to consumers. Duque believes that from a
management point of view, a merger is an excellent idea, but
according to industry experts it is counterintuitive to
providing a transparent and competitive sector. The problem
with a merger of the state-owned telephone companies, which
combined have 87.5 percent of the total land lines in
Colombia, is that Colombia's telecommunications land-line
sector would become a nontransparent and noncompetitive
market. Viewed in conjunction with the close ties between
the telecommunications regulatory authority and the GOC, this
could easily reinforce rigidities in the regulatory regime
related to licensing and interconnection policies.


7. (C) In the sixth round of FTA negotiations, which
followed the merger meeting in Colombia, the U.S. negotiator
directly asked the Colombian negotiator if the
telecommunications sector in Colombia was becoming less
competitive due to talks of a merger. The Colombians refused
to acknowledge any talk of a merger and asserted that nothing
to date has affected the competitive climate in Colombia.
Since the round, there has been no talk of a merger in the
press or in the halls of the state-owned telephone companies.

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The FTA
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8. (C) The GOC is heading into the seventh round of the free
trade agreement negotiations intent on preventing a carve out
for mobile communication service providers (found in CAFTA
and other U.S. FTA agreements),not in the interests of the
Colombian mobile sector and the public, but in the interests
of the government and the state-owned telecommunications
companies. The state-owned companies feel that it's unfair
that obligations set forth in the FTA only apply to
fixed-line companies. Other issues to be addressed are
illegal phone traffic and transparency.


9. (C) During the sixth round, the Colombian negotiators
again asked for U.S. assistance to combat illegal
international phone traffic, originating in the U.S. (Reftel
C),via a side letter. Although the issue is still being
negotiated, the FCC could not police the corruption within
Colombia's state-owned telephone companies. The illegal
traffic is almost exclusively using Voice over IP technology
and the only companies that have access to VoIP are the
state-owned phone companies. These companies also have a
monopoly on both long distance and internet services. Thus,
one part of the company is profiting from the illegal
activity, while hurting the other.

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Word On The Street
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10. (U) A few telecommunication conferences have paralleled
the FTA negotiations and have all focused on Colombia's
future and the need for further deregulation. Many of the
speakers have focused on the need to modernize the industry's
operations and infrastructure via foreign direct investment.
They mentioned that public telecommunication companies,
primarily ETB, Telecom, Orbitel, EPM, and EMCALI, should look
to merge with private companies because the public sector
does not have adequate access to capital and cannot react
quickly to technology changes. Further, it has weak
administrative and commercial departments, high labor costs
and antiquated networks.


11. (U) Arguments against the privatization of the
telecommunications sector span the commercial, financial and
political spectrums. They assert that privatization will
reduce national coverage, cut Colombian jobs and defy the
1991 Constitution (the Constitution states that the Colombian
government must provide public services to all Colombians and
telecommunications is a public service). The political
opponents to privatizing claim that due to Colombia's high
poverty level, privatization of the sector will force
telecommunication operators to focus only on profitable
regions in Colombia, leaving antiquated networks or no
networks in rural and poor urban areas. Currently, Telecom
is required to provide telecommunication services to all
areas in Colombia, but if it privatized, opponents believe
that Telecom would focus on the cities and bypass the rural
poor areas. Commercial and financial opponents believe that
privatizing would invite the major foreign telecommunications
providers to enter the Colombian market, buy out the
parastatals, slash Colombian jobs by the thousands, and
reduce the government's revenues.


12. (C) Those against privatization consist of the Ministry
of Communications, municipal officials, mayors, and obviously
the state-owned operators. Colombian FTA negotiators are
quick to point out that the privatization section of the
telecommunications text had been previously deleted in prior
U.S. FTA agreements. Lucho Garzon, mayor of Bogota, is the
most vocal against privatization of the telecommunication
sector, (Garzon and his own ETB, the second largest
telecommunications operator in Colombia, provide the city
with considerable revenues.) Medellin's mayor and council,
who own EPM, the third largest telecom in the country, share
a similar view.

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Trade Development Agency and the New Telecommunications Law
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13. (C) The Trade Development Agency has awarded a contract
to a telecommunications consulting firm to conduct a market
study for the Ministry of Communications. Areas to be
studied are long distance license fees, deployment of
broadband networks, the competitive environment of mobile
communications, and enforcement mechanisms of the Ministry of
Communications and CRT. The group will also propose policy
options for the Ministry and CRT regarding spectrum, VoIP,
license fees for new cellular and long distance operators,
and unbundling. According to Ministry of Communications'
officials, the study's findings will be used to help draft a
new telecommunications law, which will be presented to
Congress in March 2005. A key aspect of the study will be a
proposal for a more autonomous regulator. Although CRT
officials are in favor of a regulator independent of the
Ministry, CRT officials, to include the Director, claim that
the Ministry of Communications will not be in favor of
relinquishing their hold over the CRT.
WOOD