continued: "The Impact of Regional Trade Pacts on Foreign TV Enterprises in Latin America" by Luiz Guilherme Duarte
page 1 | 2 | 3 | Notes and References

Foreign Investment in Latin America
In each step of the foreign involvement in Latin America’s telecommunication industry, specific legal and contractual issues impact upon the business plan and the financial viability of the investment. These key issues generally apply to all participants who enter a given country at any particular stage of development of the sector. Transactional counsel to a strategic investor in telecommunications in Latin America coordinates closely with business executives and in-house counsel about these issues and their impact on the valuation of the investment opportunity and the business plan. In order to better understand the legal environments in which these new pay-TV enterprises struggle to operate, appropriately harmonizing the interests of foreign investors and local managers, a review of each country’s rules was compiled from several reports by attorney offices around the region.1 In all countries, as it will be demonstrated, regional trade pacts have started to impact the legal parameters of television operations, thus inevitably demanding adaptations in the strategies adopted by foreign allies in the pay-TV business.

Argentina Foreign investments in Argentina are governed by Argentine Foreign Investment Law No. 21,382 of 1976, amended in 1980 and 1989, including the Regulatory Decree No. 1225/89 (FIL). Short of granting special incentives to foreign investors in order to promote their settlement in the country, FIL provides, as a general principle, that foreign investors shall have the same rights that the constitution grants to local investors. For the FIL, foreign investors are “any individual or corporation domiciled abroad and the so-called ‘foreign capital local firms,’ that is, any firm domiciled in Argentina in which individuals or corporations domiciled abroad should own directly or indirectly no less than 49% of the capital or possess directly or indirectly the number of votes needed to have a majority vote in shareholders meetings” (Marval and Pellegrini, 1993).

Since the Economic Emergency Law No. 23,697 was enacted in 1989, liberalizing and simplifying the legal frame in force until then, no prior approval is required to make foreign investments in Argentina. In addition, the ability of foreign investors to participate in privatizations may be limited by the specific regulations issued by the government in each case. Unless specific prior approval is required, foreign investors may elect not to register their investments under FIL, in which case they will be subject to the same exchange controls as local residents. Presently, there are no restrictions on exchange transactions.

In the past, during periods when exchange controls have been in force, only registered investors have had the right to purchase foreign currency (or Argentine External bonds denominated BONEX) at the official rate of exchange to remit dividends and repatriate capital. Even during periods of exchange controls, however, all foreign investors have been able to repatriate investments from Argentina by purchasing BONEX in the secondary market with local currency and selling them outside Argentina for U.S. dollars since there are no restrictions on the movement of BONEX out of Argentina. BONEX are U.S. dollar denominated government bonds which yield interest semiannually at LIBOR and have an active secondary market, both in pesos and in U.S. dollars in Argentina and in U.S. dollars in Montevideo and New York. There are no limits for profit remittances, whether foreign investors are registered or not, nor is there obligation of association with residents.

Since 1989, the foreign exchange market was liberalized after more than four decades of strict control. At present, foreign currencies may be freely purchased, sold or transferred from or towards the country, as the law allows foreign currency deposits at domestic banks with the guarantee of no confiscation or forcible conversion into local currency of such deposits by the government. In order to control inflation and to stabilize the economy, the current government has encouraged a monetary reform without precedents. In March 1991, the convertibility of the austral, Law No. 23,928, was enacted and on November 1, 1991, the National Executive Power issued Decree No. 2284/91 (the “Deregulation Decree”), which significantly reduced certain regulations relating to a number of economic activities which had previously limited the contractual freedom of economic agents or which had resulted in procedural difficulties generating high transaction costs.

The most significant changes introduced by the Deregulation Decree were:

• the abrogation of import restrictions and quotas;
• the abrogation of several taxes and duties imposed on the internal and external commercialization of certain products, including the abrogation of the 3% statistical tax on exports;
• the abrogation of stamp duty with respect to acts and transactions relating to the issue of securities by companies authorized by the Comisión Nacional de Valores (National Securities Commission) to publicly offer such securities;
• the abrogation of the tax on the transfer of securities and the tax on the sale of foreign exchange; and
• the exemption from the payment of income tax on capital gains earned by foreign beneficiaries arising out from securities transactions.

In 1989, the State Reform Law proposed by the government was passed declaring 32 state enterprises eligible for privatization (the number of eligible enterprises was increased in 1990). In addition, to increase the efficiency of public sector enterprises, the privatizations are intended to provide cash to reduce the public sector deficit and to reduce the government’s external debt through selective use of debt-equity conversions. In the case of ENTel, in November 1990, the government sold a 60% stake in each of two operating companies created from the existing telephone company for a total of US$214 million in cash and US$5 billion payable in Argentine external sovereign debt. The Argentine government has since sold its remaining interest in Telecom Argentina and in Telefónica de Argentina S.A. (the two operating companies set up after the initial incorporation of ENTel in November 1990) through a public offering in Argentina and abroad for a gross price of US$2.1 billion.

Overall, Argentina is one of the most aggressive in opening its markets to the world. Several laws have recently approved the Investments Promotions and Reciprocal Protection Treaties signed with the United States, Italy, Germany, Switzerland, Poland, France, Spain, Canada and Sweden. While inflation remains low and the influx of imported capital goods has been immense, the majority of the population has difficulties in acquiring such new items as they suffer with high unemployment rates—a consequence of the demise of poorly equipped local manufacturers, incapable of competing with international players.

Television Law
Radio communication services between land stations and space stations, or between space stations, or between land stations when signals are retransmitted by space stations, are also regulated by the Telecommunications Law No. 19, 798 (Agatiello, 1994). CNT is in charge of administering the radioelectric spectrum, of issuing measures to provide satellite services and of authorizing the use and installation of satellite systems for telecommunications. Any matter related to transmissions by satellite broadcasting will be regulated by both the Comfer and CNT. The transportation of signals for distribution purposes to cable television channels or for private use has been liberalized. Therefore, only an authorization is needed for the use of the frequency if the signals are to be transported through the radioelectric spectrum. Since June 1993, authorizations to install and operate systems, equipment or instruments exclusively destined to the reception of radio and television signals issued through communication satellites are no longer required.

Direct broadcasting to the general public is regulated both by the Radio Broadcasting and the Telecommunications Laws. Regarding open-air television, Decree No. 1151 of 1984 suspended all public bids for air TV and radio services provided through the radioelectric spectrum. Since 1984, however, approximately 1150 licenses for cable television broadcasting have been granted by Comfer.

Argentine law has no restrictions on foreign investments in telecommunications. Indeed, the majority interest in the two companies that provide basic telephone service and in the three that provide the mobile cellular service is held by foreign companies. However, Argentina still restricts the ability of foreigners to be licensors of radio broadcasting services. Article 45 of the Radio Broadcasting Law states that the licenses must be granted to Argentine individuals and/or legal entities domiciled in Argentina. The licensees must not be affiliated, controlled or directed by foreign individuals or foreign entities. The individual shareholders must be Argentine natives or naturalized, in both cases residing in Argentina for at least 10 years. Article 45 of the Radio Broadcasting Law has been severely criticized over the years. This limitation will probably be abrogated in the near future as a bill providing for its lifting is currently before the National Congress.

Bolivia Back on September 17, 1990, the Bolivian government passed its Investment Law which grants several guarantees to the foreign investor (Rojas and Rojas, 1993). There is no foreign exchange control and banks are operating with current accounts or deposits in dollars or in bolivianos. To encourage foreign investment, Bolivia has signed bilateral treaties with several countries, such as Italy, Spain, Belgium, Luxembourg, Switzerland, Great Britain and China. The government has also ratified the Multilateral Investment Guarantee Agreement (MIGA) proposed by the International Bank for Reconstruction and Development. A respective agreement is being negotiated with the United States. Several state-owned companies are being privatized. With the countries of Colombia, Ecuador and Venezuela, as well as Peru, free trade agreements have been executed. Also, with Peru, an agreement called Mcal has been executed.

Brazil The investment of foreign capital in the country is regulated by Law No. 4.131/62 (modified in 1964 and 1991), regulated by Decree 55.762/65 and complemented with regulatory acts issued by the Central Bank of Brazil. The control of inward and outward investments is carried out through the registration of such investments with the Central Bank of Brazil. Once having submitted and having obtained from the Central Bank of Brazil the registration of the investment, the Central Bank will issue a certificate which allows the foreign investor to receive dividends in his country, as well as to return the capital invested. In general, any payment made by a Brazilian source to a person domiciled abroad is subject to a 25% withholding tax. (2) Such rate can be reduced in the event the recipient of the payment is domiciled in a country with which Brazil has entered into a tax treaty to avoid double taxation.

Since March 15, 1990 when President Collor took office and announced the new economic policy, there has been great expectation about radical changes in the legislation relating to foreign investments (Castro, Barros, Sobral, and Xavier, 1993). Despite some numerous retreats—including the impeachment of Collor—some advances have been obtained to open the national market to foreign involvement, thus obliging the national sector to get used to a free market policy where no protectionist measures and no subsidies will soften the competition. Although the old law on foreign capital (Law No. 4.131) has only suffered minor changes, they were significant enough to lower the tax burden on foreign investment and spark a change in the bureaucracy’s state of mind. The latter greatly helped reduce the difficulties previously experienced by investors in remitting dividends abroad or registering reinvestments, which were attributed mostly to the way the public bodies, such as the Central Bank, would interpret and enforce the rules. Since the Central Bank used to hold the power to legislate on the matter, a rather unstable situation distressed the holders of foreign investments in Brazil.

A sign of advance in welcoming foreign trade was the creation of a group of members of the public sector, along with foreign investors, to study the rules which were making difficult the access and permanence of foreign resources in the country. Progress has been announced by legal consultants, especially on the way the Central Bank controls the investments. The groups has also exerted great pressure on the Congress, by providing information to projects such as the ones referring to the new legislation of foreign capital, a new law concerning the industrial property, new software legislation and others. While the regulation of Mercosur is still being set up, one of the most important steps in that way was the enactment of the Resolution no. 1968/92 of the Central Bank of Brazil, which permits the realization of capital investments made by Brazilian persons or legal entities in the Stock and Commodities Exchange of the other countries, and the same goes for persons or legal entities of the other countries. Such investments can be made in North American dollars, in the currency of both countries involved in the investment. Such measure points, indeed, in the direction of a common market of stocks and commodities inside the Mercosur what would certainly fit to the intensification of the commerce.

Television Law
Television services, when not open to the general public, are not classified as broadcasting services, but as special services and do not fall within the restrictions of Article 222 of the Brazilian Federal Constitution, which requires ownership by Brazilian individuals (Agatiello, 1994). Depending on the mode of transmission (VHF, UHF, MMDS, cable and DTH), pay-TV services are subject to specific regulations. Despite the fact of not being classified as broadcasting, specific regulations on the different pay-TV modes still provide for limitations to the participation of foreign capital, as discussed below.

Special Service of Subscription Television: Decree No. 95,744/88, as amended by Decree No. 95,915/88, regulates the so-called Special Service of Subscription Television (“TVA Service”), which uses radioelectric waves (VHF or UHF) for transmitting codified signals to the subscribers. Exploitation of the TVA Service is only allowed to Brazilian national companies (the capital of which is held exclusively by Brazilian individuals). Such licenses are granted on a non-exclusive basis for a term of up to 15 years, subject to renewal for additional and equal periods.

Multipoint Multichannel Distribution Service (MMDS): The rules governing the MMDS are set out in Ordinance No. 43 of 10 February 1994, of the Ministry of Communication, which approved Norm 002194. This service is defined as the special telecommunications service which uses microwaves to transmit signals to be received, under a contract, in specific locations within the area of the service. Exploitation of MMDS service is allowed to legal entities having at least 51% of the voting capital held by Brazilian companies or Brazilian individuals domiciled in Brazil. Permission for the exploitation of the MMDS service shall be granted for a period of 10 years, renewable for equal periods, and on a non-exclusive basis.

Cable TV: The first attempt to regulate cable television services was made by Ordinance No. 250/89 of the Ministry of Communications which regulated the service of Distribution of Television Signals (DISTV). This service was conceived only for the distribution, by cable, of television signals within areas where such signals were not clearly received and operators were not allowed to generate their own programming. Licenses to exploit DISTV services are no longer being granted after the passage of specific cable legislation. As currently drafted, the rules restrict participation of foreign capital in this activity to no more than 49% of voting capital. Cable television is also being implemented in Brazil through agreements between public telephone services operators and private companies regarding the use of the telephone cable network for purposes of transmitting pay-TV programming.

Direct to Home Television Services (DTH): It may be provided by the use of satellite transmission services, which may be contracted with Embratel, the operator of Brazilian satellites Brasilsat I and II. Agreements with Embratel to obtain these services do not require any government license.

The participation of foreign investors in the Brazilian telecommunications industry has been a controversial issue over the years. In the past, telecommunications services were considered a key sector which should be reserved to the Brazilian Government (specially the public services) and/or Brazilian nationals (radio, TV etc.). In addition, the infomatics market reserve enforced until recently included the marketing of telecommunications equipment. With respect to current restrictions, the 1988 constitution reserves to the federal government, directly or through government controlled companies, the exploitation of telegraphic, telephonic, data transformation and other public services of telecommunication. The Brazilian Telecommunications Code defines public services as those executed by stations available for public correspondence, for use by the public in general.

Furthermore, the federal constitution provides that the government may, directly or indirectly, exploit any radio, sound, or image transmission activities. These activities may also be exercised by individuals (i) born in Brazil; or (ii) who obtained Brazilian nationality for more than 10 years, upon granting of a license from the government. The Brazilian Congress has been debating the lifting of the above restrictions, but no conclusion has yet been reached. Therefore, these restrictions are likely to remain unaltered for the time being. In addition to the restrictions of a constitutional nature, various portarias establish additional restrictions on a case-by-case basis. Whether such restrictions have an appropriate legal foundation is not a question we address here. The variety of restrictions should probably be viewed more as the result of historical processes than anything else. In general, some types of service have no restrictions, while others limit foreign participation to 49% (when speaking of voting capital), require that an operator be a “Brazilian company of national capital” (that is, one de facto and de jure under the control of persons domiciled in Brazil), demand state share control, or require that an operator be owned only by Brazilians.

Chile The economy of Chile has undergone a substantial transformation over the last two decades. Following the implementation of the free market economy, various governmental subsidies were substantially lowered, price controls gradually relaxed, average import tariffs reduced to reasonable levels, and extensive legislation was passed initially to attract and later to encourage domestic and, principally, foreign investments in Chile (Claro, 1993). Foreign investments may be brought into Chile either under the LOC or the Foreign Investment Statute (Decree Law 600). Under both systems, the foreign investors are granted access to the formal foreign exchange market for repatriate capital and profits. Capital invested thereunder may not be repatriated earlier than three years from the time the investment is made, but profits may be freely remitted abroad at any time at the discretion of each investor.

Certainly, Decree Law 600 affords the best legal protection available in Chile to foreign investors, as their rights and privileges are secured by an investment contract entered into with the Republic of Chile. These foreign investments are governed by Chilean law and are subject to the jurisdiction of Chilean courts. The LOC alternative available to foreign investors has traditionally been based only on an administrative resolution issued by the Central Bank and, consequently, is to some extent more vulnerable. Furthermore, Decree Law 600 grants to foreign investors additional protection, such as special protection against discriminatory treatment vis-à-vis domestic investors. Decree Law 600 provides that foreign investors and the local companies receiving investments are subject to the general provisions of law applicable to domestic investors and that no discrimination, neither direct nor indirect, may be made against them. Nevertheless, it provides that regulations may be enacted to limit the foreign investor’s access to local financing.

On December 11, 1994, the prime minister of Canada and the presidents of the United States, Mexico and Chile announced their intention to pursue Chile’s accession to the NAFTA (Gelkopf, 1997). However, the process of expanding NAFTA stalled when the American Congress refused to give President Clinton the fast track authority to negotiate with Chile. As a result, the Canada-Chile Free Trade Agreement was negotiated as a bilateral accord. The agreement was signed on November 18, 1996 and since then, several additional negotiating rounds have taken place. The Canada-Chile FTA includes two parallel agreements on environment and labor cooperation, modeled on the NAFTA side agreements. These side agreements reflect both countries’ emphasis on increased cooperation and effective enforcement of domestic laws in these areas, while an exemption for cultural industries clearly excludes all forms of television from the FTA. These are the first agreements of this nature ever signed by the government of Chile.

The purpose of the Canada-Chile FTA is to eliminate most tariffs and non-tariff trade barriers on goods traded between the two countries. The Canada-Chile FTA calls for the immediate duty-free access for most industrial goods, which account for 80% of Canadian exports to Chile. Tariffs on many other industrial and resource-based goods will be phased out over a maximum of five years. While the Canada-Chile FTA will allow Chile to maintain existing capital control measures, it nevertheless prevents Chile from imposing more restrictive measures against Canadian investors. Most Canadian investors will no longer be subject to Chile’s requirement that 30% of their capital remain in the country. This will give Canadian exporters an important advantage over their principal competitors in the Chilean market, including U.S., European and Asian suppliers, as well as Chile’s regional trading partners. Total two-way Canada-Chile trade has increased dramatically since 1990, with shipments totaling $666 million in 1995, up 20 percent from the 1994 total assets of $553 million. Canadian investments in Chile have increased sharply in recent years and the cumulative total of actual and planned investments exceeds $7 billion. As Standard & Poor rated Chile as a BBB investment grade country, it celebrated the highest rating given to any country in Latin America today (Mexico followed with a BB+ rating).

Colombia Since the new constitution was adopted in 1991, deregulation of foreign trade and the opening to foreign investments have become priorities and the new regulations applicable to imports have eliminated the restrictions that were commonplace in Colombia to protect local industrial sectors (Urrutia, 1993). The system of prior import license and prohibited imports list have been virtually eliminated, and it is now possible to import freely most goods without obtaining prior governmental approval. The basic principle of foreign investment regulations is that foreign investors are entitled to equal treatment vis-à-vis Colombian investors. Accordingly, foreign investors can participate in all areas of the economy, with the exception of national defense and disposal of toxic waste product abroad. Foreign investors can own and control 100% of local companies and are not required to team with local investors. Foreign investments do not require prior governmental approval, with the exception of investments in oil, gas, mining and public services (power generation, distribution and transmission, basic telecommunications, water and sewage). Foreign investments must be registered with the Central Bank; such registration entitles the investor to repatriate yearly 100% of after-tax profits.

The government has recently implemented the law that created the Ministry of Foreign Trade, which is responsible for all matters having to do with imports, exports and other trade-related matters, such as bilateral and multilateral trade negotiations. The government is actively participating in bilateral and multilateral negotiations with other Latin American nations, with the United States, and with the members of GATT so as to ensure Colombian’s active participation in the world markets. As a member of the Andean Pact, Colombia has also agreed to a new more liberal foreign set of regulations. In March of 1991, the Commission adopted Decision 291 that eliminates all prior restrictions to foreign investments within the region and authorizes the member countries to adopt their own specific rules concerning such issues as the rights accorded to foreign investors, the need to obtain prior approvals for an investment, the rules applicable to the resolution of disputes and the requirements concerning technical assistance and license agreements. Perhaps one of the most important aspects of Decision 291 is that it provides that all companies, whether national, mixed or foreign, operating within the region are entitled to take advantage of the trade liberalization programs, provided that their products fulfill the requirements of origin set forth in the implementing regulations of the Andean Pact.

Television Law Colombia is a founding member of the Agreement of Cartagena of 1969 (commonly known as the Andean Pact), a regional integration organization treaty that regulates a number of economic activities (Agetiello, 1994). However, telecommunications services have not yet been a subject matter of this integration policy. According to Colombia’s legal system, international treaties ratified by Congress and duly promulgated by the executive branch are part of internal legislation and as such must be observed. Therefore, since the Andean Pact has already been approved and ratified, in the event the Commission of the Agreement of Cartagena issues regulations regarding telecommunications these shall be mandatory for all member parties to it, including Colombia.

For cable television services the broadcasting and programming, as well as the distribution of television signals, are subject matter of a concession agreement to be executed after a bidding process has been followed. Concession agreements may only be granted to national universities or companies duly incorporated under the laws of Colombia. This shall not be considered a restriction for foreign investment. Furthermore, in order to guarantee a free competition regime, and to prevent the abuse of a dominant market position by the concessionaires, no individual or company may be awarded more than 25% of the total amount of hours granted in concession on the same channel. Likewise, no individual or company may be awarded concession in more than one television channel. In order to protect national productions, any and all concessionaires are obliged to transmit national programs during at least 60% of the total amount of hours awarded.

Colombia has also been actively pursuing free trade agreements outside the scope of the Andean Pact, particularly with Venezuela. Venezuela and Colombia have entered into a bilateral trade agreement to adopt a common external tariff and a customs zone within two countries. The Colombian government has been actively negotiating with the Office of the U.S. Trade Representative in order to be eligible to take advantage of the benefits and incentives of the Andean Basin Initiative. Simultaneously, it has been negotiating with the United States, Mexico and Canada for an eventual integration into the North American Free Trade Agreement (Urrutia, 1996). continued

Next page: Ecuador, Mexico, Paraguay, Uruguay, Venezuela
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Notes and References

Map: Regional Trade Agreements
Map: Pay-TV Liberalization
Chart: Pay-TV Developmental Phases
Chart: From Open Markets to Regional Pacts: A Common History