Hanging Up On the State

Hanging Up On the State

In Brazil you own a phone like you own your car. And
while used car prices fall, used phone prices only rise. To buy a phone
is a great investment. You cant get a telephone in Rio or São Paulo
very quickly. With $3,000 you can get yourself a cellular in no time at
all and, depending on the line location, $3,000-$6,000 will buy a conventional
telephone line. The alternative is to pay more than $1,000 in monthly installments
in the so-called self-financing plans. But then you will have to wait years
for an actual line. All of this should change soon.
By Emerson Luís

Brazil ranks tenth in Latin America in the number of telephones per
capita, with 10 telephones for every 100 people. In São Paulo, South
America’s largest city, the situation is only slightly better with 15 lines
per 100 inhabitants. As a result, there are 10 million hopeful people on
waiting lists to get a conventional telephone line in Brazil and seven
million more hoping to put their hands on a cellular telephone. After paying
hundreds of dollars, their wait could last up to three years. And these
are the lucky ones, since there are millions more who were not even able
to secure a place in line.

In Brasília, the nation’s capital, there are 400,000 residents
who have paid for mobile phones and now are waiting to receive them. In
the greater Sao Paulo area there are another 460,000 people in the same
situation. Since November 1994, in São Paulo itself, people cannot
even apply for a telephone line. When Telesp, the São Paulo state
phone company, begins selling lines once more, up to three million people
are expected to apply for them. To begin solving this chronic lack of telephones,
the government would need to invest at least $8 billion a year, but it
has not committed more than an average of $3.5 billion for the last few

For some time now, privatization of the telecommunications industry
has been presented by the government itself as the only solution to this
predicament. But the process has been slow and much depends on the political
will of Congress, which has the last word on the matter. Telebrás,
the federal agency that monopolizes communications in Brazil, has been
a national and inexhaustible pork barrel for politicians seeking to reward
their protégés. There is much hope, however, that 1997 —
the eve of the 21st century — will witness the start of a process
that will usher the telephone service in Brazil into the 20th

The Câmara dos Deputados (House of Representatives) has approved
a law that allows the participation of private capital in the telecommunications
business since May 1996, but nothing will change for some time. The lengthy
process of opening the market is starting with the sale of only the B-Band
part of the spectrum for cellular telephones. (The A-Band will continue
to be operated by the state for now.) These concessions from the government
will be granted for 15 years, and if everything works as planned by the
Communications Ministry — and few people believe it will — the first concession
contracts should be signed by June and the first private cellular telephone
companies should be operating at the end of this year.

The overly optimistic minister of communications, Sérgio Motta,
believes that private telecommunications companies will invest at least
$8 billion by the end of 1997 and that, by December, 5.5 million Brazilians
will have their cellular telephones, a number double that of cellular phones
now available. Motta is working with these unrealistic deadlines in an
apparent attempt to pressure Congress to approve additional laws that will
facilitate a broader privatization of the communications sector. He wants,
for example, the Lei Geral (General Law) which would establish the ground
rules for privatization, to be ready by April. No one believes this to
be even a remote possibility.

One of the skeptics, Boavista bank director Graça Paiva, declared
to the daily newspaper O Estado de São Paulo: "In 1996,
we wasted time with endless postponements. This year has to be one of definitions.
The investor who wants to apply in the sector will not be waiting until
Brazil decides for privatization. To not make a decision fast is to miss
the appreciation jump." Responding to the critics, the Communications
Ministry’s executive secretary, Renato Guerreiro, declared: "Brazil
is getting into the train of history as a locomotive and not as a wagon."

Minister Motta also would like to start privatization of the communications
sector before the end of the year, "and by the end of 1998, complete
the privatization of the system, or at least make it irreversible,"
as he declares in a document called "The Changes in the Communications

Communications in Brazil are currently centralized at Telebrás,
which serves more than 90 percent of the national telecommunications network
(some state and municipal companies do the rest). It is also the holding
company for 27 state subsidiaries and Embratel, the long-distance and international
carrier also in charge of the Internet service in the country. The privatization
will begin with Embratel and São Paulo’s Telesp, the largest Telebrás’
subsidiary, which represents more than 30 percent of Brazil’s 15 million
telephone lines.

The sheer size of the industry’s potential is causing the world to salivate
over the Brazilian telephone market. The biggest names in telecommunications
from the United States, Europe, and Asia are lining up in the hope that
Brazil will have close to 60 million telephones by the year 2003. According
to American Pyramid Research, Brazil will spend $79 billion in the next
three years on telecommunication services and equipment. The Communications
Ministry has forecast $100 billion in government and private investment
in the sector over the next seven years. The government alone expects to
receive $15 billion from the sale of the state telephone monopolies and
licenses for cellular services. The ten concessions to be sold nationally
for cellular networks will bring from $2 to $3 billion to the government

It is estimated that there will be 350 million cellular phones in the
world by the year 2000. Ten million of them will be in Brazil. "Brazil
is the biggest market for the cellular phone in Latin America," says
Mark Shultz, AT&T’s vice-president for international development and
operations. According to him, Brazil is the number one priority at the
American giant. AT&T, together with its Brazilian partners, Globo and
Bradesco, intends to invest $400 million of a total of $1 billion if it
wins its bidding for a cellular concession.

Five American telecommunications companies have already joined forces
with Brazilian firms in order to get at least a piece of the action. They
are, in addition to AT&T, Air Touch (together with Empresa Folha da
Manhã, Stelar Telecom, and Unibanco), BellSouth (with O Estado de
São Paulo, Rede Brasil Sul, and Safra bank), Southwestern Bell (with
AG Telecom, General Electric, Mannesmann, and Monteiro Aranha) and GTE
(with Sistema Brasileiro de Televisão and Mitsui). Also joining
in the contest are Bell Canada, Telia from Sweden, DDI from Japan, Stet
from Italy, Millicon from Luxembourg, Hutchinson from Hong Kong, and Korea
Telecom and Korea Mobile Telecom, both from South Korea.

The removal from the state ` s hands of the long-distance and international
services now monopolized by Embratel will also generate immense interest.
This is a very lucrative sector and Embratel has seen its monopoly eroded
by US telephone companies that offer much cheaper service through the so-called
"call back." Brazilians call a special number in the US, let
the phone ring once, then hang up. The American service returns the call,
thus completing the connection as if it were being done in the States.
"Our priority is to get more involved with Brazil," said American
MCI’s senior vice-president for international affairs, Lawrence Codacovi.
With offices in Brazil since 1992, Sprint, another US firm, has joined
forces with German Deutsche Telekom and French France Telecom to create
the Global One company. While Embratel does not share the benefits, Global
One is investing $10 million in Internet service. "If there was a
long-distance license open for competition in Brazil, we would be investing
in it right now," said Francisco Loureiro, president of Global One.

It will take some years before the monopoly of the 27 subsidiaries of
Telebras is broken and the companies are reconfigured into several groups
across the country. Industry observers are already calling the future entities
"baby-brás," since the Brazilian privatization plan is
being modeled on the breakup of the AT&T monopoly in the US that produced
the seven "Baby Bells." It is not clear, however, how such a
division would be made. If a geographic criterion is chosen, it is probable
that the companies with the choicest markets — like those from Telesp in
São Paulo and Telerj in Rio — will also have to accept less developed
regions, so the whole country can be served without regard for market size.

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