Printer Friendly

Telecommunications in Latin America and the Caribbean: the role of foreign capital.

I. INTRODUCTION

The last ten years have witnessed significant changes in the structure of the telecommunications sector in Latin America and the Caribbean (LAC). Privatization and liberalization (the lowering of barriers to entry to new operators in the telecommunications sector) have been pursued by most countries, although some relevant exceptions remain.(1) As a consequence, the number of service providers, the pattern of ownership, the sources of financing and the regulatory environment have all changed dramatically. In this paper, we document these changes and discuss to what extent the observed growing role of foreign capital in this industry should be expected to continue.

The paper is organized as follows. Section II documents the trends in privatization and analyzes the growing level of competition that characterizes the industry in the region. Section III discusses the role of foreign capital in the expansion of the telecommunications sector in LAC. In Section IV, the commitments of Latin American and Caribbean economies within the scope of WTO negotiations on basic telecommunications are reviewed. Section V concludes.

II. PRIVATIZATION AND LIBERALIZATION IN LATIN AMERICA: WHAT'S NEW?

It is often noted that telecommunications companies began as private enterprises in many places around the world. By the 1970s, however, few were the cases in which the operators had remained as private companies (e.g., the Philippines, Spain, and the United States). In most countries, telecommunications services were provided by monopolistic government-owned entities. The logic behind government control - based on the belief that telecommunications were a natural monopoly and the strategic nature of these services - has been reviewed elsewhere.(2) In the 1980s, however, this panorama began to change.

The poor record of state-owned enterprises in fulfilling the needs of the local economies in the area of telecommunications, as well as rapid technological progress in the sector (eroding the strength of the natural monopoly argument), played an important role in favoring the privatization trend around the world. Needless to say, this trend was also directly influenced by the fiscal needs of governments.

In the case of LAC countries, the 1980s was a period characterized by economic duress and foreign exchange scarcity. Some governments saw the privatization process as a way to raise as much cash as possible and only secondarily as an opportunity to maximize access to new technologies and to explore the possibilities of upgrading and expanding the existing network. The privatization movement in the region is summarized in Table 1 which presents the main transactions that occurred in LAC over the period 1984-1996. This information is complemented by Figure 1 which illustrates the privatization trend showing that by the end of the 1990s almost all countries in the region will have embarked on the privatization of major segments of their telecommunications sectors.

[TABULAR DATA FOR TABLE 1 OMITTED]

The mode of privatization chosen (e.g., the adoption of a strategic equity partner, an initial public offering or sale of shares to employees) is also identified in Table 1. The reliance on strategic partners (typically a foreign company) is a common characteristic of many of the LAC privatizations.(3) In some cases, the selection of the partner was done in the context of private negotiations without competitive bidding (e.g., Cable & Wireless in Jamaica). Against this background, some analysts have described the privatization process as a case of "deja vu all over again" in which public monopolies were being replaced by private monopolies with limited long-term benefits for the economies involved.

The experience of the 1990s, however, suggests that these fears are misplaced. The basic difference nowadays is provided by the fast moving technological frontier for telecommunications and the parallel progress in liberalization reforms. Competitive pressures (from cellular, satellites, call-back services, etc.) are eroding monopolistic positions even when regulatory barriers to entry remain. Needless to say, those countries that are liberalizing their telecommunications markets in tandem with privatization efforts are the ones better positioned to benefit from these changes. Figure 2 captures the different stages in which LAC countries find themselves as far as privatization and liberalization are concerned.

On the horizontal axis of the chart, four different stages of a country's telecoms sector are given (ellipsoidal shape). The final stage of this development is denoted here as convergence competitive in the sense of segment operators competing in other segments - .g., a Cable TV (CATV) company offering basic telephone services. As already noted, the sector structure in LAC was dominated by state owned monopoly operators prior to 1990. Currently, most countries have already replaced their state owned operators by privately controlled companies and this is being done in an increasingly competitive environment.

In a nutshell, with the exception of Costa Rica, Paraguay and Uruguay, privatization of major operators has been implemented or is in progress. All over the region the primary role of governments in the sector has changed (or is changing) from that of owner to that of regulator. Chile, Argentina, Mexico and Venezuela were the first countries to take decisive steps towards restructuring their telecoms sector and today the list of nations having adopted and implemented measures of reform includes Bolivia, Brazil, Colombia, Ecuador, El Salvador, Honduras, Panama and Peru.

Although privatized, telecom operators still enjoy the status of quasi-monopoly entities in the basic services sector (including the long-distance segment). Chile is the only telecommunications market in LAC that is fully liberalized and where there are no significant impediments to convergence. As illustrated in Figure 2, Mexico is also moving in the same direction. This trend, however, is expected to expand throughout the region, providing a new impetus to FDI-flows into telecom-related activities.

III. INVESTMENTS IN THE TELECOMMUNICATIONS SECTOR IN THE POST-PRIVATIZATION ERA

To illustrate the major role of foreign capital and investment in the privatization and liberalization process in LAC, Figure 3 shows overall annual investment in million USS for selected countries where foreign operators were important actors in the privatization process. A continued higher level of investment has been sustained as compared to the situation before privatization.

On average, the level of annual investments in year five (yop+5) after privatization is five times the level of annual investment prevailing two years before privatization (yop-2). The extraordinary growth in investment level in Mexico even several years after the first privatization efforts (see Table 1) has been funded via consecutive public offerings. Telmex has chosen a strategic equity partner in 1990, and in the following four years public offerings were organized every year.

After privatization, private owners tend to pursue new business opportunities leading to continued high investment levels (e.g., in Chile: annual investment in public telecommunications increased from US$109 million in 1988 to US$575 million in 1994 and main lines doubled to 1.5 million between 1989 and 1994; after the implementation of a multicarrier system and the corresponding drop in prices the current growth forecast is 4 million subscribers by the year 2000).

Technological convergence, in turn, is opening new opportunities for contestability in the telecommunications industry. In Chile, for example, VTR plans to use its cable television infrastructure to offer local telephone and interactive multimedia services; VTR is currently investing US$300 million over a six-year period to build a hybrid fiber coaxial network. Peru provides another example of convergence-driven investment. TELE2000 currently builds up its wireless and CATV networks to compete in the basic services market after liberalization; until 1998 TELE2000 is expected to invest roughly US$ 150 million.

The level of competitive pressure that is being built up by these potential new entrants in the telecom market is illustrated by the number of new subscribers in the cellular and CATV sector in South America. It roughly equals the number of new main lines in the year 1996 and it is expected to surpass the expansion of fixed wireline new subscribers in the years ahead. This trend signals a significant shift in the investment portfolio towards wireless and CATV infrastructure in the region, being captured by Figure 4.

These trends suggest that the growth in investment levels observed is not explained by the privatization efforts in isolation. New technological opportunities to contest telecommunications markets and ongoing liberalization efforts, leveraged by the economic recovery of the region, have created additional incentives for an increase in investment levels. This foreign-capital led process is expected to be sustained in those countries that are making credible commitments to progressive liberalization. In this context, the participation of LAC countries in the WTO negotiations on basic telecommunications merits attention.

IV. WTO COMMITMENTS IN TELECOMMUNICATIONS OF LAG COUNTRIES

Almost all LAC countries have participated in the WTO's Negotiations on Basic Telecommunications and most of them have made commitments to further liberalize [TABULAR DATA FOR TABLE 2 OMITTED] their telecommunications service industry to include voice telephone, mobile services, and satellite services.(5) Table 2 provides a summary overview of the commitments made.

In broad terms, the quality of the commitments made by each of these countries seems to be well correlated with progress made in terms of privatization and liberalization to date. Mexico and Chile as well as El Salvador and Guatemala are committed to full competition across market segments. Argentina, Peru and Venezuela have committed to the full liberalization of all voice telephone services by the year 1999 or by the year 2000. In addition, Argentina and Peru have committed themselves fully to the Reference Paper on Regulatory Principles; while Venezuela made partial commitments in this area.

Brazil has made a commitment to end the monopoly in basic telephone and to submit improved commitments one year from the passage of the new telecommunications law. Existing foreign equity limits on cellular telephone and satellite transport services will be phased out by 1999. The Dominican Republic will allow competition across all segments except for terrestrial mobile voice telephone. Grenada commits to phase-in liberalization of most telecommunication services by the year 2006. Bolivia plans to phase in competition in all domestic long-distance and international basic services by 2001 and is committed to some of the regulatory principles in the reference paper. Colombia's commitments subject eventual future entry in basic services to an "economics need test" and maintain a limit (70%) on foreign-equity participation for telecommunications service providers.

Ecuador made a limited commitment offering competitive access only in the case of cellular telephone. Jamaica has made the commitment to open up domestic and international voice telephone to competition by 2013; similarly, Antigua & Barbuda and Trinidad & Tobago offer to liberalize international voice telephone by 2010. Belize and Dominica did not make any commitment in the voice telephone segment, but did commit to the reference paper and some wireless services.

Overall, these commitments suggest that in many countries the trend toward "full-fledged competition," as identified in Figure 2, is likely to proceed. In this context, FDI should continue to play a major role in the development of the regional telecommunications infrastructure in the post-privatization era.

V. CONCLUDING REMARKS

The post-privatization era for the LAC telecom sector will continue to be characterized by significant interest of foreign investors in the region. New business opportunities opened by technological progress in telecom and informatics are expected to continue to foster foreign investment into the region. Needless to say, this will be done in an increasingly competitive environment for capital and companies able to adopt innovative financing techniques will be better positioned to explore these opportunities. In the same vein, those countries that establish a credible pro-competitive regulatory environment will be better positioned to attract foreign investment into the telecommunications sector.

The ability of LAC countries to sustain the liberalization movement initiated recently will remain as a major issue. The significant commitments made by these countries in the context of the WTO basic telecommunications negotiations are a positive sign in this context. The implementation of these commitments - in particular, the establishment of pro-competitive regulatory environments - is one of the main challenges ahead for the region.

Acknowledgment: Carlos A. Primo Braga and Volker Ziegler are, respectively, Principal Economist and Information Management Specialist of the Telecommunications and Informatics Division of the World Bank. Comments by Bjorn Wellenius are gratefully acknowledged. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. This paper was prepared for delivery at the meeting of the Latin American Studies Association, Continental Plaza Hotel, Guadalajara, Mexico, April 17-19, 1997.

NOTES

* Direct all correspondence to: Carlos A. Primo Braga, The World Bank, 1818 H Street, NW, Washington, DC 20433.

1. For a discussion of the economics of services liberalization see Hoekman and Primo Braga (1997).

2. See, for example, Wellenius et al. (1989).

3. Telefonica de Espana with telephone subsidiaries in Argentina, Chile, Mexico, Peru and Venezuela, Brazil (CRT) and Colombia (wireless) has been one of the most active foreign operators in the region; within the scope of the privatization of Peruvian CPT and ENTEL, for example, Telefonica de Espana invested US$2 billion in 1994 for a 20 percent stake in CPT and a 35 percent stake in ENTEL. Telecom Italia (the former STET) is also actively involved as a strategic partner and major investor in Argentina, Bolivia, and Chile; for example, it invested US$610 million in a 50 percent stake in Bolivian ENTEL in 1995.

4. The year of privatization of the incumbent fixed-network operator is indicated. Four different stages of competition can be distinguished for illustrative purposes: (i) Fringe competition means competitive supply of a minor share of the overall telecommunication services market (e.g., satellite, cellular or value added services), whereas the major market segment (e.g., the basic telephone services) is not supplied in a competitive manner (assuming negligible effects of substitution), (ii) benchmark competition denotes the approach of awarding licenses to several basic telecommunications operators in distinct geographical regions, (iii) full-fledged competition characterizes the competitive supply of telecommunication services in any given segment (e.g., several fixed-line operators competing in the same market), and (iv) convergence competition is defined as allowing competition between operators in historically distinct segments (e.g., CATV operators competing with fixed networks telephone operators to offer basic telephone services).

5. For details about the outcome of the WTO Basic Telecommunications negotiations see Primo Braga (1997).

REFERENCES

Hoekman, Bernard and Carlos A. Primo Braga. 1997. "Protection and Trade in Services," Open Economies Review, 8(3), 285-308.

ITU. 1997. World Telecommunication Development Report 1996/97. Geneva: International Telecommunication Union.

Primo Braga, Carlos A. 1997. "Liberalizing Telecommunications and the Role of the World Trade Organization," The Information Revolution and the Future of Telecommunications. Washington, D.C.: The World Bank/FPSI Network.

Wellenius, Bjorn, Peter Stern, Timothy Nulty, and Richard Stern. 1989. Restructuring and Managing the Telecommunications Sector. Washington, D.C.: The World Bank.
COPYRIGHT 1998 JAI Press, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1998 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:The Changing Role of International Capital in Latin America
Author:Braga, Carlos A. Primo; Ziegler, Volker
Publication:Quarterly Review of Economics and Finance
Date:Sep 22, 1998
Words:2452
Previous Article:Equity, foreign investment and international competitiveness in Latin America.
Next Article:Privatization and regulatory reform in Mexico and Chile: a critical overview.
Topics:

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters