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

UNCLAS SECTION 01 OF 04 QUITO 002861 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECPS ECON EIND EINV EC XR
SUBJECT: A TALE OF TWO TELECOMS: ANDINATEL AND STEP-CHILD 
PACIFICTEL 
 
SENSITIVE 
 
¶1. (SBU) Summary.  Established when the GOE broke up former 
state telecom Emetel in 1997, Pacifictel and Andinatel have 
taken divergent paths since their formation.  While 
Andinatel has transformed itself into a profitable 
enterprise with a new corporate culture, an overstaffed and 
undeveloped Pacifictel has endured a scandal-filled life. 
Repeated efforts to privatize the management of the two 
telecoms have failed due to accusations of corruption and 
political intrigue surrounding Pacifictel.  Pacifictel's 
ruinous path reflects the negative impact that entrenched 
political interests and corruption have on the Ecuadorian 
economy.  Recent events at Andinatel suggest that political 
forces are now intent on looting it the way they have looted 
Pacifictel.  End Summary. 
 
THE BIRTH OF TWO TELECOMS 
------------------------- 
 
¶2. (U) As the first step in an aborted attempt at 
privatization, in 1997 regulators broke up state-owned 
telecom company EMETEL into two companies, Andinatel and 
Pacifictel.  Andinatel received the exclusive right to 
service 12 provinces in northern and central Ecuador while 
Pacifictel became responsible for service to the other 10 
predominantly coastal provinces.  Regulators also granted 
both companies the exclusive right to provide long distance 
services for their regions.  Although they technically 
became private companies in 1997, the GOE, through state 
holding company Fondo de Solidaridad (FS), still owns 100% 
of Andinatel and Pacifictel.  Andinatel and Pacifictel 
expanded beyond their fixed-line operations in March 2003 
when they jointly started mobile operator Telecsa.  Telecsa 
competes with Spanish-owned Movistar and Mexican-owned Porta 
for cellular service within Ecuador. 
 
TWO DISTINCT PATHS 
------------------ 
 
¶3. (SBU) While Andinatel has evolved into a profitable, 
reasonably well-run state-owned enterprise (SOE) over the 
past 8 years, Pacifictel has been repeatedly looted by the 
various coastal political parties, being driven to the point 
of bankruptcy and operating with out-dated hardware and 
ineffective personnel.  In comparison to Andinatel's growing 
profits (from $41 million in 2001 to $68 million in 2004), 
Pacifictel has generally posted losses ($52 million in 2002 
and $7 million 2004).  Further undermining faith in its 
profitability, Pacifictel consistently makes unexplained 
(downward) revisions of its losses, sometimes more than 6 
months after the fact.  While the walls of the Andinatel 
President's office are adorned with awards and his company 
accounts for 93% of the (generally lackluster) earnings of 
the SOEs in the FS portfolio, reports of Pacifictel's 
imminent bankruptcy appear annually.  (The FS also holds the 
shares of some 25 electrical companies in the country.) 
 
¶4. (U) The contrast between the services provided by the two 
fixed-line telecoms is striking.  With respect to new 
telephone lines, Andinatel has installed 600,000 new lines 
over the past 6 years while Pacifictel has installed less 
than a third of that number.  Meanwhile, a plan by Andinatel 
and Pacifictel to lay fiber optic wire and link the two 
companies' fiber networks remains unrealized because of 
Pacifictel's incompetence.  As Andinatel was completing its 
network in mid-2004, Pacifictel was nullifying the contract 
it had entered into to expand its fiber network, leaving 
2,000 miles of fiber cable unused and in warehouses. In 
addition, Andinatel and Pacifictel's cellular venture is no 
longer "joint."  Pacifictel's inability to provide agreed- 
upon investments led it in February 2005 to sell off its 
share of Telecsa, which is now owned entirely by Andinatel. 
 
¶5. (U) End users' ratings of the two telecom's services are 
consistent with this comparison.  A June 2005 customer 
satisfaction survey of mobile and fixed-line operators in 
the country ranked Andinatel first with 55% of clients 
describing its services as good or excellent. Pacifictel 
came in second to last in the survey, with just one third of 
its customers rating its services as good.  Indeed, reports 
by regulators in 2002 and 2004 indicated that some 30% of 
Pacifictel's lines were not operating in any given month. 
Pacifictel's poor service and inability to modernize and 
expand operations have led FS to try auctioning off the 
management of the company to outside investors.  Thus far, 
none of these annual auctions have succeeded. 
¶6. (U) Recent activity suggests Pacifictel's downward 
trajectory will continue.  Pacifictel's 2004 numbers are not 
encouraging.  Since 2000, the company's fixed assets have 
deteriorated by $61 million and total equity value has 
fallen by $99 million.  Revenues in 2004 were actually down 
3% compared to 2003 figures.  Finally, Pacifictel's debt is 
now 81% of equity, compared to 47% in 2000. 
 
PACIFICTEL: OVERSTAFFED, UNDERDEVELOPED, AND CORRUPT 
--------------------------------------------- ------- 
 
¶7. (U) Pacifictel's mess is tied to corrupt personnel and 
infrastructure development policies.  Pacifictel's contracts 
for expanding and modernizing operations consistently are 
disadvantageous to the company and fail in their aim to 
attract needed investment.  Such contracts have revealed 
scandals in the procurement of security and billing 
services, the purchase of equipment and software, and the 
purchase of insurance policies. 
 
¶8. (U) One of Pacifictel's biggest problems is the quantity 
and quality of its employees.  To begin with, Pacifictel has 
approximately 3,500 employees. (Andinatel has slightly more 
than 2,000.)  Wages represented more than 60% of the 
company's operating costs in 2004.  It is outlaying 240% 
more in wages than it was in 2000.  Of the 3,500 employees, 
some 2,000 of them provide security and only 100 are 
technicians.  The rest are lawyers or work in administrative 
capacities. 
 
¶9. (SBU) Superintendent Ivan Burbano of the Superintendencia 
de Telecomunicaciones (Suptel), the government entity that 
is charged with enforcing telecom regulations, claims that 
bloated and inappropriate staffing is due to corrupt 
contracting practices.  That is, Pacifictel managers receive 
kickbacks for signing unnecessary and overpriced contracts 
with employment agencies such as those providing security 
services.  Lacking a properly developed staff of engineers, 
managers also are able to contract out for technical 
services to repair broken lines, often under similarly 
suspicious circumstances. 
 
¶10. (U) Corrupt contracting decisions are not restricted to 
personnel matters.  Contracts for infrastructure development 
also have come under suspicion.  In 2004 alone, Pacifictel 
had to cancel contracts with three suppliers in response to 
public allegations of corruption.  One of these contracts 
was to provide $100 million to install equipment and phone 
lines.  Other allegations of wrongdoing led to the 
investigation of a contract awarded to China's ZTE 
Corporation to install fiber-optic cable.  In the face of 
public scrutiny, Pacifictel was forced to demand the 
nullification of the ZTE contract after it was revealed that 
ZTE had illegally sub-contracted the installation of the 
cable and that this installation never took place.  In the 
end, Pacifictel paid $3 million for fiber optic cable that 
never made it out of Customs. 
 
¶11. (U) A good example of Pacifictel's suspicious 
contracting practices is a contract it signed with 
Transferdatos, an Ecuadorian company that provides video, 
voice, and data services.  Under the contract, Transferdatos 
was to install communications equipment and provide data 
transfer and other services.  However, the contract was 
deficient in several respects.  To begin with, the equipment 
sold would be obsolete by the time it was paid for, in 
December 2005.  More importantly, under the contract's 
clauses, Transferdatos was allowed to recoup all of its 
operating costs while Pacifictel assumed almost all of the 
obligations.  For instance, Pacifictel was responsible for 
the transmission platform that Transferdatos would use, the 
management of interconnections with other operators, the 
provision of collection services on behalf of Transferdatos, 
the rent of office space for Transferdatos, the gas used in 
Transferdatos' vehicles, etc.  These clauses essentially 
required Pacifictel to cover the costs of the services that 
Tranferdatos was being paid to provide.  A rather nice 
arrangement for Transferdatos, made possible, most likely, 
by kickbacks to the Pacifictel managers who agreed to the 
contract. 
 
¶12. (U) Illegal bypass connections established in 
Pacifictel's offices are yet another example of corruption 
in the sector.  Bypass operations capture incoming 
international long-distance traffic and redirect it as local 
calls.  This practice has plagued both Andinatel and 
Pacifictel.  Andinatel and Pacifictel should be collecting 
interconnection charges for these international calls, but 
they do not, losing out on revenues.  Suptel discovered 16 
such bypass operations in 2003 and even more in 2004.  More 
recently, a crackdown by Suptel in February 2005 discovered 
a bypass operation consisting of some 48 lines that would 
provide access to over 20,000 lines in Pacifictel's 
switching center. 
 
¶13. (U) Corrupt contracting obviously takes it toll.  A 
November 2004 assessment claims that corruption has directly 
cost Pacifictel at least $100 million since its inception. 
In addition, lawsuits totaling $157 million have been 
brought against Pacifictel and remain unresolved.  Many of 
these lawsuits originate with foreign long distance carriers 
claiming that Pacifictel is withholding outstanding 
interconnection fees regarding the termination of 
international telephone calls. 
 
INVESTMENT AND PRIVATIZATION UNDERMINED 
--------------------------------------- 
 
¶14. (U) Pacifictel's poor record has forced the FS to seek 
outside investment and administration to guide the telecom 
and avoid the influence of local politics.  In this effort, 
FS has been conducting, starting in 2000, public auctions to 
award management contracts.  While the auctions try to 
address management concerns at Pacifictel, they also are 
part of an overall effort to privatize the telecom industry 
in the country. 
 
¶15. (SBU) All four of the public auctions to date have 
failed to secure foreign capital and private-sector 
management.  This failure is generally tied to foreign 
investors' concern about the corruption within and political 
influence over Pacifictel.  A good example was the 2002 
effort to award an 8-year management contract.  FS declared 
an end to that offering in May of that year after the lone 
applicant Swedtel pulled out.  Swedtel, a Scandanavian 
telecom and subsidiary of Telia, declined to make the 
required guarantee payment because of uncertainty 
surrounding an outstanding lawsuit against Pacifictel by the 
Ecuadorian company Telefcom.  The lawsuit by Telefcom, a 
shell company created during the auction and with a net 
value of only $800, was part of a strategy to disrupt the 
auction.  That strategy also included a $50,000 advertising 
campaign, paid for by Telefcom, to stir up public opinion 
against the process.  According to Alejandro Rivadaneira, 
the FS president at the time, powerful political and 
economic interests created Telefcom to undermine the 
privatization process.  These interests included both 
politicians who were accustomed to receiving campaign 
funding from Pacifictel as well as Pacifictel's suppliers 
that wanted to maintain their advantageous contracts with 
the company.  The unfounded lawsuit by Telefcom was left 
standing until Swedtel withdrew its bid.  The following day, 
the judge made a swift decision to throw out the suit. 
 
¶16. (U) Further attempts to seek outside investment and 
management for Pacifictel and Andinatel have failed due to 
similar uncertainty.  In 2003, seven bidders entered into 
discussions with FS, but by the end of the year all had 
pulled out for unspecified technical reasons.  In 2004, 
Eurocom consortium, which is controlled Norway's Telecom 
Management Partners, attempted to conduct a $120 million 
investment in Pacifictel, Andinatel, and Telecsa.  That 
process was cancelled when it was determined that Eurocom 
did not meet the requirements laid out in the bidding rules. 
 
¶17. (U) FS's current attempt to find an administrator for 
its telecoms is scheduled to be completed in the last week 
of December 2005.  Attempting to avoid past failures and to 
ensure transparency, the FS has called on the International 
Telecommunication Union (ITU), to run the process.  The 
final stages are to take place in Geneva. 
 
MANAGEMENT AND GOE INSTITUTIONS UNHELPFUL 
----------------------------------------- 
 
¶18. (U) Instability in Pacifictel's board is commonplace. 
Pacifictel has had ten presidents in the last five years. 
In July 2005, the Pacifictel Chairman resigned after only 47 
days in office.  Last month, the entire Pacifictel Board 
(along with that of Andinatel) was changed.  Some suggest 
that the rapid leadership turnover precludes any real 
management of the company, allowing corrupt lower-level 
managers to take advantage of the constant change at the 
top.  However, the reality is that changes in management are 
the result of constant political infighting over who 
receives the kickbacks. 
 
¶19. (U) This infighting played out on a larger scale when 
the administration of President Gutierrez attempted to wrest 
control of Pacifictel from the coastal parties and in 
particular the Social Christian Party (PSC).  Gutierrez's 
efforts, which came to a head in March and April 2004, 
included replacing top-level managers at Pacifictel with 
close associates and family members, to include his cousin 
Renan Borbua, who also was a congressman.  Challenging the 
interests of the PSC triggered a response from Leon Febres 
Cordero, the leader of the PSC and former President of 
Ecuador (1984-88), who publicly and successfully attacked 
Gutierrez and his "circle of intimates" involved in 
Pacifictel.  (This attempt by Gutierrez mirrors the common 
Ecuadorian practice of "sharing the wealth" with associates. 
Indeed, a reported 20 military officers involved in a 2000 
military coup led by Gutierrez received bureaucratic posts 
in his administration.) 
 
¶20. (U) Meanwhile, government institutions are strategically 
positioned to block change at Pacifictel.  Structural 
changes within Pacifictel, for example, require the support 
of the Telecommunications Council.  The Council includes 
among its six members, representatives from the military, 
the Vice-President's office, the Secretariat of Production, 
and the worker's union.  Thus, the economic interests that 
these groups have to maintain current corrupt practices at 
Pacifictel could undermine efforts to privatize the 
management of the telecom because of their influence on the 
Council.  As we saw with the Telefcom suit, the judicial 
sector also can facilitate corrupt activities. 
 
COMMENT 
------- 
 
¶21. (SBU) In Ecuador, the corrupt business practices found 
in Pacifictel are not uncommon.  There are ample 
opportunities for rent-seekers at all levels to take 
advantage of the considerable and duplicative bureaucracy. 
These would include employees and management within 
companies, unions, GOE regulators, "oversight" entities such 
as the FS, and the variety of politicians who benefit from 
the slush funds created by kickbacks.  In many cases, 
embedded interests run across these actors, making the web 
of corruption strong and lasting. 
 
JEWELL