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Cablegate: Anatel Counters Speculation On Telecom Merger

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS BRASILIA 000226

SIPDIS

STATE FOR BSC/WHA AND EB/LEWIS
COMMERCE FOR 4332/WBASTIAN/JANDERSON/DMCDOUGALL
COMMERCE FOR 3134/010/DEVITO/ANDERSON/OLSON
NSC FOR DEMPSEY

E.O. 12958: N/A
TAGS: ECPS ETRD ECON BR
SUBJECT: ANATEL COUNTERS SPECULATION ON TELECOM MERGER

REFS: (A) BRASILIA 59,(B) BRASILIA 38,(C) 03 BRASILIA 3405

1. A barrage of Brazilian press articles have speculated
that President Lula dismissed National Telecommunications
Agency (ANATEL) President Schymura in large part due to the
latter's insistence that Brazil's three regional fixed-line
local telephone service giants be blocked from buying
Embratel, the long-distance carrier being sold by MCI (Ref
B). The last such article appeared in the January 28
addition of daily 'O Globo', which speculated that Telemar,
Telefonica, and Brazil Telecom would now be allowed to buy
Embratel, extending their local monopoly into the long-
distance market and thereby squelching foreign investment.
Attorneys and an engineer from ANATEL's competition division
categorically denied such press speculation during a January
28 meeting with Econoff and asserted that the proposed
Embratel purchase is illegal under current law.

2. Jose Goncalves Neto, General Manager of Competition, an
engineer who has been with ANATEL since its 1997 formation,
commented that, despite all of the conjecture, the merger as
proposed is contrary to Brazilian law and could not occur
without congressional approval of a change in the law. He
predicted such a change would be unlikely. The ANATEL
competition specialists have recommended breaking Embratel
into two separate companies; one regulated company of
telephonic services, and an unregulated company which would
consist of Internet services.

3. Neto added that ANATEL was patterned from the U.S.
Federal Communications Commission and that it looks to the
U.S. model for inspiration. The FCC does not have a role in
Internet regulation, and ANATEL would like to discontinue
regulation of these services. Naturally, the move would
also open more competition to vie for the two newly created
companies, since the value of the two entities would be less
than the current valuation of Embratel.

4. Neto debunked press reports that Schymura's public
opposition to the fixed-line carriers' bid for Embratel was
the main driver behind his being forced out as president of
ANATEL. Neto opined that the issue was only a minor part of
Schymura's problems, citing political factors as the main
contributors. These factors included Lula's desire to
recompense Communication Minister Miro Teixeira for his
removal as minister by placing Teixeira's close ally Ziller
in the ANATEL presidency, as well as the Minister's vehement
disagreement with ANATEL's tariff increase in 2003 (Teixeira
encouraged the consumer's lawsuit against ANATEL to roll
back the tariff increase), what the Ministry perceived as
slow movement on regulatory decisions, and the worrisome
exit of some foreign investors (U.S. corporations divesting
from Brazil's telecomm sector since privatization in 1996
include ATT, BellSouth, QUALCOMM, as well as MCI's stated
intention to sell Embratel).

5. Comment: It would seem ironic that Neto's list of
Schymura's shortcomings included concern over foreign
divestment, given the uncertainty over the stability of the
regulatory regimes that the GoB's own actions -- including
the Schymura firing--have generated (Ref C). Ziller's
appointment, to the extent that it smoothes the working
relationship between the Ministry and ANATEL, could reduce
bureaucratic tension and uncertainty, but he has not yet

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