US embassy cable - 05BOGOTA224

C O N F I D E N T I A L SECTION 01 OF 03 BOGOTA 000224 
 
SIPDIS 
 
STATE PLEASE PASS TO USTR: KENNETH SCHAGRIN 
 
E.O. 12958: DECL: 01/07/2015 
TAGS: ECON, ECPS, CO, FTA 
SUBJECT: TELECOMMUNICATIONS, THE FTA, AND THE NEED FOR 
PRIVATIZATION 
 
REF: A. REFTEL A: BOGOTA 12921 
     B. REFTEL B: BOGOTA 12925 
     C. REFTEL C: BOGOTA 10132 
 
Classified By: Deputy Chief of Mission Milton K. Drucker for reasons 1. 
4 (b) and (d). 
 
1.  (C) Summary.  While the telecommunications chapter in the 
Andean Free Trade Agreement (FTA) should conclude at the next 
round, Colombia will be unable to fully enjoy the benefits of 
the chapter without either privatization or joint ventures as 
well as more autonomy for the Colombian Regulator (CRT). 
Nevertheless, significant opposition to privatization exists 
from various sectors in Colombia.  In general, the sector 
enjoyed a good year in 2004, especially in the wireless area, 
but continued growth faces important structural obstacles. 
End Summary. 
 
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Background 
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2.  (C) The telecommunications sector as a percentage of GDP 
reached 2.8 percent for 2003 and is expected to grow to 3 
percent of GDP for 2004.  There are only three long distance 
operators, two state-owned and one 50 percent state-owned, 
three cellular operators, two private and one state-owned, 
one private trunking operator, and over a hundred local 
landline operators, many of which are unauthorized.  All 
three long distance operators are losing market share to the 
cellular operators, and industry experts state that as 
individual companies, none of them are able to compete 
against the capital-rich private carriers. Corruption 
continues to be a major problem for the state-owned 
companies.  This compelled the Colombian negotiating team to 
request U.S. assistance, in the form of a side letter, in the 
telecommunications chapter of the FTA.  In the face of a free 
trade agreement (FTA) with the U.S., industry experts claim 
Colombia's telecommunications sector needs to privatize to 
gain more capital and provide better infrastructure, reduce 
corruption, lower international phone charges and compete 
more effectively. 
 
--------------------------------------------- - 
Where The Telecommunications Sector Is Heading 
--------------------------------------------- - 
 
3.  (U) Over the last two years Colombia has experienced the 
rapid growth of mobile and internet networks.  According to 
the Regulatory Commission on Telecommunications, in 2003 
mobile and internet users increased by 33 percent and 60 
percent, respectively, from 2002.  In mid 2004, the number of 
mobile users surpassed the number of landlines.  From 2000 to 
2003, the overall penetration of mobile and internet services 
for every 100 Colombians increased from 5.3 percent to 13.9 
percent and from 2.1 percent to 6.24 percent, respectively, 
while landlines remained at 17 percent.  Earnings generated 
by mobile and internet networks represented 28 percent of 
total earnings for the telecommunications sector for 2003. 
 
4.  (C) The boom of mobile communications continues with the 
recent sale of BellSouth (Latin America) to Telefonica.  The 
two main mobile service providers, Telefonica and Comcel, 
control more than 80 percent of the Colombian mobile market. 
The other mobile company is Colombia Movil or "Ola", which is 
jointly owned by Empresas Publicas de Medellin (EPM) and 
Empresas de Telecomunicaciones de Bogota (ETB), both owned by 
municipal governments.  According to industry experts, Ola is 
in dire straits with its former president under investigation 
for mismanagement of funds, unsatisfied customers due to an 
increase in dropped calls and an unsustainable business plan. 
 Another player in the mobile market, but without a mobile 
license, is Avantel, a U.S. trunked operator.  Avantel uses 
technology similar to Nextel and had been in the Colombian 
market since 1998.  Without a mobile license however, the 
other mobile operators refuse to interconnect with Avantel, 
causing Avantel to drop in market share from 7 percent to 1.5 
percent.  On December 16, President Uribe signed Decree 4239, 
granting full interconnection rights to trunking operators, 
including Avantel.  Although this is good news for Avantel, 
the conditions and enforcement measures will be the key test 
for Avantel's success.  According to the Colombian 
Association for Cellular Operators (ASOCEL), Sprint-Nextel 
will buy Avantel if Avantel achieves the same access given to 
mobile operators. 
 
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A Voice of Reason 
------------------ 
 
5.  (SBU) A major blow to the state-owned companies came when 
Colombia's national telecommunications company, 
Telecomunicaciones de Colombia, declared bankruptcy in 2003. 
The end result was a "leaner" new company called Colombia 
Telecomunicaciones or "Telecom", which currently does not own 
the assets of the bankrupt company, but utilizes them to 
ensure continuity of phone service to over 900 
municipalities.  Its president, Alfonso Gomez, realizes the 
challenges Telecom faces and told econoff that Telecom will 
focus on Internet and Voice over Internet Protocol (VoIP) 
services.  The young and innovative president also 
understands that the capital-strapped state company cannot 
compete head to head with the private telecoms.  (One saving 
grace that these state-owned telephone companies have is 
time; the expiration date for the exorbitantly priced long 
distance license fees (USD 150 million) is 2008, Reftel B). 
 
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Talk of a Merger 
----------------- 
6.  (SBU) Gomez met in late November to discuss a merger with 
the other two long distance operators, Orbitel (which is 
owned by the Medellin city government) and ETB (owned by 
Bogota's city government).  Following the merger meeting, 
then-Vice Minister of Communications, Maria Paula Duque, said 
"with the entry of multinationals and soon the FTA, the 
state-owned telephone companies have realized that the only 
way to compete in the future is to have better economies of 
scale."  Although her statement is correct in principle, the 
idea of having an even larger state-owned player in the 
telecommunications sector is worrisome to foreign investors 
as well as to consumers.  Duque believes that from a 
management point of view, a merger is an excellent idea, but 
according to industry experts it is counterintuitive to 
providing a transparent and competitive sector.  The problem 
with a merger of the state-owned telephone companies, which 
combined have 87.5 percent of the total land lines in 
Colombia, is that Colombia's telecommunications land-line 
sector would become a nontransparent and noncompetitive 
market.  Viewed in conjunction with the close ties between 
the telecommunications regulatory authority and the GOC, this 
could easily reinforce rigidities in the regulatory regime 
related to licensing and interconnection policies. 
 
7.  (C) In the sixth round of FTA negotiations, which 
followed the merger meeting in Colombia, the U.S. negotiator 
directly asked the Colombian negotiator if the 
telecommunications sector in Colombia was becoming less 
competitive due to talks of a merger.  The Colombians refused 
to acknowledge any talk of a merger and asserted that nothing 
to date has affected the competitive climate in Colombia. 
Since the round, there has been no talk of a merger in the 
press or in the halls of the state-owned telephone companies. 
 
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The FTA 
------- 
 
8.  (C) The GOC is heading into the seventh round of the free 
trade agreement negotiations intent on preventing a carve out 
for mobile communication service providers (found in CAFTA 
and other U.S. FTA agreements), not in the interests of the 
Colombian mobile sector and the public, but in the interests 
of the government and the state-owned telecommunications 
companies.  The state-owned companies feel that it's unfair 
that obligations set forth in the FTA only apply to 
fixed-line companies.  Other issues to be addressed are 
illegal phone traffic and transparency. 
 
9.  (C) During the sixth round, the Colombian negotiators 
again asked for U.S. assistance to combat illegal 
international phone traffic, originating in the U.S. (Reftel 
C), via a side letter.  Although the issue is still being 
negotiated, the FCC could not police the corruption within 
Colombia's state-owned telephone companies.  The illegal 
traffic is almost exclusively using Voice over IP technology 
and the only companies that have access to VoIP are the 
state-owned phone companies.  These companies also have a 
monopoly on both long distance and internet services.  Thus, 
one part of the company is profiting from the illegal 
activity, while hurting the other. 
 
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Word On The Street 
------------------ 
 
10.  (U) A few telecommunication conferences have paralleled 
the FTA negotiations and have all focused on Colombia's 
future and the need for further deregulation.  Many of the 
speakers have focused on the need to modernize the industry's 
operations and infrastructure via foreign direct investment. 
They mentioned that public telecommunication companies, 
primarily ETB, Telecom, Orbitel, EPM, and EMCALI, should look 
to merge with private companies because the public sector 
does not have adequate access to capital and cannot react 
quickly to technology changes.  Further, it has weak 
administrative and commercial departments, high labor costs 
and antiquated networks. 
 
11.  (U) Arguments against the privatization of the 
telecommunications sector span the commercial, financial and 
political spectrums.  They assert that privatization will 
reduce national coverage, cut Colombian jobs and defy the 
1991 Constitution (the Constitution states that the Colombian 
government must provide public services to all Colombians and 
telecommunications is a public service).  The political 
opponents to privatizing claim that due to Colombia's high 
poverty level, privatization of the sector will force 
telecommunication operators to focus only on profitable 
regions in Colombia, leaving antiquated networks or no 
networks in rural and poor urban areas.  Currently, Telecom 
is required to provide telecommunication services to all 
areas in Colombia, but if it privatized, opponents believe 
that Telecom would focus on the cities and bypass the rural 
poor areas.  Commercial and financial opponents believe that 
privatizing would invite the major foreign telecommunications 
providers to enter the Colombian market, buy out the 
parastatals, slash Colombian jobs by the thousands, and 
reduce the government's revenues. 
 
12.  (C) Those against privatization consist of the Ministry 
of Communications, municipal officials, mayors, and obviously 
the state-owned operators.  Colombian FTA negotiators are 
quick to point out that the privatization section of the 
telecommunications text had been previously deleted in prior 
U.S. FTA agreements.  Lucho Garzon, mayor of Bogota, is the 
most vocal against privatization of the telecommunication 
sector, (Garzon and his own ETB, the second largest 
telecommunications operator in Colombia, provide the city 
with considerable revenues.)  Medellin's mayor and council, 
who own EPM, the third largest telecom in the country, share 
a similar view. 
 
--------------------------------------------- -------------- 
Trade Development Agency and the New Telecommunications Law 
--------------------------------------------- -------------- 
 
13.  (C) The Trade Development Agency has awarded a contract 
to a telecommunications consulting firm to conduct a market 
study for the Ministry of Communications.  Areas to be 
studied are long distance license fees, deployment of 
broadband networks, the competitive environment of mobile 
communications, and enforcement mechanisms of the Ministry of 
Communications and CRT.  The group will also propose policy 
options for the Ministry and CRT regarding spectrum, VoIP, 
license fees for new cellular and long distance operators, 
and unbundling.  According to Ministry of Communications' 
officials, the study's findings will be used to help draft a 
new telecommunications law, which will be presented to 
Congress in March 2005.  A key aspect of the study will be a 
proposal for a more autonomous regulator.  Although CRT 
officials are in favor of a regulator independent of the 
Ministry, CRT officials, to include the Director, claim that 
the Ministry of Communications will not be in favor of 
relinquishing their hold over the CRT. 
WOOD