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Rio de Janeiro's mayor Eduardo Paes waves the Olympic Flag with IOC President Jacque Rogge and London mayor Boris Johnson as the Brazilian flag is hoisted during the closing ceremonies of 2012 Olympic Games in London, Aug. 12, 2012. Rio de Janeiro is the host city for the next Summer Games in 2016.Sean Kilpatrick/The Canadian Press

For Jose Fortunati, one of the hardest parts of being mayor of Porto Alegre in Brazil's southern "gaucho" or cowboy state is getting reception on his mobile phone.

"I was talking to you in another room, but I had to move as I couldn't hear you," he explains over a faint line. "Our building is right in the middle of town so in theory we're meant to get the best signal."

Complaints in the city have sparked a national crackdown by the telecoms regulator, Anatel, over the past few weeks, raising fears about the direction of one of the world's most attractive mobile phone markets.

Foreigners have piled into Brazil, enticed by the possibility of strong growth in Latin America's biggest economy as its middle class expands and its legions of mobile phone users upgrade to smartphones.

President Dilma Rousseff has also made wider Internet access a priority ahead of Brazil hosting the World Cup in 2014 and the next Olympics in 2016.

The four biggest telecoms companies are all at least partly foreign owned – Telefonica's Vivo from Spain, Telecom Italia's Tim mobile unit, Claro, owned by Mexico's Carlos Slim, and Oi, part owned by Portugal Telecom.

But aggressive moves recently by Brazilian regulators have shaken the industry and raised concerns about increasing state intervention.

Last week, it emerged that Anatel was investigating Tim for possible fraud after it allegedly cut off calls made under its pay-per-call plan – a claim the company vehemently denies.

Only a few weeks earlier Anatel banned the Italian operator, as well as Claro and Oi, from selling phone Sim cards in 19 of Brazil's 27 states as punishment for poor service. The ban was later lifted after the three companies promised to invest $9.8-billion (U.S.) over the next two years.

"What kind of atmosphere does this create for companies that are looking at Brazil from the outside?" says Wally Swain, telecoms analyst at Yankee Group.

Few dispute the need to improve Brazil's mobile phone services – poor reception and interrupted calls are common even in business hubs such as Sao Paulo. Operators have also invested far less in Brazil than in other Latin American countries.

Over the past year, operators in the sector have invested on average 16.1 per cent of their local service revenues in Brazil, compared to 28.9 per cent in Mexico and 25.1 per cent in Chile, according to the Yankee Group's Mobile Carrier Monitor.

But some observers worry that Brazil's sudden draconian measures will not only do little to improve services, but may have the reverse effect of scaring away investment.

For more than a decade Anatel has given companies relatively free rein in the industry. "They went from one extreme to another," says Richard Dubois, infrastructure partner at PwC in Sao Paulo, adding that it would have been better first to threaten the companies with fines rather than suspend their sales without warning.

At a senate hearing this month, Mario Girasole, Tim's vice-president of regulatory issues, accused Anatel of making basic technical errors in its report that led to this month's allegations of possible fraud.

"It will take us a long time to rebuild our image," he said, adding that the regulator had not taken into consideration that calls could have been cut out because of other factors such as users' batteries or credit running out.

Analysts believe Anatel was first forced to step in after the consumer rights group, Procon, suspended the four biggest operators in Porto Alegre last month following more than 800 complaints this year in the city.

Some also suspect that Brazil's increasingly interventionist government is keen to regain control over one of the few industries dominated by foreign companies – Ms. Rousseff "highly approved" of Anatel's decision to impose bans, reported Brazil's O Estado de S. Paulo newspaper last month.

"This has the smell of a political game inside the Brazilian government ... it's very peculiar," says Yankee's Mr. Swain, who also disputes the apparently random criteria upon which Anatel's decision was based.

Rather than previously agreeing on minimum performance targets with the operators, Anatel suspended the sale of Sim cards last month of whichever company showed the worst performance in each state, until they presented adequate action plans.

However, Bruno Ramos, a superintendent at Anatel, says the decision was a result of annual studies, adding that the prospect of hosting the World Cup in 2014 and the Olympics two years later had forced them to act.

"We reached a point where we realized that considering there is still time before the big events in two years, it was the ideal moment to take a decision," he says.

Analysts also question to what extent greater investments will improve services and whether operators will be able to recoup the extra billions of reais they are being forced to spend.

Tim, which was banned from 19 states after Anatel judged it to be the worst performer, has in fact invested more of its revenue in Brazil over the past three years than Claro and Oi.

Often Brazil's labyrinthine bureaucracy is to blame. Infrastructure projects can be delayed for years as companies struggle to meet the requirements of each of Brazil's more than 5,000 municipalities, which are responsible for approving new masts in their local area.

Roger Oey at BES Securities in Sao Paulo says the biggest deciding factor for further foreign investment, though, is likely to be the conduct of Anatel itself, as the industry waits to see if recent events are just the start of a tougher and more erratic approach to regulation.

"If we see more new measures, which have not been negotiated with the operators, it could be negative, even for the country as a whole," says Mr. Oey. "Continuous rule changes will, if anything, just make the operators start to invest less."

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