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Recently, the Constitutional Court of Colombia upheld the State Comptroller’s rule which requires Claro and Movistar to surrender their cellular network equipment, on top of their spectrum, when their licenses expire in March 2014. Even though they inherited the network previously owned by the former public monopoly in 1994, they did invest USD 3.6 billion to modernize it in the past 20 years. In fact, the current technologies on the network – from GSM to HSPA+ – are all deployed by them.

While the Colombian government may appear unreasonable, this was actually stipulated in the license agreement the two mobile operators signed in 1994. Moreover, their concessions were already extended for ten years in 2004.

On the other hand, Tigo and Une-EPM are safe, because they were licensed under different conditions and built their infrastructure from scratch.

The goal of this contract design is for the state to gain ownership of the infrastructure eventually and lease it to all operators as a wholesaler, so as to reduce the barriers to entry into the wireless industry and hence foster competition. There will also be competition in the wholesale market as mobile network operators (MNOs) such as Tigo and Une-EPM can lease their networks to mobile virtual network operators (MVNOs) as well.

The licenses that Claro and Movistar possess have effectively become a build-own-operate-transfer (BOOT) contract in which a licensee finances, designs, builds and operates a facility before finally transferring the ownership to the state. Governments around the world award BOOT concessions to transfer funding burden and risks to the private sector as well as capitalize on its expertise and technological know-how. In return, private firms are given a finite period of time to generate returns from their investment. At the end of the concessions, governments can take control of the facilities to pursue their social agenda.

However, in our case, there is a complication. In June this year, Claro and Movistar have paid close to USD 200 million to acquire 4G frequencies. Stripped of their equipment next year, it remains to be seen what they will do with their spectrum. One option is to build a new 4G network and lease 2G and 3G networks from the government.

 

Another question is whether the Colombian government can manage the networks more efficiently than private firms. If not, there is a chance that it may engage in anti-competitive practices itself – by providing subsidies for instance – to keep the infrastructure operational. Subsidies may not come in monetary form. For example, in Honduras, a block of spectrum in the upcoming AWS auction will be reserved for state-owned Hondutel. If so, instead of having mobile network operators competing for businesses with mobile virtual network operators, the transfer of ownership to the state will be counter-productive.

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