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Legal Update

Mexico Telecommunications: Red Troncal Project Bid Update

5 June 2018
Mayer Brown Legal Update

We understand that during mid-June, the final bidding guidelines are scheduled to be released for Mexico’s telecommunications backbone network (Red Troncal) project, approximately a year after the federal agency Telecomm released draft guidelines for the contract award. One of the constitutional reforms approved during President Peña Nieto’s administration, the Red Troncal is intended to promote greater competition between telecommunications service providers and to increase the coverage of and improve the quality of these services in Mexico.

The Project

The Red Troncal will be a 25,000-km fiber optic wholesale network through which its operator can offer capacity services only to concessionaires and resellers (such as mobile network operators, fixed network operators and fixed and mobile virtual operators) but not to end users.

The project will include the award through a public-private partnership (asociación publico-privada) of a contract for the design, financing, installation, deployment, operation, refurbishment, maintenance, growth (including “illuminating”) and commercialization of a pair of fiber optic strands owned by state-owned electric utility CFE (throughout 25,000 km nationwide) as well as to access to “hotels” (hoteles de interconexión) and rights-of-way, with the contractor bearing all costs related with the project, including the contribution of all assets, rights, infrastructure, equipment and licenses, related to the installation, deployment and operation of the network. Simultaneously, the winning bidder will receive a license (concesión única) to render wholesale-broadband access services with a 30-year renewable term. If spectrum is necessary for last-mile connections, a separate license would be granted.

It is expected that investment for the Red Troncal will be a 70:30 debt-to-capital ratio. It is also expected that no restrictions as to potential bidders may be imposed, other than to incumbent operators.

Preliminary Guidelines

A draft of the bid guidelines has been published on the Telecomm web page (http://www.telecomm.gob.mx/rtroncal/download/english-pre-bases-red-troncal-english-version/), pursuant to which a performance bond for $200 million pesos will need to be submitted by all bidders (considerably lower to the bond for the Red Compartida project, which was $1 billion pesos).

Bidders shall propose a minimum coverage to be reached during the first, second and third years of operation, provided that at least 75 percent population is covered after the third year. All bidders shall obtain a favorable opinion from the Federal Antitrust Commission to submit a proposal. A Mexican SPV shall be formed by the winning bidder to receive the PPP contract and license. A group of bidders may participate together as long as a consortium is created and all members provide the documentation required under the guidelines.

Schedule

We understand that in September 2018, the bids shall be presented. Bidders may perform physical due diligence on the existing network.

The tender award will be announced between October and November of this year in order for the winning bidder to start the construction phase within 60 days after the APP agreement becomes effective.

The start date of commercial operations will be the one that the winning entrant proposes in the entrant’s economic offer in accordance with the deployment schedule, which may not exceed 120 calendar days counted from the effective date of the agreement.

To Be Determined

Discussions with Mexican development banks shall be held in order to understand whether they will participate in the financing of the Red Troncal in terms similar to the ones for the Red Compartida.

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