ECUADOR APPROVES CONTENTIOUS MOBILE CONCESSION

C O N F I D E N T I A L QUITO 000415

SIPDIS

E.O. 12958: DECL: 05/09/2018
TAGS: ECPS ECON EINV EC
SUBJECT: ECUADOR APPROVES CONTENTIOUS MOBILE CONCESSION
CONTRACT WITH AMERICA MOVIL

REF: A. QUITO 346

B. QUITO 351

C. QUITO 365

Classified By: Classified by DCM Jefferson Brown; Reasons 1.4 (b) and (
d).


1. (SBU) Summary: After a week of tense brinksmanship, the
Government of Ecuador has come to agreement with America
Movil subsidiary and majority market share holder Porta, to
renew its mobile phone concession for 15 years. While the
company has been silent, the press has speculated it will pay
near the amount demanded by the GOE, reportedly $480 million.
End Summary.


2. (U) On April 29, the GOE rejected Porta's third offer to
renew its mobile concession (reportedly $307 million),and
asserted that it would sever its relationship with Porta.
The country's Telecommunications Secretariat, Senatel,
announced that it would begin plans on May 5 to assume
control of Porta's technical network when its concession
expires in August. Conatel, the national advisory council
that oversees Senatel, said it would offer a new tender
within the next few months, with an eye to having some public
participation in the new operator.


3. (U) On May 5, Daniel Hajj, president of America Movil, a
Telmex subsidiary (Hajj is the son-in-law of Telmex owner
Carlos Slim) arrived from Mexico to meet with President
Correa. Hajj presented a fourth offer, which Correa accepted
and characterized as "convenient to the interests of
Ecuador." The press reported on May 7 that Porta agreed to
pay $480 million; Senatel announced late on May 6 that the
government had "achieved $700 million" from the two private
mobile concessions.


4. (SBU) This, and other press reports indicate that the
amount paid by Movistar (a subsidiary of Spain's Telefonica)
for its concession in mid-April was much lower than
previously hinted by the company (reftel a); namely that it
paid $206 million to renew the concession (instead of $480
m),but with the promise to invest another $400 million over
the next 15 years. Given the lower price paid by Movistar,
Porta claimed the GOE was asking it to pay more for an
"identical concession." Senatel responded that Porta's
concession clearly holds more market share and that its
relationship with the government is different (likely a
reference to the GOE's displeasure with Porta over back taxes
of $153 million). Senatel clarified that both concession
contracts are entirely new contracts, and not just renewals.


5. (C) Prior to this latest round of brinkmanship, Porta
contacts told the Embassy Commercial Office that they feared
the company would be charged more than Movistar for the same
concession, even though the company uses the same bandwidth
and provides the same services. These contacts pointed out
that while they hold greater market share, this does not
necessarily yield greater revenue, since a majority of their
clients purchase pre-paid services, which are notably less
profitable than the post-paid services that make up most of
Movistar's business. They also said, however, that to drop
the concession entirely would be more costly for Porta than
paying a high price to renew it, given the fact that it would
probably be difficult to sell their investment if they were
to leave. A senior Porta executive told Guayaquil Consul
General that Porta was "satisfied" with the final agreement,
as it allows Porta to pay half of the concession fee at the
back-end of the concession and it provides Porta with
additional spectrum to offer high-margin enhanced services.


6. (C) Comment: The relationship between Porta and the GOE
over the last year has been tense, certainly more so than the
GOE's relations with Movistar. This in part reflects a
difference of philosophy over how to price the concession and
whether a company with a larger market share should pay a
premium after building up its business. However, it also
reflects Porta's aggressive use of deductions in its tax
practices, record profits this year, and several notable
service failures.


7. (C) Comment, continued: In the end the two sides backed
down from brinkmanship and reached an agreement. These
negotiations, combined with the government's decision to
suspend contract negotiations with oil and mining companies
(reftels b and c),reflect the uneven, unpredictable, and

skeptical view that the government has towards companies
operating in strategic sectors. Clearly the government wants
to obtain more revenues for the state from these concessions,
and while it pushes for those revenues in a clumsy manner, it
appears that (at least thus far) it prefers that the private
companies continue to operate the concessions rather than
have the government take them over. End comment.
Jewell