Telecom and BOT Business Opportunities in Chile

Eliel Hasson

www.prieto.cl / www.tlconsulting.cl

China-Latinamerica Summit27, November 2007

Population 16 MM Labor Force 7 millions

GDP 2006 USD$ 141.800 billions Growth Rate 4,2%

GDP per capita 2006 US$ 8,570 PPP US$ 12,737

Country Risk Standard & Poors “A” Fitch “A-”

Corporate Tax 17% V.A.T. 19%

Custom Duty: 6% (Non trade agreement)

FTA’s (95% items with 0%)

External Debt 46.5% GDP (mostly private debt)

Foreign Direct Investment 2006 USD$ 9,300 billions

Chilean Investments Abroad 2005 USD$ 2,400 billions

Chile in FiguresChile in Figures

Economic Overview

• Steady growth since 1987

• Only interrupted during 98-99 Crisis

• Current “subprime crisis” impact, controlled: Chilean economy in excellent shape, (strong reserves given high copper prices – good macroeconomic management)

Annual GDP Growth Rate( 1986-2006)

International Monetary Fund

(www.imf.org), 2006

One of the highest growth rate in the last 20 years…

1.2

1.6

2.1

2.3

2.8

2.9

3.1

3.3

4.5

5.6

5.8

5.9

6.5

9.7

0 2 4 6 8 10 12

Czech Republic

Hungary

Brazil

United Kingdom

Poland

United states

Mexico

Argentina

Indonesia

Chile

South Korea

India

Singapore

China

Chile has a highly competitive economy

Economic Freedom Index

(out of 157 countries)

Brasil70

Costa Rica51

Hong Kong1

Argentina95

México49

Panamá47

Portugal43

Uruguay33

Republica Checa31

El Salvador29

España27

Chile11

Canadá10

Reino Unido6

Estados Unidos4

PaísRanking

Heritage Foundation/Wall Street

Journal (www.heritage.org), 2007

Fuente: Fitch Ratings, Standard & Poor´s, Moody´s, 2006

B-

BB-

BBB

A-

A

AAA

AAA

AAA

Standard & Poor’s

B3

Ba3

Baa1

A2

Baa1

Aaa

Aaa

Aaa

Moody’s

DDDArgentina

BB-Brasil

BBB-México

AChina

AChile

AAASingapore

AAAReino Unido

AAAEstados Unidos

Fitch Ratings

Country

Chile has the lowest country risk in LAC

Chapter XIV D.L. 600Any operation above US$ 10.000 It is voluntary for operations above USD$ 5 millions

No contract Contract with the Chilean State

No obligation to sell the foreign exchange into Chilean pesos

The foreign exchange must be sold into Chilean pesos

Normal access to money market Normal access to the formal exchange market

No minimum time to do the operation Capital remittance may be affected only 1 year after the brought in. No time limit for profit remittance

No restriction 3/8 years (8/12 mining) to bring in the capital

Common Tax Regime Special Tax Regime

Foreign Investment Environment

EUACanadá

México

UE

Corea del Sur

Centroamérica(El Salvador-Costa Rica-Panamá)

EFTA (European Free Trade Association)(Islandia-Noruega-Suiza-Liechtenstein)

Singapur

Malasia

India

China

JapónNew Zealand

Vietnam

Brunei

Turquía

Chilean FTA´s get free access to 90% of World GDP (18 FTAs with 54 countries)

In ForcedBeing Negotiated

BOLIVIA 93

VENEZUELA 93COLOMBIA 94ECUADOR 95

MERCOSUR 96 BRASILPARAGUAYURUGUAYARGENTINA

CANADA 97

PERU 98

MEXICO 99

COSTA RICA 02EL SALVADOR 02

UNIONEUROPEA 03

ALEMANIAAUSTRIABELGICADINAMARCAESPAÑAFINLANDIAFRANCIAGRECIAIRLANDAITALIALUXENBURGOPAISES BAJOSPORTUGALREINO UNIDOSUECIAUNION

EUROPEA 04 BULGARIACHIPREHUNGRIAESLOVAQUIAESLOVENIAESTONIALETONIALITUANIAPOLONIAREP. CHECARUMANIAMALTA

ESTADOS UNIDOS 04COREA 04

EFTA 04ISLANDIALIECHTENSTEINNORUEGASUIZA

CHINA 06

BRUNEI 06

NUEVA ZELANDIA 06

SINGAPUR 06

GUATEMALAHONDURASNICARAGUA

JAPON

PANAMACUBA

INDIA

CHILE: Growth of trade in countries with trade agreements vis á vis third countries

30,8%

12,1%14,7%

8,4%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

Trade Agreements No Trade Agreements

Export Import

Worlwide Chilean BITs (43): (1974 - 2004: FDI US$ 74,600 millions (88.5% post 1990).

CanadáEUA

ArgentinaBrasilEcuadorUruguay

México

CentroAmericaCuba

PoloniaCroaciaSuiza

Noruega DinamarcaSueciaFinlandiaIslandia

PerúVenezuela Paraguay

Malasia ChinaFilipinasJapan

European Union

Corea del Sur

AustraliaNueva Zelanda

Fuente: General Directorate for International Economic Affairs (www.direcon.cl) 2006

Double Taxation Treaties with 16 Countries

CanadáEUA

ArgentinaBrasilEcuador

México

Cuba

PoloniaCroaciaFranciaHungríaItaliaRepublica ChecaSuiza

Noruega DinamarcaSueciaHolandaFinlandia

PerúVenezuela Paraguay

Malasia China

Sudáfrica

EspañaReino UnidoIrlanda

Corea del Sur

Rusia

Nueva Zelanda

In ForcedSignedBeing Negotiated

Fuente: General Directorate for International Economic Affairs (www.direcon.cl) 2006

TelecomMarket

Telecommunications Market• Total Sales (net income): US$ 4.300.000.000 (dec. 2006)

• Major Competitors:– Mobile: Entel PCS - local investors / Movistar: Telefonica de España / Claro: Telmex

(Slim Group)

– Local / Cable: Telefonica de España / VTR: Liberty Media / Entel: local investors / Telmex (Slim Group) / GTD Manquehue : Local Investors

Telecommunications Market• General Market Data

– Sucribers per service

– Average ARPU

– Total Income

Subscribers ARPU Total Income

Sector (Dec 2006) (US$) (US$ millions)

Mobile Telephony 12.450.801 17,74 2.461 57%

Local Telephony 3.383.809 22,63 919 21%

Broadband 1.034.000 39,00 408 9%

CATV 1.026.667 28,20 306 7%

Long Distance 7,54 204 5%

TOTAL 4.298 100%

Where Most Profits Are

Most growth opportunity

Telecommunications Market• Market Shares in each sector

Market Share - Mobile Market

Movistar45%

Entel PCS35%

Claro20%

Pay TV Market Share

VTR (CATV)79%

Telefónica (Sat)13%

Direct TV (Sat)8%

Braodband - Market Share

VTR (HFC); 40,0%

Telefonica (ADSL); 54,1%

Manquehue (ADSL); 3,5%

Others (Wireless &

ADSL); 2,4%

Broadband Market Chile: The Opportunity

• 1,200,000 broadband connections at June 2007

• 33% growth since dec 2006

• 7.9% penetration (each 100 pop)

• 23% houses connected

• 36.2% 512 kbps or more

• 7.3% 1 Mbps or more

• National target for the Bicentennial (2010): 2,000,000 connections (40% of the houses connected – 13% total penetration)

Broadband Market ForecastBrodband Connections in Chile - Forecast

711

9001034

11221217

13211434

15561688

18321988

585 657740 810 850 922

10011086

11791279

13881506

1635

0,0

250,0

500,0

750,0

1000,0

1250,0

1500,0

1750,0

2000,0

2250,0

Dic-05

Mar-0

6

Jun-0

6

Sep-0

6

Dic-06

Mar-0

7

Jun-0

7

Sep-0

7

Dic-07

Mar-0

8

Jun-0

8

Sep-0

8

Dic-08

Mar-0

9

Jun-0

9

Sep-0

9

Dic-09

Mar-1

0

Jun-1

0

Sep-1

0

Dic-10

Total Connections Houses Connected

Broadband Penetration: by Regions of Chile

• Highest penetration observed in Metropolitan Region (Santiago), and regions I and II• Interesting opportunities in other regions, with very low penetration

Broadband Price ComparisonChile – Argentina – Colombia - Peru

• Broadband prices are relatively high, in comparison with Argentina and Colombia• Also Chilean prices are relatively high, in comparison with European and other OECD countries• There is an interesting opportunity for high velocity / low prices services (if possible)

Comparison with OECD CountriesOECD Key ICT indicators4a. Broadband subscribers per 100 inhabitants in OECD countries and ICCP Committee observers countries*, December 2006

* Israel and Singapore are observers on the OECD Committee for Information, Computer and Communications Policy (ICCP).

Source: OECD Broadband Statistics [www.oecd.org/sti/ict/broadband]

0

5

10

15

20

25

30

35

Denm

ark

Netherlands

Iceland

Korea

Sw

itzerland

Norw

ay

Finlan

d

Sw

eden

Canada

Belgium

United K

ingdom

Luxembourg

France

Japan

United S

tates

Australia

Austria

Ge

rmany

Spain

Italy

New

Ze

aland

Portugal

Ireland

Hungary

Czech R

epublic

Poland

Slovak R

epublic

Greece

Turkey

Mexico

Israel*

Singapore*

Subscribers per 100 inhabitants

DSL Cable Fibre/LAN Other

Source: www.oecd.org

Chile June 2007

Compared with OECD countries, there is an interesting growth potential

Business Opportunities

• The most interesting business opportunity is in the Broadband market, although there is an attractive mobile market, specially with the 3G tender coming soon.

• Expected to grow strongly in the next 5 years– Broadband in Chile is still expensive (compared with many OECD countries)– Mass markets (mid – low income families) will enter the market– A combination of an efficient access technology plus a strong commercial

base is the key

• With a combination of attractive prices for higher speed plans, also there is an opportunity in the high income segments (actually served by ADSL / HFC-CATV operators)

• Chilean regulator will bid new 3G and WiMax bands during 2008

Technological & Regulatory Scenarios

• During 2008 Subtel will bid two WiMax bands and one mobile 3G band– 2.3 and 2.5 GHz for Wimax– 3 to 6 operators max each bid– 3 nation wide bands, 3 regional base bands– 1.7 Ghz for 3G mobile operators

• In Chile, spectrum bids follow the “beauty contest” model– Participants are scored according to the velocity which their project proposals cover

territory & population, (more territory & population covered in less time, means higher score)

• The process is strictly regulated

Possible Entry Strategies

• Buying existing companies

• Starting a new company – alone

• Starting a new company – with a strategic partner

PUBLIC WORKS MARKET

16 years of Experience and Trajectory.

A Consolidated Concessions Industry.

Business Designs Appropriate to Projects.

A Solid and Secure Financial System.

A Public-Private Partnership that has allowed the country to grow and experiences to be transferred:

Solid and flexible regulations.

Stable conditions for foreign investment.

Appropriate risk distribution.

Transparency of tender processes.

Technological quality and innovation.

PUBLIC WORKS CONCESSIONS PROGRAM

Impacts on Chilean Infrastructure

A total of 51 Projects Awarded

USD$ 8 Billions Invested

Main Elements for Defining Business Models

Legal Framework.

Public Works Ministry Charter Law.

Public Works Concessions Law and Regulations.

Tender Ground rules and Explanatory Fliers.

Technical and Economic Offer by the Concessionaire.

Supreme Decree Awarding Project.

Analysis of Risks Involved.

Financing Framework.

BOT Process: Main Legal Aspects

• The MOP is the Chilean governmental entity responsible for supervising, implementing and awarding the Concessions and executing the corresponding public works concessions agreements (the “Concession Agreements”).

• The project concerned may have been proposed by an interested party (the Concessions Act and the Concessions Regulation set forth the procedure for interested parties to propose a project) or prepared by the MOP. In both instances, the Concessions Act and the Concessions Regulation require that the award of the Concession be carried out through a transparent tender process.

• The Concession is awarded by means of a Supreme Decree. Once awarded, the successful bidder enters into the Concession Agreement with the State of Chile, represented by the MOP. The successful bidder is then required, within the term specified in the Bidding Terms, to execute copies of the Supreme Decree as acceptance of the award, and to incorporate a Chilean sociedad anónima, or register a foreign agency in Chile, as the Bidding Terms so require, with whom the Concession Agreement shall be deemed to be executed (the “Concessionaire”).

• Any controversies arising from the interpretation or performance of the Concession Agreement shall be known by a Conciliation Commission.

Project DiversificationTypology :

• Urban Highways (2.15 Billion US$)

North-South System• 61 Km. • 600 Million US$.• 1,4 Million inhabitants.

Vespucio North Express• 29 Km. • 450 Million US$.• 1,5 Million inhabitants.

Vespucio South Highway

• 25 Km. • 550 Million US$.• 1,8 Million inhabitants.

East-West System• 43 Km. • 550 Million US$.• 1,4 Million inhabitants.

Project DesignDrafting of

Concession Contract

Legal Aspects

Engineering Aspects

Demand AspectsTerritorial and Environmental Aspects

Expropriation Aspects

Business Model and Financial Issues

• Pre-Project Studies.

• Study of Demand.

• Expropriation Study.

• Environmental Impact Assessment.

• Technological Studies.

• Financial and Business Studies.

• Legal Studies.

Analysis of Risks Involved

Project Portfolio 2007 - 2009

Total Portfolio Amount 2007-2009Approximately US$ 5.0 billion

Global Government Procurement

Creation of a market niche for any government providers

Interested in internationalizing their operations by way of prerogatives and opportunities arising from chapters regarding government procurement in treaties with other countries such as the United States, Korea, México, Canada, Central America and the European UnionThe GP market, on a annual basis, demands upwards of 10% of the world’s GDP, or approximately the equivalent of 80% of global commerce

This market is expected to bring about important tax savings; create both greater competition as well as transparency, and increase the flow commerce for all players.

To Summarize…

From an investment point of view, from Asia to South America, Chile can give interesting business opportunities at very competitive prices in an stable and friendly investor environment.

... If everybody else is doing it, why not you?