Home Insights Close Call: Brazil at a crossroads over 5G tender

Close Call: Brazil at a crossroads over 5G tender

The Brazilian telecoms regulator, Anatel, is preparing the auction for 5G equipment, a structural investment which will take place in the first semester of 2021 and has the potential to...

 

The Brazilian telecoms regulator, Anatel, is preparing the auction for 5G equipment, a structural investment which will take place in the first semester of 2021 and has the potential to be the world’s biggest single tender of its kind. Amid international pressures from the US, local decision-makers ponder over the convenience of restricting the telecoms’ capacity to acquire Huawei equipment, a move that would upset China– Brazil’s largest trading partner. The executive, led by President Jair Bolsonaro, remains divided into a business-like front which opposes Huawei’s ban and an ideological bloc aligned with the US position. Although a total ban on Huawei looks unlikely at this point, the government will need to abandon its ‘muddling-through’ approach and take a clear stance to attract foreign investment and assuage the economic impact caused by Covid-19.

Instead of cheering his first year in power, Jair Bolsonaro’s government is facing an unexpected triple crisis: a health emergency derived from an erratic response to Covid-19, placing Brazil with the second highest death toll in the world; an economic crisis with an expected contraction of 8% in 20201; and a political crisis between the judiciary and the federal government highlighting major cracks within the presidential cabinet.

In this multifaceted situation and frail economic context, the Brazilian telecom sector has been holding its breath while Anatel, the Brazilian regulator, prepares the auction of bandwidth frequencies for the installation of 5G equipment. A board member of the telecommunications operators’ union, SindiTelebrasil explained, “The implementation of 5G in Brazil will provide a whole new technological horizon to develop the country’s digital economy. It will have a crucial impact on the future social and economic conditions of the Brazilian population, and we need to make the most of it. We participated in expert and technical consultations and we expect all parties to have their say”.

Brazilian operators largely favour the postponement of such capital-intensive projects until the economic stress, caused by the pandemic, has been quantified, adjusted and shows perceptible signs of recovery. Additionally, Brazil’s three leading mobile carriers – Telefónica-Vivo, TIM, Claro-América Móvil – are currently on a spending spree jointly bidding for the wireless business of Oi, the financially troubled fourth largest carrier in the country.

Amid such an agitated state of affairs, it is understandable that telecom operators are demanding more time to prepare for the tender. This innovative infrastructure could generate BRL 5.5 trillion (USD 1.03 trillion) to the country over the next 15 years, which would imply a 1% increase in Brazil’s GDP from 2021 to 2035.2 A member of one of Anatel’s presidency advisory committees told us that “pricing studies are still in progess. But our priority is to generate investment commitments that guarantee universal access to the new telecommunication services”.

Originally scheduled for March 2020, the tender was initially postponed for technical reasons and later delayed by the Covid-19 pandemic. Our Anatel source told us, “Taking into account the remaining procedural steps, it is still feasible to hold technical 5G public consultations in 2020. However, we think it is more appropriate to delay them in order to give more transparency to the these evaluations so that they can take place in an environment where the pandemic is not a priority and stakeholders can exclusively focus on the development of new networks”.

Fábio Faria, Minister of Communications, recently announced in a radio show at Jovem Pan that the call for bids will take place in the first semester of 2021.3 Faria’s public announcement in a live interview evidences how the tender has become a high priority in Brazil’s current affairs.

Brazilian decision-makers are currently mirroring the global dispute between the US and China with Huawei – considered a national security threat by the Trump administration – at its centre. “Brazil’s interests are more important than the tensions between the US and China”, observed a senator, member of the Infrastructure committe and Faria’s fellow Social Democratic Party (PSD) member.

“From a global point of view, the increasing tensions between the US and China will cause a major dilemma for all developing countries”, emphasised the head of the International Relations department of a leading Brazilian university. Both Washington DC and Beijing see Brazil’s 5G contract as a major trophy for their strategic geopolitical interests.

Brazil solved the first dilemma, when the Institutional Security Office of Brazil (GSI) – an executive cabinet with ministerial powers, headed by General Augusto Heleno – issued a cybersecurity report on 27 March 2020, which does not prevent Huawei from participating in the tender.

The decision was clearly influenced by a phone conversation held between President Bolsonaro and Xi Jinping, three days earlier. The call took place to smoothen tensions following a diplomatic row, started by Eduardo Boslonaro, one of the president’s sons and a member of the Congress, whom accused China of poor handling of the coronavirus crisis. The call was attended by ministers from both governments which emphasised the USD 34.9 billion trade balance between the two countries. At present, China is Brazil’s main trading partner and, in 2019, 27.8% of Brazilian exports went to China while Chinese products accounted to 20.4% of Brazilian imports.4The Brazilian International Relations professor we spoke to claimed that China operates in a very nuanced fashion, “Beijing does not want third countries to see China as interfering in their domestic affairs as the US has traditionally been seen. Instead, China could retaliate in a more subtle way, complicating Brazilian business interests in China”.

Bolsonaro admitted on 11 June 2020 that the 5G tender participation requirements would not be solely technical. Geopolitical considerations including sovereignty, data security and foreign policy will also play an important role.5 Despite Bolsonaro’s unpredictable political judgement – often focused on the short-term to galvanise support from his backers – and continued pressures from major international powers, Brazil has a solid public administration. As part of the state’s administrative apparatus, regulators are sensitive to the demands of stakeholders and often bridge the gap between far-fetched political ambitions and technical viability.

Divisions within the presidential cabinet spur investor uncertainty


The government is currently divided into two blocs, an ideological pro-US faction, in favour of banning Huawei’s participation in the tender and a pragmatic group that disapproves restrictions in the offering. The ideological bloc is spearheaded by Ernesto Araújo, minister of Foreign Affairs, who has the support of Bolsonaro’s sons: Carlos, Flávio and Eduardo all have a strong influence over their father’s decisions and operate as de facto aides for the President, particularly on foreign policy issues.

The pragmatic faction is headed by Vice President, General Hamilton Mourão – who met with Reng Zhenfei, CEO of Huawei in Beijing prior to Covid-19 – and Paulo Guedes, Minister of the Economy. In an interview with O Globo, Guedes said that it would be a mistake if the tender was decided for geopolitical reasons and affirmed that Brazil should “dance with everybody” as it would be good to see Ericsson and Huawei compete without making a geopolitical problem out of an economic one.6
“Bolsonaro is still doubtful. The tender is still at a strategic stage but when the time comes he will make the decision”, claimed a business reporter from one of Brazil’s largest newspaper. “There are many other technical studies which have to be prepared,” the reporter continued.

The Minister of Communications, Faria, is mostly perceived as a pragmatist. The International Relations professor agreed, “He is pragmatic not as in making better decisions but as an opportunist. Faria is clearly not an ideologue. He will not start a battle if a decision is made at a higher level. The tender issue has moved so far up that Faria’s power will be limited to broader issues like requesting further technical studies on the matter, influencing agenda-setting and framing the debate in the Congress.” The professor believes that if Bolsonaro commits to a specific decision, “Faria will have little to say”.

The same source added, “Bolsonaro thinks of foreign policy as a way to shore up support domestically. If he finds working with Huawei advantageous he’ll do it. If excluded, it will be for domestic purposes only.”

In an attempt to improve the government’s perception at home and abroad, on 10 June 2020, Bolsonaro restored the Ministry of Communications. The appointment of Faria, congressman for the centrist PSD and son-in-law of the media tycoon Silvio Santos, was widely perceived as a move to ease tensions with the National Congress by courting more moderate parliamentary groups. At present, Bolsonaro is currently facing 48 requests for impeachment, the proceedings of which are voted in Congress.

A business reporter explained of the government’s communication vehicle: “My feeling is that the regulatory agencies controlled by the Ministry of Communications like Anatel will continue to work as independent organisations. The mandarins of his ministry are very pragmatic as well”.

As an example of what Faria can do, the senator mentioned that “the new minister can help reduce the bureaucratic process in the regulation policies of satellite dishes which will significantly reduce the complexity of the tender. This has been a major obstacle for the implementation of telecommunications equipment in Brazil.”

This practical approach evidences that the ideological faction is currently losing ground to the pragmatic camp within the presidential cabinet. Sensing this, in an interview with Folha de S. Paulo, the US ambassador to Brazil, Todd Chapman, claimed that the US is in conversations with Ericsson and Nokia to fund Brazil’s purchase of 5G equipment while blocking out Huawei from the tender.7
Furthermore, Mike Pompeo, United States Secretary of State, inaccurately stated that Telefónica – operating in Brazil through Vivo – would cease to work with Huawei in Brazil. This referred to a claim made by José María Álvarez-Pallete, president of Telefónica global, who said that the company would stop working with “non-reliable providers” in Brazil, without specifically mentioning Huawei.8
Considering the strategic nature of the 5G tender, there is likely to be an increase in these interested claims over the following months, both at a national and international level. Nevertheless, they will hardly have any political impact, given that Bolsonaro’s administration currently has other political priorities, such as easing tensions with the legislative and judiciary and focusing on the November 2020 municipal elections. Despite the local nature of the vote, the results will be read as a plebiscite on Bolsonaro, who held state governors and municipal authorities responsible for the country’s economic crisis after they imposed lockdown measures to combat the pandemic. The outcome of the election will likely result in cabinet change and new members may be more receptive to financial measures should the economy continue to decline.

How are telecom operators dealing with institutional pressures?

Throughout the last two decades, Huawei has played a major role in the development of telecommunications infrastructure in Brazil. The four larger telecom carriers in the country have already executed successful 5G tests with the Chinese company. A senior executive from one of the major mobile phone operators said, “Huawei is one of our main providers and our previous CEO travelled to China and met with Huawei executives to strengthen the collaboration between both companies. This whole war against Huawei and the [Brazilian] government being aligned to the US seems absurd to us”.

In addition to technical equipment, Brazilian operators are also reliant on Chinese capital. “We will need to attract further foreign investment and, of course, this includes potential Chinese companies and infrastructure funds,” said the same executive.

In these circumstances, mobile operators in Brazil are not exempt from international pressures either. “I am not aware of telecom operators receiving international pressure here in Brazil, but I don’t think it can be discounted. However, it would be more likely that lobbyists approach board members of the parent companies in their respective countries: Spain [for Telefónica-Vivo], Italy [TIM], and Mexico [Claro-América Móvil]”, said the business reporter.

The confirmation of the news that TIM – the second largest operator in Brazil – will exclude Huawei from its 5G core equipment tender for new suppliers in Italy and Brazil, is a clear example of the successful result of intense international lobbying efforts. However, the company said that the measure was part of its supplier diversification policy and that Huawei could rejoin the process in Brazil in the future.9
Unimpressed by the wider public debate, Brazilian public officials underline the neutrality of local powers, as evidenced by Anatel’s efforts to reiterate the technical nature of the tender. “The choice of suppliers for the equipment is up to providers [telecom operators] themselves. There is no interference from public powers in their choices. This is a matter exclusively concerning private corporations and remains in the sphere of their own interests and relationsips”, claimed the Anatel source. “As long as quality requirements are met, there should not be any restrictions in the network”.

Similarly, the senator acknowledged that “the Brazilian government has remained neutral in this debate. Huawei is a technical equipment supplier for the development of telecommunications infrastructure. It will not directly participate in the tender which focuses on telecom operators and their use of radiofrequencies. Telecom operators are free to acquire technical equipment from any supplier, including Huawei”.

While Brazilian regulators continue to bide their time, a board member of the telecommunications operators’ union, SindiTelebrasil remarked, “the tender needs to be established following strict public policy guidelines. Regulators need to offer legal security to investors, and this requires providing regulatory guarantees”.

A ban on Huawei is unlikely but full open-market competition is not guaranteed

There is no easy choice for Brazilian regulators. The global tendency is against Huawei, most recently evidenced by the UK government’s announcement on 14 July to ban equipment from the country’s 5G wireless network. Well aware of this perception, Huawei Brazil’s director of cybersecurity said that limiting the company’s role in the deployment of the 5G network will impact the prices for carriers, customers and providers, while slowing down the deployment of the technical infrastructure.10 Luiz Alberto Garcia, chairman of the board of Algar Telecom, a Minas Gerais-based private national telecom operator, stressed the risks of banning Huawi from the tender as it would implicitly cause a loss of competitiveness, with less technical solutions at a higher price”.11
In geopolitical terms, Brazil can afford to wait as the November 2020 presidential election in the US will not bring significant changes on the US global stance on Huawei: “Although there is a possibility of Trump not winning the upcoming presidential elections, a victory of Joe Biden will not alter the US stance on this matter”, said the International Relations professor.

Nonetheless, the country’s short-term economic woes urge the government to maximise its foreign investment opportunities. “Brazil’s risks include an extended weakness of the impacts of the Covid-19 pandemic. If reforms stall, the country could face another macroeconomic deceleration and capital-intensive projects such as the deployment of the 5G network could become less attractive for investors”, warned a Latin America telecoms senior analyst of an international bank operating in Brazil.

We believe it is unlikely that Brazilian regulators will impose a full ban on Huawei for the 2021 tender, but the devil will be in the details as, after the calls for bids, regulators will still be able to pass bylaws implicitly targeting Huawei, including restrictive monopolistic measures and imposing specific bans in sensitive locations and other such limitations. Brazil will need to solve its internal problems and take a firm stance that prioritises its economic interests at the risk of upsetting one of its strategic allies for the sake of avoiding the perfect economic storm, which the country could be heading to if it continues to just muddle-through.

 

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[1] “Global Economic Prospects: A World Bank’s Group Falgship report”, World Bank. June 2020. https://www.worldbank.org/en/publication/global-economic-prospects. [Accessed on 1 July 2020].
[2] The estimates were provided by Wilson Cardoso – CSO Nokia Latin America – and Ari Lopes – senior manager Americas at Omdia technology consultancy – in the Futurecom Digital Summit between 22 June 2020 and 2 July 2020. Video available under registration at https://videos.netshow.me/informa [Accessed 6 July 2020].
[3] “ Fábio Faria (2020) ‘Fábio Faria nos Pingos’ interviewed by Vítor Brown in Nos Pingos nas Is, Radio Jovem Pan. 3 July 2020. https://www.youtube.com/watch?v=1-f6h8avCnw [Accessed 6 July 2020].
[4] As reported on the Icomex (Indicador do Comerço Exterior) foreign trade index prepared by the Fudação Getúlio Vargas university and think tank. Available at https://blogdoibre.fgv.br/posts/icomex-comercio-exterior-brasileiro-por-paises-eregioes [Accessed 15 July 2020].
[5] “Bolsonaro transofrma 5G em disputa geopolítica, e leilão debe ficar para 2021”, Folha de S. Paulo. 12 july 2020. Available at https://www1.folha.uol.com.br/mercado/2020/06/bolsonaro-transforma-5g-em-disputa-geopolitica-e-leilaodeve- ficar-para-2021.shtml [Accessed 12 July 2020].
[6] “Guedes indica tendência no 5G”, O Globo. 7 July 2020. Available under registration at https://blogs.oglobo.globo.com/miriam-leitao/post/guedes-indica-tendencia-no-5g.html [Accessed 12 July 2020].
[7] “Por segurança nacional os EUA já discutem crédito para 5G no Brasil, diz embaizador”, Folha de S. Paulo. 11 June 2020. Available at https://www1.folha.uol.com.br/mundo/2020/06/por-seguranca-nacional-eua-ja-discutem-credito-para-5g-nobrasil- diz-embaixador.shtml [Accessed 25 June 2020].
[8] “Teles temem concentração de mercado e querem que Huawei fique no Brasil”, O Estado de S.Paulo. 26 June 2020. Available under registration at https://link.estadao.com.br/noticias/empresas,operadoras-temem-concentracao-de-mercado-epedem- huawei-no-brasil,70003348158 [Accessed 25 June 2020].
[9] “Exclusive: TIM excludes Huawei from 5G core equipment tender”, Reuters. 9 July 2020 . Available at https://www.reuters.com/article/us-huawei-tech-5g-italy-brazil-exclusive/exclusive-tim-excludes-huawei-from-5g-coreequipment- tender-in-italy-brazil-sources-idUSKBN24A2AE [Accessed 9 July 2020].
[10] “Huawei says US pressure on Brazil threatens long delays in 5G rollout”, Reuters. 7 July 2020. Available at: https://www.reuters.com/article/us-huawei-tech-brazil-5g/huawei-says-u-s-pressure-on-brazil-threatens-long-delays-in-5grollout- idUSKBN2482WS [Accessed on 9 July 2020].
[11] “Algar Telecom: banir o Huawei do 5G no Brasil seria equívoco tremendo”, Teletime. 19 June 2020. Available at: https://teletime.com.br/19/06/2020/algar-telecom-banir-a-huawei-do-5g-no-brasil-seria-equivoco-tremendo/ [Accessed on 23 July 2020].

 

 

About the Author

Albert Buyé
Albert Buyé is a strategic intelligence analyst based in São Paulo. He has eight years of professional experience in sector leading non-financial risk consultancies in London (UK) and Madrid (Spain). His area of focus includes political risk analysis, addressing compliance and regulation uncertainties and investigating opaque structures in money laundering and corruption cases. Albert started his career in the Delegation of the Catalan Government to the EU in Brussels and the Delegation of the EU to Mexico in Mexico City.

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