US embassy cable - 04TEGUCIGALPA2427

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 002427 
 
SIPDIS 
 
STATE FOR EB/IFD, IO/EDA, WHA/EPSC, EB, CBA, AND WHA/CEN 
STATE FOR IO/EDA (CCHANG) AND DRL/IL 
TREASURY FOR DDOUGLASS 
COMMERCE FOR AVANVUREN, MSIEGELMAN 
DOL FOR ILAB 
STATE PASS AID FOR LAC/CAM 
 
E.O. 12958: DECL: 10/28/2014 
TAGS: EFIN, ECPS, EINV, PGOV, ELAB, KJUS, KMCA, HO, UNDP 
SUBJECT: HONDURAS TELECOMMS UPDATE OCTOBER 2004 
 
REF: 04 TEGUCIGALPA 2312 
 
Classified By: Classified by EconChief PDunn for reasons 1.4(b,d). 
 
1. (C) Summary:  On October 12, EconChief met with Jose Renan 
Caballero, Chief Telecommunications Advisor on the 
President,s Modernization Commission, to discuss recent 
developments in the telecommunications sector.  Caballero was 
candid regarding Alcatel, Communitel, Megatel, the new 
telecommunications law, and his views of the future of the 
sector in Honduras.  Over the last two weeks, Post has also 
met with representatives of Motorola to discuss Motorola,s 
participation in Honduras, Communitel regarding its 
continuing struggle to begin operations, Lucent on its 
proposed donation of telecomms infrastructure, and Project 
Finance Advisors (PFA) to discuss its feasibility study on 
creating a fibre-optic backbone for the Honduran telecomms 
sector.  This cable incorporates all of these views to 
present a snapshot of the telecomms sector in Honduras.  The 
Alcatel/UNDP procurement issue will be reported septel.  End 
Summary. 
 
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Communitel:  Champing at the Bit 
-------------------------------- 
 
2. (C) Communitel is a consortium, made up of Airway and 
Motorola, that is in the process of securing permission to 
provide fixed wireless services in Honduras as a sub-operator 
to state-owned Hondutel.  (Note:  By law, Hondutel has a 
monopoly on fixed-line services throughout the country until 
December 2005, though it has recently been approving 
investments by &sub-operators8.  End Note.)  Communitel is 
eager to get moving on its project, but its request has been 
bound up in red tape for nearly eight months.  Post has been 
active in urging GOH progress on the case.  According to 
Caballero, Communitel,s license has now been approved by GOH 
telecomms regulators Conatel.  What remains in dispute is the 
fee Communitel will be asked to pay for the spectrum.  Post 
is in regular contact with Hector Nunez, General Manager for 
Communitel, who provided much the same readout.  According to 
Nunez, technical experts within Conatel were recommending a 
spectrum fee of approximately USD 817,000 per year, whereas 
cellular service provider Megatel pays only USD 19,000 and 
fixed wireless service provider Multifon pays only USD 
10,000.  Nunes said that the proposed fee, if approved, 
&would be another way of saying no to our project.8 
According to Caballero, Conatel director David Matamoros is 
seeking a reasonable fee that recognizes the value of the 
spectrum while not being as prohibitively high as that being 
proposed currently. 
 
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Megatel Sale:  Not (only) Windfall Profits for the Elites 
--------------------------------------------- ------------ 
 
3. (C) Megatel is the second-largest provider of cellular 
phone service in Honduras.  Established about a year ago, 
Megatel grew quickly to approximately 80,000 subscribers, and 
succeeded in driving down prices for cellular service by 
injecting badly needed competition into the market previously 
dominated by Celtel.  Megatel was formed by a consortium that 
included a Swedish telecomms company and local business 
tycoons Miguel Facusse and Fredy Naser.  Megatel acquired 
spectrum rights for approximately USD six million, under a 
concession that reportedly prohibited re-sale for a period of 
five years.  Despite this prohibition, Naser and Facuse 
announced in July 2004 that they were selling out to 
Americamovil (the cellular service arm of Carlos Slim,s 
Telmex) for USD 60 million.  According to Caballero, such a 
sale was inevitable, since given its small size and 
consequent lack of economies of scale, Megatel could not 
compete over the long term without the backing of a much 
larger firm with lower procurement costs. 
 
4. (C) Asked if the sale price did not represent windfall 
profits, Caballero told us he thought the sale price 
reasonable, and said the sale was legal following the notably 
quick alterations to the concession agreement pushed through 
Congress to facilitate the deal.  The sale price, he said, 
includes the entire firm, not just the spectrum, and so the 
proper baseline is not the USD six million often cited in the 
press.  One should add to that figure, he said, some USD 13 
million in infrastructure (supplied by Ericsson), 
installation of approximately 120 cellular towers costing an 
estimated USD six million, and the revenue stream from 80,000 
subscribers, which even at only USD 15 per month is over USD 
14 million per year.  Totaling that, and adding something 
more for an established brand-name, Caballero found that a 
price of USD 50 to 60 million is not unreasonable.  Plus, he 
added wryly, there were the payments necessary to get 
approval for the sale from Congress in record time, including 
all necessary changes to the original concession agreement. 
 
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New Telecomms Law:  Sounds Good, But Let,s See It 
--------------------------------------------- ---- 
 
5. (C) Caballero said the Modernization Commission and 
regulatory authorities are crafting a new telecommunications 
law, which was completed in draft on October 12 and is now 
circulating for comment with a view to formally introducing 
it before Congress goes out of session at the end of October. 
 The new law will set maximum fees for services that are not 
currently regulated (such as installation fees) and these 
regulations will apply sector-wide.  More interesting, it 
reforms the licensing process, such that a firm, once granted 
an operating license, will be free to propose offering any 
service directly to regulators for approval.  (Note: 
Currently each new service first requires a new concession 
from Congress.  End Note.)  Caballero explicitly recognized 
that free access to the WiFi spectrum in the U.S. had led to 
an explosion of new technologies.  Nevertheless, he said, 
while the new Honduran law leaves the WiFi spectrum free, 
that free-spectrum model will not be applied to any other 
bands.  In response to points raised by EconChief, Caballero 
emphasized that the new law will be technology neutral. 
Caballero will provide Post with a copy of the draft law. 
 
--------------------------------------------- ------------- 
Sector Future:  Strong, But Not As Strong as Figures Imply 
--------------------------------------------- ------------- 
 
6. (C) In December 2005, Hondutel will lose its monopoly over 
fixed-line telephone services.  It is currently anticipated 
that Hondutel will be privatized thereafter, but a previous 
attempt to privatize Hondutel in 2000 failed when no bidders 
would meet the minimum (reserve) price.  Hondutel 
infrastructure is aging and inadequate, and there is some 
doubt about whether a future privatization effort will be 
successful.  Hondutel has been plagued by repeated GOH's 
raids of its profits to subsidize other GOH operations, 
robbing Hondutel of the money needed to invest in 
improvements, a fact Hondutel's labor union has repeatedly 
bemoaned to LabAtt.  (Caballero mentioned Telefonica de 
Espana as a potential suitor, noting that they are flush with 
cash and active in nearly every country in the region except 
Honduras.)  Hondutel is also one of the largest employers of 
technical and white-collar workers in Honduras, and there are 
limited opportunities for them in other sectors.  The 
rightsizing that would be needed to make Hondutel an 
attractive target could prove to be too politically painful 
to carry out, further jeopardizing any future privatization. 
 
7. (C) Hondutel has begun authorizing &sub-operatorships8 
to entice new entrants into the fixed-line services sector in 
the run-up to de-monopolization.  To date, 37 licenses have 
been approved.  However, Caballero said that figure is 
somewhat misleading since permission for interconnectivity ) 
the key next step ) has been requested in only 18 cases, and 
only 5 of those firms have actually begun offering services 
to the public.  In his view, this implies that the majority 
of sub-operatorships were obtained for speculative purposes, 
by investors who do not intend to provide services themselves 
but hope to re-sell the concession for a profit in the 
future.  Those who are serious entrants, on the other hand, 
upon receiving permission to interconnect, have only 90 days 
to begin to offer services.  Since it often takes six months 
or more to install the network architecture, firms are placed 
in the awkward position of initiating capital expenditures 
before receiving interconnectivity licenses.  Caballero cited 
Communitel as an example, saying that they have already begun 
work on their main building in Tegucigalpa.  According to 
Caballero, the 13 remaining firms have applied for 
interconnectivity in the last 90 days, but have not yet begun 
operations.  Asked why there seems to be a sudden rush into 
the market, he told us that there is a race for market share. 
 Once some entrants move forward none wants to be last, so 
all are rushing to get in now.  Caballero agreed, however, 
that eventually there will need to be a consolidation of the 
market in Honduras; the market simply is not big enough to 
justify 37 separate fixed-wireless service providers. 
 
----------------------------- 
Motorola:  A Foot in the Door 
----------------------------- 
 
8. (C) On October 8, EconOffs met with Motorola officials 
John Magee, Director for Central America and Caribbean, and 
David Archilla, Area Sales Manager for Central America and 
Caribbean, to discuss ongoing projects.  In addition to being 
a supplier to the telecommunications industry here and an 
occasional consortium partner (as in the Communitel effort), 
Motorola is also engaged in an Inter American Development 
Bank project associated with the Chiminike Children,s Museum 
to provide communications links to 100 remote centers 
throughout Honduras.  The required satellite dish has now 
been set up and test communications have been established 
with about half of the sites.  Motorola has requested that 
the Ambassador attend the project inauguration in November. 
Privately, Motorola admits the project is a loss-leader, but 
they hope the good will and name recognition engendered will 
assist them in expanding their market base in Honduras. 
 
9. (C) Motorola is also pushing forward with a USD five 
million sole source supply contract to the Ministry of Public 
Security for emergency communications.  The contract was 
approved in 2003, but must still be approved by both the 
Minister and the President.  According to Magee, the approval 
from the Minister has not been forthcoming, despite clear 
recognition by the communications experts at the ministry 
that the new system is needed.  Police forces currently use a 
ten-year-old outdated Motorola system with insufficient 
capacity, and for which it is increasingly difficult to find 
spare parts.  Furthermore, the current system operates in the 
800 MHz band, while the new equipment could operate in the 
700 MHz band, which is rapidly becoming a suggested world 
standard for emergency operations.  Post has requested 
additional information on this contract from Motorola, and 
upon receipt will make appropriate inquiries. 
 
10. (C) On October 14, Managing Director Richard Rubin and 
Senior I.T. Specialist Martin Morell of Project Finance 
Advisors, LLC (PFA) updated EconChief on the status of PFA,s 
proposal to build a fibre-optic backbone for the Honduran 
telecommunications sector between the capital Tegucigalpa, 
the business center San Pedro Sula, the north coast city of 
Puerto Cortes, and thence connecting directly to the subsea 
international cable.  The pre-feasibility study for this 
project, financed by the U.S. Trade Development Agency (TDA) 
with a USD 300,000 grant, revealed strong economic and market 
justifications for such a project.  The backbone would 
provide services to the service providers, and therefore 
would not incur the &last mile8 costs of installation, 
billing, or marketing.  Rubin said PFA has approached a 
number of major telecommunications firms within Honduras and 
elsewhere in the region and found interest in both joining 
the consortium and/or using the service.  According to 
Morell, the fibre-optic cables themselves would be strung 
along the poles and rights-of-way owned by the parastatal 
electricity company ENEE, yielding a cheaper and faster 
installation than would be possible with buried cables. 
According to Rubin, ENEE would like to be a member of the 
consortium as well, but is currently prohibited by its 
authorizing legislation from owning any assets outside of the 
energy generation, transmission, or distribution sectors. 
PFA will provide additional information on this project once 
the full study is made available in about a month. 
 
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Lucent:  Looking for Our OK to Give It Away 
------------------------------------------- 
 
11. (C) On October 7, EconChief met with Carlos Aviles, 
Senior Manager for Lucent in Latin America, and Juan Carlos 
Galan, New Business Manager for Lucent, to discuss a pending 
Lucent proposal to donate USD five million worth of 
CDMA-based switching technology to Honduran state telephone 
monopoly Hondutel.  Similar offers have been made by and 
accepted from Ericsson and Siemens, each of which has already 
launched GSM-based demonstration projects in more remote 
regions along the borders with Guatemala, El Salvador, and 
Nicaragua.  Lucent wishes to compete on an equal footing, 
defend its existing market share, and prevent de facto 
lockout of CDMA technologies in the Honduran market.  Lucent 
officials requested that the USG publicly endorse the 
donation as transparent and entirely above-board.In 
particular, Lucent requested that the U.S. Embassy provide a 
cover letter endorsing the donation, thereby protecting them 
somewhat from any potential future allegations of improper 
behavior.  Post has requested (reftel) L/EB concurrence that 
the proposed donation does not violate FCPA, and requested 
suggested wording on a brief cover letter to Hondutel 
endorsing the donation. 
 
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Bio Information:  Jose Renan Caballero 
-------------------------------------- 
 
12. (C) In August 2004, Caballero became the Advisor on 
Telecommunications on the President,s Commission on the 
Modernization of the State.  From 2003 through August 2004, 
Caballero worked for the Nasser Economic Group,s 
telecommunications arm in Nicaragua (Note:  This is the same 
group that was for a time a member of the founding consortium 
of Megatel.  End Note.)  From 2002 to 2003, he was the Deputy 
Director of state telecommunications firm Hondutel.  Prior to 
that, Caballero was from 1999 until 2002 the Managing 
Director and Country representative for Sprint (later Global 
One) in Honduras.  From 1993-1999, he held a number of 
middle-management positions in Hondutel.  In the early 1990s, 
Caballero received a Master,s degree from a U.S. university 
(NFI), prior to which he worked as an engineer in Hondutel 
from the mid-1980s onward.  Caballero is in his late 40s and 
is married. 
 
Palmer 
Palmer