Privatization Of The Telecommunication Sector example essay topic

Brazil and Privatization Due February 22, 2005 Brief History The earliest inhabitants of Brazil were the Indians. However, the country's recorded history begins with the arrival of the Portuguese in 1500. The Portuguese sailor Pedro A lvares Cabral visited the continent we call South America, eight years after Columbus arrived in America. Portuguese settlers followed, calling the new colony Brazil, after the brazil wood tree that they extracted red dye from. The Portuguese did not bring prosperity and progress to the Indians.

Instead, they unintentionally infected and killed thousands of Indians with diseases such as measles and smallpox. The growing number of settlers spurred the exploration of Brazil. Frontiersmen called established Brazil's claim to lands in the west. Their main purpose was to search for slaves and gold. They found gold in Minas Gerais in 1693, setting off a gold rush that drew thousands of settlers to Brazil's center. During the 1500's and 1600's, five million African slaves were brought to Brazil to work on the sugarcane plantations.

The slaves did not submit willingly to their fate. Many escaped and formed independent colonies called. After Brazil gained independence, a movement to end slavery slowly grew. Slavery was abolished in 1888. Brazil was the last country in the Western Hemisphere to abolish slavery.

Brazil was declared independent of Portugal in 1822 and became republic in 1889. Since then the country has been run by democratic governments and by military governments. Brazil today is a democratic republic with a president. In the 1950's, extensive amounts of money were spent on building hydroelectric plants, highways and other economic projects. This set the stage for future growth, but also brought economic problems by putting the nation into debt. In the 1970's industry grew and provided thousand of jobs under military rule.

The economy stopped growing in the 1980's and Brazil was unable to pay back its loans again. Frustrated by the debt and growing public discontent, the military handed power back to the civilian government in 1985. Culture Brazil has a huge range of music and dance styles. Brazil's music, dances and instruments are developed from the blending of European, African, and indigenous Indian roots. The most famous dance is the samba, which is their national beat. Another special kind of dancing is called, a mixture of martial arts, dance and fighting.

Brazil is also famous for its sculptures. Their most famous sculptor is also one of the world's most remarkable artists, Antonio Francisco Lisboa. He became known as Aleijadinho, the little cripple, when a disease paralyzed his hands. He tied a hammer and a chisel to his wrists and continued to work. Brazilians also love sports. There is 8,000 sports clubs all over the country.

They enjoy water sports, basketball, volleyball, tennis, and boxing. But none of these sports rivals their all time favorite, soccer. Brazilian's call it. Scoring a goal in the world's soccer championship is the dream of every Brazilian boy. Language Brazil's national language is Portuguese. Like the United States' English differs from England, Brazil also developed a character of its own.

The difference is mostly from the influence of Brazil's Indians. Other influences are attributed to the African heritage and German, Italian and Spanish immigrants. Their alphabet has three fewer letters than English, missing "k", "w", and "y". Political Makeup During Brazil's 20 years of military rule, the army had almost complete control and congress had little power. Since 1985 the government has been in the hands of civilians. Brazil is a federal republic under the leadership of a president whose powers are similar to those of the president of the United States.

A vice-president and the cabinet consisting of state ministers support the president. The government is divided into the executive, legislative and judicial branches. The president and the cabinets make up the executive branches. The president serves a five-year term and cannot be re-elected. Demographics Brazil is the largest country in Latin America in both population and landmass, bordering every country in South America except Chile and Ecuador. Covering approximately 3.3 million square miles, Brazil is the fifth largest country in the world, only slightly smaller than the size of the continental United States.

Covering half of the country, the North contains the dense and tropical lowland basin of the Amazon, the world's largest rain forest and largest river in volume of water. In the Northeast, the most economically disadvantaged and heavily settled region of the country, agriculture is the main economic activity. The South Central region, the country's wealthiest area, contains half of Brazil's total population as well as the urbanized and industrial centers of S~ao Paulo and Rio de Janeiro, the third and ninth largest cities in the world. Population Mix and Currency The population estimate in 1999 was 171,853. Their ethnic groups include: white (includes Portuguese, German, Italian, Spanish, Polish) 55%, mixed white and black 38%, black 6%, other (includes Japanese, Arab, Amerindian).

The currency is the Brazilian Real. (1.795 Reals = 1 US Dollar) Privatization in Brazil What is privatization? Simply put privatization is the transfer of assets or service delivery from the government to the private sector. Privatization runs a very broad range, sometimes leaving very little government involvement, and other times creating partnerships between government and private service providers where government is still the dominant player. It also includes a wide range of public-private partnerships, such as voucher systems. Even the creation of federal corporations, quasi government organizations and government-sponsored enterprises is often filed under the general category of privatization.

In such organizations, though, it is often difficult to tell where government ends and the private sector begins. 1 Privatization in Brazil During 1994, Brazil's national government began considering privatization plans to generate badly needed investment capital. The government was not able to provide fundamental social rights, such as education, health, justice and public security, because of their enormous public debt. The government's goal were to: Reduce public sector debt Reduce the government's role in the economy and allocate more resources to social investment Encourage increased competition and thereby raise the standards and efficiency of Brazilian industry Strengthen the capital markets and promote wider share ownership. 1 Between 1991-1999 one hundred, twenty-three state and federal companies were privatized, generating over $89 billion in proceeds that helped finance elevated current account deficits and keep public debt under control. Privatization in Telecommunications and electrical sectors In 1998, Brazil led the world in the number of companies that were privatized in the areas of telecommunications and electrical energy.

The BODES, the Brazilian bank organizing the privatization program stood to collect approximately $80 billion from the privatization of the telecommunications and electrical sectors. 2 Privatization in Telecommunications The change in the Brazilian telecommunications sector was impressive. It went from a state monopoly system without a regulatory environment (frequently inefficient, and investing much less than necessary) to a new sector with a modern and competitive structure, fueled by large investments and commitments from aggressive investors. The privatization of Telebr " as was thought to be politically impossible in 1993 became a reality on July 29, 1998. Brazil's government sold 51.79 percent of the voting shares in Telebr " as (approximately 19.26 percent of the company's total capital) for US$19 billion, it was one of the world's largest privatization's. There was a series of major challenges that lead up to the successful result of privatization.

The first was the change to the Brazilian Constitution of 1988, which instituted state's monopoly in the sector. In addition to a change in the constitution, there were six other necessary steps before privatization could be successful: Preparation of a new law which would change the role of the state in the sector; Establishment of an independent regulatory agency; Creation of a competitive environment after privatization; Re-balancing of tariffs and the reduction of crossed subsidies; Creation of a model able to handle the transfer of a state monopoly to the private sector, protecting the sometime conflicting interests of the government and of the minority shareholders of Telebr " as; and Preparation of the Telebr " as companies for privatization. History In 1995, telecom sector was still under rule of the "Brazilian Telecoms Code" of 1962. The basis of this code was that the state held a significant stake in providing and operating telecommunications services. The 1962 Code: Defined the attributes of the state Defined telecommunications services and divided them into categories Created the national Telecommunications Council, a regulatory agency for the sector which was subsequently abolished by the Color government Authorized the executive branch of government to constitute a state-controlled company to provide lone-distance telecommunication services itself and Establish the nation Telecommunications Fund (FNT), to finance Embratel.

At this time the dominant telephone company in Brazil was a subsidiary of the Canadian Traction, Light and Power Company. It operated 62 percent of the fixed telephone lines in Brazil. Brazil had 1.3 million telephone lines for a population of 74 million, a density of 1.7 telephones per 100 inhabitants. At the time of privatization there were 14.8 lines per 100 inhabitants.

Embratel was founded during this time, it was a long-distance company that interconnected all the Brazilian capitals and main cities. Embratel was state-controlled entity that serviced all long distance. In 1972, the creation of Telebr " as was another important step the government took the in the process of nationalization and unification of the country's telecommunications system. After Telebr " as was set up it intensified the process of taking over other companies which had set up telephone services. As a result, Telebr " as dominated approximately 90 percent of the Brazilian telecommunications sector. Telebr " as was created as a holding company whose purpose was to control an operating company in each state of the Brazilian federation, and Embratel.

It's functions were to manage the federal government's stock holdings in each of the operating companies and to raise funds in the foreign and domestic capital markets to be transferred to the subsidiaries to execute projects approved by the government. Embratel and Telebr " as carried out an important role in the unification and creation of a basic telephone network in Brazil and achieved the economies of scale inherent in telephone services. At the end of the 1980's, they were showing clear signs of reaching their limit of effectiveness. The telecoms sector was already undergoing rapid technological changes and demanded fast reactions from operators of services to meet growing demand for specialized services. Telebr " as and its subsidiaries did not have the ability to meet the growing demand for investments. As a government company they were subject to wide-ranging regulations and the government approved all strategic plans and investments.

The control over tariffs and Telebr " as lack of independence determined the level of indebtedness. This lead to the first steps in changes for the sector. For and Against the Privatization of Telecommunications Who is in favor of privatization are the mainstream media; the general public; influential journalists, administration, powerful multinational telecommunication companies, industry representatives, and many more. They are in favor of privatization because: 6 Brazilian telecommunication was inadequate, inefficient and expensive.

Good telecommunication is vital to development and LDC governments do not have the funds or know-how to effectively implement and upgrade their telecommunications infrastructure. Service under the principles of competition and private capital work more efficiently and will help LDC's develop more quickly. Monopolies reduce creativity, workers were not motivated, marginalize the client, and do not encourage incentive to invent. They nearly always result in low productivity. In a country full of corruption, monopolies only benefit their own workers, the suppliers and the politicians involved. Those against privatization are socialist organizations such as the syndicates with ties to the CUT; political parties such as PT, PDT, the PC of B; minority sectors of the Catholic Church; and some journalists.

They are against privatization because: 6 Telecommunications are a natural monopoly Only the government would ensure the services are equally distributed to all regions. Private capital only flows to lucrative mark et areas. Leads to the loss of many jobs and government revenue, welfare will not be maximized It is the mark of independence. The size of the private telecommunications companies will eventually lead to private monopolies. It is in the best interest of national security for the government to control telecommunications. The Privatization of the Telecommunications sector In 1995 Constitutional Amendment No. 8 changed Article 21 of the 1988 Constitution.

4 This was the first step in the replacement of the state-controlled model to a model that made faster decisions so it was able to meet the growing demand of the private sector for specialized and valued services. It ended the state monopoly for operating telecommunication services. At the same time, preparations were being made for the privatization of the Telebr " as companies. The Telebr " as subsidiaries were divided into 26 operators, on for each of the 26 states (which exception to State of Rio Grande do Sul which had its own telephone company), one municipal operator, and the long-distance carrier, Embratel. Telebr " as held at least 80 percent control of the voting stock and 67 percent of the total capital of its subsidiaries at the time of privatization. Tariffs Re-balancing of tariffs was a change needed for the privatization process.

The government would not succeed in attracting investment in basic telephone service if this activity did not offer an attractive return. In 1995, there was a major distortion in the form of the high crossed subsidies between rates charged for long-distance and local services. Due to the low tariffs, Telebr " as had unsatisfactory cash flow and prevented an increase in investments. The distortions were certainly significant and changes were desperately needed to consolidate reforms that would enable the sector to recover its investment capacity and to become competitive. The first step was a courageous one. In 1995, the Brazilian government increased the residential subscription by a factor of five and the cost of local calls by 80 percent.

Domestic long-distance was increased by 22 percent. This was important for enabling Telebr " as to recover its ability to generate cash flow. The re-balancing put Telebr " as closer to international levels. The following table shows the tariffs before privatization and at privatization in comparison to International levels. Brazilian Tariff Structure (in US $) Services Brazil Argentina Chile USA July 1994 November 1995 May 1997 Wireline Installation n / a n / a 43.10 250.00 183.00 50.00 Local Services Residential - Monthly Charge 0.63 3.86 11.91 12.75 19.48 12.50 Commercial - Monthly Charge 7.45 13.45 17.87 36.16 19.48 17.313-minute Local Call (peak time) 0.03 0.05 0.07 0.09 0.04 0.08 Domestic Long-Distance Service (1 minute) 0.26 0.31 0.21 0.28 0.21 0.23 International Service (1 minute) 2.61 1.78 0.93 1.40 1.35 0.69 Mobile Cellular Service (1 minute, local) 0.34 0.38 0.32 n / a n / a n / a Rates ere in effect at the time of privatization in July 1998 Telebr " as tariffs were extremely competitive in world terms when they privatized in 1998, with the exception of cellular and international services.

In 1997 the Congress of the General Telecoms Law was passed. This changed the government's role in the telecoms sector from provider to regulator. The main point was: telecommunications services will be organized on the basis of free, wide-ranging and fair competition between all service providers and the Public Sector must act to ensure this, to correct the effects of imperfect competition and to suppress actions which may subvert this economic state of affairs. This made the government's role as regulator clear.

After years of state monopoly, the demand for a regulatory agency was needed to set the basic rules and exercise the role of arbiter in disputes among other functions. So section 8 of the Congress of the General Telecoms Law created Anatel. Anatel safeguarded the administrative flexibility and financial independence of the regulatory agency. Anatel's first duty was to prepare and propose two plans that were necessary for the privatization of Telebr " as. The two plans were The General Concessions Plan and The Telecoms Services General Universalization Plan. The General Concessions Plan was approved in 1998.

It established the rules for concessions of public telephone services. Based on this plan Brazil was geographically divided into four areas for provision of wire line service: 1 the state of Sao Paulo (Telesp), 2 the Northern and Northeastern regions (Tele Norte-Leste), 3 the Center-West regions (Tele Centro-Sul) and 4 the whole country, for long-distance (Embratel). Anatel is now fully operative and played an important role in the preparation for the privatization of Telebr " as. Anatel also has the duty of defining different types of telecoms services as a function of their purpose, the way they are provided, their form, means of transmission, and technology used. They also acquired control of tariff levels. The Telebr " as privatization was one of the largest and one of the most complex in the world.

There was the regulatory challenge to avoid the transfer of a state monopoly to a private monopoly and assuring the rights of minority shareholders, while also guaranteeing that the government received the premium paid for control at the moment of privatization. There were three possible models for the privatization of Telebr " as: Model A - the government would sell its 51.79 percent stake in voting stock Model B - the government would maintain its take and Telebr " as would begin to sell its subsidiaries Model C - the government would spin-off Telebr " as into local companies, plus the long-distance carrier company Model A was the fastest way for the privatization sale but it did not ensure that the state monopoly would not turn into a private sector monopoly. Model B was the least favorable because it put the minority shareholders at risk. Model C was the one adopted by the government. Model C allowed the government to receive the control premium from privatization, assured the rights of the minority shareholders and created necessary conditions for a competitive environment.

The twelve companies were also divided into 3 categories and the government also imposed a rule that only one company in each group could be acquired by one controlling shareholder to avoid private monopoly. The auction of these companies was scheduled for July 29, 1998. It took place on its scheduled day despite problems of lawsuits and the upcoming election. It was also completed earlier than most had expected: all 12 companies were auctioned in less than 6 hours on the Rio de Janeiro stock exchange. The premium achieved by the government exceeded all expectations.

The results were as follows: Result of the Telebr " as Auction 3 Company Winning Consortium Minimum Price Price Obtained Premium %Telesp Telfonica de Espana, Portugal Telecom, RBS, Iberdrola, BBC 3,028 4,974 64.3 Tele Norte-Leste Andrade Gutierrez, La Fonte, Ine par, Macau, Local Insurance Companies 2,924 2,954 1.0 Tel Centro-Sul Telecom Italia, Alga r, Opportunity, Splice 1,677 1,780 6.2 Telesp Cellular Portugal Telecom 946 3,086 226.2 Tele Sud este Cellular Telefonica de Espana, Iberdrola, NTT, Ito chu 490 1,170 138.6 Tele Sul Cellular Telecom Italia, Globopar, Bradesco 198 650 228.7 Tele Centro Cellular Splice 198 378 91.3 Tele Nordette Cellular Telecom Italia, Globopar, Bradesco 194 568 193.3 Tele Leste Cellular Telfonica de Espana, Iberdrola 108 348 224.0 Tele Norte Cellular Tele system, Local Pension Funds, Opportunity 77 162 108.9 Embratel MCI 1,548 2,279 47.2 Telebr " as 11,586 18,952 63.6 In US$ Million After Privatization The privatization of telecommunications in Brazil was one of the last to take place in Latin America. Brazil's process differed from the other countries in the way they introduced competition and handle tariffs. The Brazilian government did not give a period of monopoly to the new controlling shareholders. This allowed part of the productivity gains to be passed on to the consumers. The distortions of tariffs were corrected before privatization. These made the impact of cash flow clear and reduced uncertainties for the buyers.

It limited the management fees paid to the strategic operator of a telecom company. The regulatory agency was established and fully operational before privatization. This reduced risk, making the rules of the game clear. The government made it clear that competition would be introduced in each area immediately. After Telebr " as privatization, Anatel was able to grant an unlimited number of local, domestic long-distance and international licenses to provide additional competition. Industry observers hailed it as the country's most significant privatization in three decades.

Brazilian's government declared the growth of the telecom sector essential to the development of its economy. Being the sixth most populated nation, Brazil had much to gain from its underdeveloped wire-line infrastructure. According to a study from the research firm Frost & Sullivan, the investment in telecom was projected to exceed $200 million by 2003.5 Market Overview By the end of 2003, Brazil had just over 39 million telephone lines in service, one of the highest in Latin America. The market remains dominated by the former Telebr " as operating companies, which between them operated approximately 95 percent of Brazil's lines in service.

With the increase of the lines installed and in service, waiting lists for lines had fallen sharply. Brazil's fixed-line operators are now permitted to offer fixed-line services in each other's concession areas. Telesp was the first operator to take advantage of this in May 2003. It introduced services in six additional states. Telesp has also offered domestic long-distance services outside of Sao Paulo to the corporate segment of the market. While Embratel continues to dominate the long-distance market, they began to face increasing competition from the country's former local incumbents and from new entrants such as AT&T Latin America.

After seeing it financial position weakening in 2003, Embratel has seen a recovery in early 2004. This increase was due to tariff increases and improved long distance and local service revenue. In the cellular sector, there were 46.4 million cellular subscribers in Brazil. By March 2004, the total had risen to 49.14 million. Brazil's mobile market is still dominated by prepaid customers, which account for approximately 73 percent of the total subscriber base. In 2000, the internet services had approximately 200 internet service providers with the introduction of free internet services by a number of companies.

There were some 17.6 million internet users in 2003. Conclusion The Brazilian government successfully balanced its two conflicting roles of regulator and shareholder. It opened a competitive environment in the sector and achieved the maximum possible value from the sale of its assets. The government could have gotten a higher price if they allowed a period of monopoly, but it was not in the best interest of society as a whole or for consumers. The route they chose was a balanced one. The government and society gained from this process and it will have better and more competitive telecommunications service.

The success of privatization in the telecommunications sector opened up many opportunities for competition in other markets. For instance, the growing wireless industry, internet markets, and construction for added lines. A larger internet market could give Brazil an opportunity to increase sales of products due to online purchasing. I think the privatization of the telecommunication sector was a good choice.

It resembles the U. S in the 1980's when the government dissolved AT&T Corp's hold on the telephone market by opening it to competition. As a result, the cost to the consumers decreased. The cost of phone lines that once had a three-year waiting list and could cost up to $4,000, now have only 24-month waiting list and the cost approximately $1,000. Unless a government can afford to maintain an industry and keep up with the changing technology, the best way to optimize economy for their country is through competition.

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