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Internal audit, former workers' complaints, conflicts of interest cast phone privatization in a disastrous light
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by Eric Jackson
An 11-page letter to President Moscoso from former employees of the state-owned INTEL phone company, control of which passed to the British-based Cable & Wireless in a 1997 privatization deal, details a train of abuses and seeks to set aside the concession contract. The workers' complaint is well supported by an internal audit by the company's Washington office. However, the odds of any action on the complaint are remote --- it turns out that the current or former directors, officers and dignitaries of what is probably Panama's most hated company include Economy and Finance Minister Norberto Delgado, Minister of the Presidency Ivonne Young, Vice-Minister of Economy and Finance Domingo Latorraca, Social Investment Fund chief Arnulfo Escalona and a number of other politically connected individuals.
The privatization, of course, took place under Ernesto Pérez Balladares's PRD administration, and PRD member Juan Ramón Porras, the last man to head INTEL, was paid a large bonus for his part in negotiating the phone company's sale. But it seems that Cable & Wireless played both sides of the political street, winning the concession from a PRD government and then transferring the contract to a subsidiary whose board of directors is top-heavy with prominent Arnulfistas.
In a bidding process with qualification prerequisites that excluded a number of companies that initially expressed interest, the contest eventually came down to US-based General Telephone (GT) against UK-based Cable & Wireless PLC (C&W). In the end, the bidding wasn't even close: C&W offered $652 million, as against GT's $420 million, for 49 percent of the shares and control of the utility. Most of the remaining shares, 49 percent, remained in the government's hands, while two percent went to the former INTEL employees.
The wide disparity was curious, and according to the former INTEL workers, it may have been because C&W was privy to information that GT was not. There were large sums of accounts receivable, for example. But more than anything else, GT had no way of knowing that C&W would be allowed to violate the contract immediately and egregiously.
The concession contract provides that it isn't transferrable. The day it was signed, C&W transferred its interests to an Algerian subsidiary, Cable & Wireless Panama Holding Limited, which had a stated capital of $500, and passed the non-transferrable operation and administration to Cable & Wireless Cala Management Services Limited, another Algerian company with a stated capital of £1 Sterling. These companies would not have been allowed to bid due to their lack of capitalization, and because the contract required that the bidders had to be registered in Panama, which these subsidiaries were and are not.
Beyond those technicalities, however, Cable & Wireless has indulged in a string of abuses, some of them with complete impunity, others with relative wrist-slappings, that have allowed the company to profit from conduct that was later held improper. There were the efforts to pressure Internet users to switch to C&W, by charging those with dial-up modems to pay phone bills if using other service providers but providing the service for free if using C&W as an ISP. Then, once the company got a lot of customers in the Interior, C&W switched the deal to charge them long distance rates for their online time. There was the time C&W made it impossible for Sinfo.net users to exchange emails with those using Cable & Wireless Internet services. There were blocks against Panamanian Internet websites that didn't use C&W's servers. There were the exaggerated charges to connect, disconnect or move telephone lines from one office to another. There were the rate hikes that most of the nation's business groups complained were ruinous.
But according to an internal audit, conducted by the company's Washington subsidiary after it found that KPMG's local audits were inadequate, the abuses were much worse than the public ever knew. The Washington audit tells a tale of gross mismanagement, fraud and the cheating of contactors, a series of bad practices that raise strong suspicions that somebody has been skimming somewhere, or more likely, that a lot of people have been skimming in a lot of places. There were, for example, payments to do work that had already be done and paid for once. There were materials that were unaccounted for. There were all these political hacks in leading positions.
The abuses went on thanks to "corporate secrecy" --- including from the Panamanian people, who own 49 percent of the shares, and from the former INTEL workers, who own two percent more.
The bottom line, however, is that even in INTEL's darkest days, it brought in at least $150 million per year for the Panamanian public coffers. Now the government, which still owns nearly half of the company, gets just $30 million a year, the value of the INTEL workers' shares is much deflated and the entire Panamanian nation is paying much more for phone service that is at most only marginally improved.
And the Moscoso administration has too many of its bigwigs on the gravy train to consider doing anything to improve the situation.
By the terms of its concession contract Cable & Wireless loses its exclusive right to provide fixed line phone service at the end of this year, but they're resisting the onset of competition by stonewalling on negotiations to create a phone number system that includes new companies. And might you wonder why the government isn't doing anything to remove the monopolistic obstruction?
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