ECUADOR NEGOTIATING NEW MOBILE TELEPHONE

C O N F I D E N T I A L QUITO 000346

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/17/2008
TAGS: ECON EINV EINT EC
SUBJECT: ECUADOR NEGOTIATING NEW MOBILE TELEPHONE
CONCESSIONS

REF: A. A: QUITO 293

B. B: QUITO 315


1. (SBU) Summary: The government of Ecuador is seeking
approximately $500 million from each of the two largest
cellular companies in Ecuador, to renew the companies'
concession contracts. On April 5, Telefonica announced that
it agreed on an undisclosed price for a 15-year contract
extension; Porta is still quietly negotiating. Possible
remaining hurdles include arbitration provisions and
service-outage penalties. End Summary.


2. (U) Both major mobile concession contracts in Ecuador are
set to expire in 2008: Porta's in August (68% market share;
owned by Telmex of Mexico),and Movistar's in November (28%
market share; owned by Telefonica of Spain).

Movistar/Telefonica Announces Progress
--------------


3. (C) On April 5, Movistar announced that it had agreed
with the GOE on the price and duration (15 years) of its new
contract. As negotiations began, Telefonica told post
privately that the GOE's quoted price was $480 million.
Since then, the company indicated that the agreed price was
&what they expected.8 Negotiations continue, however,
particularly on revising penalties for service outages (the
telecom regulator, Suptel, charges companies $200 each time
there is a technical lapse in service, regardless of the
cause).


4. (C) Movistar representatives cited two other concerns
that had surfaced in their negotiations. First, the GOE was
adamant that the contracts not contain arbitration
provisions; Movistar agreed to this. Second, the company has
expressed concern that Suptel is not an independent agency.


5. (SBU) Telefonica has invested $800 million in Ecuador,
including joint investments with state-owned Allegro (a small
mobile phone service provider) and the inauguration of a $40
million submarine internet cable in November of 2007.

Porta/Telmex Continue to Negotiate
--------------


6. (SBU) Porta remains in negotiations. Movistar says that
talks with both companies did not begin in earnest until the
week of March 12, despite President Correa's imposition of a
10-day deadline in February on Porta to accept the GOE's
proposal. The deadline came after months of press coverage
about Porta's alleged tax evasion, the GOE's efforts to
sanction the company, and speculation over whether the GOE
would renew its concession at all. (Note: given Porta's
market share and the absence of a viable alternative,
industry contacts have assumed that the GOE would continue to
work with Porta.)


7. (SBU) Post is unaware of the contract price quoted to
Porta. Movistar assumes it is higher than the price it
agreed to, based on market share, but the Mexican embassy
says that Porta believes the GOE is asking too much in
comparison to the prices of other concessions in the region.
Still, Porta wants to renew its contract, and has made
efforts to come to agreement with the GOE on tax issues
separately from the concession negotiations.


8. (SBU) Comment: At the same time that the GOE is
negotiating new mobile phone concessions, it has been
renegotiating petroleum and mining contracts (reftels A and
B). Until very recently, in at least a few of the cases
(Telefonica and two oil contracts),it appeared to be close
to reaching agreement on terms that were acceptable to both
the government and the companies involved. Correa just
announced that the oil company contract negotiations are
being shelved (septel),and it remains to be seen if the
Telefonica contract will go forward. It if does, the GOE
will substantially increase its revenue from the telecom
sector with the new mobile contracts; the contract prices are
considerably higher than the approximately $60 million each
company paid to enter the market in 1993 (but growth in
Ecuador over the last decade has been exponential, so the
increase seems appropriate). End comment.
Jewell