NEW HONDURAN TELECOM LAW PUT ON HOLD

C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 000271

SIPDIS

SIPDIS

STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, AND WHA/CEN
STATE PASS USTR

E.O. 12958: DECL: 02/13/2016
TAGS: ECON ECPS ELAB HO KJUS KPRV PGOV PINR
SUBJECT: NEW HONDURAN TELECOM LAW PUT ON HOLD


Classified By: EconChief PDunn for reasons 1.4 (B,D)


1. (U) SUMMARY: In the face of rising opposition, a new
draft telecommunications law designed to open the market to
competition and meet CAFTA requirements was not introduced to
Congress. A last-minute attempt to introduce competition
specifically into international calling was also derailed.
Key players now enjoying the near monopoly environment may be
the main obstacles for any future reform. END SUMMARY.

LAST MINUTE CALL UNANSWERED
--------------


2. (SBU) EconOff met with two of the three commissioners of
CONATEL, the GOH telecommunications oversight agency, on
January 12 to discuss the prospects of passing the proposed
telecommunications law (the &Ley Marco8) in the last few
days of the outgoing Congress (controlled by the National
Party). During the discussion, the commissioners described a
rising opposition to the law from representatives of the
Liberal Party, which was set to gain considerable power after
Liberal Party President-elect Jose Manuel &Mel8 Zelaya took
office on January 27. During the meeting, the commissioners
took a call from outgoing President Ricardo Maduro, who
informed the commissioners that the bill would not be
introduced and asked for other ways to open the market to
more competition.


3. (SBU) The commissioners responded with a final attempt to
introduce competition by extending the concessions (licenses
to compete) awarded under a program called &Telephony for
Everyone.8 The program, designed to expand telephone
service to outlying cities and villages, allowed certain
companies to compete in fixed line services by acting as
sub-contractors to parastatal telephone monopoly Hondutel.
The hastily drafted law (termed the Equity Law) would have
allowed about twenty companies authorized for fixed line
service to compete in the lucrative international calling
market. Despite calls from Ambassador to both then-President
of Congress Porfirio &Pepe8 Lobo (National Party) and
incoming President of Congress Roberto Micheletti (Liberal
Party) supporting the measure, however, the law failed to be
introduced. Per Lobo, resistance from the Popular Block (a
federation of leftist and anti-globalization civic groups and
labor unions -- including some workers from Hondutel) was
simply too difficult to overcome. (Note: This is a
questionable statement, given that the minor leftist Union
Democratica - Democratic Union - Party that supports the
Popular Block does not have the votes to block legislation.
End Note).


4. (C) Even before the legislative defeats, CONATEL,s
commissioners had indicated their concern that Liberal Party
opponents to the new law were preparing to propose a new
structure for CONATEL which would dramatically reduce the
number of concessions awarded in the future. The new
structure would potentially replace the three CONATEL
commissioners with just one and change the agency from an
independent organ to one under the jurisdiction of three
ministers. This structure, per the commissioners, was
adopted in Guatemala several years ago and since then ¬
one concession has been awarded.8 One commissioner would be
able to tightly control the flow of concessions, they
indicated, leaving the approval process in the hands of
political forces that would play to their own agendas rather
then benefit the market.

THE OPERATOR,S CONNECTIONS
--------------


5. (C) The commissioners freely speculated on where the last
minute resistance to the laws originated. The main culprit,
in their view, was Mexican telecom mogul Carlos Slim (owner
of AmericaMovil and TelMex) and his high-level connections
with the GOH. Megatel, one of the two existing cellular
companies, is owned by a Slim company (America Movil),and is
enjoying large profits on international calling and other
services in a near-monopolistic market. (Note: Former
President Ricardo Maduro reportedly was granted a large block
of stock options at the time Megatel was granted entry into
the Honduras market, but chose not to exercise them. Despite
specific contractual prohibitions on the re-sale of the
concession within the first two years of operations, Megatel
was sold in 2005 -- after less than one year of operation --

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to Slim. Late-night Congressional approval of the sale
fueled rumors of corruption. End Note.)


6. (C) If Slim is in fact behind efforts to stall
liberalization of the market, an additional possible
motivation for reducing competition would be to maintain the
value of Hondutel, which lies strategically between the
former state-owned companies in Guatemala and Nicaragua --
both now owned by Slim. Not coincidentally, the sale of
Hondutel broke down several years ago when only one company
made an extremely low bid for the unit. The bidder was
Slim,s Telmex, the former state-owned company in Mexico.

HOW (NOT) TO BREAK-UP A MONOPOLY
--------------


6. (U) Up until December 25, 2005, Hondutel, the state-owned
fixed line company, had a monopoly on all calling services
except wireless. Mobil company CelTel (owned by Milicom
International of Luxembourg and Motorola) had been the sole
operator on the wireless side from 1994 until 2003, when
MegaTel (now wholly owned by America Movil of Mexico) entered
the market. On December 25, 2005, Hondutel,s monopoly
expired on key services, particularly the high margin
international calling, leaving the market open for all
eligible companies to complete international calls without
going through Hondutel,s network. Without the new
legislation, only CelTel and MegaTel are now allowed to
compete in this newly opened market segment. The cell phone
providers immediately dropped rates by 50 percent, but
experts argue that real competition would lead to a further
reduction in calls to the U.S. of at least another 50 percent
(from 89 U.S. cents per minute to under 20 cents.)


7. (U) December 2005 was also the month for two key
legislative proposals to be introduced. One was the Ley
Marco, or framework law, that would immediately allow about
forty companies already approved for any type of
telecommunications service under Telephony for Everyone to
compete in lucrative areas such as wireless service and
international calling. A universal service fund would also
be created to continue expanding service into rural areas,
offsetting Hondutel,s expected revenue loss from increased
competition. Introducing the Ley Marco while the Hondutel
monopoly was ending would move the market from a monopoly to
open competition without having to go through a tight
oligolopic phase of just Hondutel, CelTel and MegaTel.


8. (U) The Ley Marco includes several key provisions that
meet the technical requirements of CAFTA. According to
Conatel experts, the current telecom law does not
sufficiently address requirements for: service resale, number
portability, competitive safeguards, unbundling of network
elements, universal service, and transparency. Consequently,
passage of the Ley Marco is deemed essential for successful
passage of CAFTA. USTR is currently reviewing proposed
changes to the existing telecoms law that would fix these
non-compliance areas -- thus allowing CAFTA entry into force,
but not addressing the larger issue of bringing real
competition to the sector.


9. (U) The other key pending legislative proposal -- the Law
to Restructure Hondutel -- was meant to attract foreign
investment to Hondutel. Proposed by the GOH modernization
committee, the law would create a holding company that would
allow Hondutel to issue shares, opening the door to new
foreign investment without having to sell the company as a
whole. Strategic areas held by Hondutel, like fixed network
coverage in major population centers, the technological
ability to compete in wireless, and data services would
benefit from fresh capital and improve the company,s ability
to compete in the new environment. This legislation was
slated to be introduced at the same time as the Ley Marco,
responding directly to critics, complaints of Hondutel,s
inability to compete in the new competitive environment.


10. (C) COMMENT: With the Ley Marco on hold, the main focus
of the outgoing CONATEL representatives was to sidetrack the
Liberal Party,s initiative to restructure CONATEL and gain
control over the concession process. While the initiative
was not introduced in the last Congress, the new Liberal
Party dominated Congress may see it as a way to pass the
CAFTA-compliant Ley Marco while retaining control over
competition. Ambassador delivered a non-paper to

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President-elect Zelaya on January 13 that reiterated the need
for the Ley Marco while arguing against a new CONATEL
structure. Post will continue to support this view as CAFTA
implementation talks resume in February. END SUMMARY.
Ford