Last call: Central America reaps rewards for being the last to privatize telecommunications. (Central America).

Faced with too mulch phone traffic for its network two years ago, Empresa Nicaraguense de Te1ecomunicaciones--then owned by the state--ran ads asking Nicaraguans to refrain from calling to save minutes and avoid wasting communications. "This was unheard of. Any other company would have exploited such a potentially profitable situation, while at the same time benefiting users," says Carlos Ramos, CEO of the now privately operated phone company.

At a time when the world's telecommunications companies are struggling with over-capacity and massive debts, businesses are rushing into Nicaragua and other Central American countries because so little has been done. Ramos is now rolling out a nationwide cellular phone network and begins deployment in December of 50,000 new telephone lines in the capital city of Managua, part of a US$40 million investment.

Meanwhile, America Movil and Telefonos de Mexico (Telmex), Telefonia of Spain, AT&T of the United States and France Telecom, among others, are buying state-owned phone companies and operating licenses in some of the last opportunities in Latin American telecommunications.

Much of the market growth and profit opportunity comes from building ordinary voice lines, as opposed to offering fancy data, broadband, and Internet services. "As a whole, Central America's fixed communications market represents a $12.6 billion opportunity over the next five years," Pyramid Research analyst Leslie Arathoon says. That's more than will be generated in Colombia, the region's fourth largest market, during the same time period.

License costs are well below the region's average, says Arathoon, and Central American governments rarely, if ever, impose the strict build-out or investment requirements on new operating companies, requirements that have been so taxing in other markets.

Quick and high returns. Panama and Costa Rica enjoy high fixed-line penetration levels, but the rest of Central America suffers from the lowest penetration levels in the region, ranging from 4% of the population in Nicaragua to 10% in El Salvador at the end of 2001, says Pyramid. Because phone penetration in four of the seven Central American countries is well below what income levels would suggest, the region offers high revenue potential, Arathoon says, for "new market entrants wishing to make quick and high returns."

That is exactly what attracted Telia Swedtel of Sweden and Grupo MegatelEmce of Honduras to bid for Enitel in Nicaragua. In December 2001, the Telia-Swedtel-Emce consortium won the right to manage and operate Enitel after acquiring a minority stake. The company paid $33 million for 40% of the company and will pay $10 million annually through 2007 for the right to administer the former state enterprise.

Telia and its Honduran partners face opposition from leftist and populist groups who worked against privatization of Nicaragua's phone monopoly. Leftist parties argue that privatization favors foreign investors, not the country's interests. In the case of Enitel, that charge is strengthened by a growing corruption scandal, including allegations that the former President Arnoldo Aleman was a "shadow partner" in the bid for the company, which was officially privatized only days before he left office at the end of last year.

"Unfortunately, yes, the privatization process took place within a highly charged political environment," says Enitel's Ramos. "It's as if the foreigners came and took the prettiest bride away and now we are parading her in the town's main plaza. There is a lot of political envy, but that is only normal after three failed privatization attempts."

Ericsson calling. Ramos and Enitel are moving aggressively to replace the rancor with results. Following the rollout of nationwide cellular service, Enitel has signed a second contract with Swedish equipment maker Ericsson to supply 50,000 fixed lines and introduce broadband in Nicaragua.

Part of the drive to launch new services is to keep competitors at bay. America Movil, which won a cellular license from the Nicaraguan government on Sept. 19, has also contracted Ericsson for the construction of its cellular network, scheduled to begin service sometime next year, according to company sources.

"In general terms, all investment from operators in [Latin America] has been decreasing 10% to 15% compared to the previous year," says Raul Lucido, a marketing director for Ericsson in Mexico City. "But, in Nicaragua, we have announced three of our largest contracts in the region in the last couple of months."

With all of the activity there, Pyramid predicts phone penetration could double to 8% of the population in the next four years. Similarly, Guatemala, Panama and El Salvador have enjoyed a boost in penetration from the sale of state-run phone companies and subsequent opening of markets to cellular competition. Honduras is expected to follow suit soon with a capitalization plan for the government telecommunications monopoly Empresa Hondurena de Telecomunicaciones. Costa Rica's phone monopoly is expected to remain in government hands for now.

After the flash of quick subscriber growth from privatization and liberalization, however, the Central American communications market might not be able to support many powerhouse players, "We do not expect more than two incumbent players to operate in Central America over the long term," says Arathoon, who thinks Telmex and France Telecom are most likely survive. "And we believe Nicaragua's Enitel will be the first target for a takeover."

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