Fixing a hole: Colombia's state-run phone company starts over under some very dark clouds.

By the time Colombian Communications Minister Martha Pinto liquidated state-run Telecom, the country's largest telecommunications company, there was one manager for every single rank-and-file employee. The 56-year-old company had not turned a profit since 1995. Employee costs were running at over 50% of revenues and many jobs were being performed twice among the nearly 40 units in the telecommunications giant.

Predictably, the bottom line suffered. In 2002, the company reported revenues of US$706 million but a loss of $169 million. In 2001, the company lost $257 million.

So, the axe fell. In June, the government dissolved Telecom and formed a new state-run telecommunications company, Colombia Telecom, to carry on the work of the country's major fixed-line carrier. Telecom's president, Alfonso Gomez, must take one of Colombia's most: bloated government monopolies and make it profitable--even as a potential $1.8 billion lawsuit, Ned by vendors including Ericsson, Nortel, Nec Corp, Siemens, Alcatel and Itochu Corp., hangs overhead.

"Before anything else we have to put our house in order," says Gomez, 34, who joined the company in August 2002 to clean up Telecom.

Formerly general counsel at Bogota's stale-run phone company, Empresa de Telecomunicaciones de Bogota, Gomez was hired to oversee the sell-off of Telecom's assets, including the telco's former plush headquarters and its stake in one of the country's largest cellular operators, Comcel. For now, the company is encamped in a former technological institute that more resembles a 1960s high school than the operations center of one of the country's largest companies. To save money, line maintenance is now contracted out.

Even with cost cutting, Telecom is not out of the woods. The company must fund severance packages for 8,000 employees averaging more than $21,000 per employee. Gomez estimates that the company also will spend up to 18 years paying off its pension liabilities, all told, $1.5 billion.

Perhaps Telecom's biggest, balance-sheet blunder is self-inflicted. In what has been called one of the worst business deals in the history of the country, the company agreed to penalty clauses in a 1993 contract with foreign vendors to install 1.6 million lines across the country.

Telecom says that the contracts were illegal from the get-go, and an arbitrator reviewing the matter should arrive at a decision within the next 12 months. Repealed interview requests made to Ramiro Valencia, president of the Chamber of Colombian Telecommunications and spokesman for the foreign plaintiffs, were unsuccessful.

Suspicions. Gomez acknowledges that Telecom will have to pay some money in the suit but, he says, not the full $1.8 billion. He must win the case to revive Telecom but a victory could hurt future Foreign investment, as some companies may fear the rules of the game are not as clear and inviolable as they would like.

Workers, meanwhile, are suspicious of the turnaround plan. Not one union employee has been hired back, union leaders charge, precisely so that no one could protest Telecom's eventual privatization. "I see the government selling this company off in the short-term, maybe to some foreign company," says Jorge Lerma, president of the Union Sindical de Trabajadores de las Comunicaciones.

Gomez swears Telecom will stay in public hands--and Uribe promised the same at least until 2006, when his term ends. But a sale of shares to the public is not out of the question, says Gomez. Telecom's private competitors, meanwhile, have found it profitable to remain in densely populated urban areas. In response, Gomez is focusing efforts on urban zones as well, especially Internet and long-distance, and on building up its pre-paid telephone plans.

Colombia Telecom "looks pretty good, especially considering that it is the only operator in much of the country;" says Alejandro Guerra, an analyst with Medellin brokerage Multivalores. "But I think it will face a lot of competition in the main cities:"

In most countries, winning at home is usually a no-brainer for the state-run incumbent. They own the Lines, after all. But for the new Telecom, winning will be a matter of doing nothing the same as before--and even that might not be enough.

TOBY MUSE * BOGOTA