US embassy cable - 04BRASILIA226

UNCLAS BRASILIA 000226 
 
SIPDIS 
 
STATE FOR BSC/WHA AND EB/LEWIS 
COMMERCE FOR 4332/WBASTIAN/JANDERSON/DMCDOUGALL 
COMMERCE FOR 3134/010/DEVITO/ANDERSON/OLSON 
NSC FOR DEMPSEY 
 
E.O. 12958: N/A 
TAGS: ECPS, ETRD, ECON, BR, Telecommunications 
SUBJECT:  ANATEL COUNTERS SPECULATION ON TELECOM MERGER 
 
REFS: (A) BRASILIA 59,(B) BRASILIA 38,(C) 03 BRASILIA 3405 
 
1.  A barrage of Brazilian press articles have speculated 
that President Lula dismissed National Telecommunications 
Agency (ANATEL) President Schymura in large part due to the 
latter's insistence that Brazil's three regional fixed-line 
local telephone service giants be blocked from buying 
Embratel, the long-distance carrier being sold by MCI (Ref 
B).  The last such article appeared in the January 28 
addition of daily 'O Globo', which speculated that Telemar, 
Telefonica, and Brazil Telecom would now be allowed to buy 
Embratel, extending their local monopoly into the long- 
distance market and thereby squelching foreign investment. 
Attorneys and an engineer from ANATEL's competition division 
categorically denied such press speculation during a January 
28 meeting with Econoff and asserted that the proposed 
Embratel purchase is illegal under current law. 
 
2.  Jose Goncalves Neto, General Manager of Competition, an 
engineer who has been with ANATEL since its 1997 formation, 
commented that, despite all of the conjecture, the merger as 
proposed is contrary to Brazilian law and could not occur 
without congressional approval of a change in the law.  He 
predicted such a change would be unlikely.  The ANATEL 
competition specialists have recommended breaking Embratel 
into two separate companies; one regulated company of 
telephonic services, and an unregulated company which would 
consist of Internet services. 
 
3.  Neto added that ANATEL was patterned from the U.S. 
Federal Communications Commission and that it looks to the 
U.S. model for inspiration.  The FCC does not have a role in 
Internet regulation, and ANATEL would like to discontinue 
regulation of these services.  Naturally, the move would 
also open more competition to vie for the two newly created 
companies, since the value of the two entities would be less 
than the current valuation of Embratel. 
 
4.  Neto debunked press reports that Schymura's public 
opposition to the fixed-line carriers' bid for Embratel was 
the main driver behind his being forced out as president of 
ANATEL.  Neto opined that the issue was only a minor part of 
Schymura's problems, citing political factors as the main 
contributors.  These factors included Lula's desire to 
recompense Communication Minister Miro Teixeira for his 
removal as minister by placing Teixeira's close ally Ziller 
in the ANATEL presidency, as well as the Minister's vehement 
disagreement with ANATEL's tariff increase in 2003 (Teixeira 
encouraged the consumer's lawsuit against ANATEL to roll 
back the tariff increase), what the Ministry perceived as 
slow movement on regulatory decisions, and the worrisome 
exit of some foreign investors (U.S. corporations divesting 
from Brazil's telecomm sector since privatization in 1996 
include ATT, BellSouth, QUALCOMM, as well as MCI's stated 
intention to sell Embratel). 
 
5.  Comment:  It would seem ironic that Neto's list of 
Schymura's shortcomings included concern over foreign 
divestment, given the uncertainty over the stability of the 
regulatory regimes that the GoB's own actions -- including 
the Schymura firing--have generated (Ref C).  Ziller's 
appointment, to the extent that it smoothes the working 
relationship between the Ministry and ANATEL, could reduce 
bureaucratic tension and uncertainty, but he has not yet