A TALE OF TWO TELECOMS: ANDINATEL AND STEP-CHILD

UNCLAS SECTION 01 OF 04 QUITO 002861 SIPDIS E.O. 12958: N/A TAGS: ECPS ECON EIND EINV EC XR SUBJECT: A TALE OF TWO TELECOMS: ANDINATEL AND STEP-CHILD PACIFICTEL SENSITIVE ¶1. (SBU) Summary. Established when the GOE broke up former state telecom Emetel in 1997, Pacifictel and Andinatel have taken divergent paths since their formation. While Andinatel has transformed itself into a profitable enterprise with a new corporate culture, an overstaffed and undeveloped Pacifictel has endured a scandal-filled life. Repeated efforts to privatize the management of the two telecoms have failed due to accusations of corruption and political intrigue surrounding Pacifictel. Pacifictel's ruinous path reflects the negative impact that entrenched political interests and corruption have on the Ecuadorian economy. Recent events at Andinatel suggest that political forces are now intent on looting it the way they have looted Pacifictel. End Summary. THE BIRTH OF TWO TELECOMS -------------- ¶2. (U) As the first step in an aborted attempt at privatization, in 1997 regulators broke up state-owned telecom company EMETEL into two companies, Andinatel and Pacifictel. Andinatel received the exclusive right to service 12 provinces in northern and central Ecuador while Pacifictel became responsible for service to the other 10 predominantly coastal provinces. Regulators also granted both companies the exclusive right to provide long distance services for their regions. Although they technically became private companies in 1997, the GOE, through state holding company Fondo de Solidaridad (FS),still owns 100% of Andinatel and Pacifictel. Andinatel and Pacifictel expanded beyond their fixed-line operations in March 2003 when they jointly started mobile operator Telecsa. Telecsa competes with Spanish-owned Movistar and Mexican-owned Porta for cellular service within Ecuador. TWO DISTINCT PATHS -------------- ¶3. (SBU) While Andinatel has evolved into a profitable, reasonably well-run state-owned enterprise (SOE) over the past 8 years, Pacifictel has been repeatedly looted by the various coastal political parties, being driven to the point of bankruptcy and operating with out-dated hardware and ineffective personnel. In comparison to Andinatel's growing profits (from $41 million in 2001 to $68 million in 2004), Pacifictel has generally posted losses ($52 million in 2002 and $7 million 2004). Further undermining faith in its profitability, Pacifictel consistently makes unexplained (downward) revisions of its losses, sometimes more than 6 months after the fact. While the walls of the Andinatel President's office are adorned with awards and his company accounts for 93% of the (generally lackluster) earnings of the SOEs in the FS portfolio, reports of Pacifictel's imminent bankruptcy appear annually. (The FS also holds the shares of some 25 electrical companies in the country.) ¶4. (U) The contrast between the services provided by the two fixed-line telecoms is striking. With respect to new telephone lines, Andinatel has installed 600,000 new lines over the past 6 years while Pacifictel has installed less than a third of that number. Meanwhile, a plan by Andinatel and Pacifictel to lay fiber optic wire and link the two companies' fiber networks remains unrealized because of Pacifictel's incompetence. As Andinatel was completing its network in mid-2004, Pacifictel was nullifying the contract it had entered into to expand its fiber network, leaving 2,000 miles of fiber cable unused and in warehouses. In addition, Andinatel and Pacifictel's cellular venture is no longer "joint." Pacifictel's inability to provide agreed- upon investments led it in February 2005 to sell off its share of Telecsa, which is now owned entirely by Andinatel. ¶5. (U) End users' ratings of the two telecom's services are consistent with this comparison. A June 2005 customer satisfaction survey of mobile and fixed-line operators in the country ranked Andinatel first with 55% of clients describing its services as good or excellent. Pacifictel came in second to last in the survey, with just one third of its customers rating its services as good. Indeed, reports by regulators in 2002 and 2004 indicated that some 30% of Pacifictel's lines were not operating in any given month. Pacifictel's poor service and inability to modernize and expand operations have led FS to try auctioning off the management of the company to outside investors. Thus far, none of these annual auctions have succeeded. ¶6. (U) Recent activity suggests Pacifictel's downward trajectory will continue. Pacifictel's 2004 numbers are not encouraging. Since 2000, the company's fixed assets have deteriorated by $61 million and total equity value has fallen by $99 million. Revenues in 2004 were actually down 3% compared to 2003 figures. Finally, Pacifictel's debt is now 81% of equity, compared to 47% in 2000. PACIFICTEL: OVERSTAFFED, UNDERDEVELOPED, AND CORRUPT -------------- -------------- ¶7. (U) Pacifictel's mess is tied to corrupt personnel and infrastructure development policies. Pacifictel's contracts for expanding and modernizing operations consistently are disadvantageous to the company and fail in their aim to attract needed investment. Such contracts have revealed scandals in the procurement of security and billing services, the purchase of equipment and software, and the purchase of insurance policies. ¶8. (U) One of Pacifictel's biggest problems is the quantity and quality of its employees. To begin with, Pacifictel has approximately 3,500 employees. (Andinatel has slightly more than 2,000.) Wages represented more than 60% of the company's operating costs in 2004. It is outlaying 240% more in wages than it was in 2000. Of the 3,500 employees, some 2,000 of them provide security and only 100 are technicians. The rest are lawyers or work in administrative capacities. ¶9. (SBU) Superintendent Ivan Burbano of the Superintendencia de Telecomunicaciones (Suptel),the government entity that is charged with enforcing telecom regulations, claims that bloated and inappropriate staffing is due to corrupt contracting practices. That is, Pacifictel managers receive kickbacks for signing unnecessary and overpriced contracts with employment agencies such as those providing security services. Lacking a properly developed staff of engineers, managers also are able to contract out for technical services to repair broken lines, often under similarly suspicious circumstances. ¶10. (U) Corrupt contracting decisions are not restricted to personnel matters. Contracts for infrastructure development also have come under suspicion. In 2004 alone, Pacifictel had to cancel contracts with three suppliers in response to public allegations of corruption. One of these contracts was to provide $100 million to install equipment and phone lines. Other allegations of wrongdoing led to the investigation of a contract awarded to China's ZTE Corporation to install fiber-optic cable. In the face of public scrutiny, Pacifictel was forced to demand the nullification of the ZTE contract after it was revealed that ZTE had illegally sub-contracted the installation of the cable and that this installation never took place. In the end, Pacifictel paid $3 million for fiber optic cable that never made it out of Customs. ¶11. (U) A good example of Pacifictel's suspicious contracting practices is a contract it signed with Transferdatos, an Ecuadorian company that provides video, voice, and data services. Under the contract, Transferdatos was to install communications equipment and provide data transfer and other services. However, the contract was deficient in several respects. To begin with, the equipment sold would be obsolete by the time it was paid for, in December 2005. More importantly, under the contract's clauses, Transferdatos was allowed to recoup all of its operating costs while Pacifictel assumed almost all of the obligations. For instance, Pacifictel was responsible for the transmission platform that Transferdatos would use, the management of interconnections with other operators, the provision of collection services on behalf of Transferdatos, the rent of office space for Transferdatos, the gas used in Transferdatos' vehicles, etc. These clauses essentially required Pacifictel to cover the costs of the services that Tranferdatos was being paid to provide. A rather nice arrangement for Transferdatos, made possible, most likely, by kickbacks to the Pacifictel managers who agreed to the contract. ¶12. (U) Illegal bypass connections established in Pacifictel's offices are yet another example of corruption in the sector. Bypass operations capture incoming international long-distance traffic and redirect it as local calls. This practice has plagued both Andinatel and Pacifictel. Andinatel and Pacifictel should be collecting interconnection charges for these international calls, but they do not, losing out on revenues. Suptel discovered 16 such bypass operations in 2003 and even more in 2004. More recently, a crackdown by Suptel in February 2005 discovered a bypass operation consisting of some 48 lines that would provide access to over 20,000 lines in Pacifictel's switching center. ¶13. (U) Corrupt contracting obviously takes it toll. A November 2004 assessment claims that corruption has directly cost Pacifictel at least $100 million since its inception. In addition, lawsuits totaling $157 million have been brought against Pacifictel and remain unresolved. Many of these lawsuits originate with foreign long distance carriers claiming that Pacifictel is withholding outstanding interconnection fees regarding the termination of international telephone calls. INVESTMENT AND PRIVATIZATION UNDERMINED -------------- ¶14. (U) Pacifictel's poor record has forced the FS to seek outside investment and administration to guide the telecom and avoid the influence of local politics. In this effort, FS has been conducting, starting in 2000, public auctions to award management contracts. While the auctions try to address management concerns at Pacifictel, they also are part of an overall effort to privatize the telecom industry in the country. ¶15. (SBU) All four of the public auctions to date have failed to secure foreign capital and private-sector management. This failure is generally tied to foreign investors' concern about the corruption within and political influence over Pacifictel. A good example was the 2002 effort to award an 8-year management contract. FS declared an end to that offering in May of that year after the lone applicant Swedtel pulled out. Swedtel, a Scandanavian telecom and subsidiary of Telia, declined to make the required guarantee payment because of uncertainty surrounding an outstanding lawsuit against Pacifictel by the Ecuadorian company Telefcom. The lawsuit by Telefcom, a shell company created during the auction and with a net value of only $800, was part of a strategy to disrupt the auction. That strategy also included a $50,000 advertising campaign, paid for by Telefcom, to stir up public opinion against the process. According to Alejandro Rivadaneira, the FS president at the time, powerful political and economic interests created Telefcom to undermine the privatization process. These interests included both politicians who were accustomed to receiving campaign funding from Pacifictel as well as Pacifictel's suppliers that wanted to maintain their advantageous contracts with the company. The unfounded lawsuit by Telefcom was left standing until Swedtel withdrew its bid. The following day, the judge made a swift decision to throw out the suit. ¶16. (U) Further attempts to seek outside investment and management for Pacifictel and Andinatel have failed due to similar uncertainty. In 2003, seven bidders entered into discussions with FS, but by the end of the year all had pulled out for unspecified technical reasons. In 2004, Eurocom consortium, which is controlled Norway's Telecom Management Partners, attempted to conduct a $120 million investment in Pacifictel, Andinatel, and Telecsa. That process was cancelled when it was determined that Eurocom did not meet the requirements laid out in the bidding rules. ¶17. (U) FS's current attempt to find an administrator for its telecoms is scheduled to be completed in the last week of December 2005. Attempting to avoid past failures and to ensure transparency, the FS has called on the International Telecommunication Union (ITU),to run the process. The final stages are to take place in Geneva. MANAGEMENT AND GOE INSTITUTIONS UNHELPFUL -------------- ¶18. (U) Instability in Pacifictel's board is commonplace. Pacifictel has had ten presidents in the last five years. In July 2005, the Pacifictel Chairman resigned after only 47 days in office. Last month, the entire Pacifictel Board (along with that of Andinatel) was changed. Some suggest that the rapid leadership turnover precludes any real management of the company, allowing corrupt lower-level managers to take advantage of the constant change at the top. However, the reality is that changes in management are the result of constant political infighting over who receives the kickbacks. ¶19. (U) This infighting played out on a larger scale when the administration of President Gutierrez attempted to wrest control of Pacifictel from the coastal parties and in particular the Social Christian Party (PSC). Gutierrez's efforts, which came to a head in March and April 2004, included replacing top-level managers at Pacifictel with close associates and family members, to include his cousin Renan Borbua, who also was a congressman. Challenging the interests of the PSC triggered a response from Leon Febres Cordero, the leader of the PSC and former President of Ecuador (1984-88),who publicly and successfully attacked Gutierrez and his "circle of intimates" involved in Pacifictel. (This attempt by Gutierrez mirrors the common Ecuadorian practice of "sharing the wealth" with associates. Indeed, a reported 20 military officers involved in a 2000 military coup led by Gutierrez received bureaucratic posts in his administration.) ¶20. (U) Meanwhile, government institutions are strategically positioned to block change at Pacifictel. Structural changes within Pacifictel, for example, require the support of the Telecommunications Council. The Council includes among its six members, representatives from the military, the Vice-President's office, the Secretariat of Production, and the worker's union. Thus, the economic interests that these groups have to maintain current corrupt practices at Pacifictel could undermine efforts to privatize the management of the telecom because of their influence on the Council. As we saw with the Telefcom suit, the judicial sector also can facilitate corrupt activities. COMMENT -------------- ¶21. (SBU) In Ecuador, the corrupt business practices found in Pacifictel are not uncommon. There are ample opportunities for rent-seekers at all levels to take advantage of the considerable and duplicative bureaucracy. These would include employees and management within companies, unions, GOE regulators, "oversight" entities such as the FS, and the variety of politicians who benefit from the slush funds created by kickbacks. In many cases, embedded interests run across these actors, making the web of corruption strong and lasting. JEWELL