Mutual concession: a deal between Argentina's government and Spain's Telefonica opens the door to new investments.

Spanish telecom giant Telefonica and the Argentine government have buried the hatchet and signed an agreement that will bring some relief to both sides in a long-running battle. The deal makes way for Telefonica to renew investing in the country after a long period of doubt following the country's historic 2002 collapse, which all but froze foreign investment for years.

Telefonica is now 15 years in Argentina with investments in place of US$10 billion. Company executives now say they will resume their investment plan with $326 million in 2006, with the main objective of developing and updating its network. "Signing this agreement is a very important act, one which puts into place the foundation for a continued, constructive dialogue and one which reflects the deep commitment our company feels in Argentina," says Mario Vazquez, president of Telefonica de Argentina.

"The company will step up its investments planned for 2006 with the objective of continuing to develop our telephone networks and broadband Internet," Vazquez says. "The development of broadband in the country is one of our main goals. Currently, we have more than 300,00 DSL [broadband via phone line] clients and we expect in 2008 to have 1 million."

Ramon Ponce Gil, external communications director for Telefonica de Argentina, detailed the investment plan for this year. "These investments are planned for both fixed and mobile telephone systems," he says. "In terms of fixed-line telephony, the focus will be on the development of broadband in the entire country in order to support digital inclusion. In terms of mobile, we expect a significant expansion of the network and services and the development of third-generation services."

Ponce Gil says the goal of Telefonica is to continue to grow its broadband business and concentrate on value-added services and the latest in technology. The Argentine telecommunications industry grew substantially last year, to $4.89 billion from $3.49 billion the year before.

According to the agreement, the company will suspend a $2.80 billion lawsuit against the government before the International Center for Settlement of Investment Disputes, part of the World Bank, for alleged economic injury after Argentina devalued its currency and shifted what Telefonica could charge customers to the devalued peso in 2002. The peso, by policy, was once equal to the U.S. dollar.

In turn, the government decided to offer some concession on rates to the phone company. Among these will be an increase in the cost of international calls that come into the country, which will triple in amount. This adjustment to rates implies a 1% improvement in billing, which means $10 million in new revenues.

Frozen. The deal also allows for current rates for fined-line telephone service to remain in place and a change in the hour for reduced evening rates. Telefonica posted positive earnings in 2005, with revenues of $1.10 billion and profits of $252 million.

While most of the telecom market in Argentina is deregulated, the company Telecom, controlled by Telecom Italia, Argentina's Grupo Werthein and minority partner France Telecom, and Telefonica itself continue to negotiate with the government over contracts, since fixed-line rates remain frozen. "Although fixed-line rates continue to be the main source of income for the companies, today the telecommunications business is headed toward unregulated markets, Internet and mobile communications," says Enrique Carrier, director of consultancy Carrier y Asociados.

Internet connections in Argentina rose by 17.8% in 2005 to 2.4 million users. Of those residential customers, in a country of 38 million, 47.1% are in the city of Buenos Aires, another 26.4% in Buenos Aires province, followed by Santa Fe at 7.1% and Cordoba, at 6.4%.

In the Internet market, broadband is the standout, according to Carrier y Asociados. Users increased by 90% to 800,000 accounts at the cost of slower dial-up connections, which fell by 10%.

Broadband penetration is the foundation for a coming revolution in the telecom business, one that will push new convergence technology and services to the fore. Once a greater number of people are using the Web, operators can make money by offering triple play, which combines Internet, fixed telephone and cable-television service through one provider. Operators are very interested in developing the market since it generates more revenues on existing infrastructure, a trend already under way in Europe, the United States and Chile.

JUAN PEDRO TOMAS * BUENOS AIRES