Claro’s Struggle to Gain Licenses Puts Colombia’s Telecom Policy Under Microscope

Colombia was named the third best country for doing business in Latin America by the World Bank’s 2012 Doing Business report. Colombia has shown the greatest improvement of Latin America in the World Bank’s annual rankings since 2007. Despite the improved business environment and the strong likelihood that the broadly pro-business policies championed by President Juan Manuel Santos will continue, risks for businesses operating in Colombia have not dissipated.

Don’t take my word for it. Just ask Carlos Slim. Claro, the Colombian subsidiary of the Mexican billionaire’s América Movil, fell into a mobile phone tariff dispute with state-owned firm Empresa de Telecomunicaciones de Bogotá (ETB) earlier this year. On June 4, Cudinamarca department’s Administrative Tribunal ruled in favour of ETB and ordered Claro to pay $80 million plus interest. The lawsuit dated back to a 2006 disagreement between Comcel (which has since become Claro) and ETB over tariff collections. Claro responded to the ruling with a statement that it planned to appeal the ruling.

Claro’s determination to fight the ruling prompted a response from Bogotá’s mayor, Gustavo Petro, who threatened to seize Claro’s assets if the payment was not made. He also suggested that Claro should not be permitted to participate in the highly anticipated 4G licensing round until the matter was resolved. Petro also called for President Santos to directly intervene in the case.

The controversy came at a political sensitive time for Petro, a former M-19 leftist guerrilla who took office in January 2012. Since taking office, Petro has faced sharp criticism on a number of issues ranging from a labour dispute with garbage collectors to his management of Transmilenio, the Colombian capital’s transportation system. The fairly rapid public disenchantment with Petro’s leadership has led to a petition drive to collect enough signatures to trigger a recall election.

In this context, Petro’s aggressive stance against Claro should be viewed as posturing and makes much more sense. As the leftist politician, who as recently as last year was mentioned as a potential presidential candidate, prepares to fight for his political life, a foreign company owned by the world’s second richest man is an attractive target. Attacking Claro allowed Petro the opportunity to strengthen his political base ahead of what could be a contentious recall election.

Claro’s dispute with Petro and ETB must also be viewed within the larger Colombian institutional framework. Despite the threats, Claro would have been able to appeal any asset seizure in Colombia’s court system, which is considered fairly independent by Latin American standards. Although Claro has faced fines from Colombia’s federal telecom regulator for service disruptions, lack of coverage in certain areas and consumer complaints, its issue with ETB did not indicate a broader problem that extended beyond Bogotá’s municipal government.

The announcement in late June that Claro was one of the four companies to receive one of the coveted 4G licenses confirmed that. Despite Petro’s rhetoric, Claro was still able to receive fair treatment at the federal level. Additionally, the only company to have its 4G bid rejected was Mexico’s Azteca, one of Claro’s biggest rivals. However, the episode highlights the importance of foreign companies examining the regulatory environment not just of the federal government, but of regional and local governments as well.

At the federal level, telecommunications regulator CRC has begun to implement policies designed to reduce Claro’s market dominance. In March 2013, the regulator said it would require operators to provide automatic national roaming services. These efforts are consistent with federal regulators’ desire to improve service quality and maintain fair pricing.

The yet to be resolved saga between Claro, ETB and Bogotá mayor Petro illustrates that risks do continue to exist despite an increasingly business friendly federal government. The key is to understand the local political realities in order to reduce the likelihood of ending up in a situation similar like that of Slim’s Claro. However, the federal regulators’ commitment to maintaining a strict regulatory environment that prioritizes increased competition, better service and penalizes price gouging means Colombia will likely continue to be an increasingly attractive outsourcing option.