The new Colombian Minister’s 4-billion-dollar question

Posted on Thursday, August 30, 2018

As I reported a few weeks ago, Colombia’s new President (Iván Duque sworn in on August 7th) brought a new Minister of ITC (aka MinTIC), Silvia Constaín. Now she has given her first interview and laid out what her priorities will be.

The interview in El Tiempo was a week before her first major speech to the industry, at the annual Andicom conference in Cartagena. (No, this year I will not be there. The Minister’s speech will likely be on YouTube anyway. That suggests a debating topic for another day: “This house believes that face-to-face conferences in expensive tourist venues will go away.”)

“I want to connect the country and I want to connect it well”

The Minister says that this is was the President’s instruction to her when sworn into her post.

She was not more forthcoming on exactly why she (or the president) believes that the country is not well-connected, so the precise metrics and goals are yet to be determined.

4G coverage is pretty good in major cities but even 3G coverage can be pretty bad in rural areas and tertiary cities, without talking about the ‘urban centers’ of the country’s hundreds of rural municipalities where there can even be 2G challenges.

Colombia was recently admitted into the ‘rich nations club’ of the OECD (Organization for Economic Cooperation and Development). I have not done the research but I suspect the country does not fair well in technology comparisons with its new peers. This may be the concern.

In practical terms, I expect the definition of the term ‘broadband’ to increase, probably to double-digit megabits per second.

The government has definitely been bitten by the 5G hype bug: “There is no one in my office that is not thinking about 5G,” Minister Constaín told El Tiempo. If that is how she (and her boss) are defining being ‘connected well’ and, in addition, wants this to be deployed over Colombia’s vast and mountainous territory, the country has its work cut out for itself.

I hope that this is not just the Colombian elite’s usual complaint that the mobile operators provide undefined “bad service”. I have been hearing this for 20 years: that the service is poor, that I do not have the same kind of service in my country house or farm as I do in the city, that calls drop as roads weave in and out of mountain valleys etc. Then they fly to Miami and endure terrible service in flat terrain without a word – and without making the connection to the service they get at home. Since President Duque’s party is that of the country’s rich, constantly kvetching, elites, I worry about the problem being overstated.

“Without investment there will not be better connectivity”

She returned to the investment theme, several times in the interview, noting that it had fallen over the past three years and saying that “we need to recover the growth path.”

There is no question that investment has stalled at least by the two largest operators in terms of subscribers, American Movíl and Telefonica. This lack of investment is one reason, perhaps the main reason, why the country’s standing has fallen (slightly) in global ranking’s like the World Economic Forum’s competitiveness ranking or its Network Readiness Index. She says she is talking with the “principal actors” and went on to say “the government cannot do this alone.”

This is right on the money and while “the government cannot do this (invest) alone,” I believe the Colombian state (in the broad sense) is responsible for the current situation.

What created this mess?

One major player, ETB, the municipal phone company in Bogotá has been in stasis for several years now trying to privatize itself. The process has been delayed again and again by unions and politicians who fear the end of the ‘gravy train’. But while in the process, it is no doubt trying to keep its balance sheet and cash position as ‘attractive’ as possible and that usually means cutting back on Capex.

The number two mobile operator, Telefonica, has the Colombian government as a 32.5% partner. Having had State-owned enterprises as partners and members of the Comcel board, I can assure you that agility when it comes to investment decisions is not their ‘long suit’. From painful personal experience, I suspect that the government neither was able to shoulder its 32.5% share of Telefonica’s proposed Capex budgets nor prepared to be diluted. It may even have blocked the company from taking on more debt to cover the bill. That means Capex was likely restricted to coming from Operating Cash Flow and that has been under severe pressure lately, see below.

After the OECD put it on the to-do list, the Colombian government has finally decided to divest its stake. But doing so will not be easy. TEF will be stuck with MinHacienda (Finance) as a board member for several months more (at least).

Operating Cash Flow has been ‘pressured’ (to put it mildly) because Colombia’s regulator, the CRC, has spent the last several years systematically transferring wealth from the operators’ shareholders to consumers. It has arbitrarily lowered interconnection fees, lowered the tariffs for calls between fixed and mobile phones, fiddled with handset subsidies etc. The result has been sub-par performance by the entire industry. (A byproduct of this has been a complete collapse of the notion that the Colombian regulator is ‘independent’ or ‘technical’. Its actions have been rather obviously purely political.)

Lower Operating Cash Flow means lower Capex, either because there is simply less internally generated cash to spend, or because the banks are unwilling to lend money given that there is less cash to pay them back, or because the parent company is reluctant to ‘send more good money after bad’.

The 4-billion-dollar question

The elephant in the room as far as I am concerned, the single most important reason why America Movíl and Telefonica at least have dialed down their Capex, is the US$4B bill they were presented with for renewing their mobile licenses.

The original 1994 contract had a clause saying that if the contract terminated, the company’s assets would revert to the State. This comes from the regulatory framework for public utilities like water or electricity and the idea was that if the contract was canceled because of breech or if contract was not renewed then the government could assure continuity of service.

However, there was no breech, the two parties were obviously going to renew, and service continuity was never in doubt, but Colombian politicians saw a way to get a few headlines, some to enhance their Presidential aspirations, and to get some cash for the public Treasury.

US$4B of cash.

US$4B that could have been spent on broadening 4G coverage. Or, someday, on 5G.

I won’t go into the arbitrariness of the calculation or the unfairness of the idea in the first place. (Other operators were liberated from this obligation by a 1998 law. Local and international advice said the law was supposed to cover the two earlier contracts. But politicians are above the law apparently.) This is working its way through the courts and will no doubt take years to get resolved.

But the money had to be paid first and then fought over afterward.

The two largest operators are ‘out-of-pocket’ US$4B. For absolutely nothing. Just a ransom payment to keep operating.

And the Minister wonders why they have stopped investing?

I am sure someone will explain it to her.

If anyone needs a witness that MinCom (at the time) officials told investors that the reversion of assets clause would never be invoked under normal circumstances, I volunteer. I was there.

Unfortunately, Minister Constaín can do (almost) nothing about this. She cannot change a decision made by the previous government. She cannot give the money back. And, if she did do it somehow, the Colombia’s various overlapping and even competing ‘asustorias’ would order her to pay the US$4B out of her personal net worth.

The only way America Móvil and Telefonica will get their money back is if the courts give it to them. (And then have fun collecting!)

In the meantime, Colombia will probably continue to fall in the WEF’s ‘league tables’ and the Minister can do nothing to stop it but watch. ‘Jawboning’ only goes so far.


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