TELEBRAS The Privatization Detour

Though Brazil was one of the first countries to introducetelephones soon after its invention by Graham Bell, growth rate did not matchthat of the developed countries. The Telebras system was created in the latesixties and early seventies during the military regime to stimulate growth oftelephony in Brazil. And since private entrepreneurs could not afford therequisite massive investment, the Government decided to undertake the venture.Several operating companies were set up with financial participation of thestate governments, private parties, and customers of the respective telephonecompanies. These companies were to operate in each state to provide localconnections. For long distance and international connections, a separate entitycalled Embratel was created.

There were also a few small independent operating companies–eitherowned by local municipal governments or private parties–that did not wish tointegrate into the Telebras system.

The system worked very well to service the huge Brazilianmarket with basic telephony, especially for the middle class residential marketand business sector. Another beneficiary was the rural market that could affordthe cost-
effective basic telephony through wireless or cable. Traditionally, both ruraland urban customers paid for the cost, waited for a period that ranged from twoto seven years before getting their basic telephone service hooked up. Thus,they financed part of the investment made by Telebras. The quality of theservice was good with the exception of large cities like Rio de Janeiro and SãoPaulo. However, as a state monopoly, Telebras stressed more on engineering andless on customer needs. The market started demanding lower user-rates.

The demand from the rural market was so heavy that Telebrascould not simply cope up with it. In 1992, it set up cellular telephone serviceall over the country ("A" band) and to certain extent alleviated thedemand both in urban and rural areas.

The late eighties and early nineties were the turning pointfor the Brazilian economy and the public sector industries. In order to reducethe huge internal and external debts, civilian governments decided to privatizethe various state-owned companies and banks. Both the banking and the stockmarket rules were changed after extensive debates in both the houses ofCongress. Since 1994, the state-owned companies are being sold in an orderlyway.

The Beginning

A national telecommunications agency called Anatel wascreated with ample power to coordinate the privatization of Telebras andintroduction of competition. It took the following decisions:

• The country was to be divided in three areas

• All the operating companies within these areas would be auctioned off to the highest bidders

• No single group could buy all the three areas

• Embratel was to be treated separately and sold off to a party that would not be allowed to buy any of the companies in the three areas

• The small independent companies, which were part of Telebras, were permitted to operate independently, but within the newly passed ‘General Laws of Telecommunications’

• The same criteria would be applied to the cellular companies also. That is, the cellular telephony departments of operating companies in each of the areas would merge to form a singular cellular company and would be sold off to the highest bidders.

This was the first phase of the privatization and thedeadline to accomplish this was the end of July 1998. The second phase of theoperation was opening up the telecom sector to competition. Anatel would auctionoff licences to set up and operate new companies in the three areas tointerested parties. Embratel, the long distance carrier, also would face similarcompetition.

The Auction

The three areas divided were Sao Paulo (TELESP), the areathat consisted of 16 states in the north and northeastern part of the country,and southern and central part of the country consisting of 10 states.

29 July 1998 was the D-day. After the courts overruledseveral court suits against the privatization, the auction started. Followingwas the result.

Telefonica of Spain bought TELESP. A consortium of variousnational companies and banks bought the companies in the north and northeast ofBrazil. Telecom Italia bought the remaining area jointly with a Brazilianinvestment-banking firm. Embratel was sold to MCI-Worldcom. While Embratelretained its name, Telemar was to be the name of the holding companies in thenorth and the northeastern parts of the country. Brasil Telecom was the name ofthe holding company covering the central and the southern parts of Brazil.

During the next six months and after several tender calls,licences were auctioned off for the competing companies. These are called "EmpresasEspelhos" in Portuguese or translated into English, "MirrorCompanies". Accordingly, the competitor of Telefonica is Vesper, that ofTelemar is Canbra and the "Mirror Company" of Brasil Telecom is GlobalVillage Telecom.

The most interesting fact is that Sprint and a group ofBrazilian investors brought the licence to compete with Embratel and named thenew company as Bonari (now renamed Intelig). When MCI and Sprint decided tomerge in 1999, Anatel objected to it and Sprint was supposed to divest itselffrom the group. However, it is to be seen whether it will happen now since MCIand Sprint called off the merger.

Operational Rules

As it was said before, now all the telcos have one competitorin the field where they operate, besides having two competing cellularcompanies. The telcos are allowed to lay their own backbones and compete forvoice, data, and video markets. The customers are given a choice to use anybackbone they desire, utilizing a 3-digit number to access it. For example, if acustomer wants to call long distance he can either opt for Embratel by dialing021 or Intelig through 023. These numbers were allocated to every company byAnatel. The six telcos that operate in the three areas mentioned before are notpermitted to give long distance connections outside their territory. However,they can use their backbones to interconnect within their territory, using the3-digit numbers allocated to them. Therefore, the business and residentialcustomers have a wide choice, depending on the quality and price each telcooffers. All of them are allowed to issue separate bills to their customer.

Current Situation

It has been two years since Telebras was sold away and it isinteresting to observe that the market has not yet perceived the benefit of thecompetition. That is because the old companies are still restructuringthemselves to become competitive and the new ones are yet to become fullyoperational. Many business customers are quite pleased with the progress and theservice they are getting. It is expected that the "Mirror Companies"will introduce new technology and better their customer service. The ruralmarket has been one of the most significant beneficiaries.

Anatel is about to grant licences to the power utilitycompanies into the telecommunications field, at least to lease theirinfrastructure to others. It is quite possible that the Internet ServiceProviders (ISPs) will be able to use their facilities to carry their signal tothe rural and urban areas.

Conclusions

Since the beginning of the privatization process till date,the debate continues about the benefits the country has obtained. The are stillprotests from the labour unions, various consumer groups and public at large.Many have come to see it as
an anti-social decision taken by the Government.

However, the process of privatization is bound to benefitseveral segments of the society. The market for telecommunications, includingIT, is bound to receive new technology at affordable prices. In the next fewyears there is likely to be a reduction in call rates. The poorer segment of thepopulation will have more access to pay phones, Internet connections, etc. Thelong neglected rural market will enjoy all the benefits of urban market. Thebusiness sector will have the latest technology at its disposal to take fulladvantage of the globalization of the Brazilian economy.

E-commerce in Brazil is not as developed as in countries likeUS, but an annual growth of 45 percent is expected in the next three years.Though the labour unions are chagrined at loss of jobs, the competing companiesare hiring the ones who lost their jobs in Telebras. Some have set up firms todo contract work in installation and maintenance of backbones, central offices,etc.

In a nut shell, the benefits of privatizing Telebras andopening the country to competition will be appreciated by the public at largeonly in a year or two. Till then doubts will continue
to exist.

Anant Murthy isdirector, Disque Amizade do Brazil Ltda/Digital Highway, Brazil