Asset Recapturing Undermines Competition Aims

Senator Juan Mario Laserna has submitted a proposal in Congress which would give the Colombian state a greater role in the governance of the telecoms sector. Among the initiatives under discussion is the possibility of creating a state-owned mobile network, by recapturing the infrastructure and spectrum from current operators Claro and Movistar when their licences expire in 2014. BMI feels that the decision to increase competition and quality in the mobile market is much-needed, however, we caution that recapturing Claro and Movistar's networks goes too far and will be met with serious opposition.

Colombia's Constitutional Court ruled in August 2013, that the contracts signed by the six com panies in March 1994 and which will expire in March 2014, are subject to a full 'reversal' clause. These six companies have since merged into Claro (subsidiary of América Móvil ) and Movistar ( Telefónica ), the two largest players in the mobile market which account for around 80 % of the mobile market between them. With extensive financial backing from their parents companies, it is estimated that the two have combined to invest around US$3.6bn in Colombia.

The 'reversal' clause means that all equipment used by the operators for the provision of mobile services must be returned to the state once the licence expires and is not renewed. This includes wireless spectrum, but also antennas, switches, buildings, towers, computers and base stations, for example. Spectrum is generally considered a natural resource that is the property of the government and rented out to operators for a contracted period of time and it is not unusual that the state would take this resource back once a licence expires. The contracts signed in 1994 allowed the use of equipment and infrastructure inherited from the state-owned former monopoly, as opposed to networks built from scratch by Tigo and Une-EPM , which the court confirmed are not subject to the reversal clause.

Lack Of Competition Stunts Growth
Mobile Penetration (%), 2007-2017

Senator Juan Mario Laserna has submitted a proposal in Congress which would give the Colombian state a greater role in the governance of the telecoms sector. Among the initiatives under discussion is the possibility of creating a state-owned mobile network, by recapturing the infrastructure and spectrum from current operators Claro and Movistar when their licences expire in 2014. BMI feels that the decision to increase competition and quality in the mobile market is much-needed, however, we caution that recapturing Claro and Movistar's networks goes too far and will be met with serious opposition.

Colombia's Constitutional Court ruled in August 2013, that the contracts signed by the six com panies in March 1994 and which will expire in March 2014, are subject to a full 'reversal' clause. These six companies have since merged into Claro (subsidiary of América Móvil ) and Movistar ( Telefónica ), the two largest players in the mobile market which account for around 80 % of the mobile market between them. With extensive financial backing from their parents companies, it is estimated that the two have combined to invest around US$3.6bn in Colombia.

Lack Of Competition Stunts Growth
Mobile Penetration (%), 2007-2017

The 'reversal' clause means that all equipment used by the operators for the provision of mobile services must be returned to the state once the licence expires and is not renewed. This includes wireless spectrum, but also antennas, switches, buildings, towers, computers and base stations, for example. Spectrum is generally considered a natural resource that is the property of the government and rented out to operators for a contracted period of time and it is not unusual that the state would take this resource back once a licence expires. The contracts signed in 1994 allowed the use of equipment and infrastructure inherited from the state-owned former monopoly, as opposed to networks built from scratch by Tigo and Une-EPM , which the court confirmed are not subject to the reversal clause.

Under the terms of the proposal, the operators would be required to acquire new spectrum licences and sign wholesale infrastructure deals to continue offering their services in 2014. In doing so, the government hopes to increase the level of competition in the mobile market, while also improving the service quality. The decision likely stems from the record fine issued by the Superintendency of Industry & Commerce (SIC) of COP87.8bn (US$45.2mn) on Claro earlier in September 2013. The company was accused of abusing its dominant position in the mobile market, blocking frequencies and delaying the completion of number porting beyond the legal period. The bill also includes provisions to strengthen the Communications Regulation Commission (CRC) to enable it to act against dominant providers and establish penalties. It will also prohibit telecoms companies from selling new lines when the service quality is deemed to be too poor, a move seen in Brazil in 2012 , and would also seek to bill voice services by the second rather than minutes.

BMI has long held the view that competition needs to be increased in the Colombian mobile market, as the dominant position of Claro has held the market back compared to its regional peers. In May 2013, we expressed concern that the Senate had decided not to pursue this course of action when it voted against a bill designed to reduce the dominance of América Móvil ( see 'Senate Ruling Hurts New Entrants', May 28 ) but with this latest development, it seems to have ramped up its interest in the sector. We believe that proposals to strengthen the CRC are much-needed given its inability to take action against Claro. However, other proposals are too extreme and would result in stunted market growth.

We would expect a strong challenge to be mounted by Claro and Movistar if the bill is passed to create a state-owned national network. At risk is the US$3.6bn invested by the two in expanding and improving existing infrastructure since 1994. The companies were granted spectrum for 4G services in the June 2013 auction, paying a combined total of COP317.9bn (US$16.6mn), meaning the threat of a reversal could negatively affect the levels of investment the two choose to commit to their 4G rollouts an d could actually result in poorer service quality. It is not cle ar at this stage whether the companies will be compensated for their investments over t he years, but we believe they will likely appeal the ruling.

BMI posits that issues of quality could be addressed through network sharing between the operators, minimising costs and increasing the level of competition. An agreement to share 4G infrastructure between Movistar, ETB, UNE and Tigo will be extremely beneficial over the long-term for all involved, and should bring forward the commercial launch date of 4G services for consumers. The regulator should do more to encourage these agreements, as a non-intrusive and less extreme way of intervening in the sector.

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Sector: Telecommunications
Geography: Brazil, Colombia, Colombia
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