Identifier
Created
Classification
Origin
05QUITO2861
2005-12-15 21:37:00
UNCLASSIFIED
Embassy Quito
Cable title:  

A TALE OF TWO TELECOMS: ANDINATEL AND STEP-CHILD

Tags:  ECPS ECON EIND EINV EC XR 
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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

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