ARGENTIAN’S TELECOMMUNICATION INDUSTRY AND

THE ECONOMIC CRISIS OF 2002

ISSUE
Renegotiating public utility concession contracts fairly and
efficiently in the face of severe economic, social, political and legal
disruptions caused by devaluation of the peso, pesoization of the
Argentine economy and heightened inflation.

1. Now that tariffs have been converted to pesos, was an

initial one-time adjustment necessary to restore
profitability? And what should be the process of any
subsequent adjustments?

A. The emergency economic decree required that the tariffs be

converted from dollars to pesos at the old exchange rate of one to
one and delinked from foreign inflation in spite of the devaluation of
the peso, heightened domestic inflation and prior contracts, which
were denominated in dollar rates.

The devaluation of the peso resulted in significant real reduction in

the previously dollarized rates. Considering this devaluation, the
significance of dollar denominated foreign debts many of these
utilizes owed, increasing domestic inflation rates and an increase in
domestic interest rates in this period it is proper to implement a
one-time adjustment in tariffs.

Furthermore, to preserve investments, quality of service and

efficiency it is necessary that an initial onetime adjustment be
implemented.

This one-time adjustment would also be fair in the spirit of the initial
contracts structured to guarantee profits and preservation of
investor funds. This also takes into consideration the short run
requirement to keep the investors within the country and the
moderate to long run need to have the public utilities function
efficiently. However, this adjustment has to be moderated by the
underlying social crises of high unemployment and inflation rates.
Full price recovery at current dollar rates cannot be implemented
but partial recoveries over a determined period would be socially
and politically appropriate. A one-time adjustment that would
ensure 30% -40% price recovery at current dollar prices would be
appropriate.

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B. Subsequent adjustments should be in relation to the domestic
retail price index. The utilities should be allowed to adjust their
prices on a quarterly basis in relation to increases in the domestic
consumer price index. In addition, the utilities should be allowed to
increase their real prices every six months to ensure that real prices
provide the utilities with a determined return on their investments.

2. The economic emergency law seemed to require that

accounts be kept in pesos, but should investments be
valued at their historic costs or their current replacement
costs? What rate of return should the companies be
allowed?

New or prospective investments should be valued at replacement

costs due to higher costs of capital and a need to prevent the utility
companies from operating at a permanent loss.

Pricing new investments at replacement cost would ensure that the

utilities regardless of past losses caused by the devaluation hold on
to their concessions, continually develop, expand and improve their
operations and services.

However, retrospective investments should be valued at their

historic costs. The investors could have paid a premium to cover the
exchange risks associated with the dollar denominated debts or
they could have financed their operations with equity or retained
earnings.

B. The rate of return that should be allowed should clearly be less

than the return on the Government debt. It would be social and
politically suicidal to expect that the rate of return is matched to the
rate of return on Government debt of 40%. However, a more
tenable rate of return would be between 10% to 20%.

3. Should rates be re-balanced to protect services used

mostly by residences and small businesses?

Re-balancing rates will lead to decreased profits by the utilities and

correspondingly decreased tax collection by the government, which
is very critical in view of declining government revenue due to high
unemployment rates and increasing difficulty to access foreign and
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domestic borrowing opportunities. The collected revenue can be
utilized to implement broad based social protection initiatives such
as security, education and health services which will benefit the
people in residential areas and the small businesses.

There is no need to rebalance rates in order to protect services

used by residences and small businesses, rather increasing
corporate taxes overall within a single unified structure would
increase tax collection by the government. The increased tax
collection can be utilized to provide social protection initiatives for
the vulnerable groups.

4. Were there new reasons to limit competition, extend

periods of exclusivity and accommodate more or greater
cross subsidies? Or should the government accelerate the
expansion of competition and end the cross subsidies?

There are reasons to limit competition, extend exclusivity and cross

subsidies in order to compensate the investors for loses suffered
due to the severe economic losses caused by the emergency
decree or even as a promise for future payments by the
government in exchange for not adjusting tariffs. However, it is
imperative to note that such policies would create inefficiencies and
political conflicts in the future. Such policies increase the likelihood
of complacency, poor quality of service by the firms and the risk of
policy reversal (re-nationalization or over-regulation) in the future.

Consequently, the Argentine Government should not limit

competition, extend periods of exclusivity nor accommodate more
or greater subsidies.

Rather government should renegotiate the contracts with existing

utilities without extending their exclusivities or limiting competition.
In times like these, Government should not constrain investment by
extending the exclusivity periods and limiting competition.

Government should also end cross subsidies in order to limit

inefficiencies and ensure appropriate pricing by the utilities.

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