Can Brazil’s mini telecom reform save Oi?

Author: Ricardo Tavares
Published: 2016-09-02

Since enacting its General Telecommunications Law (Law 9.472) on July 16, 1997 Brazil has developed an over-regulated telecom policy regime. Evidence of the regulatory over-stretch became clear when telecom operator Oi filed for bankruptcy protection last June. This $19bn bankruptcy case is the largest in Brazilian history.

A new bill before Congress aims to amend the existing regulations by changing the current highly-regulated concessionary regime into one of more-lightly-regulated authorization. Concessionaires are the companies which emerged from the privatization of state monopoly Telebras. The quid pro quo for them retaining hard-to-replicate physical assets was to carry significant universal services obligations. Oi’s fixed-line network, which covers the whole of Brazil except the state of São Paulo, is by far the largest concession in the country.

The concession regime has allowed Brazilian politicians and bureaucrats to impose non-economical universal services targets on the concessionaires, and particularly Oi. But at the same time the government kept collecting 1% of the operators’ gross revenues for the Universal Services Fund (FUST). The more than $6bn which has been collected since the concessions were awarded has gone straight into the Treasury, and stayed there. While the concession is not the only reason for Oi’s failure—poor governance and a disastrous merger with Portugal Telecom in 2014 are also important factors—there is no doubt the status quo is no longer sustainable.

The bill would allow the concessionaires to change their legal status to that of less-regulated authorized companies. One of the requirements for the change of status will benefit the disabled, who will receive subsidies to access telecommunications. Existing authorized companies will also benefit by getting permission to trade spectrum. This is all good and together the proposed reforms amount to a mini telecoms reform.

But a potential problem is the cost of migration from concession to authorization, which has not been spelt out. It has been made clear the cost will be paid in “investment commitments” to expand broadband access. But what is the time frame for these investments? And, more importantly, how will the government calculate the price of migration? “The economic value referred (…) will be the balance between the expected value of the adapted service in the authorization regime and the expected value of this service under the concession regime,” at the time of migration, states the bill (PL No. 3.453). What does this really mean? Then there are the “reversible assets,” which were supposed to return to the government at the end of concession, and how they will be defined and priced into the migration cost.

One hopes these questions will be properly addressed as the bill progresses to a vote in Congress early next year. Meanwhile, the economic impact of this change on Oi’s long-term sustainability is still hard to project, and will remain so until the mists of uncertainly are blown away.

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