Bolivia faces legal challenges in phone takeover

By Ana Maria Fabbri

LA PAZ, May 7 (Reuters) - Bolivia's government has taken over operations of leading phone company Entel, but still faces a legal challenge from Telecom Italia (TLIT.MI) overcompensation for the nationalization.

The government of leftist President Evo Morales has signaled that it should not pay anything for Entel, claiming Telecom Italia failed to meet investment commitments and owes the government $645 million in fines and back taxes.

But the Italian firm says it has invested more than it pledged when it took a 50 percent stake in the company in 1996, and experts say Telecom Italia will pursue claims against Bolivia to get compensation for the nationalization.

"You can bet the Italian partners will fight the government," Francesco Zaratti, who supervised privatized businesses during the 2003-2005 government of President Carlos Mesa.

Telecom Italia has filed a claim against Bolivia at the World Bank's arbitration unit, the International Center for Settlement of Investment Disputes.

Bolivia is expected to argue that its withdrawal from the ICSID last year makes it immune to that claim.

But legal experts said Bolivia may still be subject to arbitration in this case because the claim predates the completion of the exit, and impartial mediators might not look favorably on the government's nationalization by decree.

"The mediator will determine that one of the sides is using force to come out on top, imposing unilaterally the prices and conditions of the sale," said a former Bolivian financial markets official, who asked not to be named.

The same source said Bolivia's arguments that Telecom Italia owes fines and taxes may not hold up in international arbitration.

NOTHING OR VERY LITTLE

When Telecom Italia took administrative control of Entel and half its shares in the mid 1990s, all it gave Bolivia were pledges to invest and improve service

At the time, privatizations were popular in Latin America but in the last two years Morales has nationalized the energy industry and has moved for the government to take more control of other sectors of the economy, reflecting a leftist trend throughout much of the region.

Vice President Alvaro Garcia last week said the government could "pay nothing or very little" for retaking control of Entel.

"It's looking more like a confiscation than a legal expropriation, especially if the objective is not to pay anything," Zaratti said.

Entel has 80 percent of Bolivia's long distance market and 70 percent of the mobile telephone services. The government plans to make an initial investment of $30 million to widen service and bring down rates.