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Becoming A Privatization Model: Puerto Rico Reaping Benefits

by Doreen Hemlock

April 16, 2000
Copyright © 2000 SUN SENTINEL. All Rights Reserved.

SAN JUAN, Puerto Rico -- Two years ago, the streets in front of the Puerto Rico Telephone Co. were lined with police and protesters. Loudspeakers blared nationalist slogans, as workers picketed against the sale of the state-owned company to private investors.

But today, employees sit among potted palms at the headquarters, reading corporate bulletins. Banners thank workers for help on charity drives, and company vans make busy rounds amid growing competition.

Gone are the headlines about bloody clashes over privatization. One year after the sale of the phone company to Texas-based GTE Corp., Puerto Rico's telecom news focuses on fancy Internet offerings and new competitors. In this U.S. commonwealth of 3.8 million people, telecom privatization seems to be working.

Even the phone unions that went on strike for 41 days to oppose the sale have muted their criticism.

"It's better to have the phone company managed by GTE, although we'd rather the government own it and keep the profits," said José Juan Hernández, president of the Independent Union of Phone Company Employees. "But the truth is the government had measured everything in terms of votes [not good business practices]."

What lessons can Puerto Rico offer about privatization?

Analysts and executives point to:

    • A well-structured deal, with company employees and local investors getting shares in the company.
    • Progressive management, sensitivity to employee and customer needs.
    • A recognition of the value of communication -- and lots of it.

The $2 billion sale gave GTE a majority stake in the 10th-largest local carrier in the United States -- a modern operation with fully digital networks for calls on the island. Before the purchase, Puerto Rico Telephone was a virtual monopoly, with revenue of more than $1.2 billion in 1997.

Puerto Rico bought the company from ITT Corp. in 1974, when private ownership had meant shoddy phone service and few rural lines. In two decades, the government invested heavily to modernize and extend lines islandwide. But payrolls were bloated with political appointees, and service lagged behind U.S. standards.

In 1996, when Congress passed a law deregulating the phone industry and ushering in competition, the Puerto Rico government decided to sell. The government felt the company would lose market share and profits, unless it got new managers accustomed to competition. And it tried to sell off quickly, before new rivals chipped away at the customer base and profits that it had long enjoyed.

But then came the first lesson in privatization.

The pro-statehood administration, led by Gov. Pedro Rosselló, rammed the plan through the Legislature and negotiated quickly and secretly -- without getting workers and other potential critics involved in the deal and without widely communicating the details and benefits of divestment.

The Rosselló team should have known better, analysts say. In 1990, a different Puerto Rican administration, led by pro-commonwealth Gov. Rafael Hernández Colón, had tried to sell the phone company and failed. Labor had declared a one-day work stoppage and mobilized more than 100,000 people in San Juan in one of the biggest rallies ever. And Puerto Rico could not get the price it sought amid a wave of phone sales worldwide.

In 1998, union leader Hernández said he would have been open to talks to Rosselló.

"I shook hands with President Clinton at a union convention, but I've never been called to meet with Rosselló," the union chief said. "He may have had good intentions, but he was poorly advised on the sale. He acted with such arrogance."

But after a 41-day strike protesting the sale, the government structured a deal that satisfied many. The island's biggest banking group, Popular Inc., partnered with GTE and agreed to buy 10 percent of the Puerto Rico phone company and share that stake with phone workers and other local investors. Plus, the government gave another 3 percent to workers. That left the majority of shares in local hands, with up to 7 percent owned by workers -- a structure that quelled nationalist opposition.

That still left a tough assignment for Jon Slater, a Kansas native and 29-year GTE veteran who took over as president of Puerto Rico Telephone in March 1999.

Allaying fears

On his first day on the job, Slater said, he called a management meeting with more than 140 executives to allay fears and rumors. He repeated promises that there would be no mass firings, that residential rates would stay frozen for three years and that the company would invest $1 billion to modernize.

He quickly offered early retirement packages, which have been accepted by about 1,100 company workers. And he cut nine layers of management to five to get closer to employees.

Plus, Slater embarked on a series of meetings across the island to reassure workers and emphasize the need for customer service. "Many of the front-line workers told me, `I've never seen a company president before and never shook their hand,'" Slater said.

In the first six months, service orders to be filled dropped 22 percent, and phone installations completed within 10 days rose by one-third, the company reported.

GTE had little room for missteps, as rivals such as AT&T Corp., Centennial and Sprint Corp. moved onto the island. Puerto Rico Telephone now commands less than two-thirds of long-distance service within Puerto Rico, about one-third of the cellular market and more than 15 percent of the Internet services market, he said.

But the real challenge was reforming employee attitudes. The mentality, ingrained during government ownership and monopoly, was summed up as: "We're the only game in town, take it or leave it," Slater said.

Power of the change

"You can't underestimate the power of that public-to-private change," he said.

"Whatever time you think it's going to take to change that, it's going to take more. So, you really have to concentrate on the people and make sure you understand the human side of change: the denial, the anger, the usual change curve. Training and communication are the biggest things."

Communication proves especially key in Puerto Rico because of vibrant media, including some half-dozen daily newspapers, plus dozens of radio and TV news programs in San Juan alone. "There's a lot more sensationalism on the island around anything that happens, because everyone is scratching around for that front-page story," Slater said.

To lower tensions, for example, management now issues bulletins after meetings with unions on new collective bargaining contracts. The bulletins summarize the status of talks, diminishing debates in the media.

Union leaders say the communication boosts respect. GTE "has a different vision" than government, Annie Cruz, president of the Independent Brotherhood of Telephone Workers, told reporters after the sale. "They look at unions as a facilitator," she said.

The upshot for Puerto Rico from the privatization seems to be better labor relations and customer service.

"The unions realized this is a whole new ballgame, and they're learning to play," said economist Antonio Villamil, president of economic consulting firm Estudios Tecnicos.

"And the phone company now is a lot more agile dealing with a competitive situation."

Doreen Hemlock can be reached at or 305-810-5009.

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