"Informal Entrepreneurs" and the Telecommunications Monopoly in Caracas

I had been hearing stories about two-man teams rampaging all over Caracas and showing a very special interest in phone booths. It looked as if they had finally gotten to my neighborhood.

To be sure, another fellow stood a few steps away with, what from a distance, looked like a sawn-off shotgun, a weapon favored by the guys in charge of guarding drug-vendors in most of Caracas’s slums. He wore a Cleveland Indians baseball cap and cheap sunglasses. He would flash the shotgun for a second, then pretend to hide it under his XL-size T-shirt, too large for him but not large enough to conceal the shotgun, then he would brandish it again. And all the time he kept grinning ominously at pedestrians and motorists who passed by him in awe.

It was early morning in my middle class neighborhood; most motorists were mothers driving their kids to school. I still cannot see the point in vandalizing phone booths in full daylight for all to see. The man with the shotgun and a sneer waved good-by at the kids who stared too long at him. The man with the sledgehammer now put himself to tampering with the entrails of the large metal box as if he was trying to disembowel the phone booth. Finally, looking satisfied with the results, both men took off towards the next phone booth, four or five blocks away. They were my first sighting of a very special breed of “informal telecommunications entrepreneurs”, as they are called in the jargon of the Ministry of Popular Economy.

By now I had put on my jogging suit and gone down onto the street. Mimicking an overweight week-end athlete recovering from a knee operation I cautiously followed the team. The men seemed used to trading roles during their workday; the one with the sledgehammer now carried the shotgun as they casually approached a kind of makeshift street-side phone parlor that deserves a detailed description since it has become one of Caracas’s distinctive hallmarks: the illegal mobile phone call peddler’s shop.

A folding patio side-table, a couple of beach chairs and a large umbrella make up these street corner camps where customers can “rent” a mobile phone for no more than Bs 300 a minute: that’s somewhere near 6 cents at the official change rate. (Venezuela has had tight foreign exchange controls since early 2003.) Four or five mobile phones are laid out on the table (one for each phone company operating in the country). A billboard hanging from the umbrella’s pole states the different rates. Coffee, soft drinks (from an icebox conveniently at hand), candy and chocolate bars and even loose cigarettes are also for sale. These parlors are usually set up not far from—or even within—large impoverished barrios. You can also find them close to important public buildings, marketplaces or subway stations.

As with almost every upper middle—class neighborhood in this city of 5 million there is a large poor “barrio” within walking distance of my place. According to world experts on poverty, millions of people all over Latin America have never actually made a telephone call from their own ramshackle homes. Major telephone companies operating in the country simply do not serve the barrios. Thus, the poor rely heavily on the public network that now comprises not only dimly lit phone booths on mean streets but also lush secluded parlors and Internet centers.

When the state-owned phone monopoly was privatized back in the ’90s, the Venezuelan government required the purchasers to boost public telephone service. The companies over-complied and by 2001 there were 1,300 phone booths in Caracas alone, with an average of 8 phones each, located in the most populated barrios. High maintenance costs due to endemic vandalizing, forced the setting up of a network of closed and secure public parlors. These are scattered all over the city and run by franchised managers.

As opposed to the franchised parlors, Caracas’s informal entrepreneurs manage more than 13,500 mobile lines purchased at volume discount with personal credit cards. They show a daily consumption of 2,500 minutes per parlor. (Note that there are 41.7 hours per line in a 24 hour day.) The Venezuelan public telecommunications market has been growing 5% per year during the last 3 years. In 2004 it had reached $280 million. The “informal” parlors steal energy from the lines serving the city and none of them pay any city taxes at all. Of course, they cannot get around having to pay protection fees to corrupt police officers and/or drug gangs. That allows the phone entrepreneurs to operate all through the night in any given barrio, no matter how dangerous, while the legal parlors usually close at 10 pm. But for the cost of mobile phone lines and handsets, side tables, iceboxes and “protection”, their investment/profit ratio is still one of the best you could find in the country.

The legal companies that compete in this market have tried all kinds of strategies to minimize their losses, the most successful one has been to offer every prepaid card holder lower rates per minute in any street corner phone booth than those offered by the informal parlors. That prompted the sledgehammer and shotgun wrecking teams that enforce a monopolistic niche worth US $40 million in 2004. What does the destroying of public property have to do with what Professor Schumpeter would call the enterprising spirit of the little guy? The boom of the sledgehammer and shotgun entrepreneurs in Caracas only shows that the poor can hurt the poor in even worse ways than the rich wherever government’s contempt for the rule of law favors not the people but only the clientele of a lenient and corrupt populist system.