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The current environment in the Latin American telecommunications market is one of perpetual change. After many years of significant investments made in infrastructure, many players are considering reducing their presence in the region due to the global economic situation. While many countries in the region have liberalized their markets (market leaders are Chile, Brazil and Mexico), there are still significant pockets of areas and market segments with restrictive competition practices as well as state-owned operator monopolies (Cost Rica, Ecuador, Honduras, and Uruguay).

After many years, the region’s key markets are witnessing open competition. However, in some markets this open competition is not yet a REALITY. In addition, we have seen major growth in the deployment of wireless, data and broadband services across the Latin American region. Much of the focus has been on Internet access and not content. But, there is a huge potential marketplace for the distribution of Spanish- and Portuguese-language content in many countries.

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It is easy to get excited about investment in Latin America in general, and in telecommunications in particular, particularly in such “hot spots” as Peru, Mexico, Chile and others, as evidenced by the hundreds of companies that have done so over the past decade. My presentation is designed to put that investment into a sober context of benefits and burdens, while observing what appears to be a phenomenon of a new economy driving the sector. The presentation begins with a brief history of the opening of the telecommunications markets in Latin America, with emphasis on a few countries that have attracted a high level of investor interest.

These include particularly Mexico, Chile and Peru, but also others who have rebalance tariffs, privatized the incumbent telephone company and/or otherwise pursued private investment in their telecom’s sectors. This brief background will examine private investment in the context of the Risk Factors to be considered; discuss some risks realized in the course of investment in Latin America; and finally look toward the new Millennium as the economics of the sector change.

Latin America has an interesting and successful recent history of attracting investment into its telecommunications sectors. Mexico privatized TELMEX, its then incumbent monopoly in December of 1990; Argentina, privatized ENTEL in 1990; Chile privatized both Entel and CTC in 1988; Venezuela sold control of CANTV in 1991; Peru completed its sale of control to Telefonica del Peru in 1995, Brazil belatedly and with vigor opened its incumbent carrier to private investment more recently and Colombia is now in the process of doing the same with its local as well as long distance carriers.

The histories are different, but similar. The similarities are described in this Part, while some of the national anecdotes of transitioning to a market driven telecom’s economy are set forth in Part II. The Latin American “model of privatization” is to sell a percentage of the shares of the incumbent Telco’s to a strategic investor, in exchange for which the investor gets operating and management control. This is true even with as little as 20.

4% sold of TELMEX, 40% sold of CANTV; and 45% sold of ENTEL Peru. Typically, the company’s shares are divided into different classes of stock, which allow the investor comfort in its control even though it controls a minority of the company’s equity. Also, typically in Latin America, the privatization of the incumbent is accompanied by a Concession Agreement, which acts as a license, a contractual obligation and a grant of a limited monopoly for a defined period of time.

In Latin America, the exclusivity periods ranged from 5 years to 10 years depending on the country and were limited to basic telephony service. Cellular, data and value added services were opened to competition roughly simultaneously with the privatization of the incumbent operator. The valuation of each company privatized, took into account its revenue streams, identifiable costs, customer base, cost of deploying infrastructure in accordance with the mandates of the Concession Agreement, and the regulation of tariffs.

The latter was further refined to an examination of long distance and international versus local exchange service, monthly recurring charges, per minute usage charges, installation charges, and commercial versus residential charges. As we will see below, the economics of the foregoing has dramatically changed in the late 1990’s and can be expected to continue to produce a completely new paradigm in the new Millennium. Part III will examine this.

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