Ring In The New
By Heidi Kriz, Fri Sep 22 00:00:00 GMT 2000

The first changes to Venezuelan telecoms regulations in 60 years will take effect in November, and investors are drooling at the investment opportunities.

Newly elected Venezualan president Hugo Chavez's promises of sweeping economic and regulations reform are tempting foreign investors -- especially those poised to enter the fast-growing telecommunications market.

Nevertheless, Chavez, a self-described socialist, relied upon revolutionary rhetoric to get elected last August. So why should investors even bother with the gamble?

Consider this: Venezuela is one of the fastest growing telecom markets in Latin America. In ten years, the number of mobile phone users has jumped from 20,000 to 3.5 million, with 100,000 new subscribers coming on every month. That's a fat percentage of the total population of about 21 million. Moreover, the telecommunications industry is practically the only flourishing part of the Venezuelan economy, which last year shrank by seven percent.

In November, the first changes to the country's telecommunications regulations in over 60 years will take effect. And the death knell will clang for the long-standing governmental monopoly in fixed-line service.

So the billion-Bolivares question is this -- does Chavez mean it? Will he keep his promises of economic reform and implement his plan to bring the Internet to the masses?

"Chavez is an instinctive, populist politician, playing out a role for the people," says Eric Curiel, an economic analyst with Latin American investment group Santander Central Hispano. "But my feeling is that it is mostly theater, because in fact many of his new policies are very capitalistic. The best example of this is the new telecom law, which is very market-oriented -- a big change from the way the industry has worked for the past 60 years."

Quite. In fact, for years, the Venezuelan telecom industry was a monopoly of the national company CANTV. When the monopoly expires on November 27, foreign investors will officially be able to invest for the first time in Venezuela's fixed-line telephone market. (Though, for a number of years, CANTV has had a limited partnership with American-based GTE, which has been folded into Verizon.)

According to Conatel, the government-appointed regulator of the industry, this sector of the economy will attract a huge increase in investment almost immediately -- $2 billion by the end of the year 2000. That's an increase of almost 70 percent of the $1.2 billion in 1999, says Andres Rivero, a lawyer with Conatel who helped draft the new telecom law.

And a number of mega-multinationals are already in, or about to enter the market, like Verizon, BellSouth Corp, and Impsat.

"We have eight years of experience in Venezuela through our 74 percent share in Telcel, a Venezuelan cellular company with two-thirds of the market there," says Jeff Battcher, a spokesman for BellSouth. "Venezuela has proven a phenomenal market for us. In the past year, our number of customers has grown from one million to three million. So one country --Venezuela -- makes up one-third of our entire Latin American customer base of nine million."

This deep penetration is remarkable in light of the apparent flight of a significant segment of the middle- and upper-class population of Venezuela, with their considerable assets, to places like Miami, and New York in the United States, and cities in Europe. Their panic is inspired by the spiralling economy, skyrocketing violent crime, and heated political rhetoric of its president.

But even as the gap between rich and poor widens, the penetration of wireless service deepens, due in large part to the huge popularity of the pre-paid service that BellSouth, through Telcel, offers.

"We have found that rural and lower-income people that do not have access to traditional banking services or credit are embracing the pre-paid cellular programs. In many cases, financial restraints and geographical remoteness make it more difficult for them to get landline telephone service," says Battcher.

Consequently, the lush but frenetic capital city of Caracas is spiny with cellular antennas, and it's not unusual to see a banking executive chattering into the same model phone as the shoe shine boy bent over his wingtip.

"Venezuelans love their telephones, and they love the status it connotes - rich or poor," says Curiel.

As for predicting Chavez's behavior, Battcher says "BellSouth is not in the business of speculating on speculation. But we continue to think Venezuela will be a strong market."

Verizon, which owns 26 percent of the stock in CANTV, claims to be equally confident of the stability of telecom market in Venezuela, in spite of Chavez's double-edged talk.

"We're pleased with the new legislation," says Verizon's Chuck Fallini, vice president of international ingineering and operations.

So what's so good about the new telecommunications law in Venezuela? Well, according to Curiel, the invenstment analyst, quite a bit.

Here are some of the highlights:

- Tariffs of telecom services will be set freely by the market, not by the industry's regulatory body, Conatel, or any branch of the government.

- All telecom companies, foreign or domestic, will be taxed at the same rate across the aboard: 4.3 percent of net sales for cable television and fixed-line companies, 4.8 percent for wireless companies.

- A portion of the above taxes will be used to create something called the "Universal Service Fund", which will help guarantee that all inhabitants of Venezuela will have access to telecommunications services, including telephony and access to the Internet, regardless of income or location.

Curiel believes that the Universal Service Fund is one of the ways Chavez reconciles his populist promises to bring the telecommunications and the Internet to the masses, with his obvious about-face on the subject of the "evils of capitalism."

Nevertheless, Curiel goes on to say, there is a big "but" in the new law.

The language of the law also dictates that the director of Conatel, the telecom regulator and directorate, is to be appointed and removed freely by the president. That makes Conatel - and the industry - vulnerable to the political pressures and possible whims of Chavez, and could jeopardize the transparency of future decisions by Conatel.

Conatel lawyer Rivero rejects that idea. "Chavez has been profoundly supportive of the independence of Conatel, and the promotion of the telecom industry in general," Rivero says.

Curiel concurs that the president's ability to remove the Conatel director could be problematic. But he sees no signs on the horizon that it will be.

Heidi Kriz is a San Francisco-based freelance writer whose work has appeared in Wired, Red Herring, and PC Computing.