Convergencia Research, Consultoría especializada en Latinoamérica y Caribe
Tuesday, July 07, 2020

Azteca begins hard way out of RDNFO while MTC structures new model

In December 2019, the Ministry of Transport and Communications received a proposal from the backbone network licensee to terminate the contract by mutual agreement. The Peruvian government's counterproposal includes multiple changes to Azteca's initial suggestion, amog them, on the review of multiple deployment failures.

At the beginning of 2020, Azteca's proposal was analyzed by the MTC, the Ministry of Economy and Finance, the General Comptroller of the Republic and Osiptel, since all their opinions must be considered, as established in the procedure in the Law of Public-Private Partnerships. In the last six months, the process of analyzing this proposal was carried out, which included a counterproposal from the MTC -based on the suggestions gathered from all the entities mentioned-, which is currently under analysis by Azteca.

The conclusions drawn from the evaluation of the MTC show a complicated transition and an exit from Azteca that must meet all kinds of conditions in the process of verification and reversion of assets. The above is based on the number of minor and important observations found by the participating entities to the deployment of the network (and that have been denounced since 2015, as stated in previous reports). The spirit of the evaluations is summarized in this sentence of the report presented by the MTC: “It is necessary to evaluate the Addendum Proposal presented by the Licensee in order to establish that the termination of the Project License Contract proposed in the aforementioned Addendum does not generate economic damages to the State and allows to safeguard the interests of the public administration”.

The MTC declares in its report that it cannot accept Azteca's addendum proposal of late 2019 for numerous reasons, among which are these that follow:

-prevent the qualification of non-compliance during the execution of the test protocol that will start this year for the exit of Azteca

-determine the supervision methodology to be used by the regulator

-determine the inapplication of some service levels (SLAs).

-in relation to the Guarantee the Carrier Service Provision Phase, the Adenda proposal maintains said validity even during the process of reversion of the license assets, unlike the current version of the License Contract, which only maintains its validity until the expiration of the license. "The Licensee's proposal is designed in a scenario of gradual return of the property held and not in the reversal of the same in a single act as established in the License Contract in force. As regards this point, the counterproposal of this Ministry considers less risky that said reversal process takes place in a single act with a prior verification process, for which reason it is not appropriate to reduce the guarantee gradually, accepting its replacement by a new guarantee once the Final Delivery Act has been signed”, states the MTC.

-as for the amount of the guarantee, Azteca proposes its final replacement for an amount of US$5.38 million to guarantee the results of an arbitration award related to the cost of the land and/or real estate of the project, but for the Peruvian State, that amount is insufficient to guarantee the State the coverage of these lands. "The MTC cannot accept an Addenda proposal that generates additional commitments for the State, which total an overall sum of around US$11.99 million for the undervaluation of the land in dispute with the Licensee. In this regard, these additional resources would cause fiscal contingencies and therefore firm and contingent liabilities for the State”, the report indicates. The MTC's counterproposal is to set this amount at US$17.37 million.

-for the MTC, the Final Delivery Act should be signed after verifying that all the Concession Assets are without any observations. The RDNFO had so far 720 observations (130 major and 590 minor) in 322 deployed nodes, that is to say that on average each node recorded around 2.24 observations.

-the MTC considers that the tests proposed by the licensee are not sufficient to verify all the components of the network regarding their state of conservation, operability, functionality and availability. "There is a high risk of not carrying out the tests indicated by this Ministry and receiving goods with observations could not be noticed", it warns. On the other hand, from the government it is suggested to carry out general tests of the Nodes, of the operation of the NOC management systems of Trujillo and Huachipa (Lima), and of IT infrastructure.

Priority for regional networks. While awaiting Azteca's response to the MTC's counterproposal, the Government lays the foundations for a new model for the RDNFO. After the advances of last January with the project to modify the Regulation of the Broadband Law, changes were incorporated to the operation and business model of the RDNFO and the 21 regional network projects. This new model and the efforts at the regulatory level not only seek to take advantage of the Azteca line, but also to promote regional projects, which are the ones that ultimately bring access to the underserved, particularly due to the interruption suffered by the work due to the Covid-19 pandemic.

In this spirit, the main modification introduced in January had to do with those 21 ongoing regional projects. Those who were awarded these projects must build the transport and access networks, but they can only operate the access network, for about ten years. As for the transportation network, once deployed it must be licensed to another operator, a process that the State faces and that has been taking, on average, about two years. With the changes to the regulations of last January, while those 24 months elapse, the State contracts an operator to operate the transmission network, and that operator may be the original awardee of the regional project. And even that actor can also participate in the tender and be awarded the transmission network license.

In this spirit, the main modification introduced in January had to do with those 21 ongoing regional projects. Those who were awarded these projects must build the transport and access networks, but they can only operate the access network, for about ten years. As for the transportation network, once deployed it must be licensed to another operator, a process that the State faces and that has been taking, on average, about two years. With the changes to the regulations of last January, while those 24 months elapse, the State contracts an operator to operate the transmission network, and that operator may be the original awardee of the regional project. And even that actor can also participate in the tender and be awarded the transmission network license.

The priority for improving telecommunications coverage should be, from the point of view of the MTC, in the Red Nacional del Estado Peruano (Rednace) (National Network of the Peruvian State) and the University Network. In the framework of the needs of e-government and tele-education arising from the mandatory confinement, the vice minister already declared without hesitation that the RDNFO must go into state hands: “The backbone, whether by one way or by another, must return to the Peruvian state. We must have technical decisions, tidy and outside of any political sphere. It is a technically flawless network, at least three years ago. We already have it installed, it is operational, it took place in the established milestones and deadlines, let's use it in an intelligent way that connects those who are not connected”, she said.

Once it returns to the State, the two paths that are being considered are to re-license it - although making it clear that part of the traffic must be destined free of charge to the government and educational networks - or that it remains under the administration of Pronatel, although operated by a third party. A third option that MTC recognizes as the fastest and simplest, but “politically incorrect”, would be to sell it in parts, so that operators acquire the portion that interests them the most based on their own fiber deployments so far. Going down this path, government networks would be out of the priorities.

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