YOU ARE AT:Archived ArticlesANALYSTS SAY ROAD TO BRAZILIAN PRIVATIZATION MAY PROVE BUMPY

ANALYSTS SAY ROAD TO BRAZILIAN PRIVATIZATION MAY PROVE BUMPY

The privatization of Brazil’s cellular telephone industry appears to have moved forward in recent weeks with the announcement of the sale of the country’s first B-band concession.

But while one Brazilian analyst’s reaction to the announcement was: “Everything’s on track,” a number of other Brazil watchers believe the government’s recent disqualification of a handful of prominent auction players might herald the beginning of a protracted legal battle that could bring privatization progress in Brazil to a screeching halt.

First, the good news: With a who’s-who of global wireless players lined up to do business in Brazil-a country rated second only to China in projected wireless growth during the next five years-the Brazilian tele-communications ministry on June 4 granted its first major private wireless license to Americel, a Canadian-led consortium that includes Bell Canada, a unit of BCE Inc.; Telesystem, another Canadian company; Citibank; Brazil’s Opportunity bank; and pension funds owned by Banco do Brasil.

Americel offered 338.5 million reals ($314 million) for Area 7, a largely rural sector that encompasses central and western Brazil. Americel was the lone bidder for the license.

The Area 7 contract “is just the first part of a big game in wireless in Brazil,” said Humberto Baranek of local bank Banco Pactual. Other industry analysts have characterized the Brazilian auctions as “a wireless Mardi Gras.”

Cellular activity in Brazil, fueled by deregulation and a strengthening economy, is currently enjoying a 70 percent annual growth rate.

The vast majority of Brazil’s cellular systems use Advanced Mobile Phone Service analog networks. As subscriber numbers have increased-to more than 2 million today, accounting for nearly half of all Latin American cellular users-capacity has become an increasing problem. As many as 5 million Brazilians are said to want cellular service.

But if more B-band spectrum is licensed, pent-up demand for wireless services should be relieved. Government forecasters predict Brazil will have between 10 million and 12 million cellular subscribers by 2000, representing a whopping 192 percent annual growth rate.

The proposed liberalization of Brazil’s lucrative cellular market has attracted wide interest from major global operators. This past April, the Brazilian government’s B-band license tender announcement drew bids from 15 foreign and local groups.

With nine remaining licenses yet to be awarded, experts are predicting large premiums, especially for the potentially lucrative concession that covers Sao Paulo.

But with the good news of the successful sale of Area 7, the Brazilian government also announced some bad news: Five of the groups submitting bids were disqualified from the auction for either failing to provide sufficient financial guarantees, prove members had legally formed a consortium or for not using an officially sanctioned Brazilian translator for preparation of documents.

The disqualified groups, which included Tess, Algar and MCOM, all had planned to compete for Sao Paulo and Rio de Janeiro concessions. They were given five days to appeal the government’s decision and if one or more of the groups chooses to mount a direct appeal or subsequent legal challenge-“a high probability” according to one analyst-it could delay significantly the sale of the remaining B-band licenses and also could cloud the awarding of the Area 7 concession.

“Several of the consortia that were disqualified contain notable Brazilian partners,” said Ed Czarnecki, director of international consulting with BIA International. “If lawsuits occur, it will certainly delay the entire process, beginning with the award of licenses to the acquisition of necessary permits to the physical buildout of the actual networks.”

With a population of 161 million, landline phones serve only one of every 11 Brazilians and more than 10 million people are reported to be waiting for basic phone service.

Meanwhile, the government also is reported to be making slow-but-steady strides toward privatization in its A-band arena, up to now dominated by state-owned Telebrasilia, which oversees 27 regional A-band operators. Those affiliates eventually are expected to break off from the parent company and merge into about nine private regional operators.

The 10 domestic and international groups still in the running for the remaining nine B-band concessions include AT&T Corp., France Telecom, Societa Finanziaria Telefonica SpA, DDI Corp. and Motorola Inc.

Under the rules of the government tender, Brazil’s B-band operators will be limited to 49 percent foreign ownership for the first three years of their 15-year regional licenses.

The government will allow the winning companies to choose the specific technology deployed in each service area.

The auctions are expected to raise as much as $4.5 billion for the Brazilian government.

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