Regional Division
Mirror Companies
Baby Mirror Companies
The Winners

The recent General Telecommunications Law (9472/97) has provided the new model for the operation of telecommunication services. The law establishes basic rules and creates the National Telecommunications Agency, an independent government agency with supervisory powers. The changes foresaw the privatization of the former Telebrás system (state owned companies that maintained a monopoly of fixed and cellular telephone services), and encourage free competition.

Regional Division

The privatization process was based on the General Grants Plan which divided the country into four regions for the operation of the fixed-switched telephone service under the public regime (ie, with universal access and continuity obligations). The four regions are as follows:

  • Region one includes the states of Rio de Janeiro, Minas Gerais, Espírito Santo, Bahia, Sergipe, Alagoas, Pernambuco, Paraíba, Rio Grande do Norte, Ceará, Piauí, Maranhão, Pará, Amapá, Amazonas and Roraima;
  • Region two includes Distrito Federal and the states of Rio Grande do Sul, Santa Catarina, Paraná, Mato Grosso do Sul, Mato Grosso, Goiás, Tocantins, Rondônia, and Acre;
  • Region three includes the state of São Paulo; and
  • Region four includes the entire national territory.

The winning companies in the invitation to bid for the operation of fixed-switched telephone services were as follows:

  • in region one, Telemar (whose main shareholder is Opportunity Investment Bank);
  • in region two, Brasil Telecom (whose main shareholder is Telecom Italia);
  • in region three, Telefonica (whose main shareholder is Telefonica d'Espanha); and
  • in region four, Embratel (whose main shareholder is MCI WorldCom).

The winners for regions one, two and three received operational concessions for local and intra-regional long distance services. The winner for region four received an operational concession for national and international long distance services. These four companies are known as concessionaires, being in fact the incumbents of the fixed-switched telephone services market.

Mirror Companies

The National Telecommunications Agency then invited bids to award authorizations for operating fixed-switched telephone services under the private regime (ie, without the universal access and continuity obligations) in the same four regions as the incumbents. The aim was to establish a duopoly system.

The winners, called 'mirror companies' (empresas espelho), were as follows:

  • in regions one and three, Vésper (whose principal shareholder is Bell Canada);
  • in region two, GVT (whose principal shareholders are Global Village Telecom and Comtech); and
  • in region four, Intelig (whose principal shareholders are National Grid, Sprint and France Telecom).

As requested prior to the invitation, the winning companies presented a list to the agency containing the localities they intended to serve.

The mirror companies only expressed an interest in serving some localities in which they were authorized to provide services, leaving other areas to be serviced only by the incumbents. Therefore, the intended duopoly was not established. Users in localities not served by the mirror companies were neither able to exercise their right to choose a provider, nor to reap the benefits derived from competition.

Baby Mirror Companies

To correct this unfairness, the National Telecommunications Agency invited new bids in order to award authorizations for service operation only in the localities that were not serviced by the mirror companies. This process involved the same regional division as the previous bidding process.

The companies that provide services to the cities not covered by mirror companies, called 'baby mirror companies' (espelhinhos), will receive a grant to provide local and intra-regional long distance service to these cities. The scope of their grants will be expanded on January 1 2002 to include the provision of national and international long distance services, making them extremely attractive to investors.

The first round of invitation to bid was published in the Official Gazette on June 29 2000. Region one attracted the most interest from investors. Any party (except for service concessionaires and their mirror companies) could participate in the process, irrespective of its business activity.

The agency specified the winning criterion as being the highest telephone density per inhabitant - at least 0.6% in the first year or by December 31 2001 and over 1% for the first 24 months.

The authorizations have a fixed price depending on the number of inhabitants in the relevant locality, that is:

  • $10,000 for municipalities with up to 50,000 inhabitants;
  • $20,000 for municipalities with between 50,000 and 100,000 inhabitants; and
  • $30,000 for municipalities with over 100,000 inhabitants.

Proposals for cities in region one were delivered on July 14, for region two on July 28, and for region three on August 4.

The Winners

In the first invitation to operate baby mirror companies in region one, 174 municipalities were offered, of which:

  • three municipalities have more than 100,000 inhabitants;
  • 150 municipalities have between 50,000 and 100,000 inhabitants; and
  • 21 municipalities have less than 50,000 inhabitants.

Fifty-three municipalities did not attract investor interest. Proposals were presented by 21 companies and the biggest winner was Commware Tecnologia e Sistemas Ltda which won 64 municipalities. The telephone densities specified in the winning proposals were generally much higher than the minimum density required.

In region two, 136 municipalities out of 150 attracted investors. The biggest winner was the Telnet consortium (formed by Wittel, Bank of America and four companies from Rio de Janeiro). The average density offered was 15.17 terminals per 100 inhabitants, reaching 26.55 for the municipality of Lageado.

In region three, 152 municipalities out of 154 attracted investors. Again, the biggest winner was Commware Tecnologia e Sistema Ltda which won 108 municipalities offering the maximum density of 35.90 terminals per 100 inhabitants in the municipality of Barretos. Although Commware is composed of three Brazilian engineers, it was publicly stated in the media that there are foreign investors which will financially support the company by means of project finance.

The second round of invitation to bid to operate baby mirror companies has already begun and the proposals shall be delivered on September 8, 15 and 20 2000 for municipalities located in region one, two and three respectively.

The success of the bid invitation and the level of investor interest in the authorizations for baby mirror companies clearly indicates that the National Telecommunications Agency will soon be implementing the fundamental principal of the General Telecommunications Law, of free, fair and ample competition, always with a view to benefiting service users.

For further information on this topic please contact Ricardo Barretto or Kátia Madeira Kliauga at Barretto Ferreira, Kujawski, Brancher e Gonçalves – Sociedade de Advogados by telephone (+55 11 3066 5999) or by fax (+55 11 282 8735) or by e-mail ([email protected] or [email protected]).

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