COSTA RICA'S TELECOM MONOPOLY PREPARES FOR CHANGE

UNCLAS SAN JOSE 002750

SIPDIS

WHA/CEN

SIPDIS

E.O. 12958: N/A
TAGS: ETRD EINV ECIN ELAB PGOV CS
SUBJECT: COSTA RICA'S TELECOM MONOPOLY PREPARES FOR CHANGE

REF: SAN JOSE 2041


1. SUMMARY. With CAFTA-DR ratification slowly moving forward, and
telecom competition on the horizon, Costa Rica's telecom monopoly,
ICE, (Instituto Costarricense de Electricidad) is making moves to
modernize under new ICE President, Pedro Pablo Quiros. The new ICE
leadership is clearly engaged in strategic preparation for the
future, spurred to action by the specter of competition. For
instance, ICE recently announced that it will invest US$20M to
install 8,000 new multi-use public pay phones and has started
offering Wi-Max internet service in selected areas. ICE also
recently began offering higher speeds of internet service at about
half previous prices through its subsidiary internet service
provider. Meanwhile, to counter union opposition to CAFTA-DR, Quiros
is by-passing union leadership and meeting directly with rank and
file members weekly to explain that with recently enacted executive
decrees and pending legislation, ICE can effectively compete in an
open market. END SUMMARY.


2. PHONE LINES: CAFTA-DR requires that Costa Rica open its telecom
market to competition for wireless service, data transmission and
internet services when the treaty enters into force. Breaking up
part of the government telecom monopoly is arguably the most
contentious step. ICE is one of the most popular public
institutions in Costa Rica for delivering land lines to 65% of homes
nationwide (at the reportedly low cost of US$8 per month),and plans
to expand coverage (via public phone) to the remaining (mostly
low-income) 35% of households, which rely heavily on public phones.
Currently 400 aging pay phones, many of which are broken, are
installed in the metropolitan area which has a population of
approximately two million people. These old pay phones are being
replaced by 8,000 new public phones with modern technology that will
cost about $2,500 per phone and will be installed throughout the
country. The new phones will have text messaging and e-mail
capability and will accept tokens, a new generation of prepaid phone
cards with computer chips, as well as the older prepaid "Viajera
199" card.


3. INTERNET: According to ICE, in 2003 only 0.6% of Costa Ricans
had access to the internet. Now 22% of Costa Ricans have access,
primarily via offices and internet cafes, although residential
installations continue to increase. In the past several months
ICE's internet subsidiary has announced the availability of faster
internet speeds at about half previous prices, and recently the
current monopoly provider began offering Wi-Max service in two
upscale suburban neighborhoods. The new ICE leadership is clearly
engaged in strategic preparation for the future, spurred to action
by the specter of competition.


4. MOBILE SERVICE: ICE's president recently stated that 35% of
Costa Ricans have mobile phones, up from 3.6% in 2000. ICE's
wireless infrastructure is sorely taxed and although there are
plenty of cell phones for sale in the local market, there are long
waiting lists to activate service. An industry source says that the
tortuous public contracting process is partly at fault. In December
2002 ICE issued public tenders for the purchase of 600,000 cell
phone line (GSM) infrastructure. Ericsson was the successful bidder
at US$130 million. By the time the contract was finally awarded --
nearly 28 months later -- the technology was already outdated and
worth only about US$65 million. ICE thus ended up paying a hefty
premium for outdated technology as a result of such slow processing.



5. The same industry source says that additional cell phone
infrastructure is badly needed. Because of the lengthy contracting
process ICE will probably extend the Ericsson contract, purchasing
more outdated technology, at an increasing premium as the market
value of the old technology continues to decline. The industry
source summed it up aptly: ICE's current contracting process is
longer than product lifetime. It is one of the reasons the ICE
President has on his list of needed reforms, "a more agile and
efficient contracting process".


6. LEGISLATION AND DECREES: Some of the reforms requested by ICE
President Quiros were included in an executive decree recently
signed by President Arias. Others that require legislation are
included in a bill known as the "Strengthening ICE Law". In that
bill, in addition to improved contracting authority, ICE is asking
for more autonomy, the capacity to make investments, and the ability
to operate internationally and form strategic alliances. This
strengthening legislation is an important bargaining chip being used
to convince the politically strong ICE union to accept breaking its
monopoly in the wireless and data segments of the market.

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COMMENT
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7. LEADERSHIP MATTERS: ICE President Quiros has proven to be an
adept choice by President Arias to lead the public telecom agency in
a time of change. Arias's first selection to head ICE lasted only
four months. Quiros's previous ICE and international work
experience lend him credibility. He is engaged in a very active
campaign to convince both internal and external audiences that ICE
can compete effectively in an open market. He recently told the
Charg that he meets weekly with union rank and file, by-passing
obstinant union leadership, to discuss the changes and opportunities
that lie ahead. In addition, he regularly appears in public fora
where he pitches the same story. Post expects Quiros to be a very
effective witness in the upcoming Asamblea hearings on bills to
strengthen ICE and open the telecom market.

FRISBIE