Envío Digital
Central American University - UCA  
  Number 173 | Diciembre 1995



Privatizing TELCOR: Not the Only or Best Solution

The present times require that behind every protest there be a proposal, one that responds to every neoliberal measure with a viable alternative. Whether successful or not, the proposal should make us think and should show us that the present model is neither the best nor the only one. The TELCOR workers provide us with such a proposal.

Nitlápan-Envío team

Comments on the proposal by the TELCOR National Workers Federation, "Enrique Schmidt Cuadra," titled, "TELCOR: Supporting Stability and Development," and a synthesis of that document.

Debates around the property issue have been accompanied for many months by another issue: privatization of TELCOR, the state telecommunications institute. The government is so confident that the National Assembly will approve its privatization that TELCOR was not included as a line item in the 1996 national budget.

The privatization of TELCOR was born as a condition of the International Monetary Fund, but has been presented by the government as a sort of magic solution to the property issue. The official argument is not only that we must meet our commitment to the IMF if we want to avoid scuttling the Enhanced Structural Adjustment (ESAF) agreement, but also that "the reconciliation of the Nicaraguan family," so affected by the property issue, demands the sacrifice of privatizing one of the public sector's most profitable institutes. This line is capped by the promise that, once privatized, TELCOR will modernize its technology beyond all imagination. "We will all come out ahead with privatization!" has been repeated throughout the media for almost two years in the country's longest and surely one of its most costly publicity campaigns. Wielding these arguments, the government has execrated all those opposed to privatization and has put constant pressure on National Assembly representatives and TELCOR union workers.

No Justification to the Rush

In May, during the executive legislative conflict that saturated the first half of 1995, the National Assembly rejected a hidden privatization proposal that the executive presented in the form of a presidential decree. After finally hammering out the Framework Law to regulate the relationship between the executive and legislative branches, the Assembly now has the titanic job of passing legislation to resolve the property problem, privatize TELCOR and reform the Electoral Law, not to mention approving the 1996 General Budget, all in the next two months.

Rushing on such a delicate issue as TELCOR is not justified the problems of ESAF financing are different and are totally the government's responsibility. Furthermore, privatizing TELCOR will not magically solve the complex property problem. Reducing the time and space for debating the country's options only favors very specific interests; it can only be a tactic to rush through what will be a stunning blow to the public sector.

Resolve the Property Issue?

To open up the debate and seek the best options for the country, the TELCOR National Workers' Federation is offering a reasonable alternative titled "TELCOR: Supporting Stability and Development." The proposal was formulated with the collaboration of a group of technical specialists from various public and private institutions, coordinated by economist Adolfo Acevedo, The union was also backed by Haroldo Montealegre, banker and director of the rightwing newspaper, La Tribuna.

The government argues that the profits from privatizing TELCOR will be used to revalue the indemnification bonds given to all those unjustly confiscated in the 1980s who agreed to accept them. The union proposal, however, reveals that, given the low initial value of the bonds, many of their holders sold them to national speculators for a song between 1991 and 1993, a period in which the FSLN government alliance offered scant likelihood that their demand to revalue the bonds would be met. Now that the political winds have changed, these speculators, a small but very influential group, have joined the IMF and the government in pressuring for TELCOR's privatization. They stand to close the deal of their lives by reselling the revalued bonds at much more than they paid for them.

The market is like that; if you make the error of not risking the wait, not calculating that the situation could change, it's your error, not the market's. But that does not give the government the right to claim that revaluing the bonds will resolve once and for all the problem of those unjustly confiscated.

The TELCOR workers also ask why the property issue must be resolved through sacrificing only TELCOR. Wasn't one of the proclaimed advantages of the massive privatizations of the past two years that doing so would give the state access to greater financial resources? The TELCOR workers, like many other sectors, are demanding an audit of the privatization carried out by CORNAP, the state holding company charged with selling off the state businesses. This demand is totally just and in the national interest to combat corruption, given accusations that the businesses were sold at bargain basement prices in bidding that was not very transparent and that CORNAP spent more in the process than the sales brought in to the state coffers.

Why Privatize TELCOR if It's Profitable?

In their proposal, the workers also demonstrate that TELCOR has an acceptable investment capacity and can meet its responsibilities perfectly well. They thus propose co-investment instead of privatization. They claim that the prerequisites the government is putting on potential purchasers are below the institute's capacity. Bidders are not being required to contribute in a concrete way to improving the institute's efficiency and technology.

In any case, it is not clear in the government proposal or in that of the workers what the advantages of either privatization or co-investment are for future TELCOR profitability. Even more importantly, neither formula makes clear how to insure access to key technology. Obviously, this will depend on the type of negotiation the government is proposing, which it has so far not made public.

The TELCOR workers argue that TELCOR's high profitability will make their co-investment formula attractive to foreign investors while maintaining adequate state control; in fact they say the foreign capital for such investment is assured. They claim that attracting some $250 300 million in foreign capital would increase TELCOR's profits and make it possible to pay for the bonds to those confiscated.

Although the proposal does not detail the advantages of co-investment and also does not indicate the areas in which it should occur, the proposal is perfectly valid and should be studied and compared with other options. Only by analyzing the pros and cons of various options can Assembly representatives make the best decision for the country. Without peremptory terms for making a decision, common sense is on the side of the workers' proposal.

Finally, the TELCOR union's proposal argues for the state to play the proprietary and regulatory role that corresponds to it in the strategic area of national telecommunications. The argument against turning a state monopoly into a private one is rational. Although no monopoly is good, a private one more easily escapes social control and implies a worsening of consumer service relationships, almost always to the consumer's detriment. The TELCOR workers' co-investment scheme and their demand for transparent bidding with clear advantages for the country and the institute reinforces the idea that appears more and more correct in these times: within a democratic framework, mixed property schemes and social control exercised by organized public service users guarantee greater efficiency.

In sum, the alternative solution the TELCOR workers present to the public is to develop a co-investment scheme without privatizing, use net TELCOR earnings as a payment guarantee for the bonds, recapitalize the institute with its own resources, act with transparency and take more time to find what benefits the country most. Using simple coercive measures against the workers will only deteriorate the government's image even more, as it finishes its term proclaiming a democracy it does not practice.
A synthesis of the extensive TELCOR union proposal follows.

Not Enough Information to Decide

The government has frugally doled out information indispensable to analyzing the pros and cons of privatizing TELCOR. The relevant and necessary information is not available about key variables such as TELCOR's economic and financial situation and its projections for the future, The National Assembly, theoretically the sovereign representative of the nation, is trying to decide about TELCOR without access to this information. But a decision of this scope without criteria for judgment and without indispensable information makes the nation's interests vulnerable. From the outset, a major contradiction is that the government has provided exhaustive information to potential international buyers about the institute that it has not made available domestically. This procedure appears to obey the official determination to push the executive proposal over any other consideration, presenting it as the only existing possibility.

Because of TELCOR's strategic role in telecommunications, this public service institute requires control over its management and development and a national vision. Up to now, TELCOR, as a decentralized public entity, has been able to finance its own short and medium term modernization and expansion needs. It also has enormous potential for providing profitable public services that can support both the public sector and the country. Both its investment rhythm and the evaluation of the institute's profitability certified by the IMF put TELCOR in a solid position within the Nicaraguan public sector.

Investments and Modernization

Between 1992 and 1994, Nicaragua made the greatest investments to modernize its telecommunications in all of Central America. TELCOR's infrastructure is now considered one of the most modern in the region as a result of these investments. In this period, US$103.9 million was invested, 72% of it in machinery and equipment acquisition.

TELCOR's ambitious investment process was initially oriented to totally replacing and technologically renovating existing capacities. The primary goal was to replace antiquated transmission centers with modern digital centers. As a result, 78% of the telephone network is now digital and by the start of 1996 this should rise to 90%. This means that TELCOR's infrastructure is now completely new. Another result of the greater capacity of these new digital centers is increased telephone density: 2.7 telephones for every 100 inhabitants in 1995. In 1990 there were 1.6 for every 100 inhabitants. This is a 67% increase in coverage, the greatest in Nicaragua's history.

As these investments mature, there will be an installed capacity of 113,855 lines by the end of 1995, 18% more than in 1994. A 20% increase is expected in 1996, and by 1997, with the full maturation of the expansion investments, there should be 230,000 lines. In light of these data, the goal of reaching a density of 6 telephones per 100 inhabitants by the end of 1997 the target the government is proposing to the new private operator of TELCOR is simply insufficient, above all if the 1995 census results are used for the calculations. Reaching the government's goal means installing only 38,000 additional lines, when TELCOR already has the capacity to install 116,000 more. It can be surmised that the official goal is just one of the many benefits to be given to the new private operator, while it means stagnation rather than growth for the country.
Why privatize under these conditions? A co-investment scheme seems more appropriate, with the foreign investor participating with capital and technological investment, promoting telecommunications expansion and modernization together with the national public sector. This is the formula adopted in Costa Rica's electricity sector.

Profitable and Vital Patrimony

Is TELCOR profitable? In 1993, when the IMF prepared the Financial Programming prior to the signing of the ESAF agreement, TELCOR showed an operating surplus of US$37.2 million. That allowed it to pay the interest on its debt and even make a $6.8 million transfer. That year, all TELCOR investments were completely self financed. After that, it had a current surplus of $29.2 million, which allowed it to finance $29 million in investments. It also received $26.4 million in loans, of which $13.6 million was used to amortize previous debts. The remaining $12.8 million could not be used, so TELCOR was obliged to deposit it in the Central Bank.
This data demonstrates that TELCOR's profitability has allowed it to finance largely with its own funds and also with some loans an ambitious investment process that has been developed even though the government has impeded access to concessional loans from financial organizations.

For all these reasons, TELCOR, without being privatized, can generate enough resources to significantly support the refinancing of indemnification bonds for those who were unjustly confiscated. However, it is not fair that responsibility for refinancing these bonds fall only on a national patrimony as vital as TELCOR. The income earned by the government through the massive privatization process as a whole should also contribute. And this may be the opportunity, at last, for CORNAP to present a transparent report about the income that has been generated and is still to be generated, assuming that the public assets were largely sold on credit, not for cash.

The businesses privatized just to the Area of Workers' Property (APT) owe the government some $37 million between 1996 and 1997. It could not be possible that the APT enterprises are the only ones generating income for the government through privatization. It is to be assumed that the more powerful economic groups benefited with privatized state businesses are making equal or even more substantial payments. Payments for properties that come under Law 85 but are larger than 200 square meters will also generate income.

In any case, since bondholders appear determined to demand immediate redemption of most of the bonds and have great political weight, the government might consider the alternative of requesting a 10 year loan for roughly the cost of revaluing the bonds, guaranteeing the loan with TELCOR income and the income from the privatized companies.
The high economic and social benefits that TELCOR can report and its potential to contribute to both development with equity and national stability raise the serious question of whether this institute should be handed over to an international oligopolic operator.

17 Powerful People Behind the Scenes

Many agree that the only reason to privatize TELCOR is to respond to pressures from compensation bondholders, who comprise a small but powerful group that is well represented in government, the National Assembly and different political forces. This leads one to more carefully analyze the interests behind the TELCOR privatization.

In the first place, it should be pointed out that, in many cases, the current bondholders have little or nothing to do with those who were confiscated. A fifth of the issued bonds, equivalent to some $50 million and 20 40% of the expected TELCOR sale price are now in the hands of only 17 people who were either affected by Confiscation Decrees 3 and 38 (Somocistas and Somocista allies) or otherwise have considerable economic resources and power.

In terms of economic policy, using income from the sale of one of the nation's strategic assets to respond to this demand would be a profound error. A massive transfer of national resources to private individuals, whether they be ex confiscated or current bondholders who are speculating with them, is unjustifiable.

The "Risk" of the Transnationals

It is also known that, behind the national forces promoting TELCOR's privatization, powerful transnational corporations are bidding to buy up our company. [Among those interested are the US companies ATT and Sprint, Italy's STET, Spain's Telefónica, France Telecom and Korea Telecom.] Like the speculative bondholders, these corporations are also well represented in the current government and the political system, and their lobbying ability equals or surpasses that of the bondholders. It is clear that the TELCOR Privatization Bill proposed by the government, as well as the procedures and methods established to evaluate TELCOR, have been designed to favor those interests.

To justify selling TELCOR to them at a level well below cost, the consortium representatives argue that the risks of investing in Nicaragua means that the discount rate used to obtain the current value of TELCOR's net future utility flows the standard method of evaluating businesses should be very high. As a consequence, TELCOR's sale price should be very low.

In reality, TELCOR's proven profitability allows these "risk taking" consortiums to go on self financing all basic required investments, and become privileged credit recipients in the international capital market, virtually risk free and therefore at normal interest rates.

Nothing is more sensitive to uncertainty and risk than capital markets. If they do not apply "risk rates" to TELCOR's interest rates and, on the contrary, consider TELCOR a safe investment there is no "technical" justification for TELCOR to agree to exaggerated discounts that not even the fearful capital markets apply to it, just to exclusively benefit the consortiums. The explanation is obviously elsewhere. It is precisely TELCOR's high and practically risk free profitability that is motivating so much interest.

Just as in Argentina, the profit expectations sought by transnational operators in the Chamorro government's privatization proposal are bolstered by the concession of exclusive rights in the market. This has happened in other Latin American countries with questionable results. According to a 1992 analysis by the Interamerican Development Bank (IDB), privatization in Argentina "implied much more than just the simple shift of a publicly owned set of fixed assets and trade fund to predominantly private ownership, because what was mainly produced was a transfer of exclusive rights to exploit a market, accompanied by changes in the regulation of said rights... This meant the possibility of abolishing a series of norms that conspired against business profitability and offering previously nonexistent security with respect to the right of owners to maintain tariff levels."

Points that Remain Unclear

The government argues that the fiscal resources the state will cease to receive when it sells TELCOR will be compensated for by the taxes paid by the new operators. But if we take Chile as a reference point, the fiscal support of its Telecommunications Institute was reduced from $30 million in 1984 87 before being privatized to only $4.7 million in 1988 1990, coming from taxes charged after privatization (IDB, 1992).

In Nicaragua, the fallacy that there will be compensation is revealed when public functionaries themselves declare that the new private operator will receive tax exemptions for several years and preferential schemes for indirect taxes, thereby subsidizing expected profitability once again.

In our country, the loss of TELCOR generated resources takes on greater relevance if one takes into account that in recent years TELCOR transfers have subsidized social security financial requirements through INSSBI, an institution that not only covers workers and pensioners, but also war wounded and mothers and orphaned war victims, who have no other financial coverage.

Another point that demands transparency is the net intertemporal hard currency balance expected with the TELCOR privatization, including the benefits that will be sent abroad by the new owners. In Argentina, "the intertemporal effects on the external sector seem clearly negative. This external financing is immediately offset by the remittance of profits out of the country by the new private consortiums." Thus, the final result is adverse (IDB, 1992).

Who Gets the "Cream"?

Since TELCOR is a public entity, another key question is, will it be sold free of debt? Who will take on the debts from financing the important modernization and expansion investments made to improve infrastructure that will now be sold? The state? If so, it that is to say, the country will retain the contracted debt while having lost the resources to pay it off. Through what mechanisms will still required investments be financed? Charging more for new lines, increasing tariffs or outside loans? In all of these cases, TELCOR could make these decisions if necessary, but none of them justify privatization.

In the information presented by the government, the future relationship between the private and public sectors is not clear. The public sector will be reduced to a mere norm setter, but how will it assure the adequate expansion of services, responding not only to the demand from the small sector with greatest resources, but also to the needs of the country's integral social and economic development? A symptom, for example, is that neither telephones nor mail are even mentioned for the rural areas in the prerequisites established in the government's bill to privatize TELCOR. Does this mean that, as in the case of financial services, the ologopolist private sector will keep the high profit, low risk segments the "cream" and leave the less profitable services to the public sector, an operation known as "skimming the cream" off the market? Is this simply the near total abandonment of developing less profitable services? Or is it yet another attempt to privatize benefits and socialize costs by passing them on to the state or to marginalized sectors?
What rate policy will the state establish with the new TELCOR operators? How will sufficient profitability be guaranteed to "stimulate" the private oligopoly to invest in telecommunications expansion? The rate system is fundamental for TELCOR to be an "attractive" investment and for potential investors to be clear about what their incomes will be in the medium and long term. This is achieved not only by eliminating "crossed subsidies" between public services and establishing adjustment and indexation rules, but also including an attractive return in the rate setting methodology.

The central objective in such a proposal is to maintain private investment profitability, and subordinate any commitment to telephone rate reduction to that profitability. In Argentina, the contractually established commitments were revised several times at the request of the new operators to guarantee profitability. The minimum profitability implicit in the rates was initially set at 16% of assets, but was immediately raised during the transfer process itself, finally settling between 30% and 60%. Rates went up considerably instead of being reduced.

A rate increase affects not only domestic users. High service costs, added to the already high interest rates, will raise trade and production costs even more in Nicaragua, seriously affecting trade and production profitability and competitiveness. The government's bill only requests that rates be "reasonable," but setting basic telephone rates is at the discretion of the monopolistic private operator.

Will the State Have this Capacity?

The only government response to fundamental questions such as these that we are putting forward is the promise that the conflictive issues will be resolved through the "regulatory capacity" that the state will retain in the telecommunications sector. But how will the state resolve conflicts of interest and perspective that are not "details" but rather fundamental and even contrary, as is the "market economy" itself? By magic?
The proposed law talks about establishing regulations to reach various essential objectives, among them, to:
* Guarantee planned, sustained, ordered and efficient development of telecommunications and the postal service.

* Promote the availability of a broad spectrum of efficient telecommunications services, at the lowest possible cost with the highest quality for all the country's inhabitants.

* Promote the extension of basic telephone services to the rural sector.

These objectives are universally recognized as state responsibilities in this field. But if the services are in the hands of private operators, how will the state guarantee these objectives? Is it not excessively ingenuous to think that it will be possible to regulate when the regulation mechanisms are not even mentioned? Although the bill states that TELCOR will be a regulating entity and that the privatization law will establish norms for functions, activities and responsibilities, those "regulating" functions do not appear anywhere. What does appear as the main task of the "regulating entity" is granting concessions and licenses to private operators, processing user "complaints" and eventually imposing "fines."
In contrast to what happened with the financial sector, where basic prerequisites and minimum regulations were established that private entities interested in operating banks must respect, all that has been done with TELCOR is to establish an unclear framework for casuistic "negotiations" between the powerful transnational private interests demanding concessions and the involved legislative and government leaders.

Even if the state retains some effective regulatory capacity, any attempt to introduce considerations of social profit and national interest in decisions will imply more or less serious conflicts of power, because they will conflict with the logic and interests guiding the decisions of the consortiums that will administer and dominate the service.

What remains most clear from studying the proposed government law is that the real objective of privatization is none other than to leave a free field one free of "regulations" to international consortiums that want to operate in such a profitable area.


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