El Blog!
   


About
El Blog!, Touppi's Super Eleet Blog.

Tuomas Toivonen

Subscribe
Subscribe to a syndicated feed of my weblog, brought to you by the wonders of RSS.

Flavours
There's more than one way to view this weblog; try these flavours on for size.

  • index
  • circa 1993
  • RSS

    • Links
    These are a few of my favourite links.

  • raelity bytes ;-)
  • link 2
  • link 3


    		•         
    Wed, 04 Apr 2007

    Reflections on Bolivia's plan to nationalize Entel

    On Monday, April 2, 2007, the Bolivian government promulgated presidential decree (Decreto Supremo) 29087. According to the decree, a commission is to be formed to negotiate the return to state control of Entel, the ex-Empresa Nacional de Telecomunicaciones, or national telephone company [3, 4]. Last year on Labour Day, the Bolivian president Evo Morales announced the nationalization of the hydrocarbon sector. With the commission formed on Monday having a thirty day mandate, we can expect Morales to have another labour Day show, this time with completion of Entel's nationalization.

    Capitalizations

    As with hydrocarbons, nationalization is a somewhat misleading term. Rather the Morales administration appears to be intent on returning a controlling interest in Entel to the state, i.e. reversing the ideologically loathed privatization process of the mid-1990s.

    During the administration of Gonzalo Sánchez de Lozada (1993-1997) Bolivia privatized state owned enterprises (SOE) in a process known as capitalization. A case of traditional privatization entails the sale of partial or full interest in a SOE to private sector interests. Proceeds of the sale enter the state coffers. In contrast the Bolivian capitalization process entailed the sale of a fifty percent stake in each SOE to strategic investors. Nothing was paid to the government. Instead the strategic investor committed to an investment schedule that was supposed to boost the performance of the ex-SOE by bringing in capital (and, of course, managerial talent). At the same time two pension funds (AFPs or Administradoras de Fondos de Pensiones) were created. Little under half the shares in the capitalized companies were transferred to the AFPs with the intention of funding the Bonosol, an annual entitlement to all Bolivians over 65. Few percent of the shares were distributed to employees of the ex-SOEs. Besides the AFPs and associated pension reform, the capitalization process created regulatory agencies were in each of sector with capitalized SOEs. For telecommunications the Superintendencia de Telecomunicaciones de Bolivia was established [6].

    Capitalization of Entel took place in 1996. Fifty percent was sold to Stet International, a company that later merged with Telecom Italia. Employees were distributed three percent of the shares and the rest (47%) were lodged with the two AFPs. In exchange for its share Stet committed to capitalizing Entel with $608m over four years.

    Entel post-capitalization

    A statement [1] on Tuesday by administration stated that no jobs would be lost due to the nationalization. Concluding the statement are misdemeanors supposedly committed by Entel that seem to serve as a partial rationale for the nationalization. An investigation by the telecommunications regulator and a ministry are said to have found "indications of irregularities in the administration and operations of Entel that affect the company's financial investments and attempts at the national tax regime".

    In their recent book "Impasse Bolivia" [2] Kohl & Farthing claim that pre-capitalization Entel was one of the best managed SOEs and the second most profitable. After taking over, the Italians brough in new management, streamlined the workforce, and started an ambitious investment program to fulfil the over $600m in commitments. Cellular service was expanded and fiber optic connections to Brazil and Chile established. Revenue growth at Entel has been strong, but profits weaker than expected. Accusations have been levelled of Entel shifting profits to overseas subsidiaries as a means of tax evasion; full repartiation of profits of the capitalized companies is otherwise allowed. Weak financial transparency and regulatory control have undermined investor confidence and Entel's stock price has at times been lower than existing cash reserves. [Note 1]

    Despite telecommunications deregulation in Bolivia, Entel remains the dominant operator in all sectors. Reports [3, 4] vary, but Entel is claimed to hold 68% to 80% of the long distance market, 67% to 70% of the cellular market and 90% of the Internet market.

    Whether nationalization of Entel makes sense or not remains to be seen. Most likely the Morales administration is using the supposed misdeeds of Entel to push for a best possible deal with Telecom Italia (TI). According to reports [4, 7], the TI has valued its stake in Entel at $170m. Also, TI is supposedly willing to sell and doesn't consider its stake in Entel as strategic [7]. Given that TI has invested at least over $600m in Entel, $170m seems low. Few possible explanations: (1) Entel was a rather sucky investment for TI; (2) Bolivian accusations are true and Entel has siphoned off profits thus recouping its investment (the "tax evasion" claim); or (3) TI's investments are not exactly what they seem (the "financial investments" claim.

    Regarding the third point, something similar to what happened with the capitalized Bolivian flag carrier LAB (Lloyd Aero Boliviano) could have happened [2]. After the 50% stake in LAB was acquired by the Brazilian carrier VASP, LAB rented offices in Miami from VASP paying a total of $11.5m in rents over six years. Strangely enough LAB already had perfectly adequate offices in Miami. As a result significant percentage of VASP's total capitalization commitment of $47.5m was routed right back to where it came from.

    As for the second point (tax evasion), it is also somewhat plausible. According to an anecdote related by Kohl & Farthing [2], Bolivian companies keep three sets of books (accounting). One set is accounts is kept for government inspections (taxes), another to show minority investors what supposedly is "really" happening at the company, and a third set that is kept internally to know what the true state of the company is. Naturally, the controlling investor(s) have privileged access to the accurate books.

    Especially if the allegations of tax evasion and profit siphoning are true nationalization would make sense. However, strenghtening transparency and regularions could achieve (almost) the same thing, but without the imposition of a state owned behemoth on a sector that by all accounts benefits from competition.

    References

    Notes

    • [Note 1] Supposedly low liquidity has also affected Entel's stock price. According to the most recent available yearly report (memoria 2005) for Entel [6: 2005], thirteen investors have 98.23% of Entel's shares. Euro Telecom International (ETI, a Telecom Italia subsidiary) has 50.00%, the two AFPs 23.73% each. Next ten biggest (reported) investors have 0.77% and the rest (unreported) 1.77%. Stakes of ETI and the AFPs appear to have remained mostly unaffected since capitalization. As such, the floating shares have come from the block originally allocated to employees.

    [] permanent link