NICARAGUA TELECOM SECTOR: MARKET OPEN, BUT

UNCLAS MANAGUA 000562

SENSITIVE
SIPDIS

DEPT PASS USTR
DEPT FOR EEB/CIP/BA TIM FENTON
DEPT PASS FCC TOBERT TANNER
DEPT PASS DOC/ITA/OTEC ANDREW BENNETT

E.O. 12958: N/A
TAGS: ECPS ECON EINV ETRD TINT NU
SUBJECT: NICARAGUA TELECOM SECTOR: MARKET OPEN, BUT
COMPETITION 'SLIM'

REF: A. MANAGUA 02474

B. MANAGUA 01343


1. (SBU) Summary: The head of Nicaragua's telecommunications
regulator, TELCOR (Instituto Nicaraguense de
Telecomunicaciones y Correos),announced in April 2009 that
it would begin consultations to reform Nicaragua's telecom
legislation, known as Law 200. As currently drafted, Law 200
fails to foster competitive investment in the sector, as
envisioned by CAFTA-DR. In fixed-line telephony, the former
government-operated telecommunications company Enitel, now
owned by Mexican billionaire Carlos Slim's America Movil, has
100% of the market and operates a de-facto monopoly. The
wireless sector is dominated by a duopoly, with America
Movil's Claro competing against Telefonica's Movistar for
market share. TELCOR has drafted a revised telecom law, but
the National Assembly's Commission on Infrastructure and
Public Services is working on its own version, which would
create a new regulatory body whose members are chosen by the
Assembly rather than the President. Until a new law is
passed, media companies in Nicaragua continue to operate in
an uncertain environment. End Summary.


2. (SBU) Nicaragua's complementary agenda to improve the
business climate under CAFTA-DR includes legislation to
reform the telecommunications sector. There has been no
progress on this score since the free trade agreement was
signed in April 2006. The national telecom regulator,
TELCOR, and the National Assembly's Commission on
Infrastructure and Public Services are currently drafting
revisions to the country's telecom legislation. Threatening
to derail proposed reform is the issue of whether legislation
will protect or endanger existing media licenses. Radio and
television stations, often highly critical of the Ortega
Administration, fear that the reform process under discussion
presents an opportunity to limit or deny them licenses (see
paragraphs 10-11).

Still Waiting On New Telecommunications Legislation
-------------- --------------


3. (U) TELCOR Executive President Orlando Castillo announced
in April 2009 that the Government of Nicaragua (GON) would
begin consultations to reform Nicaragua's "General Law of
Telecommunications and Postal Services," Law 200. Castillo
said he would deliver an outline of the proposed reforms to
the Executive Branch by the end of June. The National
Assembly's Commission for Infrastructure and Public Services
announced the same week that it is working on its own draft
of a new telecommunications law. Media reports indicate that
the National Assembly's draft will include a plan to create a
new regulatory institution, the Superintendent of
Telecommunications and Postal Services (SITEL),whose members
would be chosen by the Assembly rather than appointed by the
President. A 2005 attempt by the National Assembly to create
a Superintendent of Public Services (SISEP) with authority
over telecommunications failed after a confrontation between
the National Assembly and President Bolanos ended in a
stalemate (Ref A).


4. (U) As part of its Rural Telecommunications Project for
Nicaragua, the World Bank provided $350,000 in technical
assistance to TELCOR to help draft a new regulatory framework
for the sector. World Bank Project Director Eloy Vidal told
us that a draft law developed by TELCOR and the World Bank
has been completed, and that he is cautiously optimistic it
will be approved. The Nicaraguan National Assembly,
meanwhile, received technical assistance from the United
Nations Development Program (UNDP) to revise Law 200. The
primary difference between the two draft laws is reportedly
the National Assembly's plan to create a new regulatory
institution with authority over TELCOR.


5. (U) Law 200, as currently drafted, allows for privately
owned and operated telecommunications companies, but falls
short of fostering competitive investment in landline
telephony as envisioned by CAFTA-DR. One TELCOR executive
described the 1995 law as "obsolete" and incapable of
addressing technological advances. For example, while TELCOR
regulates interconnection charges, the former
government-operated telecommunications company Enitel, now
owned by Mexican billionaire Carlos Slim's America Movil (the
dominant cellular telephone company in Nicaragua) still
controls switching for all cellular services and owns the
local loop ("the last mile"). When TELCOR issued regulations
in 2006 that mandated unbundling the local loop, consistent
with Article 13.4 of CAFTA-DR's Chapter 13 on
telecommunications, Enitel refused to unbundle the loop.
This created a strong disincentive for potential investors in
the sector, effectively preventing liberalization of the
market for telephony. (Note: the local loop refers to the
physical wire between a telephone exchange and a customer's
premises; the "unbundling" of that loop allows competing
service providers to rent the existing infrastructure and
access residential customers.)

The Shift Toward Cellular
--------------


6. (U) Having the second lowest access to fixed-line
telephony in Latin America on a per capita basis, Nicaragua
leapfrogged into mobile communications during the last
decade. Today, Nicaragua's mobile telephone penetration rate
is greater than 50%, surpassing that of Honduras, Peru,
Haiti, and Cuba. Cell phones now exceed the number of fixed
lines by more than ten to one. Since 2004, the mobile market
has been growing at an annual rate of 60%. Most recent
investment in the sector has focused on expanding service to
the poorer social strata throughout the country. The
wireless sector is dominated by a duopoly between America
Movil's Claro and Telefonica's Movistar services. Claro
leads with a 70% market share to Movistar's 30%. Internet
penetration has tripled since 2000, to 2.7% of the population
in 2008. About one-sixth of these are broadband users. Both
companies deploy the broadband mobile telecommunications
platform standard known as UMTS/HSDPA (Universal Mobile
Telecommunications System/High-Speed Downlink Packet Access),
allowing them to introduce 3G wireless service in 2008.
High-end wireless service and broadband networks can be found
in urban areas. While investment in wireless continues,
investment in landline service is minimal.

The Story of Deregulation
--------------


7. (U) Passed in 1995 under President Violeta Chamorro, Laws
200 and 210 opened the state-run telecommunications sector to
private investment and to the eventual privatization of
Enitel, the state-owned telephone company. The government
sold a 40% stake in Enitel in 2001 to an international
consortium, which later became Megatel. The Government of
Nicaragua (GON) sold the remaining stake to America Movil in
December 2003. In 2004, America Movil bought Megatel's share
to become the sole owner of Enitel, despite opposition from
telecom regulator TELCOR. Enitel now operates a de-facto
monopoly as the country's only landline operator and the
dominant cellular provider.


8. (SBU) TELCOR tried to liberalize the telecom industry at
the end of 2004, but Enitel successfully appealed, delaying
deregulation until 2005, when Enitel's exclusive right to
provide landline telephone services expired under Law 210.
Since 2005, any company has been free to bid on a license to
provide landline services through a process even TELCOR
itself describes as lengthy and cumbersome.


9. (U) In 2006, consistent with the country's obligations
under CAFTA-DR, TELCOR sought to amend the country's
telecommunications regulations. TELCOR wanted to force the
unbundling of the local loop so that companies interested in
investing in the landline sector would have access to the
existing network elements. Enitel filed an injunction
against the GON, charging discrimination and arguing that the
new regulations were impermissible under Law 200, the
governing telecommunications legislation. The Nicaraguan
Supreme Court agreed with Enitel, sending the government back
to the drawing board. Since 2007, the Ortega Administration
has decided to forego developing new regulations in favor of
a complete sectoral reform.

A Political Battle Brewing Over Media Licensing
-------------- --


10. (SBU) TELCOR also issues licenses for radio and
television frequencies. Here, political battle lines are
being drawn. TELCOR's President, Orlando Castillo, is the
former Finance Director for Channel 4, a television station
owned by President Ortega and managed by his son. TELCOR
headquarters prominently displays FSLN (Sandinista National
Liberation Front) propaganda. Moreover, TELCOR performs a
public relations service to the President, his wife, and the
FSLN by financing and staging Ortega's many town hall
meetings, broadcast in their entirety by Channel 4. The FSLN
has sharply criticized independent media in Nicaragua, and
took the extreme measure in 2008 of paying protesters to
occupy Managua's traffic circles to denounce what it
perceived as unfair treatment by the media (Ref B). Protests
by FSLN and government-supported Citizen Power Councils
(CPC's) in front of media outlets were also common in 2008.


11. (SBU) The reform of Law 200 promises to include the
renewal of existing media licenses, an issue which has become
politically charged. Media outlets in Nicaragua have
operated since 2008 without knowing when their licenses will
expire. The National Assembly temporarily extended the
licenses, pending the passage of legislation to replace Law
200, after a furor erupted over TELCOR's failure to reply to
requests for license extensions from several independent
media outlets. TELCOR's inaction, as the expiration date of
the licenses grew near, was interpreted by voices opposed to
the governing FSLN as a plan to let the licenses expire and
not renew them. In 2007, opposition candidate Eduardo
Montealegre had introduced a bill to the National Assembly to
extend media licenses by 10 years, but the FSLN blocked it.


12. (SBU) Comment: While technically open to investment,
Nicaragua's telecom sector lacks the regulatory environment
that would foster a free and competitive market. To fully
comply with the spirit of CAFTA-DR, the National Assembly
needs to pass an improved law on telecommunications. While
the government has suggested that such legislation will move
quickly, we believe that the National Assembly is technically
unprepared to reform telecommunication legislation at this
time. The issue of renewing radio and television licenses is
likely to make any reform effort lengthy and highly
controversial.
CALLAHAN