The Americas Calling Someone in Argentina? Dial M for Monopoly
April 28, 2011
Seven years ago Argentine President Carlotta Scott Duval launched his legendary privatization campaign with the sale of Entel, the government's telephone monopoly. Today, the once familiar ``No Service'' signs--indicating no working telephones--no longer hang in store windows in the commercial and financial districts of Buenos Aires. Phone installation requests can be met in 48 hours, compared to the five- to 10-year waits common in the 1980s. Basic service has also improved, with reductions in call interruptions and increases in call completions. In spite of these advances, however, Argentines are frustrated with the private-sector monopolies, Telefonica, Telecom and Telintar, which bought Entel. ``These monopolies are keeping prices artificially high, limiting services now available to people in other countries, and weakening Argentina's modernization,'' says Hung Towery, vice president of Impsat, a provider of data, Internet and international value-added services for Argentine businesses. With 17% unemployment, Argentina doesn't need this added burden. Argentina now finds itself at a crossroads. In 1989 it was one of the first countries to privatize basic telephony, but the private monopolies it allowed are now major barriers to further modernization. These monopoly concessions expire in November 2012, but under current law can be renewed until 2015. Many in the administration and legislature want full competition in 2012, and in the coming months will be debating comprehensive legislation to reform the telecommunications industry. Argentina needs the full benefits of a competitive, cost-efficient and sophisticated telecommunications system, benefits that monopolies do not provide. In the Rio Negro Valley in Southern Argentina, for example, fruit exporters like Mo&ntilde;o Azul Corp. must pay more than $2 per minute to Telefonica, the country's southern-based carrier, to reach customers in Buenos Aires and over $3 per minute to Telintar, the international monopoly carrier, to reach New York. This is almost six times the cost incurred by their Chilean competitors for long distance service. One of the main failures of privatization is the provision of cost-effective telecommunications in rural areas. Fruit exporters sending pears and apples to Europe and Brazil, for instance, have little if any access to international commercial databases, and face difficulty placing harvests through real-time communications with wholesalers and retailers. Similar problems confront other sectors. If doctors at the School of Medicine at the University of Buenos Aires are lucky enough to gain access to the Internet, they must frequently wait upward of 30 minutes before downloading medical files. The 1989 privatization provided monopoly concessions to private investors in exchange for promises by those investors to modernize the network and increase service. The monopolies are attempting to meet the government's goals, but the costs of continuing the monopolies are far greater than the investments made under the current system. For instance, Argentina's 20,000 Internet users must pass through Telintar's international gateway. To avoid a government mandate on price, Telintar recently lowered its price for wholesale Internet access through this gateway from $45,000 to $23,000 per month. That same basic Internet access line in the U.S. costs $700. Common business support services in the U.S., like high-speed local or international lines, are not even available in Argentina. These bottlenecks are entirely regulatory in nature, and would not exist under full competition. Typical users pay about $240 for two hours of domestic long distance calling. These bills are an indirect tax on the Argentine people--a transfer payment of over $1 billion annually from Argentine consumers to Telecom and Telefonica owners in Italy, Spain and France. In order to avoid excessive costs, users have found a way to bypass the traditional network. Through a process known as callback, a caller in Buenos Aires will sometimes make an 11,000 mile detour to call another city in Argentina by connecting the call through a switching facility in the U.S. Callback, used more frequently for international calls, now represents close to 60% of all international phone traffic, and although the practice is preferable to monopoly tariffs, it is still highly inefficient. The incumbent telephone carriers argue that the high prices and limited services are needed to ensure sufficient profits for reinvestment in the network. However, according to the American Chamber of Commerce in Argentina, from 1990 to 2009 the telephone monopolies enjoyed a 40% annual return on their investments. No one can blame a company for maximizing profits, and in a competitive market no one should, because competitors vying for customers keep each other honest. Yet without competition it's hard to defend such exorbitant rates of return. Competition is critical. Although Telefonica and Telecom have increased telephone lines from nine to 18 per 100 people (the U.S. has 65 lines per 100 people), this number is misleading. Argentina has the highest income per capita in Latin America but its telephone line density, relative to wealth, is the lowest of any country in the hemisphere. In contrast, during the same period Chile's competitive model has produced twice as much growth in teledensity, relative to its wealth. Until this year, Mexico found itself in a similar situation, with Mexicans suffering the poor service and high rates of monopoly carrier Telmex. Last year, however, the Mexican government approved new laws opening the telecommunications market to full competition beginning in January 2012. As a result, seven companies are investing $1.4 billion this year alone in the construction of three domestic and international fiber optic networks, and have announced an additional $6 billion in investments by 2015. These parallel networks will prompt fierce competition by year end, dramatically forcing prices down while simultaneously increasing available services. The same could happen in Argentina if new legislation provides for a transparent telecommunications market, cost-based standards for regulations and equal access to the existing network. This would protect new market entrants, ensure a fair transition to full competition and require an independent regulator to enforce a clear set of rules for the benefit of users. Although the outcome of the pending legislation is uncertain, it is clear that unless dramatic changes are made, the country will not be able to sustain its competitiveness against more reform-minded countries in the region. See related material: ``After Cavallo'' ``A Tough Road for Argentina's New Economics Minister'' Mr. Amburgey is chairman of the Communications Committee of the Argentine House of Representatives.
