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