Entel nationalization: Initial reactions, government offers US$100mn

- Monday, May 5, 2008

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Bolivia's government has offered up to US$100mn for telecoms operator Entel, which President Evo Morales vowed to nationalize on Thursday, local press reported.

Morales announced through decree 29,544 during a labor day speech the nationalization of Entel, which is majority controlled by European holding company Euro Telecom Internacional (ETI).

The value of the shares owned by ETI vary from US$75mn-100mn but a final figure will be made known within 60 days, Bolivia's minister to the presidency, Juan Ramón Quintana, was quoted as saying.

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"We have constituted a trust fund to pay for the shares that this company [ETI] had in Entel. We will not pay the market price, but the book value, which is the real cost of these shares," Quintana said.

Bolivia's government has been trying to negotiate the purchase of ETI's stake in Entel since 2006 but rejected ETI's asking price of US$170mn, newspaper Correo del Sur reported.

La Prensa reported that consultancy Profín Consultores estimated two years ago that the value of the company was around US$150mn.

In a somewhat contradictory message on Monday, President Evo Morales said during a speech to Entel workers that US$30mn were available for the nationalization, newspaper Los Tiempos reported. It was not clear whether Morales meant that that is what the government is prepared to pay for the company or that is how much it can pay from its coffers with the remainder coming from loans. Morales reassured workers that their jobs were secure.

In an attempt to cushion somewhat the impact of the nationalization announcement, Bolivia's public works and services minister Óscar Coca was reported as saying over the weekend that the government would work with Entel to reach an agreement on the price, newspaper Correo del Sur reported.

"The work is not going to be unilateral on the part of the government. We are going to seek dialogue with executives" of Entel, Coca said.

Coca added that the government's first move in the nationalization process would be to change 11 of the existing executives in Entel.

Elmer Catarina, Bolivia's ambassador to Italy, was reported by La Prensa as having explained to the Italian government and Italian business community that the move was not "expropriation" but a message from the government that there was not transparency during ETI's tenancy of Entel.

The government justified its intention to take control of Entel, again saying that ETI failed to fulfill investment plans or meet quality of service commitments in rural areas, and has also accused the company of tax evasion.

BANK ACCOUNTS FROZEN

Bolivia's tax service SIN has asked the banks regulator to freeze bank accounts Entel has in the country, SIN's president Marlene Ardaya was reported as saying by newspaper El Nuevo Día.

The government has previously accused Entel of failing to report a remittance of profits to ETI in its October 2005 filing for 1.60bn bolivianos (US$217mn). Ardaya also said ETI owes 434mn bolivianos in taxes.

With nationalization, the government would end up with 97% of Entel. Entel controls 50.9%, the government 47% and the remainder is in the hands of private investors.

Previous attempts by the Bolivian government to take control of Entel, dating back to 2006, have failed with ETI resorting to international arbitration at the World Bank's International Center for Settlement of Investment Disputes (ICSID).

However, the Bolivian government has refused to recognize the ICSID as a valid organization because President Evo Morales' administration believes the body always takes the side of multinational companies.

INVESTMENT RISK

Senator Luis Vásquez Villamor, leader of opposition party Podemos, was reported by El Nuevo Día as saying that the government's decision to nationalize could put at risk foreign investment, especially from Europe, just at a time when the Andean Community of Nations (CAN) - a regional economic and political bloc formed by Venezuela, Bolivia, Colombia, Ecuador and Peru - is about to sign a free trade agreement with the European Union.

Newspaper El Mundo reported Erwin Tordoya, president of the Bolivian lawyers association, as criticizing the government's action as "hurried" and "unconstitutional."

According to Tordoya, the move sends out a bad message to the international investment community and could cause "irreparable damage" that will eventually affect the Bolivian people.

The lawyer said the move is unconstitutional as it bypasses congress.

"The government cannot precede nationalization with a decree as it bypassed the power of congress. It would first have to send a bill to congress to be considered before proceeding," Tordoya said.

"The damage caused to the country as regards the confidence of the international community, is irreparable... With this type of action it will scare off foreign and local investment, implying that we fall farther behind - less development and fewer jobs," the lawyer said.

NORMAL SERVICE GUARANTEED

Jorge Nava, head of Bolivia's telecoms watchdog Sittel, said that the regulator would take all measures necessary to avoid any interruption to normal service for the consumer as a result of the nationalization process.

According to Sittel, Entel controls 68% of the long distance market, 67% of the mobile telephony market (1.8mn users) and more than 90% of internet connections.

IMPACT ON THE SECTOR

A source close to the process, who asked not to be named, told BNamericas their greatest fear at the moment is how nationalization will affect the development of the telecoms sector. If what happened in Venezuela, where state telco Cantv was nationalized a year ago, is anything to go on, the government is likely to focus on expanding basic service to underserved areas and drastically drop calling rates, possibly below cost price.

"They certainly won't have the money to invest in new technologies such as next generation networks and as they control most of the network nationwide, they could start becoming a threat to other companies," the source said.

"I'm mostly concerned about the mobile companies. One measure Entel could take is to lower the prices of cellular rates and that would affect the other operators and put them out of business, and Entel could consolidate as the sole operator in the country," the source said.

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