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Along with its deep reformist agenda, the Brazilian government is moving to approve pro-market regulatory changes in order to encourage investment. In this field, the telecoms sector is high on the government’s priority list for alterations. Earlier this year, Congress passed an update to the sector’s legal framework and now, the National Telecoms Agency (Anatel) is working toward auctioning off 5G frequencies in 2020.

The head of the regulatory body, Leonardo de Morais, explained to The Brazilian Report that the priority is to ensure the proper amount of investment. However, the upcoming auction comes with a tough nut to crack: Anatel must ensure true competition—reducing the risk of speculators making bids in order to re-sell frequencies to large groups, resulting in a concentrated market which is already a major problem in Brazil’s telecom sector.

Another challenge relates to international relations—more specifically concerning Brazil’s role in the U.S.-China trade war. Donald Trump’s White House has put pressure on Brazil to ban Huawei from the auction, claiming the company shares sensitive information with the Chinese government.

Read the main takes of The Brazilian Report‘s exclusive with Mr. Morais at Anatel’s headquarters, in Brasília. (Disclaimer: This interview was edited for brevity and clarity.)

</p> <h4>What are Anatel&#8217;s next steps after approving the new Telecoms Law?</h4> <blockquote class="wp-block-quote"><p>2019 was a very productive year and Anatel was a source of much good news for Brazil. Regarding the new law, I&#8217;ve said it was the most important microeconomic reform since the privatization of telecoms in the late 1990s. Its sanctioning, without vetoes, opens a window of opportunities for us to put broadband internet in the center of public policy and shift the focus from landline telephony. The law also provides legal security. Once you have a concession agreement, it allows the contract to be changed as long as there is a consensus between the interests of the public and private sector. To achieve a better balance, it is necessary that the amount calculated after the migration from concessions to authorizations and the required investment should have a fair value.</p><p>Anatel worked hand in hand with the approval of the new regulation. So, all the regulatory impact analysis by technicians, developing drafts, sending these to the prosecutor’s office and then to Anatel’s board, we have already completed this. But the pricing and required investment is still to go through the Federal Accounts Court (TCU). This value also changes over time. As we approach the end of the contracts, in 2025, the difference between the economic exploration in each regime becomes smaller, and that’s why we’ve been pushing the process along.</p><p>We do have a sense of urgency, but we must uphold legal security.&nbsp;</p></blockquote> <h4>So we’ll only know the final value after the end of this process? Is there a deadline for that to take place?</h4> <blockquote class="wp-block-quote"><p>Considering the deadlines established by the law and the time the TCU will require, I think 12 months would be a reasonable estimate.</p></blockquote> <h4>Do you think some companies might choose not to migrate to the authorization regime?</h4> <blockquote class="wp-block-quote"><p>Regulation is about incentives. If the values and conditions are proper, I believe the companies will have the incentive to migrate. If they don’t, by 2025 we may be left with a situation of legal insecurity for concession contracts where the object [landline telephony] has lost its attraction. There is a possibility that the renegotiation will not take place, but we are working to agree on the correct amount and I believe that if we achieve that there will be room for private and public interests to coexist.&nbsp;</p></blockquote> <h4>If they decide not to migrate, how would this affect investments in broadband?</h4> <blockquote class="wp-block-quote"><p>Well, the law offers a possibility to transfer funds linked to landline telephony to broadband internet. I’ll give you an example. Between January 2015 and the end of 2018, BRL 1.1 billion was spent on the maintenance of public telephones. This amount no longer exists. As we come closer to 2025, it’s as if the ice is melting. That’s why we need to be fast and reach a fair value. It is important to direct this money to improve broadband in places that are not economically attractive—but this cannot be the only alternative.</p><p>Maybe the most important of them is reviewing the law regarding the <a href="https://www.anatel.gov.br/setorregulado/perguntas-frequentes?catid=9">Fust</a> [a sectoral fund aiming to universalize telecom access in Brazil’s poorer areas]. From 2001 on, we raised BRL 21 billion, or BRL 34 billion in today&#8217;s money. How much was invested in universalizing services? Nothing. Meanwhile, the U.S. has a similar fund and it is shocking to know that in 2018 alone USD 8.5 billion was spent on connecting areas that are not economically attractive. </p><p>We have to review the Fust to bring value to what really matters today—broadband internet—and ‘defrost’ Fust funds for the future. We have to be realistic, however. Given the current fiscal condition of the country, I believe the chance to use this money from an accounting fund is remote. But, at least, from now on, we should be able to have access to it.&nbsp;</p></blockquote> <h4>But a bill to abolish the Fust was presented by the Economy Ministry earlier this month. If this bill is approved and Fust is not recreated in two years’ time, it will become extinct. How would this impact upon the sector?</h4> <blockquote class="wp-block-quote"><p>I think that if Fust is never used for its actual purpose, it makes no sense to place a burden on consumers. Considering the need for digital inclusion, Fust’s existence is very important. But it cannot exist as an accounting fund as it is today. We need to improve its rules and unlock its funds.</p></blockquote> <h4>And what about the 5G auction? Is there a chance it will be delayed until 2021 due to interference with parabolic antennas?</h4> <blockquote class="wp-block-quote"><p>We worked hard to hold the election in Q1 2020. Unfortunately, this public notice stayed with the rapporteur for 140 days. This delay has taken its toll on the timetable, which is very bad for the development of telecoms in Brazil. That being said, the report the rapporteur gave was quite different from the recommendations of Anatel’s technical team. Which is why [board member] Emmanuel Campelo asked to review the report and is now working to present it at the board’s last meeting this year, on December 12. In spite of the delay, I expect we will be able to hold the auction by the end of 2020.</p><p>Now, there is indeed coexistence among 5G and parabolic antennas, but we need to be careful to not let it make 5G unfeasible in Brazil. There is a significant amount of TV reception going through parabolic antennas but many of them have no filters, meaning that any other signal, including 5G, may interfere with the reception. That doesn’t mean we’ll forget about it, but the deployment of 5G will begin in big cities, where TV signals have already gone digital. Also, by the end of 2023, analog TV is set to be turned off. I understand that we’ll see different opportunities to address this issue and I believe the public hearings will be important for that.</p></blockquote> <h4>Do you already have an estimate of profits from the auction?&nbsp;</h4> <blockquote class="wp-block-quote"><p>There is no such thing. A figure was mentioned by the <em>Estado de S.Paulo</em> newspaper <a href="https://link.estadao.com.br/noticias/cultura-digital,leilao-da-telefonia-movel-5g-deve-movimentar-r-20-bi,70002931774">(in an interview with Anatel board member Vicente Aquino),</a> of about BRL 20 billion but it is not linked to any kind of guarantee. The use of radio frequencies was not factored in. That’s because before giving a number, we draw up a hypothetical business plan. There’s the average cost of capital, that is affected by a series of variations depending on the risk-free rate applied. This is very sensitive and any kind of move in interest rates will affect it. But, besides that, you have the required investment and that will obviously affect the reserve price to be established. At this point, it is frivolous to attribute values to any of the 5G spectrums.</p></blockquote> <h4>So do you intend to opt for an auction with larger investments as opposed to money raised?</h4> <blockquote class="wp-block-quote"><p>Precisely. We need to have an auction that guarantees the expansion of the network, larger coverage and less focused on raising money. Every spectrum price has to reflect the cost of opportunity for its use, but this can be done through investments or by raising funds. I believe we should prioritize investments.</p></blockquote> <h4>Do you have an estimate of which companies will join the auction? Will Huawei be allowed to participate?</h4> <blockquote class="wp-block-quote"><p>Huawei does not take part in the auction because it is a tender of radiofrequency usage rights and it does not own radiofrequency usage, the operators do. But telecom companies buy equipment and this is when Huawei comes in. I think there is a big interest in this auction from various telecom companies, and I wouldn&#8217;t be surprised if even more interested companies show up.</p></blockquote> <h4>But we have seen Anatel working on including new entrants, such as smaller operators. The press has even reported that there are investment funds interested in the auction to try and make a profit on the secondary market.</h4> <blockquote class="wp-block-quote"><p>I can assure you one thing: no bid notice from Anatel would generate incentives for speculating on an asset such as the 5G spectrum. There’s no room for that. As far as I&#8217;m concerned, I will not give any leeway to create incentives to acquire the spectrum for speculation.

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BY Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.