China Telecom Could Be TelCel’s Next Competitor

The company is seeking local partners to join it in a consortium, three people with knowledge of the matter said.

It has already secured up to several billion dollars of financing from Chinese state-controlled banks, including the China Development Bank, for the project, which Mexico estimates will cost $10 billion over 10 years, one of the people said.

The proposed network is part of a sweeping reform designed to break billionaire Carlos Slim’s hold on the Mexican telecoms business, but the Chinese involvement could prove controversial and trigger concerns from the U.S., some Mexican officials say.

Mexico’s government is trying to ease its economic dependence on the United States and ramp up Chinese investment. A Chinese-led consortium looks poised to win a $3.75 billion contract to build a high-speed train system, sources with knowledge of the plan say. This is despite the group’s previous winning bid being revoked late last year amid a political scandal.

Representatives for China Telecom did not return requests for comment, and representatives for China Development Bank could not be reached for comment.  A spokesman for Mexico’s Communications and Transport Ministry (SCT) declined to comment.

On a trip to China in November to reduce tensions caused by the train contract cancellation, Communications and Transport Minister Gerardo Ruiz Esparza also discussed the mobile network plan with the Chinese government, according to a ministry press release.

State-owned China Telecom’s international subsidiary China Telecom Global wants to be an operating partner in the network and not just an investor, said the people, who requested anonymity.

It is still looking for Mexican partners, the people said. It was unclear who had been approached.

GOVERNMENT ASSETS

The people did not say how big a stake the Chinese would take in the consortium that would make the bid. Under a government timeline published last year, the tender should have begun last month, with a winner due to be chosen in August this year.

Creation of the wholesale network was written into Mexico’s constitution as part of telecom market reforms in 2013. It aims to allow Slim’s mobile competitors better coverage without using the network of his company America Movil, or bearing the cost of building their own.

Under current plans, Mexico’s government will not take a stake in the company that runs the network, according to two of the sources.

Instead, the winning group will have a public-private partnership contract with the government which will allow it use of some state infrastructure, such as sites to build towers on and a fiber optic network owned by the state electricity firm.

It will also have a concession for use of 90 MHz of the valuable 700 MHz spectrum.

In exchange the network will have to cover large parts of the country with the exact coverage to be decided in the tender. The winning company would then subcontract telecoms equipment makers to build and maintain the network.

If the Chinese bid wins, it would mean the Chinese government indirectly owning part of a telecoms network that would cover most of Mexico right up to the U.S. border. Many large U.S. companies also have operations in Mexico.

Chinese telecom equipment maker Huawei [HWT.UL] has expressed interest in the project and would be more likely to supply parts to the network if it is Chinese-led and financed, as has happened in other deals outside China.

Huawei has been largely locked out of supplying network equipment to the U.S. because of opposition from U.S. lawmakers who allege the company maintains ties to the Chinese authorities and could use its equipment to spy on U.S. communications.

Huawei has consistently rejected the allegations.

Representatives for Huawei did not respond to a request for comment.

The SCT already received an unsolicited bid proposal from a group of ex-telecoms executives, lawyers and bankers supported by equipment makers Ericsson and Alcatel-Lucent.

The ministry chose not to accept it in order to keep the competition level, one person said. Accepting it would have meant giving the team an edge in the bidding process.

Finland’s Nokia and U.S. equipment maker Cisco Systems Inc. have also had meetings with the Mexican government about a possible bid, one person said. Spokesmen for the both companies declined comment.