Annual Corporate Responsibility Report 2005

Telefónica S.A. Annual Corporate Responsibility Report 2005

Telefónica S.A. Contents Annual Corporate Responsibility Report 2005

Telefónica For all

Letter from the Chairman 4 04 Customers 104 Customer relationship 106 Customer relationship cycle 106 Customer satisfaction 108 6 Dialogue with customer associates 110 Telefónica, the power Critical processes for customers 112 behind progress for all Marketing 112 Service provision 118 Operation 120 Billing 124 00 Telefónica in 2006 8 Customer attention 126 World Leader in the Telecommunications Sector 10 Technical service 130 Accelerating to strenthen our leaderships 11 Excellence in service 132 International Presence 12 Service improvement initiatives 132 Organisational Profile 14 Quality certificates 134 Driving Progres 15 Responsibility in the service offered 136 Highlights 2005 16 Telecommunications secrecy 136 Protection against Internet abuse 136 Data protection and privacy 142 01 Corporate Governance 20 Protection of infancy 145 Ownership 22 Terminal theft 148 Corporate Governance in the Telefónica Group 23 Responsible use of telecommunications 149 Transparency of the Information to shareholders 28 Markets where Telefónica operates 150 Risk Control Systems 29 Competitive situation and market evolution 150 Regulatory situation and free competition 154

02 Identity 32 Corporate Responsibility 34 Milestones and challenges in Corporate Responsibility 48 05 Shareholders 168 Values 50 Profitability 170 Code of Ethics 52 Transparency 172 Corporate Responsibility 56 General Shareholders’ Meeting 174 Brand 58 Sponsorships 62

Driving progress

03 Driving progress 66 Driving economic development 68 Impact of Telefónica’s activity 68 Distribution of income 72 Evolution of rates 74 Impact on productivity 76 Driving technological progress 78 The Information Society 78 Innovation 82 Telefónica I+D (Research and Development) 90 Collaboration with the University Sector 92 Information Systems 96 “Information Society” Report 97 Institutional Collaboration 98 Driving social development 100 06 Employees 178 08 The Enviroment 252 Telefónica employees 180 Environmental commitment 254 Description of the workforce 180 Environmental management 256 Generation of employment 182 Monitoring and follow-up of environmental aspects 260 Workplace environment 184 Electromagnetic emissions 261 Internal communication 186 Impact of installations 265 Involvement of employees in strategy 187 Control and management of waste 268 Compensation policies 188 Energy consumption 271 Compensation 188 Emissions into the atmosphere 277 Health plans 190 Paper consumption 280 Pension plans 191 Water consumption 284 Other benefits 192 Consumption of poles 285 Professional development 194 Environmental impact of Telefónica’s services 286 Training 194 Tele-training 196 Management by skills 197 Professional career 198 09 Suppliers 292 Professionals and persons 200 Purchasing volume 294 Human rights 200 Purchase model 296 Freedom of association and collective bargaining 202 Supplier satisfaction 298 Work-life balance 206 Promotion of ethical standards 300 Abolition of child labour 208 Equality of opportunities 209 Health and safety 211 Employment demands 219 10 Media 304 Employee solidarity 220 Information and Transparency 306 Telefónica volunteering 220 Investment in publicity 307 ATAM 221 District C 222

11 Annex 1 310 About the report 07 Society 226 Dialogue with stakeholders 312 Commitment to countries 228 Reporting principles 316 Digital inclusion 230 Consolidation boundary of the information included 320 Universal Service 231 Consolidation process of the information 322 Geographic divide 232 United Nations Global Compact 324 Economic divide 234 Independent verification Inclusion through training 236 Social and cultural activity 238 EducaRed 240 Proniño 242 12 Annex 2 310 Cooperation 244 Independent verification report 312 Art and Culture 245 Telefónica Accessible 246 Letter from the Chairman

Dear Friend,

Telefónica would like to present you, for the fourth consecutive year, its Annual Corporate Responsibility Report, one of the keystones of the Group’s corporate responsibility strategy.

The report we present for FY 2005 is a further step towards Telefónica’s strategic goal of being a committed and responsible Group. Committed, in that we are involved in the progress and development of the countries where we operate, through the transformation of our innovations into global communications solutions. And responsible in that we are focused on permanently improving the way in which we carry out our operations. At Telefónica we understand that as far as we are capable of generating a positive impact on society, we will also be capable of generating profitable and sustainable growth for everyone, thereby guaranteeing the sustainability of our company.

This annual Report introduces improvements with regard to the reports for previous years, in an effort to remain at the forefront of the corporate responsibility movement that has been growing throughout Europe and Latin America for some years now.

The first improvement in this Report has been its ability to consolidate a comprehensive corporate responsibility reporting system at Telefónica. This system has already borne results, such as the CR Reports for Argentina, Brazil, Chile and Peru. These “country reports” are a natural consequence of our commitment to initiatives promoted by the UN such as the Global Compact and the Millennium Goals, as well as the result of our “multidomestic” character. On the one hand, we are global, because of our size, presence and services. In 2005 we have further reinforced our internationality with the acquisitions of Çesky Telecom and O2 in Europe and our strategic alliance with China Netcom. On the other hand, we are also local, because, beyond sharing the same language, especially in Latin America, it is our desire to contribute to the communities we belong to through understanding and addressing their needs.

The second improvement in this Report has been its ability to transform internal management processes and systems on a worldwide scale. In 2005, special progress was made with the environmental management systems and the implementation of specific policies to extend best corporate responsibility practices from Europe to Latin America, and vice versa. To this aim, the 2005 report includes a detailed account of goals and challenges for 2006. Thirdly, the 2005 Report includes many of the lines for improvement and progress suggested to us by our stakeholders following a detailed analysis of the reports for previous years. The fact is that, as was expressed in a series of dialogue panels held during the financial year, there is great interest in Telefónica's behaviour towards its customers, suppliers, employees of Telefónica Group, etc.

Fourthly, the report on corporate responsibility strives to present what we internally refer to as “the other Telefónica”, that is, the Telefónica that lies behind its financial results. For many of our stakeholders, Telefónica is much more than a telecommunications services provider. Many already perceive us as a driving force behind the social, technological and economic development of the societies in which we operate. Our activity generates an important wealth in social, employment, digital inclusion and education terms, as well as in product and service innovation, business opportunities for suppliers… The benefits that information and communication technologies can bring to sustainable development provide a great opportunity for our business and for the societies in which we are present.

Lastly, the 2005 Report has taken us a step further in our search for rigour, transparency and relevance of information. Thus, the 2005 Report has been externally verified by Ernst&Young, in accordance with the Standard AA1000/AS, as regards the consolidation boundary in Spain. The aim has been to offer a balanced and reasonable presentation of the economic, environmental and social performance of our organisation. In addition, once again, the Report has been prepared in accordance with the 2002 Global Reporting Initiative Guidelines for all the consolidation boundary of the Group. We are proud that our commitment to transparency has been acknowledged with the inclusion of Telefónica in the main indices of companies who invest responsibly and with the many awards and special mentions received in 2005.

To conclude, I would like to reaffirm our commitment to permanent improvement in this corporate responsibility report. This improvement would be possible without the understanding and support from our stakeholders. That is why I wish to express our sincere gratitude to all those who, through their opinions and suggestions, have allowed us to make progress.

Best regards,

César Alierta Executive Chairman, Telefónica, S.A. 00 Telefónica in 2006 Telefónica, the power behind progress for all

Customers Shareholders Employees Quality and fulfilment Profitability and Clarity and professional transparency development

Customer satisfaction Investment Employment Economic 84% fixed Spain >1.5 million shareholders 207,000 employees Progress 73% fixed Argentina 60,405 Spain 55% fixed Brazil Profitability 14,326 Europe 66% fixed Chile +76% accumulated 131,968 LATAM 63% fixed Peru profitability 2003-2005 >70% mobile LATAM 0.5 Û dividend per share Compensation 5.045 billion euros Price evolution Results 2005 147,000 employee with Fall of 12% in mobile +40% results variable salaries telephony in Spain in 2005 +24% income 5.1% a year fall in fixed +17 free cash flow Pension Plans telephony in Spain generation 94 million Û contributed by (since 1998) Telefónica to private plans >12% profitability (fonditel) Productivity increases

Innovation Shareholder Training Technological 2,9 billion Û on and investor website 9.3 million hours Progress innovation in 2005 1,182,000 visits 48 training hours 533 million Û on R&D 963,000 downloads per employee >130 new products 20% online training Shareholder helpline >43,000 training plans Operation >88,000 queries 2.18% faults in Spain Telework 4.17% faults in Latam >1,000 teleworkers 95% minimum network efficiency GSM CDMA Professional career 350 published vacancies Digital household 150 cities with digital Competencies television coverage in Spain >78,000 jobs evaluated in December 2005 (3 in Dec. 2004)

Digital inclusion Responsible Working practices Social 5.5 million low income lines investment 142,000 employees in Progress in Latin America 48.1 million euros invested collective agreements >300,000 social subscribers by Fonditel in responsible in Spain funds (1.01% of total) Work auditing 26 companies audited in 2004 Telefónica Accessible 4 companies audited in 2005 >30 services for the disabled Integration Service 1,079 disabled employees responsibility 49.3% women 21.8% female managers

Contracting 85.4% payroll with permanent or indefinite contract

Telefónica, S.A. | Corporate Responsibility Report 2005 6 00 Telefónica in 2006

Society Suppliers Environment Media Contribution and Equal opportunities Respect and protection Information and proximity and mutual benefit transparency

Economic impact Purchases Investments Advertising (% TEF income on GDP) >13 billion Û District C: largest rooftop investment 2.2% Spain >18,000 awarded suppliers solar power producing park 47% television 1.3% Argentina >42,000 suppliers in catalogue in Europe (21.5 million Û) 19% press 1.1% Brazil (16,600 solar panels) 18% exterior 1.8% Chile Local suppliers 10% radio 2.1% Peru 90% awarded suppliers Support to 1.6% Venezuela 85% volume adjudicated environmental organisations Public Supplier satisfaction 10 NGOs receive support Administrations 67.5% overall satisfaction from Telefónica 8.511 billion Û paid in 2005

Digital inclusion Online purchasing Environmental Online press room ADSL coverage >8 billion Û adjudicated impact of ICT 176,000 sessions in 2005 97.3% Spain, >20,000 online purchasing 12 studies in 2005 (82,000 in 2004) 89.5% Argentina, 96.8% Brazil, processes 96.5% Chile, 97.0% Peru Internal training Product Online auctions 3,348 employees trained information Mobile coverage 685 million Û adjudicated in 2005 42% press notes 99% Spain, 948 purchasing processes on products 92% Argentina, 95% Chile Infrastructure 76% Ecuador, 69% Mexico Joint innovation development 62% Peru, 93% Venezuela 5,000 people collaborate Agreement with the with Telefónica Federation of Municipalities Public services for the development of the Information Society ≈700,000 boxes

Social action Ethical standards Global environmental Transparency >54 million Û invested in the supply chain management Telefónica, the company 90% of suppliers support 13 countries share the with the best information Fundación Telefónica them (survey) regulation of minimum in social action* 763 projects environmental 1º Telefónica: 746 points 31,000 participating entities Compliance with requirements 2º Classified: 496 points 41 million participants payment times 3º Classified: 465 points 98% invoices Training in society Internet training 96% amount Social training on >5,000 schools (data for Spain) electromagnetic emissions connected in Chile

Telefónica Accessible *Fundación Empresa Manual of accessible y Sociedad communication in collaboration with CERMI

Telefónica, S.A. | Corporate Responsibility Report 2005 7 00 Telefónica in 2006

Telefónica is a world leader in the telecommunications sector, with over 154 million accesses and presence in 19 countries

Telefónica, S.A. | Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, motor de progreso for all 6

00 Telefónica in 2006 8 World leader in the telecommunications sector 10 Accelerating to strengthen our leaderships 11 International Presence 12 Organisational Profile 14 Driving Progress 15 2005 Highlights 16

01 Corporate Governance 20

02 Identity 32

03 Driving progress 66

04 Customers 104

05 Shareholders 168

06 Employees 178

07 Society 226

08 The Enviroment 252

09 Providers 292

10 Media 304

11 ANNEX I 310

Telefónica, S.A. | Corporate Responsibility Report 2005 00 Telefónica in 2006

World leader in the telecommunications sector Accelerating to strengthen our leadership Telefónica in International Presence 2006 Organisational Profile Driving Progress 2005 Highlights

Telefónica is the world leader in the telecommunications sector

Almost 154 million accesses Accesses Financial Results As at the end of FY 2005, Telefónica Group Telefónica Group’s income increased by had a total of 153.5 million accesses. 25.1% with respect to 2004, reaching Including customers of O2, whose 37,882.1 million euros. 4th company in the world acquisition materialised in 2006, Telefónica in terms of number of Group’s customer base rises to 180.9 Telefónica Group’s OIBDA amounted to customers million. 15,276.4 million euros, with an increase of 25.0% compared to 2004. The mobile telephony customer base grew to 99.1 million, and fixed telephony reached Telefónica Group’s net income rose to Almost 2,900 million euros the figure of 40.9 million customers. 4,445.8 million euros, a 40.0% increase invested in technological compared to 2004, thanks to the good innovation Including O2 customers, Telefónica was performance of operations as a whole, and fourth largest company in the world in terms to the positive contribution of the of number of customers as of FY 2005. acquisitions made.

More than 207,000 Investment Employees employees During the last two years, Telefónica has Telefonica’s direct staff as a consolidated considerably expanded with the acquisition Group includes over 207,000 employees, of of BellSouth’s assets in Latin America in which 37% correspond to Europe and 63% 2004, the acquisition of Cesky Telecom and correspond to Latin America. Included in the Dow Jones the purchase of 5% of the share capital of Global 50 Titans China Netcom in 2005 and the acquisition Shareholders of the European assets of operator O2 in Telefónica is an entirely private company, 2006. with over 1.5 million direct shareholders, listed in the main national and foreign Telefónica has relevant operations in 19 stock exchanges. countries, and is the leading private investor in Latin America. Telefónica is part of the Dow Jones Global 50 Titans index, which includes the 50 In the course of 2005, Telefónica assigned most important companies in the world. almost 2,900 million euros to technological innovation activities.

Telefónica, S.A. | Corporate Responsibility Report 2005 10 00 Telefónica in 2006

Transformation of the Telefónica Group

Countries (Units) 19 Accesses (millions) 181

123

15 26 1

Before 1990 1995 1999 2004 20051 ¡ Including O2 customers Accelerating to strengthen our leadership

The desire to become the best combination Over the last 20 years, Telefónica has in the telecommunications sector in terms experienced an important process of of growth and profitability is based on a transformation, which has allowed it to programme of transformation, which, acquire a new dimension, and to under the motto “Accelerating to strengthen its competitive positioning strengthen our leadership”, is built on five through the scale of the company: cornerstones: customer orientation, innovation, operational excellence, •From operating only in Spain to offering commitment, leadership in people and a its services in nineteen countries, common Group identity. representing a potential market of 670 million people. In 2005, Telefónica continued in its transformation programme, focused on •From offering basic communication becoming an integrated Group that services to offering a wide range of satisfies its customers’ overall communication solutions tailored to the communication needs, extending needs of each client. innovation from the technological field to Telefónica has increased the value of its different processes in the value chain. The • assets by seven, has multiplied its aim is to have the best customer revenue by twenty-one, and has satisfaction levels in its sector, and to be a increased its market capitalisation by company which employees are proud to be thirty-nine times. a part of. It aims to be one company, with a set of values and a common identity shared Telefónica has increased the number of by all the businesses that comprise the • its employees by three times, and its Telefónica Group. number of clients has increased by twenty times.

Telefónica, S.A. | Corporate Responsibility Report 2005 11 00 Telefónica in 2006

Geographic Distribution of Revenue1 Percentages 2004 2005

60.3

51.9

41.5 34.8

6.6 4.9

Europe and others Latin America Spain 1Revenue contributed by each region to Telefónica Group’s consolidated results International Presence

Growth of Telefónica Global presence, local focus As from April 2006, Telefónica is a strategic 2003-2005: Telefónica operates in many countries, each partner of the State operator Colombia one of them with very different challenges Telecom. In addition, Telefónica owns 5% of and opportunities. The value of a business the share capital of the Chinese Accesses x2 is not only focused on the penetration into telecommunications company China new markets, but rather in the day-to-day Netcom, which has allowed Telefónica to Countries +10 management of the companies, thinking start creating a strategic framework for globally while keeping the local focus on cooperation in fields such as joint our operations. acquisition of technology and Employees x1.5 infrastructures, technology transfers and Telefónica will only become a genuinely other fields related to management. global company if it acts and manages its affairs as a local company. To this aim, the Integrated Operator: business common focus of Telefónica Group lies in diversification its customers, and the importance of The financial results for 2005 have been customers for Telefónica Group is what strengthened by the diversification brought makes Telefónica different from other by being an integrated operator. In this operators. context, the mobile telephone business is the main contributor to the Group’s Dimension and scale revenue (+38.1%/year) while the fixed The year 2005 has meant an important telephony business is the most profitable step ahead in terms of the Group’s line, having grown by 19.9% in Spain and dimension and scale. The integration of the 14.6% in Latin America with regard to 2004. operations of BellSouth and Cesky Telecom, together with the acquisition of O2, have By geographic regions, Spain represents accelerated its growth profile, increasing its 51.9% of the Group’s consolidated revenue, differential factor with regard to its while Latin America represents 41.5%. The European competitors. acquisition of Cesky Telecom, in July 2005, has brought increased geographic These operations are proof that one of diversification, with the Czech Republic Telefónica’s strategic aims is the obtention representing 2.7% of the consolidated of synergies. More specifically, and as a result revenue. of the integration of BellSouth mobile operators Latin America, Telefónica Group has already met over 50% of its own synergy previsions. In the case of the integration of O2 in Telefónica Group, previsions point to the synergies generated reaching 3,300 million euros in the first year.

Telefónica, S.A. | Corporate Responsibility Report 2005 12 00 Telefónica in 2006

Telefónica: Market size (2005) Figures in thousands

Mexico Guatemala El Salvador Nicaragua Venezuela Germany Czech Republic Mobile Accesses Mobile Accesses Mobile Accesses Mobile Accesses Mobile Accesses United Kingdom Mobile Accesses 6,368 1,041 538 372 6,160 Ireland 4,676 Data and Internet Fixed Telephony Fixed Telephony O2 Fixed Telephony accesses 3 accesses accesses accesses 44 69 2,961 Data and Internet Data and Internet Data and Internet accesses accesses21 accesses 1 661 Pay-TV customers 14

Spain Mobile Accesses 19,890 Fixed Telephony accesses 16,136 Data and Internet accesses 5,586 Pay-TV customers 207

Panama Accesos Celulares 849

Colombia Mobile Accesses 6,033 Data and Internet accesses 3 Ecuador Mobile Accesses 1,885

Peru Mobile Accesses 3,455 Chile Argentina Uruguay Brazil Morocco China Fixed Telephony Mobile Accesses Mobile Accesses Mobile Accesses Mobile Accesses Mobile Accesses China Netcom accesses 5,276 8,335 419 29,805 4,023 5% share capital 2,348 Fixed Telephony Fixed Telephony Fixed Telephony Data and Internet accesses accesses accesses accesses 2,429 4,532 12,340 403 Data and Internet Data and Internet Data and Internet Pay-TV customers accesses accesses accesses 462 484 902 3,329

Telefónica, S.A. | Corporate Responsibility Report 2005 13 00 Telefónica in 2006

Telefónica

Telefónica Telefónica O2 Telefónica de España Internacional Móviles

Atento T-Gestiona Telefónica I+D Telefónica Contenidos Fundación Telefónica

Organisational Profile

Throughout recent years, Telefónica has O2 concentrated its telecommunications At the start of 2006 Telefónica concluded a business, strengthening its presence in tender offer to buy the operator O2, with fixed and mobile telephony markets, and significant operations in Germany, Ireland focusing its business model on satisfying and the United Kingdom. all its customers’ communication needs. As a result of the reorganisation carried out by Telefónica in December 2005, Cesky Telefónica de España Telecom and Telefónica Deutschland are Its main activity is providing fixed also integrated within this Business Unit. telephony and broadband services in Spain. Telefónica Empresas, Telefónica Soluciones Atento and Terra in Spain are also integrated in Provides customer assistance service this business unit, offering value-added through contact centres or multi-channel services to its customers. platforms (telephone, fax, Internet...).

Telefónica Internacional Telefónica I+D Telefónica’s investments in the fixed Oriented towards the creation of services, telephony sector in Latin America are the management of networks, services and managed through Telefónica Internacional businesses, with special attention to (also known as Telefónica Latinoamérica). technological innovation of a strategic Its activities are carried out mainly in nature or new to the market. Argentina (TASA), Brazil (Telesp), Chile (CTC), Peru (TdP).Telefónica Empresas América, T-Gestiona Terra Latinoamérica and Telefónica Administrative support for the Group International Wholesale Services are also related to non-strategic activities common integrated in this business unit. to the different business units.

Telefónica Móviles Fundación Telefónica Channels all the non-profit social and Telefónica Móviles leads the Spanish- and cultural activities. Portuguese-speaking markets. As at December 2005 Telefónica Móviles offered Centro Corporativo its services to over 94 million clients, Responsible for the definition of global being present in all key markets in Latin strategy and corporate policies, for the America, and achieving a leading position management of common activities and the in the region. coordination of the activities of the business units.

Telefónica, S.A. | Corporate Responsibility Report 2005 14 00 Telefónica in 2006

Driving Progress

Telefónica is an important driving force for Driving Social Development 51,000 million euros economic, social and technological Telefónica wishes to be perceived as a redistributed among development in the countries where it is group that is responsible and committed present. towards its stakeholders. stakeholder groups

Driving Economic Telefónica is increasingly customer- Revenue / GDP = 1.7% for Development oriented, and committed to excellency in main countries In 2005 Telefónica distributed over 51,000 quality and services. As a result of this million euros among its stakeholder groups, effort, in 2005, Telefónica has reached a of which over 4,000 million euros were used customer satisfaction level in Spain of 83%. Over 18,000 suppliers for employee remuneration; almost 5,000 million euros were distributed among During 2005, Fundación Telefónica carried 533 million euros on R&D shareholders and over 19,000 million euros out a strategic revision of all its projects, went to suppliers. It is important to note the focusing its efforts on two areas of activity: 83% customer collecting role of Telefónica which, through Education (Educared) and the integration fees, licenses, consumer taxes and indirect of children into society (Proniño). It is satisfaction in Spain taxes, has channelled over 8,500 million important to note the commitment of euros for the Public Administrations. employees to volunteer activities, and their 5.5 million accesses for commitment towards disabled people low income households in Telefónica’s revenue represents an average through ATAM. Latin America of 1.7% of the Gross Domestic Product of the economies of the main countries where The digital inclusion of people with low it is present. economic resources (over 5 million prepaid Over 54 million euros on and controlled lines in Latin America) or social and cultural action Over 18,000 suppliers collaborate with people with disabilities (via the project Telefónica worldwide, with a high Telefónica Accesible) are initiatives which percentage of contracts being awarded to show Telefónica’s commitment to social local suppliers (an average of 85% in 2005). inclusion.

Driving Technological Implementation of Telefónica Group’s Code of Ethics. Development During 2005, Telefónica earmarked almost Publication of annual reports on Corporate 2,900 million euros for technological Responsibility in Argentina, Brazil, Chile and innovation activities. Peru.

Telefónica further increased its investment Presence of Telefónica in the main in R&D activities in 2005, reaching a total sustainability indices: DJSI and FTSE4good, of 530 million euros, which amounts to among others. 1.4% of Telefónica Group’s total revenue.

Telefónica, S.A. | Corporate Responsibility Report 2005 15 00 Telefónica in 2006 2005 Highlights

Profitable Growth* Results 4,445.8 Million Euros +40%

Revenue OIBDA Cash flow generation Millions of Euros Millions of Euros Millions of Euros 37,882.1 30,280.9 15,276.4 12,222.0 9,917.7 8,454.9

2004 2005 2004 2005 2004 2005 +25.1% +25.0% +17.3% Clients +24% 154 million accesses (not incl. O2) ADSL Lines Mobiles Imagenio Thousands of clients Millions of clients Clients 5,880 3,916 99 74.4 206,600 6,024

2004 2005 2004 2005 4Q´04 4Q´05 +50.2% +33.2% +200.6% Growth 5 corporate acquisitions in 2 years

Growth due to acquisition 2004-2005

2004 2005 2006

*For a broken down, detailed analysis of Telefónica Group’s Bellsouth Çesky China O2 Colombia consolidated financial statements, please refer to the Telecom Netcom Telecom audited information in the annual statement of accounts

Telefónica, S.A. | Corporate Responsibility Report 2005 16 00 Telefónica in 2006

Driving Progress Divestiture Shareholders Financial Other 4,119 4,822 Econonic progress Suppliers 905 Employees 3,075 4,213

18,000 suppliers Investment 10,524 1.7% Contribution of income to National GDP

Public 154 Million accesses (not incl. O2) Total Income Administrations 8,511 1.5 Million shareholders

207,000 Employees Total Payments Suppliers Commercial Customers 19,087 43,482 CapEx 4,423 Tecnological Progress 2,900 million euros on innovation +21% Innovation R&D Who innovates? Millions of Euros Millions of Euros In percentages

2,900 Telefónica Others Latinoamérica 2,398 533 6 461 Telefónica 15 Móviles 7 15 Telefónica de España 53 25 52 27 2004 2005 2004 2005 +20.9% +16.6% Social progress 54 million euros in social action +16% Social action Digital inclusion Employee Millions of Euros Thousands of lines in low Trainning income homes LATAM Thousands of hours 54.1 5.541 9,349 8,910 46.5 4.720

2004 2005 2004 2005 2004 2005 +16.6% +17.4% +5%

Telefónica, S.A. | Corporate Responsibility Report 2005 17 00 Telefónica in 2006 Credits

Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

04 Customers Corporate Marketing Development / Quality, marketing and customer service departments of the main business lines (Telefónica de España, Telefónica Móviles, Telefónica Latinoamérica) / Secretariat General / Communication / Security

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

06 Employees Corporate Human Resources / Human Resources Departments of the main lines of business (Telefónica de España, Telefónica Móviles, Telefónica Latinoamérica, TPI, Terra, Atento, T-Gestiona) / Communication / Health and Safety / Fundación Telefónica / ATAM / Fonditel

07 Society Main lines of business (Telefónica de España, Telefónica Latinoamérica, Telefónica Móviles) / Institutional Relations / Management Control / Regulatory Affairs / Reputation and Corporate Social Responsibility / Fundación Telefónica / ATAM / Sponsorship

08 Environment Internal Auditing / Reputation and Corporate Social Responsibility / Environmental Departments of the main lines of business (Telefónica de España, Telefónica Móviles, Telefónica Latinoamérica)

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

Telefónica, S.A. | Corporate Responsibility Report 2005 18 00 Telefónica in 2006

Telefónica, S.A. | Corporate Responsibility Report 2005 19 Corporate 01 Governance

Telefónica complies with the main national and international guidelines and requirements for Corporate Governance

Telefónica, S.A. | Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, motor de progreso for all 6

00 Telefónica in 2005 8

01 Corporate Governance 20 Ownership 22 Corporate Governance in Telefónica 23 Transparency of the Information to Shareholders 28 Risk Control Systems 29

02 Identity 32

03 Driving progress 66

04 Customers 104

05 Shareholders 168

06 Employees 178

07 Society 226

08 The Enviroment 252

09 Providers 292

10 Media 304

11 ANNEX I 310

Telefónica, S.A. | Corporate Responsibility Report 2005 01 Corporate Governance

Ownership

Corporate Corporate Governance in Telefónica Governance Transparency of the Information to Shareholders Risk Control Systems

Ownership

Telefónica’s fully subscribed and paid-up Shareholders with significant stakes share capital amounts to 4,921,130,397 Name or % total share euros, and is divided into 4,921,130,397 corporate name capital ordinary shares, of a single class and series, “La Caixa” 5.09% with a nominal value of (1) one euro each, BBVA 6.63% represented by book entries. Information as at Decenber, 31, 2005

In accordance with the information available in the Company, there is currently no natural or legal person that exercises, or may exercise control, directly or indirectly, individually or jointly, over Telefónica. There are, however, two shareholders with significant shareholdings, directly and indirectly, as is shown in the following table: Caja de Ahorros y Pensiones de Barcelona (La Caixa), and Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), with 5.09% and 6.632% of the share capital, respectively.

Telefónica, S.A. | Corporate Responsibility Report 2005 22 01 Corporate Governance

This chapter presents a summarised version of the Annual Report on Corporate Governance of Telefónica S.A. for FY 2005. This report, which addresses the requirements established in the Circular 1/2004, of March 17, of the Comisión Nacional del Mercado de Valores (Spanish Stock Exchange Commission), is published on an annual basis, and can be accessed through the Company’s website for shareholders and investors. (www.telefonica.es/investors).

Corporate Governance in Telefónica

Principles of Corporate With respect to corporate interest. The Governance Board of Directors executes its functions in The information regarding the accordance with corporate interest, The basic corporate governance regulations General Shareholders’ understood as the Company's interest, of Telefónica are set out in the Company and, in this respect, acts to guarantee the Meeting is detailed in the By-laws, in the Regulations of the General long term viability of the Company and Shareholders Meeting and in the Shareholders chapter in this maximise its value, whilst taking into Regulations of the Board of Directors. report account the plurality of legitimate public or private interests that converge in the The Regulations of the General execution of all business activities. Shareholders’ Meeting establishes the principles of organisation and its operation, With respect to its shareholders. The Board offering shareholders a framework that of Directors, as the liaison between the guarantees and enables the exercise of shareholders and management, is their rights with regard to the General responsible for setting up the necessary Shareholder’s Meeting, as the governing channels to be aware of the suggestions body of the Company. put forward by shareholders with respect to the corporate management. The Board Likewise, the Regulations of the Board of of Directors also undertakes to Directors, as the founding rules of guarantee equal treatment in its relations corporate governance for the Company, with shareholders. determine the principles guiding the actions of the Board of Directors, regulate With respect to the market. The Board its organisation and operation and undertakes to execute the acts and take establish the rules of conduct for its the necessary measures to ensure the members. Company's transparency in financial markets, and to promote correct formation In accordance with the foregoing, and as of the Company's the basis of the governance structure of share prices, particularly avoiding Telefónica, the Regulations of the Board of manipulation and abuse of privileged Directors of the Company determine the information. fundamental principles that guide the actions of the Board of Directors:

Telefónica, S.A. | Corporate Responsibility Report 2005 23 01 Corporate Governance

Composition of the Board of Directors 6 8 Executives Independent directors directors

4 Proprietary directors

The Board of Directors The Board of Directors The Regulations of the Board of Directors Executive Committee establish it as a basically supervisory body Subject to the legislation in force, the controlling the Company’s activity, while Board of Directors has expressly delegated entrusting the day-to-day management of all of its powers and attributes, save those the business to the executive bodies and that may not be legally or statutorily the management team. Moreover, and in delegated, to an Executive Committee with keeping with the provisions of these general decision-making powers. Regulations, those powers that are legally or statutorily reserved for the Board of The relationship between the Board of Directors may not be delegated, nor may Directors and its Executive Committee is any others necessary for the responsible based on the principle of transparency, performance of its basic supervisory and such that the Board is always fully aware of control duties. the decisions adopted by the Committee. Accordingly, and within the scope of its Thus, the Board of Directors is informed at duties of supervision and control, the Board each of its sessions of all the resolutions of Directors (i) determines the strategies adopted by the Executive Committee, and guidelines for the Company distributing a summary of the minutes of management, (ii) establishes the basis for the Committee sessions for this purpose to corporate organisation to ensure its all the Board members. The Board then maximum efficiency, (iii) implements and proceeds to ratify these resolutions. oversees the suitable information Moreover, the election of the members of procedures to report Company information the Board of Directors to the Executive to shareholders and the markets in general, Committee must have the backing of, at (iv) makes decisions regarding business least, two thirds of the Board of Directors. and financial transactions of particular importance to the Company and (v) approves the bases of its own organisation and operation to ensure the optimal fulfilment of these duties.

The Company By-Laws of Telefónica establish that the Board of Directors must comprise a minimum of five and a maximum of twenty Board Members. In April 2006, the Board of Directors of Telefónica was comprised of 18 Directors, of which 6 are Executive Directors, 4 are Proprietary Directors and 8 are Independent Directors.

Telefónica, S.A. | Corporate Responsibility Report 2005 24 01 Corporate Governance

Telefónica’s Board of Directors’ Committees

Board of Directors’ Committee Non-executive board members Executive board members No. of sessions 2005 Executive Committee 4419 Audit and Control 4012 Nominating, Compensation and Corporate Governance 4010 Regulation 319 Human Resources and Corporate Reputation 405 Service Quality and Customer Service 314 International Affairs 506

The Board of Directors’ The Nominating, Compensation and Consultative or Control Corporate Governance Committee, regulated by the Board Regulations, has Committees the following competencies: (i) to inform The Board of Directors of Telefónica has with regard to proposals for the constituted several consultative or control appointment of Directors and other high- Committees –precisely six- which it ranking officers of the Company and its entrusts with the continual study and subsidiaries, (ii), to approve the monitoring of areas of particular relevance remuneration bands for the high-ranking for the Company’s good governance, or for officers of the Company, (iii) to approve the the monographic analysis of certain standard contracts for the high-ranking significant aspects or issues where such officers, (iv) to determine the study is appropriate. These Committees are remuneration scheme for the Chairman, not corporate bodies, but rather are (v) to inform and propose to the Board of structured as instruments to serve the Directors the retribution schemes for Board of Directors, which receives the Directors and to revise them periodically, conclusions reached in the matters and (vi) to inform of the incentive plans, (vii) to issues the Committees are instructed to perform an annual analysis of the study. remuneration policy for Directors and high-ranking officers, (viii) to inform with Among the consultative or control regard to proposals for the appointment of Committees constituted by the Board of members to the Board Committees, (ix), to Directors of Telefónica, are those that have prepare and keep a register of the status of been specifically recommended: the Directors and high-ranking officers of the Company, (x) to prepare the Annual Audit and Control Committee, established Report on Corporate Governance and (xi) in 1997, is regulated by the Company By- to exercise those competencies assigned Laws and the Board Regulations. It verifies to this Committee by the Board of both the financial information and the Directors. annual accounts of the Company, ensuring that all the financial information is In addition, the Board of Directors deemed prepared in accordance with the same it convenient to constitute four additional professional principles and practices. Its consultative Committees: the Human responsibilities are mainly (i) to know the Resources and Corporate Reputation financial information process and evaluate Committee, the Regulation Committee, the the accounting verification system, (ii) to Service Quality and Customer Service safeguard the independence of the Committee and the International Affairs external auditor, supervising their work Committee. and serving as a liaison between the Board of Directors and the external auditor; (iii) to supervise the internal auditing services and (iv) to supervise compliance and integrity of the internal control systems for financial information.

Telefónica, S.A. | Corporate Responsibility Report 2005 25 01 Corporate Governance

Directors In accordance with the Regulations of the Board of Directors, the latter performs an Appointment annual evaluation of its performance and In accordance with the provisions of the quality of its work on the occasion of the Ley de Sociedades Anónimas (Spanish approval of the Annual Report on Corporate Corporations Act), the appointment of Governance. Directors is submitted for decision and approval by the General Shareholders’ Remuneration Policy Meeting. In addition, and in accordance As regards the remuneration policy for with the Regulations of the Board of Directors, this policy is proposed, evaluated Directors of the Company, the proposals for and reviewed by the Nominating, appointment are preceded by the relevant Compensation and Corporate Governance favourable report from the Nominating, Committee, always in keeping with criteria Compensation and Corporate Governance of moderation. Currently there is no Committee. remuneration system linked to the market price of the company shares or that Rights and Obligations involves handing over shares or stock The Regulations of the Board of Directors options to Board Directors. specifically devote title V, comprised of nine articles, to the detailed description of the On an annual basis, the Company provides rights and obligations of Directors. This information regarding the remuneration title sets out the duties arising from the received by the Members of the Board of obligations of diligence, fidelity and loyalty Directors, both in its Annual Report and in of Directors and, in particular, envisages the Report on Corporate Governance, in situations of conflict of interest, the duty of accordance with the criteria established for confidentiality, the exploitation of business each of these documents. . opportunities and the use of corporate assets.

Furthermore, the Regulations of the Board of Directors also includes the right of Directors to obtain the information and counsel necessary to perform their duties, as well as the establishment of the suitable channels for the exercise of such rights. In this respect, the Company has adopted the measures required to ensure that Directors are furnished in a timely manner with sufficient information specially drawn up to this effect, geared to preparing for the sessions of the Board and its Committees.

Telefónica, S.A. | Corporate Responsibility Report 2005 26 01 Corporate Governance

Composition of the Board of Directors of Telefónica S.A. and its Committees Nominating Human Service Compensation, Resources Quality and Type of Executive Audit and and Corporate and Corporate Customer International Director Committee Control Governance Reputation Regulation Service Affairs

César Alierta Izuel ( Chairman)

Isidro Fainé Casas (Vice Chairman)

Gregorio Villalabeitia Galarraga (Vicepresidente)

Fernando de Almansa Moreno-Barreda

David Arculus

Maximino Carpio García

Carlos Colomer Casellas

Peter Erskine

Alfonso Ferrari Herrero

Gonzalo Hinojosa Fernández de Angulo

Pablo Isla Álvarez de Tejera

Luis Lada Díaz

Julio Linares López

Antonio Massanell Lavilla

Vitalino Manuel Nafría Aznar

Enrique Used Aznar

Mario Eduardo Vázquez

Antonio Viana-Baptista

Non member Secretary

Ramiro Sánchez de Lerín García-Ovies

Executive Chairman Proprietary Director Independent

Telefónica, S.A. | Corporate Responsibility Report 2005 27 01 Corporate Governance

CASE STUDY Transparency of the Information for Handbook of Internal Control Shareholders for Financial Information Reporting Regulations for Reporting to Independence of the External Markets Auditor The Sarbanes-Oxley Act affects companies In 2003, The Board of Directors of Among the main competencies of the listed on US financial markets and Telefónica approved the “Regulations on Audit and Control Committee is to propose establishes, among their obligations, the Communication of Information to the to the Board of Directors, for submittal to need for senior managers of companies to Markets”, which includes the legal the General Shareholders’ Meeting, the evaluate the internal control systems requirements that affect Telefónica derived appointment of the Accounts Auditor, as regarding financial information reporting both from the Spanish law and from well as the terms and conditions of as a necessary condition for ensuring international laws applicable to the contract, the scope of the auditor’s reliability. Company due to its shares being listed on professional mandate and the renewal or other stock markets. In accordance with not of their appointment. Telefónica has considered this legal these Regulations, the Company requirement as an opportunity for disseminates immediately and The External Auditor has direct access to improvement and, far from merely simultaneously to the markets where it is the Audit and Control Committee, and complying with the law, it has fully present all the information that could be regularly takes part in its meetings, developed its internal control structures, considered relevant, and therefore must be without the presence of the administrator control mechanisms and applied communicated to the market. when necessary. evaluation procedures. Likewise, these communications are In line with the legal requirements As a result of this experience, the “Manual published on the Company’s website. established by American regulations, the de Control Interno para el Reporte de la contracting of any service from the Información Financiera” (Handbook of External Auditor of the Company must Internal Control for Financial Information always be previously approved by the Audit Reporting) has been published, with three and Control Committee. In addition, main goals: contracting services other than account auditing must be done in strict compliance To share the knowledge acquired with the Spanish Auditing Act and the To transmit to the markets Telefónica’s Sarbanes-Oxley Act published in the United commitment to the development of States, and its regulations. In this sense, the good corporate governance practices amount corresponding to work other than auditing with regard to the total amount To provide an easier understanding of invoiced by the auditing firm was 11% in FY the model developed, with a practical 2005. handbook for all its users or users of information reported by Telefónica with reference to its Internal Control Model for Financial Reporting (SEC, rating agencies...)

Telefónica, S.A. | Corporate Responsibility Report 2005 28 01 Corporate Governance

Risk Control Systems

Telefónica carries out constant monitoring •Business process risks: (operational risks, of the most significant risks that could integrity risks, management and human affect the main companies that form part resources risks, technological risks and of its Group. To this aim it has a Corporate financial risks). Model that is applied periodically and Information risks: (operational, financial homogenously in the Companies of the • and strategic) Group, allowing the evaluation of both the importance of each of the risks that could •Contextual risks: (competition; affect the companies, and the degree of shareholder relations; availability of control over each of the risks. resources; political and economic environment; legal and fiscal; regulations Thus, the Group has a risk map that allows and changes in the sector). it to identify those risks that require specific control and monitoring, prioritised in accordance with their importance. In addition, the model has a matrix that includes all the operational processes where each of the risks considered are managed, in order to allow the evaluation of the established controls and be able to have reasonable certainty that they will not materialise.

The identification of these risks and processes is carried out by the Internal Auditing Office, which is responsible for the internal control of the Group. Its results are informed periodically to Telefónica’s Audit and Control Committee.

The 50 risks considered in the model are classified in the following categories:

Telefónica, S.A. | Corporate Responsibility Report 2005 29 01 Corporate Governance Créditos del informe

Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

Telefónica, S.A. | Corporate Responsibility Report 2005 30 01 Corporate Governance

Telefónica, S.A. | Corporate Responsibility Report 2005 31 02 Identity

Telefónica wishes to be perceived as an integrated telecommunications group, recognised for its commitment and responsibility towards its stakeholders

Telefónica, S.A. | Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, driving progress for all 6

00 Telefónica in 2005 8

01 Corporate Governance 20

02 Identity 32 Corporate Responsability 34 Milestones and Challenges in Corporate Responsibility 48 Values 50 Code of ethics 52 Corporate Reputation 56 Brand 58 Sponsorships 62

03 Driving progress 66

04 Customers 104

05 Shareholders 168

06 Employees 178

07 Society 226

08 The Enviroment 252

09 Providers 292

10 Media 304

11 ANNEX I 310

Telefónica, S.A. | Corporate Responsibility Report 2005 02 Identity

A Strategic Goal CR Organisation at Telefónica Corporate Responsibility Management Model Telefónica in the debate on CR Awards and Recognition

To Be a Responsible Company: A Strategic Goal

Telefónica has included in its Strategic Map Telefónica Group has defined two CASE STUDY (approved in 2005) the goal of being monitoring indicators to periodically perceived as a committed and responsible measure the degree of fulfilment of this Difference Between the leader by society in general and its strategic goal. Concepts of Corporate stakeholders in particular. •Firstly, the Group carries out a follow-up Responsibility and Social of the evaluations made by analysts and In order to achieve this aim, various Action observers of corporate responsibility. This initiatives and projects have been collective is considered to be expert in Social Action launched, channelled through the Strategic corporate social responsibility, and the Altruistic and in principle philanthropic Axis of Corporate Identity and criticisms they express with regard to funding of activities, within or without the Communication. This is one of the five responsible performance are deemed to company’s sector of activity. elements of the transformation constitute a faithful indicator of the programme “Forging ahead to gain issues the company must tackle. Corporate Responsibility leadership” Secondly, public surveys are carried out It involves, besides strict compliance with • with regard to society’s perception of legal obligations, the voluntary integration Both the Strategic Map and the Axes of Telefónica. These surveys have been of stakeholders’ concerns in the Transformation have been communicated carried out on a quarterly basis since management. This implies that the to over 90% of the managers that form June 2005 in Argentina, Brazil, Chile, companies recognise and manage the part of Telefónica Group, who are in turn Spain, Mexico and Peru. The survey impact of their actions through specific responsible for informing their teams responders give their opinion of the business management processes. about these goals. Company on the basis of seven dimensions and 21 characteristics, in accordance with the RepTrack© model drafted by the Reputation Institute in collaboration with the Corporate Reputation Forum.

Telefónica, S.A. | Corporate Responsibility Report 2005 34 02 Identity

Telefónica understands corporate responsibility as a way of managing its business in relation to all its stakeholders. As far as the Telefónica Group is capable of generating a positive impact through its activity, it will be capable of guaranteeing its own sustainability and that of its relations with stakeholders.

For Telefónica, it is as important to achieve its goals and financial results as is the way in which we these results are achieved

Organisation of Corporate Responsibility in Telefónica

Organisational structure and •Definition and development of the reporting line management tools and models, and of Corporate Responsibility management at the plans of action adapted to the Telefónica is the competency of the expectations of the stakeholders, and Subdirectorate General of Corporate follow-up. The execution of the plans of Reputation, Brand and Social Responsibility. action normally lies with the It is dependent, functionally and departments, to which the corporate unit hierarchically, of the Directorate General of lends its support before and during the Corporate Communication. processes. •Establishment of indicators, For the supervision of corporate social consolidation of the information related responsibility issues, Telefónica S.A.’s Board to the previous points, communication of Directors has a Committee made up by and comparison of said information with four non-executive board members: the stakeholder feedback. Human Resources and Corporate Reputation Committee, a supervisory and To this aim, the unit has direct control body that is informed every two collaborators in: months of the most relevant aspects related to corporate reputation and its •The main business lines of Telefónica evolution, corporate responsibility and the Group (Telefónica de España, Telefónica behaviour of Telefónica with regard to the Internacional, Telefónica Móviles, demands of its stakeholders. Telefónica I+D, t-gestiona, Atento, Telefónica Soluciones...) In addition, the top management of the •The countries where it publishes Telefónica Group is informed about the Corporate Responsibility Reports degree of development and fulfilment of (Argentina, Brazil, Chile, Spain and Peru) the goals of the Corporate Responsibility The management departments most projects through the Committees of • directly related to issues of corporate Coordination of Strategic Axes. responsibility (Institutional Relations, Human Resources, Auditing, Investor Roles and competencies Relations, Shareholders’ Office, The Corporate Responsibility Unit has a Secretariat General, Fundación general coordination role similar to that of Telefónica, Innovation, Security, other units of the Corporate Centre, related Communication, Sales Development, to: Environment, Quality, Finance...). •Studies and analyses of expectations, interests and demands of the internal (employees) and external (clients, shareholders, society, suppliers…) stakeholders.

Telefónica, S.A. | Corporate Responsibility Report 2005 35 02 Identity

Corporate Responsibility management should answer to a process of continuous improvement, by virtue of which a prior diagnosis is made both of the risks related to corporate responsibility and the expectations of the stakeholders.

On this basis, the company establishes policies and actions for improvement that adapt to the specifics of each line of business and country.

When evaluating the degree of fulfilment of aims and communicating it to the stakeholders, a new cycle is initiated in such a way that the entire process is repeated periodically over time.

Management Model: The Corporate Responsibility Cycle in the Telefónica Group

The management of Corporate For Telefónica, corporate responsibility Responsibility at Telefónica is based on five management has the following principles structured in phases that, characteristics: together, make up a management cycle Multistakeholder Approach: as it takes geared to continuous improvement. This • into account the needs of all its management model seeks a balance stakeholders. between the economic growth of the business and meeting the expectations of •Linked to the business: the main all its stakeholders. responsibility of a company is to “do well what it has to do”, that is, develop its business activity as well as possible. •Responsibility for the impact of sustainable development: It is not about contributing resources to social causes (philanthropy), but about optimising the way in which operations are carried out, seeking lasting relationships with stakeholders. + Internal Diagnosis: identification of areas for improvement. 1“Principle of Proactive Risk Management” Evaluation of + + External Diagnosis: fulfilment of aims and 5 dialogue with stakeholders to communication of 2 gauge expectations and opinions. performance. “Principle of Dialogue with “Principle of Information Stakeholders” Transparency” 4 3 + + Implementation in business Development and Launch lines and countries. of initiatives and projects: “Principle of Flexibility and Adaptability” “Principle of Value Generation for all Stakeholder Groups” Telefónica, S.A. | Corporate Responsibility Report 2005 36 02 Identity

Internal Internal + Diagnosis + Diagnosis

+ 1 + + 1 + Evaluation of External Evaluation of External Fulfilment 5 2 Diagnosis Fulfilment 5 2 Diagnosis 4 3 4 3

Implementation+ +Development Implementation+ +Development and Launch and Launch

Internal Internal Phase 1 work health and safety; corporate image + Diagnosis + Diagnosis Internal Diagnosis: and reputation; fraud; human resources; Identification of areas for political and economic environment. improvement •Specific Analysis of Reputational Risk Factors: in 2005, Telefónica+ has 1 + + 1 + carried out a newE diagnosisvaluation of of the ten External Evaluation of External “Principle of Proactive Risk Management” 5 5 main aspects thatFulfilme could compromisent its 2 Diagnosis Fulfilment 2 Diagnosis Telefónica carries out systematic studies corporate reputation. These aspects have that allow it to identify the risks associated been prioritised according to their to corporate responsibility and corporate impact on the reputation of the social responsibility. Periodically, it carries company and their potential impact on 4 3 4 3 out: the financial results. This study has taken into account the opinion of stakeholders,+ + + + Analysis of Risks and Implementation Development Implementation Development • comparative CSR studies by country and and Launch and Launch Opportunities with regard to sector, analyses carried out by external positioning before all stakeholder groups, analysts, investors and observers, trends in the main countries with operation, To of bodies that promote CSR, monitoring Internal do this, an analysis is carried out of the of the media and results of corporate + Diagnosis situation of corporate responsibility in reputation studies carried out in six the country, paying special attention to countries. customers, employees, society, suppliers and the environment. Among the main potential risks identified are: lack of involvement in local + 1 + The aim of these analyses is to launch development; health risks of Evaluation of External local corporate responsibility projects; as infrastructures; failing to address 5 Fulfilment 2 Diagnosis well to provide information for the stakeholders’ demands; failing to regional programmes of positioning as a guarantee equal opportunities; relations “committed and responsible leader”; and between the company and its lastly, to act as a guide for the employees; potential abuse of 3 publication of the Country Corporate 4 dominating position; contents not Responsibility Reports. desired by the customers, incoherence Implementation+ +Development Corporate Risk Analysis: in a between actions and messages; lack of • and Launch systematic manner, the Auditing transparency; or bureaucracy in the Department carries out an analysis of 50 relations with the stakeholders. corporate risks, in each of the companies This type of analysis helps to identify of Telefónica Group; classified according adequate plans of action and common to degree of importance and degree of management policies that prevent these control by the operations. Among the 50 risks from materialising and allow the different risks that make up the company to offer a homogeneous and Corporate Map, there are aspects related responsible behaviour before its to corporate responsibility, such as: stakeholders. customer satisfaction; possible failure to fulfil commitments; environmental risks;

Telefónica, S.A. | Corporate Responsibility Report 2005 37 Internal Internal + Diagnosis + Diagnosis

+ 1 + + 1 + Evaluation of External Evaluation of External Fulfilment 5 2 Diagnosis Fulfilment 5 2 Diagnosis 4 3 4 3

Implementation+ +Development Implementation+ +Development and Launch and Launch 02 Identity

Internal Internal + Diagnosis + Diagnosis

+ 1 + + 1 + Evaluation of External Evaluation of External Fulfilment 5 2 Diagnosis Fulfilment 5 2 Diagnosis 4 3 4 3 + + Implementation+ Development Implementation+ Development and Launch and Launch

Internal + Diagnosis Phase 2 During 2005, a specific methodology for External Diagnosis: contrast the dialogue with stakeholders has been with stakeholders and established, geared towards achieving alliances and collaboration relations with gathering of expectations stakeholders. + 1 + Evaluation of 5 External “Principle of Dialogue with Stakeholders” One ofFulfilme the mainnt sources of information 2 Diagnosis and knowledge for the implementation of When it comes to defining projects within a methodology of dialogue was its the framework of Corporate Responsibility, participation in the drafting of the “Good Telefónica seeks to know which are the Practice Guide for Relations with 4 3 interests and expectations of the Stakeholders”, developed by AccountAbility stakeholders that interact with the and StakeholdersImple mentResearchation Associated,+ with +Development Company. To this aim, before implementing the collaboration of the United Nations and Launch the projects, Telefónica makes an active Environment Programme. This is a tool for effort to listen and compare the daily use by Corporate Social Responsibility expectations of its stakeholders through professionals, both in companies and in several methodologies: questionnaires, civil society. In addition, the Guide was studies, surveys, focus groups... This way, presented in Spanish, with the subtitle “De the Company aims to achieve a double las palabras a la acción” (From words to aim: action), adapted to the Spanish and Latin American context, with the collaboration of That the customers, employees, citizens, • the Nóos Institute. shareholders, suppliers can influence the development of the business aims and During 2005, Telefónica set up four pilot projects undertaken by Telefónica, dialogue projects with different expressing their needs to the company, stakeholder groups. In addition, with the as well as their perception of aim of extending this methodology to management aspects of the Company other areas of the company and of that affect them directly. generating new dialogue processes, an •That the actions and projects put into internal workshop was organised, with 40 practice by Telefónica are in line with the employees from different lines of business expectations of their stakeholders, are and management departments, in which well guided, and generate value. the four processes mentioned above were presented, and attendants were shown how to apply these tools in practice.

In 2006, Telefónica will take this methodology to Latin America, through public presentations of the methodology, development of pilot dialogue processes and employee training.

Telefónica, S.A. | Corporate Responsibility Report 2005 38 02 Identity

Pilot Projects for Dialogue with Stakeholders During 2005, Telefónica put into practice the methodology for dialogue with stakeholder groups through four pilot dialogue projects. These processes were geared towards listening and understanding the needs of the following four groups:

CASE STUDY Former Telefónica de España Employees This is a collective made up of almost 50,000 people and integrated mainly by people in retirement or early retirement. The dialogue process was channelled through the two majority trade unions (UGT and CCOO) and the Association for Telefónica’s Elderly. In-depth interviews and focus groups were carried out in order to find out their expectations with regard to the Company upon conclusion of their employment relationship with Telefónica. A plan of action was designed involving setting up an online platform, mainly regarding: access to information related to the Company; access to commercial offers similar to those offered to current employees; social activities, the programme Voluntarios Telefónica (Telefónica Volunteers); tracing old colleagues; etc. The dialogue process was carried out in collaboration with the Human Resources Department. Plan of Action 2006 : Club Telefónica Senior as a goal for 2006.

Public Administrations as Customers In this case it is an internal dialogue process, aimed at understanding the needs of the Pubic Administration as a customer. A qualitative and quantitative analysis was carried out, and the internal information on customer satisfaction was analysed. The proposed plan of action was especially focused on strengthening information and communication for Regional Managers, and on a plan of public presence of the Company. The dialogue process was carried out in collaboration with the Corporate Relations Department. Plan of action 2006: Company profiles by autonomous community

Associations and Opinion Leaders A group of professional associations, federations, professional colleges and societies that make up a very specific type of customer. In-depth interviews were carried out, as well as sessions with the directors of some of the associations and a study of satisfaction surveys. The proposed plan of action focused mainly on information related to Telefónica Group’s Social Responsibility, which can be of use to some groups of SMEs that show concern and interest in the subject but that often have no work methodology at their disposal. The dialogue process was carried out in collaboration with the Department of Associations and Opinion Leaders. Plan of action 2006: training initiatives in corporate responsibility for SMES.

Non-profit Organisations that act as observers of companies with regard to corporate responsibility This is a group of civil society bodies that carry out report on and watch companies and their behaviour. One of the main lines of action is the study of information transparency with regard to corporate social responsibility. Several in-depth interviews were carried out, plus a specific session for joint analysis of the Corporate Responsibility Report 2004. The proposed plan of action was to systematise the comparison of information in a format of dialogue panels. The dialogue process was carried out from the Department of Corporate Responsibility. Plan of action 2006: Dialogue panels with stakeholders on CR Reports

Telefónica, S.A. | Corporate Responsibility Report 2005 39 02 Identity

Internal Internal + Diagnosis + Diagnosis

+ 1 + + 1 + Evaluation of External Evaluation of External Fulfilment 5 2 Diagnosis Fulfilment 5 2 Diagnosis 4 3 4 3

Implementation+ +Development Implementation+ +Development and Launch and Launch

+ Internal + Internal Diagnosis DiagnPhaseosis 3 •Digital Inclusion: elimination of Development and launch of geographic, economic and educational initiatives and projects barriers in order to take telecommunications services to 1 1 everyone. Telefónica’s vision is to “Principle of Value Generation for all + + + + contribute through technology to an Evaluation of External Evaluation of Stakeholders” External Fulfilment 5 2 Diagnosis Fulfilment 5 2 Diagnosis improved and higher social inclusion of people. Telefónica believes that this can After analysing the risks, comparing the be its best contribution to the opinion of the stakeholders and identifying achievement of the United Nations the aims and goals, the plans of action that “Millennium Development Goals”. 4 3 4 mak3e up the social responsibility strategy + are defined+ and launched; these projects •Responsibility at the service of the Implementation+ Development Implementation+ should beDeve alignedlopm withent the strategic aim of customer: including aspects such as and Launch being a acommittednd Launch and responsible leader, adult content management or the and are developed in collaboration with establishment of policies regarding the different departments or managers acceptable use of Internet services. Internal Minimum Environmental Requirements + At the same time, projects related to • Diagnosis for the Telefónica Group, applicable in all improved customer attention, professional lines of business and countries. development of Telefónica employees, innovation and excellence are promoted •Responsible Purchasing: establishment of 1 from their respective strategic CSR requirements for Telefónica + transformation+ axes. Within the framework suppliers, in collaboration with the Evaluation of External of corporate responsibility, in 2005, Purchasing Department. Fulfilment 5 Diagnosis progress2 has been made on the •Supplier Satisfaction: first supplier coordination of teams that manage satisfaction survey of Telefónica Group. projects oriented to society in general, customers, suppliers and the environment. •Analysis of the Impact of 4 3 Telecommunications on Sustainable •Telefónica Accesible: Telefónica’s answer Development. to people with disabilities. It is an + +Development Implementation integral plan to support equal Positioning of Telefónica as a driving and Launch • opportunities and full social integration force behind economic, technological of people with disabilities. All the lines of and social development of the countries business and management areas of the and regions where it operates. Telefónica Group participate in Telefónica Accesible.

Telefónica, S.A. | Corporate Responsibility Report 2005 40 Internal Internal + Diagnosis + Diagnosis

+ 1 + + 1 + Evaluation of External Evaluation of External Fulfilment 5 2 Diagnosis Fulfilment 5 2 Diagnosis 4 3 4 3

Implementation+ +Development Implementation+ +Development and Launch and Launch 02 Identity

Internal Internal + Diagnosis + Diagnosis

+ 1 + + 1 + Evaluation of External Evaluation of External Fulfilment 5 2 Diagnosis Fulfilment 5 2 Diagnosis 4 3 4 3 + + Implementation+ Development Implementation+ Development and Launch and Launch

Internal + Diagnosis Phase 4 In order to guarantee this principle, the Implementation in lines of internal regulations and policies have a business and countries period of time for their implementation by the lines of business. It is not about 1 suddenly changing the way of carrying+ out + “Principle of Flexibility and Adaptability” activities, but ratherEvalu ofation taking o fadvantage of External Fulfilment 5 their redesigns and plans to gradually and 2 Diagnosis Telefónica carries out its activities in two softly introduce the principles and criteria continents (Europe and Latin America). The established by the corporate responsibility degrees of development of environmental, policies in the business processes. employment or product and service 4 3 development regulations are very different Follow-up of the degree of implementation in the two regions. Telefónica avoids the of the different actions is a key element+ +Development adoption of double standards in both Implementation when it comes to ensuring compliance, regions by means of adopting Group and Launch thereby establishing a process of corporate policies. continuous improvement. To this aim, from 2006, actions will be carried out in The corporate responsibility policies are collaboration with the Internal Auditing presented, from their concept, as Group Department and with External Auditors, policies. The aim in this sense is to achieve geared towards verifying the degree of a better cohesion and a stronger internal compliance with the established goals. This Group culture. However, the principle of will allow the Group to define the flexibility and adaptability, seeks to respect corresponding actions for improvement, as the social, political and economic well as provide strategic follow-up environment in each country where the indicators for Telefónica. Telefónica Group operates, as well as the specific nature of each business unit. Among the policies to be implemented, is the approval of the Code of Ethics in the Flexibility and adaptability is also reflected operations of Telefónica Group. In July 2005 in the order of priorities when it comes to the Board of Directors of Telefónica S.A. implementing one or other plan of action, approved the extension of the Grupo which can sometimes be altered by the Telefónica Móviles Code of Ethics to all social needs of a country, the risk maps of a companies of the Group. During 2006, one line of business or the demands of of the key goals is to consolidate the stakeholders in each country. implementation of this Code of Ethics.

Telefónica, S.A. | Corporate Responsibility Report 2005 41 Internal Internal + Diagnosis + Diagnosis

+ 1 + + 1 + Evaluation of External Evaluation of External Fulfilment 5 2 Diagnosis Fulfilment 5 2 Diagnosis 4 3 4 3

Implementation+ +Development Implementation+ +Development and Launch and Launch

Internal Internal + Diagnosis + Diagnosis

+ 1 + + 1 + Evaluation of External Evaluation of External Fulfilment 5 2 Diagnosis Fulfilment 5 2 Diagnosis 4 3 4 3 + + Implementation+ Development Implementation+ Development 02 Identity and Launch and Launch

Internal + Diagnosis

+ 1 + Evaluation of 5 External Fulfilment 2 Diagnosis 4 3

Implementation+ +Development and Launch

Phase 5 rigour and transparency, becoming a key Evaluation of fulfilment of tool for the detection of deficiencies in the goals and communication of management systems and policies, which will be improved in subsequent years. performance From an external point of view, the best “Principle of Information Transparency” and most widespread use lies in making available to stakeholders information that The annual report is undoubtedly the best they tend to demand from the Company: presentation of the different Corporate aspects related to human resources Responsibility actions carried out by indicators, health risks of the antennae, Telefónica and brings to light all the value handling of personal details, environmental of the company for its stakeholders. It is impact, innovation, etc... It is on the basis of one of the most important communication this information that the demands of channels with stakeholders and, therefore, socially responsible investors are answered. should reflect their needs and expectations Lastly, the CR Reports are useful in the and the way in which the company is debate and dialogue with the stakeholder answering them. For this reason, the groups about the issues that most concern different lines of business and countries them. where Telefónica operates publish specific CSR reports, oriented to their respective Since December 2002, Telefónica has a stakeholder groups. section on its website devoted to corporate responsibility, which follows the same The chapter “About the 2005 Corporate structure as the annual report, but allows Responsibility Report” explains the way in updating of the information. which Telefónica responds to its commitment of continuous improvement, The corporate responsibility management sounds out the opinion of the stakeholders model of Telefónica has generated a great and the degree of acceptance of the number of queries and requests for Report; and presents and answers the information. It is the policy of the suggestions, comments and even Department to answer, whenever possible, clarifications on the information included all the requests for information, queries or therein. interviews. These are mainly related to: Socially Responsible Investment From an internal point of view, the reports questionnaires, students, thesis and are a tool for knowledge management, and dissertation research, research projects, for improvement of company performance presentations at CSR forums and in CSR, as they help to follow-up on the conferences established goals, communicate achievements and management goals for future financial years. In addition, the verification of the reports gives credibility,

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Corporate Responsibility Reports published by Telefónica 1997 1998 1999 2000 2001 2002 2003 2004 2005 By line of business Telefónica SA

Telefónica de España

Telefónica Móviles

Telefónica Móviles España

Telefónica I+D

TPI

By Country

Brazil

Argentina

Chile

Peru

Environmental Report Sustainability Report CR: Corporate Responsibility Report

Note: The reports referring to 2005 may be in progress at the time of publication of this report

CASS STUDY

Telefónica’s Company Social Reports from the 80s. Contents 1. Employees Telefónica’s archives include the company 2. Customers social reports (“Balance Social”) from the 80s with a structure and content very 3. Shareholders similar to that of current best reporting 4. The Telecommunications practices. This model has been an Sector (suppliers, distributors, inspiration for the Telefónica Reports in the other operators…) 2000s, and twenty years later, the structure 5. The Community of the report based on stakeholder groups, 6. The Environment is still used. 7. Financial Statements

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One of Telefónica’s approaches to corporate responsibility is to actively participate in initiatives, forums, work groups and institutions that generate opinions regarding the activity of companies in this field.

With its participation in the debate on corporate responsibility, Telefónica seeks to meet various aims: •To make public practices with other social interlocutors. •To gain knowledge and learn about social responsibility methodology of other companies and organisations. •To identify opportunities for collaboration. •To generate points of convergence and dialogue with bodies representing the stakeholder groups.

Telefónica in the debate on Corporate Responsibility

United Nations (UN) educational programme of academic The company of Telefónica signed the bodies. Global Compact in March 2002, which has Participation in the consulting process of generated most of the lines of work in • businesses and human rights with the collaboration with the UN and other Special Representative named to this organisations within the UN. In 2005, the effect by the United Nations. following collaborations are worthy of mention: Global Reporting Initiative (GRI) Participation in the Non-Discrimination • Member of the GRI Stakeholder Council. in Employment Work Group, within the • framework of the Spanish Global •Organizational Stakeholder since Compact Association (ASEPAM). December, 2004. •Presentation by Telefónica at the •Participation in the organisation of the Learning Seminars of the Audit on Sneak Peaks for the debate of the G3 Human Rights carried out at Telefónica drafts in Madrid, Barcelona, Sao Paulo, Rio (ASEPAM). de Janeiro, Santiago de Chile, Lima and Buenos Aires. •3rd Meeting of Local Networks, Barcelona, September 2005. International Chamber •Collaboration in the drafting of the of Commerce (ICC) Practical Handbook for Progress Reports. Telefónica takes part in the Social Responsibility and Anti-Corruption study Participation in Seminar on Progress • groups since 2002. Follow-up of the Reports, Geneva, June 2005. activities of the International •Conclusion and presentation of Manual Standardization Organization (ISO), de Compromiso con los Stakeholders regarding international standardization of (Handbook of Commitment to social responsibility. Stakeholders), linked to the UN Environment Programme and in Global e-Sustainability collaboration with AccountAbility Initiative (GeSI) (London, October 2005); An initiative that, promoted by the UNEP •Conclusion and presentation of results of (United Nations Environment Programme) the Global Responsibility Initiative and the ITU (International Project managed by the European Telecommunications Union), groups Foundation for Management manufacturers and operators of the Development (EFMD). Launch of its information technologies sector with the second phase, with the aim of aim of promoting sustainable incorporating the business models of development. social responsibility and ethics in the

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Some of the lines of work for 2005 were: Standardisation and Certification (AENOR) and the International CASE STUDY The development of standards and tools • Standardization Organization (ISO) with for collaboration in issues related to the Other participations in regard to social responsibility issues. supply chain. initiatives in Latin America: Under the coordination of the CEOE, Development of dialogue panels with • • Telefónica takes an active part in the Argentina stakeholders regarding sustainability creation of a collaboration project Argentine Institute of Corporate Social reporting In the ICT sector. between the ILO and the Spanish Responsibility (IARSE) European Telecommunication Government, which seeks to promote Brazil Network Operators (ETNO) employment for the young in Latin Instituto ETHOS de Empresas e America. ETNO groups telecommunications Responsabilidade Social operators in Europe. Telefónica is present Fundação ABRINQ para os Direitos da Criança International Organisation of since 2002 in its Environment, Health and GIFE– Grupo de Institutos, Fundações e Employers (IOE) Safety groups. Empresas Telefónica is a member of the IOE’s CSR In 2005 Telefónica: Instituto Akatu pelo Consumo Consciente Work Group. In 2005, the following CEATS- Centro de Empreendedorismo e •Collaborated in drafting the Regional collaborations were carried out: Administração do Terceiro Setor da Fundação Environmental Report 2005 •International Symposium for Employers’ Instituto de Administração da Universidade •Participated in the work team on energy Organisations– The Evolving Corporate de São Paulo (FIA-USP) and optimisation of consumption. Social Responsibility Debate: Issues for Colombia •Collaborated in a report with WWF Employers and their Organisations. Colombian Business Council for regarding the contribution of ICTs to Geneva, October. 2005. Sustainable Development (CECODES), sustainable development. •Consulting Process of companies with Colombian chapter of WBCSD John Ruggie, Special Representative of Colombian Centre for Corporate Hispanic-American Association of the United Nations Secretary General for Responsibility (CRE) Research Centers & Business and Human Rights. Geneva, Guatemala Telecommunication Companies September 2005. CentraRSE; representative of WBCSD in (AHCIET) Special Session of the Council: How Guatemala Telefónica collaborates with AHCIET in the • companies and employer organisations promotion of good practices in corporate Mexico see their role in society. Geneva, June responsibility issues in the Latin American Mexican Centre for Philanthropy (CEMEFI), 2005. telecommunications sector. In 2005 the whose Decalogue for Socially Responsible department of Corporate Social •Seminar on Management of Corporate Companies was signed by Telefónica Responsibility takes up the Presidency of Social Responsibility for members of the Móviles México, obtaining the distinction the Commission of the Information Society. IOE, Telefónica Headquarters, September “Socially Responsible Company”. 2005. Nicaragua Spanish Confederation of Business Nicaraguan Union of Corporate Social Organisations (CEOE) Spanish Association of Accounting Responsibility (UniRSE) Telefónica is a member of the CEOE’s and Business Administration (AECA) Panama Commission for Social Reponsibility. In Telefónica takes part in its Study IntegraRSE 2005, the most significant collaborations Commission of Corporate Social Corporate Ethics Agreement of Panama were: Responsibility. Peru The participation and monitoring of the • Peru 2021 activities of the Spanish Association for

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Awards and Recognition for Telefónica’s Corporate Responsibility

Responsible Investment Corporate Responsibility Reports Telefónica was included in the European European Environment Award in the and worldwide Dow Jones Sustainability category of Communication for Sustainable Index (DJSI), which lists companies that Development: Awarded by the “Fundación lead their sector in terms of sustainability. Entorno”, in collaboration with the Spanish Telefónica also ratified its presence in the Ministry of Industry and the Ministry of FTSE4good index. The presence of Environmental Affairs, it prizes companies Telefónica in those indices is recognition that show a firm commitment to to its conviction that corporate sustainable development. The prize was responsibility should be regarded as handed out by the Prince and Princess of a basic axis in a telecommunications Asturias. operator’s business strategy. Telefónica leads the social responsibility Telefónica Móviles was included in the study in the annual reports of the Ibex 35 FTSE4good index and the SAM evaluation companies, carried out by the CSR passed the minimum criteria for being Observatory. However, the qualification included in the DJSI. However, the company obtained by Telefónica (1.90 in a scale of 4 was not included in the indices due to its points) shows the company must continue low free-float. in its efforts to improve its information transparency in the future. Lastly, it is of interest to note that O2, a company acquired in 2006 by Telefónica, Telefónica’s website provides the best was awarded the distinction “Best in class” quality information. Telefónica’s website for the mobile telephony sector. has obtained the most points, according to the report "Social action in websites of large companies and savings banks " drafted by Empresa y Sociedad on the basis of a comparative analysis of 65 large companies and 10 savings banks. In the comparative analysis, Telefónica obtained 746 points, significantly above the second and third in the classification, with 495 and 465 points respectively. The analysis has six sections: general framework, products and services, human capital, employment, financing and advanced resources.

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Recognition for corporate Recognition for Corporate responsibility projects in Spain Responsibility projects in Latin America Empresa y Sociedad Award to the Best Telefónica de Argentina was awarded International Social Action: During the the award to most significant social work awards ceremony, presided by the Prince and 2005, awarded annually by the Spanish Princess of Asturias, the jury pointed out that Chamber of Commerce of the Republic Telefónica’s social action gives priority to of Argentina for its corporate social education as a social integration tool, in responsibility activities. In the choice of projects in Latin America, Morocco and Spain. the jury, attention was drawn to the work and commitment toward society, through Telefónica, the best performer in terms educational projects and especially the of social action, according to experts who Corporate Volunteer programme, which took part in a survey carried out by the groups over seven hundred members Empresa y Sociedad Foundation. The survey of the Group’s companies. included 275 experts from companies, savings banks, social organisations, In Peru, Aulas Hospitalarias, received three universities, business schools, public awards, in recognition to the uniqueness administrations and media. Telefónica of the project in terms of corporate maintains its position as leader as in 2004 responsibility (Creatividad Empresarial, and is once again the only body present in Perú 2021 and Premio Anda). the first ten positions in the four types of programmes (products and services, in In Chile, the Government recognises the collaboration with employees, commitment of Fundación Telefónica employment, sponsorship and financing). to people with disabilities. On the occasion of the launch of the publication PRnoticias users choose Telefónica as the "Discapacidad en Chile, pasos hacia un company with the best CSR project. modelo integral del funcionamiento humano" (Disability in Chile, steps toward a The theme portal on spinal cord injury global model of human performance) of of the National Paraplegics Hospital, the National Fund for Disabilities (Fonadis). www.infomedula.org, sponsored by Fundación Telefónica, has been awarded Fundación Codespa Award to Corporate the “Infanta Cristina Comunicación 2004” Solidarity, for educational projects IMSERSO Prize "for its accessible design and developed in Latin America by Telefónica ambitious structure that makes it possible and Fundación Telefónica. to develop and provide services to its users”, according to the jury. The Proniño programme carried out by Telefónica Móviles and Fundación Telefónica The Spanish Committee of Representatives received many recognitions and awards in of People with Disabilities (CERMI) has Argentina, Guatemala and Ecuador. awarded the Special Award CERMI.es 2004 to the publication "Solidaridad Latinoamericana" (Latin American Solidarity) of Fundación Telefónica’s International Solidarity Network.

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Milestones and Challenges in Corporate Responsibility

Corporate Responsibility Code of Ethics Corporate Reputation Brand Customers

Inclusion of the aim to be a Coordinate the CR strategy with O2 Consistent customer satisfaction Establishment of consistent “committed and responsible leader” measurement systems for TdE, TISA customer satisfaction in Telefónica’s Strategic Map and Telefónica Móviles España measurement systems for Telefónica Móviles LATAM Publication of Reports on Country Auditing of CR Report in accordance Projects for the improvement of Customer Defence Service in Spain Corporate Responsibility with norm AA1000/AS in the assistance by solving the customer’s (Argentina, Brazil, Chile, Peru) countries problem in the first contact

Pilot projects for dialogue with Pilot projects for dialogue with Advances in ISO 9001 Advances in ISO 9001 stakeholders in Spain stakeholders LATAM 2006 certification certification

Studies regarding the impact of Policy of Acceptable Use of Internet Implement Policy of Acceptable telecommunications on sustainable Service Use of Internet Service development

Approval of Code of Ethics for the Implementation of the Code of Adult Content Management Implement Adult Content Telefónica Group Ethics in Telefónica Group Regulations Management Regulations

Implementation of the Code of Alignment with O2’s Business Customer handbook explaining the Customer Handbook explaining the Ethics in Telefónica Móviles Principles basics of mobile telephony basics of mobile telephony for LATAM 2006 customers

Start up of RepTrack as a Improve perception of Telefónica in Regulations for Management of measurement tool the weakest dimensions by 5% in Games as contents Latin American countries

Identification of reputational risk Implementation of Corporate factors Model of reputation risk management

Establishment of the Telefónica Alignment of Telefónica and O2 Brand Model Brand Models

Global launch of movistar, brand of Launch of a commercial brand for Mobile Telephony the digital home

Milestone Challenge 2006

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Society Environment Employees Supliers

Increase employee satisfaction by Increase employee satisfaction by Strategic review of the working areas Promotion of the Corporate over 5% over 5% of Fundación Telefónica (educared, Volunteer Projects proniño, forum, volunteers)

Worldwide publication of vacancies in Personalised development plan for Telefónica Accesible Project (Spain Telefónica Accesible Project (2 Intranet in order to encourage all employees 2005) countries in LATAM in 2006) professional development and internal rotation Regulation for control of occupational 3rd and last phase of the labour Promotion of “Digital Inclusion” risks in the contracting of works and audit of the Telefónica Group Project in LATAM services (as a preventive measure following the 2004 audit) Homogenisation of management Implementation of Norm “Minimum Implementation of the Norm procedures for Health and Safety in Environmental Requirements” “Minimum Environmental the Group Requirements”. A step in each company Over 75% of employees Development of model of Corporate Improvement of waste evaluated by competencies University management systems in LATAM

Homogenisation of the social Programmes of paper consumption Internal Regulations for benefits for the Group’s efficiency environmental management and Management control

New ways of working: dynamic office, Creation of Environment mobile work; Policy for the Committees per country Reconciliation between private and professional life.

Corporate Policy for the Integration of Publication of an Environmental People with Disabilities in accordance Policy for Telefónica Group with the LISMI Law (Law for the Social Integration of People with Disabilities)

Launch of Internal Launch of Internal Communication Supplier satisfaction survey Responsible purchasing policy of Communication Plan Spain 2005 Plan LATAM 2006 the Telefónica Group

Increase of online contracting Purchasing policy for social suppliers

Participation in the Supply Chain Participation in the Supply Chain Group of the GeSI Group of the GeSI

Telefónica, S.A. | Corporate Responsibility Report 2005 49 02 Identity

Values

Telefónica’s goal is for its customers, employees, suppliers, shareholders and companies in the countries where it operates to place their trust in its ability to fulfil the commitments it makes.

Telefónica’s values are the basis on which to build a committed and responsible company.

Telefónica knows that trust cannot simply Shareholders and investors be expected, but is rather earned on a daily Transparency: Telefónica makes readily basis, by making the right commitments accessible to shareholders and investors all and fulfilling them, demonstrating that it the information regarding the company is capable of delivering the goals it sets which is of relevance to their interests. itself. Telefónica seeks to achieve this through an attitude of understanding Profitability: Telefónica has a solid and toward the needs of its stakeholders; future-oriented model that can generate through constantly improving everything it profit in a sustained manner. does; accepting the responsibilities that come with leadership, and through being Employees committed to behaving with transparency, Clarity: Telefónica makes accessible to its integrity and ethics. That is our aim. These employees any relevant information, both are our values: related to the evolution of the business and to aspects affecting them more directly. Customers Quality: Telefónica’s products and services Professional development: Telefónica (aptitude) and its relationship with provides its employees with opportunities customers (attitude) fulfil and, whenever to make progress in their professional possible, exceed customers’ expectations in career, and makes every effort for them to terms of experience and performance. be able to fully develop their potential, in accordance with their interests as well as Fulfilment: we commit to fulfilling the those of the company. aims we set ourselves and the promises we make to our customers.

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The values of the Telefonica Group

Employees Shareholders Clarity and Profitability professional and development transparency

Suppliers Customers Equal Quality and opportunities Trust Fulfilment and mutual benefit

Environment Media Respect and Information protection and transparency

Society Contribution and proximity

Society Suppliers Contribution: Telefónica has developed a Equal opportunities: Telefónica guarantees relationship based on trust both by a transparent and equal selection process generating richness through developing for suppliers, based on objective grounds. the business and directly, by investing in social commitment. Mutual benefit: Telefónica has defined a constant improvement process in the Proximity: Telefónica is a global and multi- supply chain and carries out a large volume domestic company: it is multi-country and of local purchases which translate into multi-business, and is understanding and mutual profit for Telefónica, suppliers and aware of the needs and specific the societies in which it operates. characteristics of the societies in which it operates. Media Information: Telefónica is aware of society’s Environment interest in the activities it carries out, and Respect: Telefónica is committed to commits to providing information on these respecting the environment in all the activities. activities it carries out. Transparency: Telefónica proactively Protection: the company collaborates in provides the media with full, exact and true the protection of the environment through information regarding the aspects which the extension to all members of society of are relevant at any given time. services that are beneficial for the environment.

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Ethical Principles Code of Ethics Our Behaviour Anti-corruption

Ethical Principles

Towards our shareholders Towards society To keep, protect and efficiently use the To contribute to the social and economic company’s assets and to develop a development of the countries in which the professional management geared to company operates. ensuring the creation of value for our shareholders. To act in accordance with applicable national and international laws and Provide full, true, precise and clear regulations. Under no circumstance, resort information, guaranteeing that the to or tolerate bribes of third parties to the investors’ interests are satisfied and that Company or its employees, or vice versa. the requirements of the market authorities in which the group or any of companies is To respect the regulations that guarantee the listed are complied with. free market, to compete legally in every market and to not sign agreements with other Towards our customers companies in order to reduce competition. Make available to our customers quality products and services that are innovative, To respect human rights and public freedoms safe, and meet with the advertised recognised in the Universal Declaration of description. Human Rights, to not exercise any form of discrimination and to not tolerate underage Respect the privacy of communications and working or any type of work abuse, making protect our customers’ data against any use this commitment apply to all our suppliers which is not authorised by the law in force. and collaborating companies.

To not carry out illegal or misleading To identify the environmental issues promotions or advertising in the marketing related to the development of the activity of our products and services. of the Company, with the aim of reducing their impact as much as possible. Towards our employees Establish work conditions that guarantee To promote the development of services safety and protect the health of employees, that encourage social inclusion and in an environment free from any kind of make it possible for people with disability threat or abuse. to have an improved quality of life.

Provide fair remuneration to our To guarantee the safety of our installations employees. and minimise their impact on their surroundings,within the technological Guarantee equal opportunities and limitations and safeguarding the needs of the encourage the integral development of service.To favour the integration of local employees, both on a professional level and suppliers in our activities, providing all of on a personal level. them with equal opportunities.

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In July, 2005 the Board of Directors of Telefónica S.A. approved a Code of Ethics that must be observed by the employees of the Telefónica Group in their daily activities.

Telefónica Móviles already had a Code of Ethics, on the same terms as that of the Code approved for the Group.

During 2006 one of the key aims of the Group is to consolidate the implementation of this code across the entire Telefónica Group, as well as to align O2’s “Business Principles” and Telefónica’s Code of Ethics.

Our Behaviour

Obligations of employees Obligations of the company Comply with regulations in force, and respect Respect its employees. Act unequivocally the internal policy and regulations of their against any form of discrimination, be it for companies. reasons of gender, race, age, nationality, disability, ideology or religion. Act with integrity towards customers, always providing clear and truthful information. Help employees who have family or social problems. Provide help for employees with Act with integrity, not taking advantage of the relatives under their care with disabilities or position or contacts obtained as a result of serious illnesses, as well as those with the company’s activities, for personal benefit. problems with alcohol or drug addiction. Use the company’s facilities, equipment or Safeguard confidential information of the services exclusively for the functions which employees. they have been assigned with. Establish fair and objective mechanisms of Respect colleagues and safeguard the salary remuneration. harmony in the work environment. Ensure that the internal contracting and Reject and not offer bribes, including gifts promotion policies are founded upon the which, due to their value, could result in criteria of professional skills and abilities. subsequent obligations. Offer training and make available to Safeguard the company’s physical and employees the necessary tools to carry out intellectual property. their work. Protect and avoid the dissemination of Comply with all regulations in force regarding information under their responsibility. All the health and safety at work. The company will strategic information of the Telefónica Group have a programme for preventive as well as any data regarding stakeholders management of occupational risks as a must be considered confidential and general policy. therefore treated as such. Respect freedom of association. Use only IT equipment assigned for carrying out their functions. It is forbidden to transmit Respect the right to participate in any non- pornographic images, generate or transmit professional activity. viruses, illegally copy software or distribute Establish the mechanisms for monitoring and emails with political or commercial aims. control of the Code of Ethics. The Office of the Inform the company of any conflict of Code of Ethics has been created for this interest derived from other professional purpose. activities or economic or family ties with competitors and suppliers. Show respect for the workplace by dressing appropriately and not being under the influence of alcohol or drugs. Telefónica, S.A. | Corporate Responsibility Report 2005 53 02 Identity

Anti-corruption

Telefónica has expressed institutionally, in The Group also has reporting channels that its Code of Ethics approved by the Board of guarantee the confidentiality of the Directors, communicated to its employees reporter and has established rules for and published for the knowledge of its his/her protection. In addition, the Group’s different stakeholder groups, its firm internal regulations establishes controls for commitment to “act in accordance with the processes that link decision-making applicable national and international laws and fund releasing that provide reasonable and regulations and, under no certainty that no manager or employee circumstance, resort to or tolerate bribes of may, unilaterally, make undue payments or, third parties to the Company or its should payments of this sort be made, that employees, or vice versa. Likewise, the Code they will be detected in time. includes the obligation of its employees to Among these controls are the following: “reject and not offer bribes, including gifts Restrictions to decision-making which, due to their value, could result in • capacities of line managers who have subsequent obligations”. power of attorney, access profiles to the computer systems and the signature Likewise, in the same text it restates the structure, especially those that are sent validity and commitment to the UN Global to banks for verification purposes. Compact, signed by Telefónica in March 2002 and which, in its Principle 10, indicates •Control of the existence of prior and that “companies should work against sufficient budget assignment for the corruption in all its forms, including purchase of any goods or services. extortion and bribery”. •Separation of functions between the person who makes the decision and From an organisational point of view, orders the purchase of good and services Telefónica is implementing the Office of and the person who assigns the the Code of Ethics for the study of queries, purchase. complaints or reports, dissemination and evaluation of compliance with the Code of •Intervention units that verify financial Ethics; a subdirectorate general of transactions and, for payment of Corporate Reputation and a Corporate invoices, ensure that the details Inspection Unit which acts for the correspond with the previously agreed preventively and reactively, verifying terms. specific acts and situations. •Separation of functions of Treasury and Intervention and double signature for payment documents (the control signature verifies amount, currency and recipient).

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CASE STUDY Implementation of the Code of Ethics in Telefónica Móviles Telefónica Móviles was Telefónica Group’s The issues related to compliance, including first company to approve its Code of Ethics. possible irregular contract awards, incorrect 2005 was the first anniversary of the sale assignment and undue handling of creation of its Ethics Committees. Including goods, accounted for 6% of the cases, both the activities of the operators’ which is proof of the contribution of the Corporate Committee and Ethics Channel of Ethics in detecting possible Committees, the total number of cases fraud or infractions regarding procedures. dealt with during 2005 was 306. In these cases, the Ethics Committees informed the auditing departments, who Although the classification of the cases can were then put in charge of the relevant sometimes be subjective, the cases related investigations. to behaviour, regarding the attitude of bosses or relationships between In addition, five issues resulted in the colleagues, favouritism and harassment review of the company’s internal processes. were the most common issues dealt with In no case did any of the communications by the Committees, representing 44.5% of point to an infringement of the Code of the total. Ethics, but rather to the existence of badly defined processes which were causing Work related issues such as the review of conflict and uncomfortable situations. This sanctioning processes, selection processes kind of issue has also proven that the and work conditions in general represented activity of the Committees, together with It should be noted that there are no 24.7% and were the second most common the cooperation of employees, can also conclusions in the Inspection reports category. In terms of work sanctions contribute to an improved management of prepared by the Group that suggests the derived from these issues, it should be the company. existence of payments to political parties, noted that the Committees have bribes or payments to people or companies supervised the reasons for 12 layoffs, To summarise, last year served to that could act as intermediaries to provide ensuring complete transparency in strengthen the mechanism which funds to political parties or candidates. decisions related to these cases. Telefónica Móviles put into practice to make explicit its commitment to company Telefónica, together with other companies It is important to note that the responsibility, creating a line of and bodies, has informed the examining communication related to these two types communication for employees with the members of the OECD, at the request of of issues, treatment of employees and work company, at the highest level, which is the Spanish Ministry of Industry, of the issues, have referred to situations caused by proving to be useful, not only for means at its disposal for compliance with personal behaviour and specific situations. channelling claims, but also as a discussion the Convention signed by our country for There have been no corporate policies forum where employees can express their Combating Bribery of Foreign Public or procedures that have been deemed to views regarding the organisation and the Officials in International Business be in breach of the Code of Ethics. procedures established, in order to find the Transactions. Conflicts of interest account for 19.24% of best way of complying with all the the issues dealt with. It is important to commitments established. The challenge Specifically, our company informed the note that 89.2% of the issues were queries for FY 2006 is to put into action this OECD of the regulatory frameworks in made by workers who were informing the methodology across the Telefónica Group. place at the Telefónica Group (Code of company of a family link with suppliers or Ethics, Company By-Laws, Internal other companies that carried out activities Regulations, Auditing Committees, Internal for our companies. Only in one case was it Controls, specialised units, etc. and necessary to negotiate severance due to explained how any act of this type was conflict of interests. contrary to these regulatory frameworks and thus not permissible and sanctionable This kind of issue has also been essential for unifying criteria regarding conflicts of interests arising from accepting gifts or attention, or hiring relatives.

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Telefónica considers corporate reputation, understood as the perception of a company by its stakeholders, is a key asset to guarantee the sustainability of its business.

Corporate Reputation

CASE STUDY Corporate Monitoring Indicator MERCO: Spanish Monitor for Reputation Model Corporate Reputation 2005 In December 2001, Telefónica put into action The main difficulty in applying these steps the project of Corporate Reputation for the lies in the follow-up of corporate In accordance with the results of the last Telefónica Group, and from the beginning, it reputation that companies have in society. edition of the Spanish Monitor for was established that in order to guarantee For this reason, Telefónica has taken part in Corporate Reputation, presented in the first good reputation, it is necessary for the project of the Corporate Reputation quarter of 2006, Telefónica occupies the companies to have a balance between the Forum and the Reputation Institute, geared second position among the 100 most way they behave (what they do) and their towards establishing a Corporate reputable companies in Spain. With regard messages (what they communicate). Reputation Model which can be monitored to the company leaders, the Chairman of Telefónica was the first Spanish company to periodically. Telefónica, César Alierta is in the fourth have a Board of Directors Committee in position in the list of the 100 most charge of supervising the management of The result of this is RepTrack, an indicator reputable Spanish leaders. reputation at Telefónica. with 7 dimensions and 21 attributes, used to ask survey respondents about each of In order to have a good reputation, it is the companies included in the study. The necessary (though not sufficient) to develop main advantage brought by RepTrack is business activities in a responsible manner. that it is capable of isolating the quality of This is why, at Telefónica, reputation and a company’s reputation, therefore corporate responsibility issues are managed achieving a better measurement of from the same department: the Directorate society’s qualitative perception of a General of Corporate Communication. company.

The corporate reputation management The model shows that the “offer” model shares the same five stages dimension is the most significant for the described in the chapter on corporate perception of corporate reputation in every responsibility: country. The dimensions of Leadership, Work and Citizenship have equal Internal Diagnosis and identification of • significance; followed by the dimensions of areas for improvement Governance and Innovation. The financial •External Diagnosis: dialogue with dimension of companies is that with the stakeholders to gauge expectations and least importance regarding corporate opinions. reputation in society. •Development and Launch of initiatives and projects Since June 2005, the Telefónica Group has monitored its reputation, with quarterly •Implementation in business lines and surveys in Spain, Argentina, Brazil, Chile, countries Mexico and Peru. In each of these countries, •Evaluation of Fulfilment of aims and over 3,300 people have been surveyed (the communication of performance figure rises to 4,800 in Spain and Argentina). Some of the different attributes measured with RepTrack are used by managers in different company activities.

Telefónica, S.A. | Corporate Responsibility Report 2005 56 Lo que hacemos Lo que comunicamos Clientes Empleados Sociedad Procesos de Procesos de Accionistas negocio soporte Nosotros Otros Proveedores Medios Reguladores Líderes de opinión

Lo que Lo que Lo que Lo que hacemos comunicamos hacemos comunicamos + Reputación Procesos Procesos Nosotros Otros Procesos Procesos Nosotros Otros Lo que Lo que La percepción es la realidad de negocio de soporte de negocio de soporte corporativa hacemos comunicamos Procesos Procesos Nosotros Otros La percepción de negocio de soporte Clientes Empleados Sociedad Accionistas Proveedores es la realidad Clientes Empleados Sociedad Accionistas Proveedores Medios Reguladores Líderes de opinión Medios Reguladores Líderes de opinión La percepción Clientes • Empleados • Sociedad • Accionistas • Proveedores es la realidad Medios • Reguladores • Líderes de opinión Reputación corporativa La percepción Reputación es la realidad Lo que Lo que corporativa hacemos comuinicamos Reputación corporativa

Lo que hacemos 02 Identity Procesos La percepción de negocio Lo que y soporte + Corporate Reputation Management Model es realidad comunicamos Lo que Lo que What is What is Lo que Nosotros Otros hacemos + comunicamos done? + comunicated? hacemos La percepción Procesos de Nosotros Otros • Business processes • By the company La percepción Procesos Lo que negocio y soporte • Suport processes • By others + es realidad es realidad de negocio comunicamos y soporte Nosotros Otros Perception Clientes • Empleados • Sociedad is reality Reputación corporativa Accionistas • Proveedores Corporate Medios • Reguladores • Líderes de opinión Clientes • Empleados • Sociedad reputation Clients • Employess • Society Clientes • Empleados • Sociedad Reputación Accionistas • Proveedores Shareholders• Suppliers Reputación Accionistas • Proveedores corporativa corporativa Medios • Reguladores • Líderes de opinión Media • Regulators • Opinion leaders Medios • Reguladores • Líderes de opinión

Alliances

Despite Telefónica having a good Alliances for understanding how to reputation among professionals and manage Corporate Reputation country managers (2nd position in the Spanish Monitor of Corporate Reputation Corporate Reputation Forum – MERCO 2005), the RepTrack results show Founded in September 2002 by Aguas de areas for improvement in society’s Barcelona, BBVA, Repsol-YPF and Telefónica, perception of the company in all RepTrack the FRC (Spanish acronym for Corporate dimensions and in all countries. Reputation Forum) is an initiative by which companies share knowledge and The total results present strengths in the experience in management of corporate dimensions of leadership, finances and reputation. innovation; at the same time as clear areas for improvement in the governance and With the incorporation of Abertis, Ferrovial, citizenship. By countries, Spain is the country Gas Natural, Iberdrola, Iberia, and Renfe in with best results compared to the average, 2003, the FRC groups almost 50% of the and Argentina and Brazil are the countries IBEX 35. The FRC primarily aims to become where the Group’s reputation is weakest. a meeting place for the analysis and dissemination of trends, tools and models Throughout the different RepTrack of corporate reputation in company measurements, improvements have been management. recorded regarding the company’s reputation in society in all countries except Reputation Institute Brazil. Aware that there are many public In 2004, el Reputation Institute (RI) and the myths about Telefónica, the company’s Corporate Reputation Forum (FRC) signed management has established RepTrack as an Alliance by means of which the FRC one of the key indicators to monitor the became the representative of RI in Spain compliance of the strategic aim of being a and channels its activities. (see Corporate “committed and responsible leader”. Reputation Forum above).

The report on corporate responsibility In 2005 the Reputation Institute held includes Telefónica’s results in the different its Annual Conference in Madrid RepTrack attributes. with the collaboration of the Corporate Reputation Forum.

Telefónica, S.A. | Corporate Responsibility Report 2005 57 02 Identity

During 2005, the Telefónica Group has reviewed its brand strategy and architecture model. The aim is to strengthen the commercial relation with customers and to transmit corporate values to the company’s stakeholder groups.

Brand

Strategy Model and Brand Architectur

Over 13,000 brand This model defines the roles, criteria and Corporate Values are the Foundations hierarchies of the Group’s brands, described of the Group registrations through the principles of identity and a They are the starting point and establish the graphic coherence between brands. Some of path along which the commitments its main features are: acquired by Telefónica towards its 2,650 domain names stakeholders to gain their trust are provided Masterbrand with specific content. Telefónica, the Group’s main brand, thanks to its institutional profile and the values Brand attributes associated to it, provides the backing and Telefónica builds its brands based on two guarantee to the commercial offer associated main functional attributes: Leadership and with the commercial brands, providing them Innovation, which take form in the Group’s with prestige. capacities; and two emotional attributes: Proximity and Commitment, which seek to Commercial brands provide the brand with personality and to They provide the commercial offer with make the relationship with customers closer. closeness and freshness, differentiation and relevance, making it more approachable and Telefónica’s Positioning believable. They also rejuvenate and refresh For Telefónica, understanding and satisfying the “masterbrand”. the needs of the people it relates to are its ultimate aims. Only this way, the company Brand family system will be able transform its technological The family system is strengthened by means innovations into accessible communication of a solid and inseparable relationship. It does solutions that make customers’ life easier not involve co-branding or endorsements, but and better, and contribute to developing it is rather a system that favours mutual society. benefits between the Group’s different brands. The graphic system defines colours, codes, Tone of Voice formats, styles and typography that transmit a During 2005,Telefónica’s voice perimeter and balanced and coherent vision of the Group. tone of communication has been implemented, as reflected in its “Brand Principles of Brand Strategy Manifesto”. and Architecture Telefónica manages it brand strategy and Telefónica Group’s architecture by means of its identity Brand Portfolio principles and a graphic coherence between As at December 31, 2005, the portfolio of its brands: brands and domain names of Telefónica, S.A. exceeded 13,000 brand registrations and 2,650 domain name registrations worldwide.

Telefónica, S.A. | Corporate Responsibility Report 2005 58 02 Identity

Mobile Telephony Brand Name Recognition Data from Telefónica Móviles (Accumulated for year 2005). The brand Movistar was launched in 2005.

Top of mind Market position based on total mentions Total mentions

94 95 93 87 87 88 83 84 77 75 98 67 66 55 49 50 39 41 37 36 29 29 25 1 22 1 1 1 21 18 2 2 2 2 2 2 3 3 3 Spain Argentina Peru Chile Mexico Colombia Venezuela Guatemala El Salvador Uruguay Panama Nigaragua Ecuador Source: Advertising Tracking and Brand Equity 2005. Millward Brown Brand Committee Tools for measuring brand strength

The Brand Committee has consolidated Telefónica has developed a set of common itself during 2005, and is a technical body tools for information management and reporting directly to the Management analysis for all lines of business and Committee, led by the General Director of countries, with the aim of constantly and Corporate Communication and comprised systematically monitoring recognition, of the technical managers of the various image, satisfaction and suitability of its business lines and country corporate brands with regard to its different publics. centres, on occasions involving other In the category of fixed telephony, the corporate departments for specific issues. • Telefónica brand has high levels of Its mission is to safeguard the correct recognition. execution of the Group’s new Brand Strategy and Architecture Model. •In the category of mobile telephony, taking into account the launch of the To this aim, the committee has full new commercial brand in countries competencies to: where it was not present, the Group’s mobile telephony operations have Catalyse the visions, objectives and needs • achieved similar and in some cases of the lines of business and the higher recognition levels with regard to countries, as a consulting body of previous brands. Telefónica S.A.’s Management Committee •Channel all the Group’s initiatives related to brand (communication, advertising, Fixed Telephony Brand Name Recognition sponsorships, fairs, events, etc.) with the Source: Advertising Tracking and Brand Equity 2005. aim of ensuring its correct alignment Top of mind Market position based on with the established Brand strategy and Total mentions total mentions architecture model. •Promote the process of implementation of the brand architecture system, 97 10 98 98 99 developing regulations, processes, 86 projects and initiatives in order to strengthen the system if necessary. 73 62 63 48

1 1 1 1 1

Argentina Chile Peru España Brazil1 1Non-accumulated data corresponding to December, 2005

Telefónica, S.A. | Corporate Responsibility Report 2005 59 02 Identity Main Principles of Telefónica Group’s Brand Strategy and Architecture Model

1 Telefónica is the Group masterbrand 2 Telefónica

Telefónica, S.A. | Corporate Responsibility Report 2005 60 02 Identity

Chile

Nicaragua Argentina CASE STUDY World launch of “movistar”

movistar was the first commercial brand to adapt its identity to Telefónica Group’s new strategy and architecture. This new model can be seen through the co-existence of Ecuador the Telefónica masterbrand and the commercial brand movistar on a blue band that acts as a visual link for both brands.

The brand was launched simultaneously in Uruguay Colombia 13 countries. The first phase started on March 28, with the advertising campaign, whose aim was to create great expectation. On April 6 the Group’s brand Strategy and Architecture model and movistar’s new Spain image, was unveiled to the world, entering into the life of 400 million people. The image campaign was complemented with attractive discount promotions and services, and brought about the brand image replacement in 25,000 movistar shops. Mexico Peru After the launch, we can say that the co- existence system between the Telefónica and movistar brands, has proved that this degree of linkage improves customer recognition of both brands.

Panama

Guatemala Venezuela

El Salvador

Telefónica, S.A. | Corporate Responsibility Report 2005 61 02 Identity

Telefónica takes part in many activities in society through the sponsorship of sports, technology, culture and social events. In total, during 2005 819 sponsorships projects were carried out.

Sponsorships

Telefónica wishes to communicate Culture sponsorships Sports sponsorships its presence and support to activities Diccionario Panhispánico de Dudas Telefónica Group has continued backing carried out in society, and to this aim (Pan-Hispanic Dictionary of Queries), which Spanish Formula 1 driver Fernando Alonso it has a sponsorship portal is the result of a collaboration agreement and the Renault F1 Team. 2005 has been an (www.telefonica.es/patrocinios) with the Real Academia Española de la important year for them, with their which is the external window for the Lengua (Royal Academy of Spanish Spanish pilot becoming the first ever actions it promotes and carries out Language). This significant work has been Spanish Formula 1 World Champion, and in all fields: sports, culture, society, carried out with the participation of the 22 the team itself winning the team World etc... Spanish Language Academies, among Champion title. which all Latin American countries are Telefónica continues to support football as represented. With this project, Telefónica the sponsor and exclusive supplier of has intended to strengthen its interest in telecommunications for the two main the dissemination and promotion of the Spanish teams: Real Madrid C.F. and F.C. Spanish language worldwide. Barcelona, and has signed a support agreement for Expo Zaragoza 2008 Monographic exhibition on artist through the Zaragoza S.A.D. football club. Juan Gris at the Museo Nacional Centro Likewise, it has started a social sponsorship de Arte Reina Sofía, which has received over programme for football that successfully 160,000 visitors. promotes initiatives such as the Movistar Cup of Cultures and the Mundialito 4th Centenary of El Quijote: Telefónica Solidario, both aimed at an important has wanted to be present in this important sector of the population: immigrants. With homage through the development of a this programme, Telefónica wishes to use webpage aimed at schools, with interactive this popular sport as a tool for integration. educational content which allows users to learn through games about important In addition to the initiatives mentioned aspects of this novel and its historical above, Telefónica wishes to be closer to the context. Over 10,000 Spanish schools have societies in which it operates by supporting taken part in this project through local activities of a cultural or sports EducaRed, as well as people from different nature. In this sense, in Spain Telefónica countries: 60% percent of the 194,000 sponsored Madrid’s Popular Marathon in visits made have been international, while 2005, which brought together 13,000 40% came from Spain. runners, whereas in Latin America it supported a large number of popular and Music cultural festivals such as the San Pedrito de As in previous years, Telefónica Movistar Chimbote festivities in Peru or the Carnival has wanted to approach the younger public in Rio de Janeiro in Brazil, among others. through music, and has sponsored concerts These are examples of these activities and tours in Latin America and Spain of which all transmit an image of proximity, artists such as Shakira or Carlinhos Brown. that of a global operator with a local focus.

Telefónica, S.A. | Corporate Responsibility Report 2005 62 02 Identity

Distribution of sponsorships by Countries Distribution of sponsorships by line of Distribution of sponsorships by activity Data in number of sponsorships business Data in number of sponsorships Data in number of sponsorships

Spain LATAM Telefónica Others Sports 297 133 Móviles 362 174 Chile 436 Mexico Telefónica 30 1 S.A Ecuador Brazil 83 116 77 Others Nicaragua Guatemala 82 19 17 Social Culture Argentina Venezuela Telefónica 102 181 51 78 de España Panama Peru El Salvador 105 17 63 19 Other includes technological, academic, exhibition and forum sponsorships.

Social action Other sponsorships CASE STUDY The Group’s social action is mainly Telefónica also takes part in other types of channelled through the Fundación sponsorships whose aim is to actively Management of Telefónica’s Telefónica, whose strategy and activity involve and commit the company to the Sponsorships programme is especially focused on the promotion and development of the field of education, which accounts for most Information Society. To this aim, it works During 2005, 2,657 requests for of the budget and is complemented with hand in hand with public and private sponsorships have been received from all other volunteering activities and art and bodies who share this aim, through the over the world, which were processed technology programmes. sponsorship of business forums, internally by Telefónica. Of these requests, conferences and international symposiums approximately 30% were approved. Within the field of education, the following that bring together the sector’s main are some of the most important representatives, such as: Internet Global The Sponsorship Office is the department programmes: EducaRed, which is a network Congress 2005, Broadband World Forum that receives sponsorship requests from of 10,000 schools across Spain and Latin Europe 2005, etc.... institutions and bodies presenting their America connected via Internet for training sponsorship proposals. On a monthly basis, and sharing resources, aimed at teachers This strategic line is also reflected in the committees are held where all sponsorship and students (both children and participation in Technical Institutes, projects are presented and discussed by adolescents), and the Proniño project, Academies, University Chair Programmes, Telefónica Group’s lines of business. These whose main aim is to eradicate child labour etc. It therefore involves collaborating with sponsorships have previously been trough training and support to children in sources which generate knowledge in the approved by the lines of business and their Latin American countries. field of Information Technologies. budget justified.

In 2005, once again, Telefónica has provided technological support, by means of the installation of lines and telecommunications services, for the main meeting of internet users in Europe: Campus Party at Valencia.

Telefónica, S.A. | Corporate Responsibility Report 2005 63 02 Identity Credits

Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

Telefónica, S.A. | Corporate Responsibility Report 2005 64 02 Identity

Telefónica, S.A. | Corporate Responsibility Report 2005 65 03 Driving Progress

Telefónica is one of the main driving forces behind the economic, technological and social development of the countries where it operates

Telefónica, S.A. | Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, driving progress for all 6

00 Telefónica in 2005 8

01 Corporate Governance 20

02 Identity 32

03 Driving progress 66 Driving economic development 68 Impact of Telefónica’s activity 68 Distribution of income 72 Evolution of rates 74 Impact of telecommunications on productivity 76 Driving technological progress 78 Information Society 78 Innovation 82 Telefónica I+D (Research and Development) 90 Collaboration with the University Sector 92 Information Systems 96 “Information Society” Report 97 Institutional Collaboration 98 Driving social development 100

04 Customers 104

05 Shareholders 168

06 Employees 178

07 Society 226

08 The Enviroment 252

09 Providers 292

10 Media 304

11 ANNEX I 310

Telefónica, S.A. | Corporate Responsibility Report 2005 03 Driving progress

Impact of Telefónica’s activity Driving Distribution of income economic development Evolution of Rates Impact of Telecommunications on Productivity

Impact of Telefónica’s activity

In the course of 2005, Telefónica has Investments in infrastructure (Capex) consolidated its position as the operator of corresponding to FY 2005 amounts to over reference in each of the countries where it 5,358 million euros, a 42% increase with operates, as a result of its firm regard to FY 2004. Broken down by commitment to economic, technological business line, Telefónica de España and social progress and development, as contributed 26% of the total, Telefónica well as its will to adapt to the reality and Latinoamérica contributed 20% and needs of each of these countries. Telefónica Móviles contributed 43%, the two latter representing an increase in Telefónica, as one of the leading national investment close to 40% compared to companies in each of the countries where 2004. These figures do not include UMTS it operates, assumes its role as a driving licenses, or capitalisation of expenses, but force behind the national economy. In do include activation fees. 2005, Telefónica has become a more regional company, as a result of its The number of suppliers awarded contracts commitment to investment and to with Telefónica Group worldwide exceeds adapting to the needs of each of the 18,000. An average of 85% of the total sales markets where it operates. This regional volume is awarded to local suppliers. character is reflected in the distribution of The company has paid over 7,200 million its revenue; 48% of its revenue in 2005 is euros in taxes, including direct taxes, from countries other than Spain (40% in indirect taxes, tax withheld, local taxes and 2004). levies. This figure does not include social security payments or licenses. On the other During 2005, Telefónica has once again hand, the Group has benefited from tax shown its commitment to the deductions valued at 340 million euros, development of its economies; generating understanding as such the tax credit an average of 1.7% of the GDP in the main granted for certain activities or investment. countries where it operates. Moreover, Of this amount, 333 million euros Telefónica Group plays an important role in correspond to Spain, 2 million euros to redistributing wealth among all its Brazil and 5 million euros de Chile. stakeholders; approximately 45% is redistributed among its suppliers, 16% goes to the various Public Administrations and 8% is devoted to financial remuneration to its over 200,000 employees worldwide.

1 This information has been consolidated on an accrual basis, whereas the redistribution of income has been calculated on a cash basis.

Telefónica, S.A. | Corporate Responsibility Report 2005 68 03 Driving progress

Distribution of revennue of Telefónica by country1 In percentages

2002 2003 2004 2005

61.6 58.5 60.3 51.9

18 16.9 17.2 7.4 3.7 5.3 5.2 18.2 6 4 4.9 1.9 4.5 7.2 4.2 4.5 2.1 4 6.2 5.2 4.2 2.7 3.4 2.3 3.8 2.7 2.1

Spain Argentina Brazil Chile Mexico Peru Venezuela2 Czech Colombia2 Others Rep. 1 Taking into account the contribution of each country to Telefónica Group’s consolidated revenue 2 Data corresponding to 2002, 2003 and 2004, not significant.

Percentage of revenue of Telefónica with regard to GDP1 In percentages 2002 2003 2004 2005

2.5 2.3 2.4 2.3 2.2 2.4 2.3 2.0 2.2 2.1 1.8 1.6 1.1 1.1 1.0 1.3 1.0 1.1 1.1 1.1 0.9 0.8

0.14

Spain Argentina Brazil Chile Mexico2 Peru Venezuela2 Czech Rep.2 Colombia2 1 Taking into account the contribution of each country to Telefónica Group’s consolidated revenue 2 Data corresponding to 2002, 2003 and 2004, not significant.

Telefónica, S.A. | Corporate Responsibility Report 2005 69 03 Driving progress Impact of Telefónica’s activities in the World

Present in 19 countries Income of 37,882.1 >1.5 million shareholders million euros

54 million euros in social and cultural action 181 million accesses

18,000 suppliers 207,000 employees 2,900 million euros in innovation

Colombia Venezuela % TEF revenue: 2.1 % TEF revenue: 3.8 % TEF revenue / GDP: 0.8 % TEF revenue / GDP: 1.6 CAPEX 20051: 275.4 CAPEX 20051: 147.8 Taxes paid1: 111 Taxes paid1: 358 Thou. accesses2: 6,036 Thou. accesses2: 6,160 Employees: 4,487 Employees: 5,983 Suppliers: 1,272 Suppliers: 1,102 % awarded to local suppliers: 36.9 % awarded to local suppliers: 51.4

Brazil Mexico % TEF revenue: 18.2 1.1 % TEF revenue: 2.3 % TEF revenue / GDP: CAPEX 20051: 1,068.4 % TEF revenue / GDP: 0.1 1 1 Taxes paid : 2,894 CAPEX 2005 : 266.7 2 1 Thou. accesses : 46,406 Taxes paid :* 63,743 Thou. accesses2: 6,371 Employees: 2,161 Employees: 8,506 Suppliers: 98.8 Suppliers: 590 % awarded to local suppliers: % awarded to local suppliers: 95.8

*In 2005, Telefónica received a tax rebate.

Peru % TEF revenue: 3.4 % TEF revenue / GDP: 2.1 CAPEX 20051: 175.3 Taxes paid1: 399 Thou. accesses2: 6,668 Employees: 11,548 Suppliers: 2,338 % awarded to local suppliers: 83.4

Chile Argentina % TEF revenue: 4.2 % TEF revenue: 5.2 % TEF revenue / GDP: 1.8 % TEF revenue / GDP: 1.3 CAPEX 20051: 310.7 CAPEX 20051: 260.4 Taxes paid1: 265 Taxes paid1: 450 Thou. accesses2: 8,189 Thou. accesses2: 13,769 Employees: 12,375 Employees: 18,856 Suppliers: 1,693 Suppliers: 1,514 % awarded to local suppliers: 74.3 % awarded to local suppliers: 83.4

Telefónica, S.A. | Corporate Responsibility Report 2005 70 03 Driving progress

(1) Million euros (2) Fixed + mobile + DSL + TV The information published on this page has been obtained from internal cash flow evolution sources of Telefónica Group, and verified by the auditor of this report. The mentioned data could be subject to variations as a result of subsequent events and evolutionary effects that could cause changes in their content. This information has been consolidated on an accrual basis, whereas the redistribution of income has been calculated on a cash basis. For a detailed analysis of the consolidated financial statements of Telefónica Group, the audited information is included in the annual accounts report. Countries representing over 2% of Telefónica’s revenues are included. Telefónica revenues in each country are taken as the country’s contribution to Telefónica Group’s consolidated revenue.

Country % TEF revenues: Percentage contributed by the country to Telefónica’s revenues, calculated on the basis of the contribution to Group’s consolidated revenue. (%). % TEF revenues / GDP Ratio of Telefónica’s revenues (contribution of the country to the consolidated revenues of Telefónica Group) and the estimated GDP for the country. (%). CAPEX 2005: Consolidated investment in country by Telefónica in the Financial Year (millions of euros). Taxes Paid: Taxed paid in the country during the financial year (millions of euros). Thou. accesses: Number of fixed + mobile + DSL + TV accesses (thousands). Employees: Direct employees of Telefónica Group in the country (as at December, 31, 2005) Suppliers: Suppliers awarded contracts in the country in 2005. % of contracts awarded to local suppliers: percentage of contracts awarded to suppliers with registered address in the country with regard to total number of contract awards, based on awarding volume.

Spain Czwch Republic % TEF revenue: 51.9 % TEF revenue: 2.7 % TEF revenue / GDP: 2.2 % TEF revenue / GDP: 1.1 CAPEX 20051: 2,485 CAPEX 20051: 183.2 Taxes paid1: 2,789 Taxes paid1: 179 Thou. accesses2: 41,819 Thou. accesses2: 8,298 Employees: 60,405 Employees: 10,051 Suppliers: 4,234 Suppliers: - % awarded to local suppliers: 93.7 % awarded to local suppliers: -

Countries that represent over 2% of Telefónica’s revenues Other countries where Telefónica is present.

Telefónica, S.A. | Corporate Responsibility Report 2005 71 03 Driving progress Distribution of income These pages aim to provide a summary of the contribution by telefónica Remuneration to shareholders is one of the basic aspects of the economic activity to society. The examination of the economic flows the market economy in which the Telefónica Group operates. To the direct payment of dividends, whose total amount is included in Telefónica Group is involved in, shows the distribution effect among the the chart, other non-monetary retributions are added, such as diferent social groups, such as suppliers, employees, public administrations, the re-purchase of shares and their subsequent amortisation. lending institutions, shareholders and customers. Divestiture Shareholders Other 4,119 4, 822 Employees Financial 905 suppliers 4,213 Telefónica Group has over 207,000 3,075 employees, and is one of the companies that generates the most employment in Spain Credit institutions represent a and Latin America. The figure includes source of funds for growth and salaries, pensions and employee benefits, development. In this sense, the other remunerations and incentives for early Telefónica Group develops an retirement, and leave. intense financial activity, bringing dynamism to the sector in some of the countries where it operates Investment 10,524 Telefónica’s profitable growth strategy is based on the investment in assets which make it possible to expand the business in the future (mainly investment in innovation, market development and one-off acquisitions) and the divestiture in non-strategic assets. Total Income

Customers 43,482 Public The 154 million customers 51,581 Administrations worldwide as at the end of FY 2005 8,511 appreciate the added value A Group of the size of Telefónica makes an provided by the services offered by important contribution to the public funds the Telefónica Group. This figure Total Payments of the countries where it operates through includes income from customers direct taxes, license fees and indirect taxes. and from the rest of operators. On The figure also includes payments to Social average, these services account for Security, the transfer of value-added taxes, approximately 1.70% of the Gross taxes on consumption, local taxes and Domestic Product of the main retained taxes. countries where the Group operates (average figure for Spain, Argentina, Brazil, Chile and Peru). Suppliers Commercial 19,087 CapEx 4,423 Telefónica Group redistributes great part of its income across the over 18,000 companies with which it collaborates in the countries (1) Million euros (2) Fixed + mobile + DSL + TV where it operates. This contribution is of a The information published on this page has been obtained from internal cash flow evolution sources of Telefónica Group, and verified by the auditor of this report. The mentioned data could local nature in each country, as can be seen be subject to variations as a result of subsequent events and evolutionary effects that could from the fact that, on average, 85% of the cause changes in their content. purchasing volume for each country is made This information has been calculated on a payment basis, whereas the the information to local suppliers. The figure provided here contained in earlier pages has been calculated on an accrual basis. For a detailed analysis of the consolidated financial statements of Telefónica Group, the audited also includes payments for interconnection information is included in the annual accounts report. services with the rest of the operators. This data only includes countries that represent over 2% of Telefónica’s revenue.

Telefónica, S.A. | Corporate Responsibility Report 2005 72 03 Driving progress Distribution of income These pages aim to provide a summary of the contribution by telefónica Remuneration to shareholders is one of the basic aspects of the economic activity to society. The examination of the economic flows the market economy in which the Telefónica Group operates. To the direct payment of dividends, whose total amount is included in Telefónica Group is involved in, shows the distribution effect among the the chart, other non-monetary retributions are added, such as diferent social groups, such as suppliers, employees, public administrations, the re-purchase of shares and their subsequent amortisation. lending institutions, shareholders and customers. Divestiture Shareholders Other 4,119 4, 822 Employees Financial 905 suppliers 4,213 Telefónica Group has over 207,000 3,075 employees, and is one of the companies that generates the most employment in Spain Credit institutions represent a and Latin America. The figure includes source of funds for growth and salaries, pensions and employee benefits, development. In this sense, the other remunerations and incentives for early Telefónica Group develops an retirement, and leave. intense financial activity, bringing dynamism to the sector in some of the countries where it operates Investment 10,524 Telefónica’s profitable growth strategy is based on the investment in assets which make it possible to expand the business in the future (mainly investment in innovation, market development and one-off acquisitions) and the divestiture in non-strategic assets. Total Income

Telefónica, S.A. | Corporate Responsibility Report 2005 73 03 Driving progress

Evolution of Telefónica’s basic rates Accumulated Average Annual change Average Annual change with 1998-2005 change regard to CPI Metropolitan 4.1 0.5 IPC- 2.9 Provincial (47.1)(-5.9) IPC- 9.3 National (64.8) (-8.1) IPC- 11.5 International (53.7) (-6.7) IPC- 10.1 Fixe-mobile (51.8)(-6.5) IPC- 9.9 Average (40.6) (-5.1) IPC- 8.5

Evolution of Rates

Rate reduction provides Telefónica de España has been applying In the sector of mobile telephony, it is constant reductions to their rates over important to point out that the rates for consumers with higher recent years, which has contributed to Movistar customers in Spain saw an purchasing power and improving customers’ purchasing power average reduction of 12% in FY 2005. Given and has made telecommunication services that Movistar customers represent 50% of has an anti-inflation more accessible for society in general. the Spanish population, it is natural to impact on society Specifically, customers of Telefónica de identify this reduction in the rates with an España have witnessed an average increase of available income for citizens. annual cut in rates for traffic services of 5.1% since 1998. As a result, it is important to note that in Spain, communications are the only component of the consumption basket and the only sector within public utilities whose rates have constantly been going down since the year 2000.

In Latin America, rates have evolved at a slower pace than inflation in most countries, especially in Argentina, where rates have been frozen.

CPI Spain: Rate of variation in Annual Average Source: INE 2000 2001 2002 2003 2004 2005

Food and non alcoholic beverages 3.2 5.9 4.6 4.1 3.0 4.2 Alcoholic beverages and Tobacco 3.8 4.2 4.6 2.8 5.5 5.1 Clothing and footwear 2.3 3.2 5.3 2.5 2.1 1.4 Housing 4.6 1.8 2.9 2.8 4.1 6.0 Household 3.0 2.8 2.4 1.7 1.8 2.2 Medicine 2.3 2.7 2.6 2.0 0.2 0.7 Transport 6.3 -2.9 5.0 1.0 6.0 6.2 Communications (2.0) (2.6) (5.1) (0.2) (0.7) (1.7) Leisure and culture 5.1 4.3 1.8 0.1 -0.1 0.6 Education 5.5 4.1 4.7 4.3 4.2 4.1 Hotels, cafes and restaurants 4.6 4.7 5.8 4.1 4.2 4.3 General index 4.0 2.7 4.0 2.6 3.2 3.7

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CPI: Rate of Variation in Annual Averages Residential Local Rate CPI 172 Argentina Brazil1 Peru 152 145 140 131 129 120 111 112 109 106 106 100 100103 103 100 100 100 100 103 94 100 81

2002 2003 2004 2005 2002 2003 2004 2005 2002 2003 2004 2005 Source: Internal

1 1 In Brazil, in accordance with the government concession contract, the CPI is not used as a variation index. The index used up to December 2005 was the IGP-di (General Price Index, Domestic Availability), which comprises 10% of civil construction prices, 30% of consumer prices and 60% wholesale prices, with the latter being subject to substantial fluctuations in exchange rates.

CASE STUDY Estimated evolution of average consumption basket of Fixed Impact of rates on revenue Telephony Customers in Spain (Constant euros per line) per customer Businesses These rate reductions have been passed on to the customer, as is reflected in the 85.4 5.7% average annual reduction in mean 77.7 monthly revenue. 67.9 Average The regulation of the 59.2 57.3 telecommunications sector has given 55.5 48.6 priority to price competition rather than 44.1 to service innovation, as the favourable 40.5 Residential 36.9 access conditions to Telefónica’s 36.6 36.2 network has allowed the incoming 39.0 operators sufficient margin to make 35.3 33.3 31.1 31.3 31.1 attractive offers to the end customer. 1999 2000 2001 2002 2003 2004

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Impact of telecommunications on productivity

It is important to note the indirect impact Wider commercial reach: companies that of the services offered by the Telefónica use the Internet as a channel for their Group companies on the dynamisation of relations with clients offer better access to the economy in the main countries where their services, with fewer physical office it operates. Thus, the actions carried out to and human resources requirements. In reduce the digital divide, the reduction of addition, they can extend their offer to service rates, the increase of broadband in other regions. Internet access and connectivity, have a More efficient commercial transactions: significant impact on the increase in the possibility of accessing, in real time, productivity levels of the different information regarding availability, prices, economies. warehouse products or delivery times, brings valuable benefits in terms of Positive impact of ICTs on the negotiation with clients. productivity of companies Improvement in internal management to The adoption and use of Information and offer better service to clients: offering the Communication Technologies (ICTs) on possibility of personalising the offer, with a behalf of companies and citizens seems to higher degree of flexibility to adapt to have a positive impact on productivity and clients’ needs and coordinating relations economic growth in general. This is due to between clients and suppliers. the fact that these technologies have brought opportunities for the development New approaches to work: more focused on of new business, and the improvement of achieving aims than on fulfilling time- existing business processes. The possibility tables; thanks to connectivity it is easier to of reducing costs, the efficient use of work, regardless of time-tables and places. resources and the possibility of increasing Modernisation of primary and industrial markets have contributed to citizens sectors: global positioning systems, benefiting from products of increasing geographic information, remote control… quality at lower prices. have had a spectacular impact on the The following is a summary of some of the improvement of the performance of positive impacts of ICTs on the natural resources, industrial machinery, and improvement of productivity in business distribution sectors. sectors and countries:

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Implementation Difficulties CASE STUDY

Despite the benefits associated with new Effects of the investment of ICTs on technologies, the penetration of ICTs in the productivity business environment is a slow process, as Lastly, it is likely that the improvements there is no consensus as to the link There is general consensus regarding the • in the organisation of the production between the use of ICTs and increased importance of ICTs for economic growth, linked to the use of ICTs have a positive productivity. and their contribution to the growth of effect on the total productivity of the productivity, which the literature divides factors. Ignorance and lack of training in new into three channels of influence: technologies are the main obstacles faced by companies that do not perceive the •Firstly, the ICT sector itself is expected to Studies of the European economy show advantages of investing in ICTs for their see an increase in production and that the growth of ICT production lines and companies. productivity as a consequence of the the increased use of these goods as a innovation implemented in the sector. productive factor, have had a positive effect on GDP growth. The clearest conclusion from this brief •Secondly, and as a result of the first diagnosis is that investment in ICTs will not point, the rest of the production lines are ICT investment, therefore, is a necessary improve business productivity and society’s likely to experience a reduction in costs condition to gear the economy towards the productivity in general unless employees derived from a decrease in prices and levels of growth seen in the more and work processes are adapted to the use improved quality of ICT goods and developed countries. Undoubtedly, the of these technologies. It is not only a services, which would allow an increase stimulation and incentives to invest in question of companies connecting to the in investment in new technologies for technology must be carried out in Internet, but rather of them integrating the these sectors. ICTs in their business processes in a collaboration with the Administration and productive manner. with the private finance sector. Source: Gaptel “Productividad, Crecimiento Económico y TIC” (Productivity, Economic Growth and ICTs) Report.

World GDP Growth vs. World TIC1 Growth World ICT Growth2 World GDP Growth3 5.3 4.8 4.9

4.8 4.0 4.3 3.7 3.0 1.4 0.7

2002 2003 2004 2005 2006 1 Information and Communication Technologies 2 Source: EITO 2005 European Information Technology Observatory 2005 3 Real GDP. Source: IMF (April ‘06)

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Information Society Innovation

Driving Telefónica I+D Technological Collaboration with the University Progress Information Systems Information Society Report Institutional Collaboration

Information society

Home and Citizen Inclusion Telefónica ADSL services offer different Telefónica de España takes part, by means prices and packages to cover a wide range of contributions and dissemination of citizens’ Broadband Internet access activities, in the initiative Todos.es, needs: Línea ADSL 24 horas (24-hour ADSL promoted by the Ministry of Industry, Line), ADSL Mini (ADSL Mini), ADSL a tu Tourism and Commerce and the public medida (ADSL made to measure), Tiempo business entity Red.es, whose main Libre ADSL (ADSL Leisure), Dúo ADSL (ADSL objective is to sensitise citizens and Duo), Trío ADSL (ADSL Trio), etc. increase their awareness of the advantages of the Information Society, and this way, try Telefónica de España achieved its aim of to breach the digital divide. exceeding the figure of 200,000 Imagenio customers during its first year of operation Telefónica de España is sponsor-founder of in the Spanish market. Telefónica de FUNDETEC, a foundation that participates in España’s interactive digital television is the initiative regarding the “Literacy and good available to four million homes in the 140 use of digital contents”. It is aimed, in most populated cities. The marketing of particular, at collectives that are uninitiated in Imagenio started in Madrid and Barcelona the digital world, and that are therefore at risk and was extended to the entire national of digital exclusion, or belong to what is territory within six months. known as the “digital divide”: Housewives, The Multisectorial Association of Spanish immigrants, senior citizens, rural citizens and Electronics and Communications Companies disabled people. The foundation organises (ASIMELEC), of which Telefónica de España training sessions for these collectives, forms part, approved the first set of collaborations with public and private entities regulations to achieve standardisation and to undertake projects for these collectives, normalisation of technologies for the Digital and, every year, awards the FUNDETEC prizes, Home. This first set of regulations has the in recognition of the work of public or private aim of establishing a framework of reference entities that contribute to the digitalisation of for the design of these services, which these less favoured collectives. enables both the evaluation of homes and the establishment of a solid foundation for Telefónica Móviles de España has published a its approval, promotion and adoption. Catalogue of Mobile Services for Social Integration: Information regarding the offer of ASIMELEC has also approved the timeline mobile services aimed at becoming a tool for for delivery of other services that will overcoming specific situations of disability conclude at the end of this year with the and special needs (elderly citizens, etc.). creation of a Digital Home Quality Seal, which will be of great use for real estate Telefónica de España has reached the developers, construction companies and figure of three million ADSL lines in end users. operation, of which 92% are retail accesses.

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The key to the promotion of the Information Society lies in managing to transform its potential benefits into actual benefits for its users. To achieve this, together with the development of basic infrastructure and significant efforts in terms of studies, meetings and publications, Telefónica develops, in collaboration with other companies, services geared to improving productivity of the different business sectors and Public Administrations.

The following are some of the activities carried out by Telefónica within the framework of the classification established by the “Plan Avanza 2006-2010 para el desarrollo de la Sociedad de la Información” (Plan Avanza 2006-2010 for the Development of the Information Society).

Competitiveness and In 2002, Telefónica de España launched the innovation electronic phone bill, e-Factura, accessible through its website telefonicaonline.com. Telefónica’s position with regard to the The aim of this initiative is to minimise SMEs, Businesses and Professionals postal delivery of bills to the customers’ segments is to provide a range of homes, with the consequent savings in customer-oriented services, in such a paper, postal costs and the increase in manner that the user is not only buying a comfort for the customers brought by the product, but also acquiring global possibility of referring to their bill as and communications solutions adapted to each when they wish, by simply accessing the specific case, in an integrated, modular website. manner and with a single interlocutor.

Telefónica de España signed an agreement In 2002, Telefónica launched a wide range for the installation of WiFi coverage at 118 of DSL Solutions for SMEs, which attempts delegations of the Asociación Española de to offer a value-added service to business Centros de Negocio (Spanish Association of professionals, so that they can focus Business Centres), which handles 30,000 exclusively on advancing their businesses. business people a year, to whom it provides In this sense, during 2005, Telefónica secretarial, diary management and physical launched the solutions “ADSL Jurídico” space services… (ADSL Legal),“ADSL Gestión y Estrategia” (ADSL Management and Strategy),“ADSL Telefónica has signed an agreement with Legal Construcción e Inmobiliarias” (ADSL the Council of Spanish Medical Societies Legal Construction and Real Estate),“Sector whereby it has become its technology Calzado” (Footwear Industry)... partner for everything related to Telefónica and the Fundación Banesto information technology and promote the implementation of electronic telecommunications projects. invoicing between Spanish companies. The implementation of electronic invoicing Telefónica de España will implement a brings important savings to companies, private network of over 3,000 chemists in which can reduce their invoice Catalonia to support the launch of management expenses by 90%, before electronic prescriptions. even taking into account elimination of errors.

Telefónica, S.A. | Corporate Responsibility Report 2005 79 03 Driving progress

Education in the Digital Era Public Digital Services The Programme EducaRed, created in 1998 Telefónica, in a Temporary Business Association by Fundación Telefónica, who manages it, with Indra and Software AG, will develop the aims to universalise the use of the Internet new Electronic Spanish National Identity in primary and secondary education and Document for the General Directorate of State promote the educational use of the Net by Assets.This National Identity Document will teachers, pupils, parents and schools. Over incorporate an electronic chip that will allow 11,000 schools are registered with the use of digital identity certifications and EducaRed, with over 350,000 teachers and electronic signatures, offering a higher degree more than 3,500,000 pupils. The EducaRed of security in e-commerce transactions and portal has almost half a million pages of the deployment of advanced electronic contents, tools and services, and it is administration services. considered by the experts to be one of the educational portals of reference in Spanish Ciudad Móvil (Mobile City) is a portfolio of language. services aimed at modernising the services and management of the Central Telefónica Móviles España has organised, Government with citizens through their for the fourth consecutive year, a tour of mobile phones. To date, its implementation in the Universities to showcase the latest Zaragoza and Madrid has received an award mobile telephony services. in each city from the user association Autelsi.

Telefónica signed an agreement of Telefónica de Argentina and AHCIET held the collaboration with Microsoft, HP and Intel First Digital City Symposium, with a view to to help SMEs and Public Administrations presenting the best practices in Latin America. access European Union aid and subsidies. To this aim, they will develop the European Telefónica Empresas took part and sponsored Union Grants Advisor (EUGA) programme. the II Digital City Forum, organised by the There are numerous initiatives for Digital Ministry of Industry,Tourism and Commerce Training (Internet Educativa, Telefónica in collaboration with the governments of the Accesible, Educared...), details of which are "Comunidades Autónomas". provided in the chapter Society, under the section on Digital Inclusion. Telefónica del Perú, Cisco and Intel have joined forces for the launch of the project “Cusco Inalámbrico” (Wireless Cusco), which was presented within the framework of the Colloquium of the Organisation of World Heritage Cities.

Telefónica de Argentina sponsored the first binding voting poll via the Internet in Latin America, which took place in December in the province of Mendoza.The voting poll, organised by the Ministry of Health, allowed over 15,000 doctors to place their vote from more than 35 centres connected to the Internet.

Telefónica, S.A. | Corporate Responsibility Report 2005 80 03 Driving progress

Digital Context CASE STUDY Telefónica de España has won the tender launched by the Government to provide Autelsi awards Telefónica DSL coverage in rural areas in eleven four prizes Autonomous Communities in Spain. This project includes carrying out almost 15,000 During the II Convention of AUTELSI installations in 12,000 areas without The application developed by Telefónica (Spanish Association of current broadband coverage over four Móviles España called “Mobile Phone Telecommunications and Information years, using a wide variety of technologies. Protection against gender violence”. This is Society Users), the Association awarded its a computer programme with a clear social prizes. This second year of the awards, there Telefónica offers its Internet connection orientation that processes calls or were 74 candidates, opting for 11 award service customers a Security Pack with emergency calls from victims at risk of categories. Telefónica Group received four antivirus and firewall to increase security in abuse. awards: their accesses to the Internet. Telefónica I+D received an award in the A mobile portal with information on Telefónica de España offers a service called category of Environmental Care and Madrid City (Telefónica Móviles España), in Canguronet (“Babysitternet”) that allows Protection, for its project of “contribution the category of Digital City. This is a project parents to restrict access to certain of telecommunications to sustainable carried out in collaboration with the City webpages or websites on the Internet. This development”. Council of Madrid, which consists of a way, parents can select a series of pages mobile portal for all citizens and visitors to that their under-age children will not be Lastly, Mercadis, a virtual employment visit and receive information of interest able to access. market for people with disabilities, is the about the city on their mobile phones. project from Fundación Telefónica that was Telefónica took part in the second phase of awarded the prize in the Category of Social the World Summit on the Information Commitment. Society, which, promoted by the United Nations, brought together 20,000 representatives of governments, international bodies, companies and civil organisations in Tunisia.

Telefónica took part in the VIII Summit of Latin American Regulators and Operators, organised by AHCIET, under the motto “convergence and broadband: a proposal to build the future”. This event was celebrated in conjunction with two workshops on “the universalisation of accesses” and the “Transformation of services in the IP world”

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Telefónica is aware that only those companies with a solid commitment to innovation will be in a position to lead and promote the development of the Information Society.

During FY 2005, Telefónica devoted 2,900 million of euros to technological innovation, 533 of which were invested in R&D. Over 6,800 people collaborate with Telefónica in its innovation activities.

Lo que Lo que hacemos comuinicamos

Innovation

For Telefónica, innovation constitutes the Technological Innovation key to profitable and sustained growth. Model Innovation is based on transforming ideas In 2005, Telefónica launched its new into business processes that are Innovation Model, defined in 2004. This substantially more efficient and provide model focuses not only on technological competitive advantages; into profitable innovation, but also on innovation in products and services that provide value to commercial, management or process and the customer; into a flexible and work organisation areas. Its deployment personalised offer; into services that has been led by the Corporate Innovation provide solutions and into a close approach Committee, comprised of top executives of to each individual customer. As a result, any Telefónica with the aim of focusing on innovation should imply revenue growth, innovation proposals aligned with strategy. increased customer satisfaction, or a reduction in costs. To achieve these aims, The Innovation Model encourages Telefónica has defined innovation as one of collaboration with other players, who will the five strategic axes of its programme become “technological allies” (clients, Public “Forging ahead to gain leadership”. Administration, suppliers, other companies, etc.), as well as the participation of all Telefónica employees within a new innovating culture. ”

Diagram of Telefónica’s innovation process

Ideas Projects Products Evaluate and select relevant Carry our innovation projects Transfer services, solutions concepts for the business and processes to the market Generation of value for the customer, for the organitation itself, for society Collaboration with technological allies, clients, Public Administrations, other companies, universities, R&D centres

Telefónica, S.A. | Corporate Responsibility Report 2005 82 03 Driving progress

CASE STUDY

A New Innovation Culture

An essential factor for Telefónica’s transformation into an even more The Ideas block promotes and encourages •Business offer, focused on improving innovative company is the development the contribution of ideas by the employees, services for business clients and and promotion of a new innovation culture providing the means for these ideas to be designing a new service combining and that reaches all employees. To this aim, adequately evaluated, implemented and significantly improving current service Telefónica is creating specific organisations recognised. Of special interest is the features. to manage and promote innovation within creation of a new contest, Emprendedores Rationalisation of products and services the Group. (Entrepreneurs), which has allowed the • portfolio and processes, that aims to Group to identify two ambitious projects transform and optimise products and An example of the transformation that is with high financial impact that are services management at Telefónica de taking place within the new Innovation currently under development. The contest España. To this aim, we have worked on Model is the case of Telefónica de España Ideal@b has also continued its simplifying the development process and that, during 2005 and within the development, with over one thousand ideas rationalising the product portfolio that Innovation module of the meta:cliente presented during the year. makes up our commercial offer. programme, offers a framework from which to promote and cultivate innovation. The Projects block includes a group of In addition, during 2005, Telefónica Móviles In order to favour its development in all the highly ambitious projects that are deemed España has launched the second Patenta, areas of the organisation, the module is emblematic due to their strategic Fábrica de Ideas, (Patenta, Factory of Ideas) divided into three different areas for action: implications: competition, organised to recognise the Innovating Culture, Idea Generation Cycle New Ways of Working, whose aim is to best initiatives of employees related to the and Emblematic Innovative Projects. • take advantage of the move to the new Improvement of Efficiency. This year, 95 headquarters, Distrito C, as an proposals were presented. The Culture block has undertaken to opportunity to perform a cultural shift in ensure that innovation forms part of the working habits among all the employees Telefónica Internacional and TPI have also day-to-day work of all employees. To this of Telefónica de España. This made significant progress during 2005 in aim, different activities and measures have transformation will be achieved with aspects related to management and been carried out, such as training sessions, changes in technology, space and promotion of internal innovation, with contact with other companies, creativity environment that aid this cultural shift. activities geared to generating and technique sessions, internal gathering ideas, incentive policies and communication actions and projects for Home Offer, within which aspects such • recognition schemes, etc. the dissemination of innovation, work as the evolution of the Imagenio service, sessions with people recognised for their voice over IP, home domotics services, innovative character, recognition to home broadband connectivity and employees, identification of innovative customers’ home equipment have been projects, etc addressed.

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R&D distribution by country Distribution of Innovation by country In millions of euros In millions of euros R&D Spain Innovation Spain R&D Other countries Innovation Other Countries

1,591 1,309 1,303 1,234 1,164 304 305 311

222 599 140 156

2003 2004 2005 2003 2004 2005

Technological Innovation in According to data from the European Telefónica Group in 2005 Commission, in 2004, Telefónica was the Spanish company, including all sectors, In 2005, Telefónica earmarked 2,900 million which devoted the most resources to of euros, following the OECD criteria, for research and development, with an technological innovation. This is a 20.9% investment three times that of the second increase with regard to the previous company in the classification. In 2004, financial year, mainly due to the Telefónica’s investment represented 8% of incorporation of the new businesses in private investment in R&D in Spain. With Latin America and the Czech Republic. 45% regard to the companies in the ICTs sector, of this investment went to technological according to the Spanish Association of ICT innovation carried out in Spain, 23% to that Companies, in 2004, the sector devoted carried out in Brazil and 6% to the activities 1,334 million of euros to R&D, and 5,249 carried out in Argentina. Telefónica Móviles million of euros to technological innovation is, once again, with its investment in general. According to these figures, accounting for 52% of the total, the Telefónica accounts for 23% of the ICT company of the Group with the highest sector’s investment in R&D, and 22% of its proportional investment in innovation. technological innovation investment. Telefónica believes that in order to achieve better positioning in an increasingly complex market, innovation cannot only be based on technology acquisition. It is essential that the research and development activities be made the axis and focus for the rest of innovation activities in order to guarantee differential advantages over competitors. During 2005, R&D investment rose 15.6% with regard to the previous year, reaching 311 million euros in Spain and more than 533 million of euros worldwide. The latter figure is equivalent to 1.41 % of Telefónica’s total revenues.

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Technological innovation in Telefonica 2005

Reserch Development Innovation 19 533 2.900 million euros million euros million euros 2004 14,5 461 2.398

Telefónica I+D 13 17 25 31 Research Who does it? What is involved? Backed by the EU 15 Business Lines, 18 Purchase of 35 46 directly machinery and 43 Backed by Public 40 Telefónica I+D 41 equipment 47 Administrations Other external 19 Training and 18 marketing Backed by 45 companies 22 Telefónica I+D 4 Design and 18 planning 22 Backed by 41 22 Telefónica’s R&D Corporate Centre 16 Acquisition of other 2 knowledge 6 What is done? Who is involved? 25 33 15 Infrastructure 7 Telefónica Móviles 2005 Management Telefónica de 27 26 Development of 15 España 2004 Products and Telefónica Services 53 Latinoamérica Business 25 52 Others 47 Management Systems 27 Percentages (according to OECD criteria) 42

CASE STUDY Measurement of innovation, following OECD criteria

The Organisation for Economic Co- planning activities, as well as new product According to the OECD, R&D activities are operation and Development (OECD) has commercialisation. the creative work carried out within the carried out a series of studies to establish organisation, undertaken in a systematic useful indicators for innovation. These Thus, in the innovation figures published manner with a view to increasing the studies were gathered in what are known by Telefónica, the following concepts are volume of knowledge that enables the as the Frascati Manuals for R&D and the included: development of new products or processes Oslo Manual for innovation in general. or the improvement or already existing 1. Internal R&D expenses According to these Manuals, the concept ones. The R&D results can be protected of innovation refers both to the result and 2. External R&D expenses under industrial or intellectual property to the process itself. 3. Expenses derived from purchase of rights. If these activities are carried out machinery and equipment related to internally or commissioned from another With regard to the result, technological products and processes that are organisation, one can speak of internal innovations include the technologically technologically new or improved R&D or external R&D. In either case, the important products and processes of the company financing the activities assumes innovations. An innovation is considered to 4. Expenses for acquisition of immaterial the costs and will eventually be the be such when it is launched on the market technology industrial or intellectual owner of the (product innovation) or used in a 5. Expenses for design and industrial result. The following activities are not production process of goods or services engineering, service planning, and included under R&D: education, general provision (process innovation). service launching data collection, ordinary standardisation works, routine tests, administrative and 6. Training expenses related to As to the process, innovative activities that legal work regarding patents and licenses, technologically new or improved lead to the development or introduction of routine software development activities, products and processes technological innovations are: etc. technological research and development 7. Commercialisation of new or improved (R&D), acquisition of material and products. immaterial technologies for innovation, industrial design, engineering and

Telefónica, S.A. | Corporate Responsibility Report 2005 85 03 Driving progress

Number of new products of Telefónica Móviles España and Telefónica de España Mobile Services (Telefónica Móviles España) Internet and Broadband (Telefónica de España) Voice Market (Telefónica de España) 109

42 38 109 23 85 77 77 63

55 43 37 38 27

2001 2002 2003 2004 2005

Technological Innovation •During 2005, TPI launched the search 1,509 patents and utility The technological activities carried out by engine Noxtrum, one of whose main Telefónica in 2005 were geared mainly features is that it combines access to all models towards the creation of value for information available on the Internet Businesses, especially with regard to with information about companies, broadband services and mobile services. shops and businesses (Yellow Pages), 1,546 protected The following activities are some of the commercial information, telephone intellectual property highlights of 2005: books, (White Pages), images, news, etc. rights (software products) •The activities developed within the •Telefónica generates employment for framework of TV over ADSL, the Imagenio over 6,800 people in the field of Service, that have allowed the launch of technological innovation, with over 1,800 296 new products different offers in the market, such as the professionals in companies belonging to “triple play” products, combing telephony, Telefónica Group and 5,000 employees at developed by Telefónica data and television services. At the end of partner companies. I+D in 2005 2005, Imagenio had over 200,000 customers in Spain, and it was being Another of the results stemming from launched in the Czech Republic. Telefónica’s innovation efforts is the Portfolio of Proprietary Products of The development of the Broadband • Telefónica, which, as at December 31, 2005, Service Selection Portal, a joint project included 3,055 patents, models and aimed at increasing the range of industrial designs, for which the Group has broadband services in Latin America, obtained a total of 26.4 million euros in especially in Brazil, Chile, Argentina and royalties, of which 77% from products and Peru. In 2005 Telefónica exceeded the technologies developed by Telefónica I+D. figure of two million retail ADSL accesses in Latin America. •The new mobile services developed, among which the prepayment platform deployed in practically all of Telefónica's mobile operators, and those developed within the framework of the new generation of mobile technologies, taking advantage of the emerging capacities of UMTS and the new mobile terminals. These new services have contributed, for instance, to Telefónica Móviles España’s revenue during the first nine months for download, navigation and data transmission already accounting for 17% of its total revenue, a 45% increase with regard to the same period of the previous year.

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Employment Generated by Telefónica’s R&D Activities By Business Line By Country

Direct Employment Direct Employment Indirect Employment Indirect Employment 4,008 6,812 2,421 205 6,812

2.2642,264 3,477 4,186 4,989 157 4,989

2,804 531 2,520

1,512 1,666 1,292 1,823 1,823

Telefónica I+D Otras empresas Total Spain Latin America Other Total of the Group markets Management and Process CASE STUDY Innovation Telefónica's efforts in the field of MovilForum: a joint innovation are not only focused on the innovation effort launch of new services, but also on commercial and processes innovation and Within the innovation tools of Telefónica new models of work organisation. Thus, Móviles, it is interesting to point to the Telefónica has developed new establishment of the MovilForum, an management systems and substantially initiative launched by Telefónica Móviles improved those already in place, within the España five years ago to promote the framework of commercial and operational collaboration with the business world with management, aimed at designing a view to strengthening and encouraging innovative solutions for business processes, development and commercialisation of with a view both to providing them with mobility services and applications. further intelligence and increasing profitability and efficacy of the processes of Movilforum, which offers companies its Provisioning, Invoicing, Customer Service platforms and networks to carry out tests, and Infrastructure Management. free terminals and training courses, currently has 5,400 partner members and There has also been significant activity in 150 registered companies, who already the field of network and service have a catalogue of products and services management Systems, aimed at improving with over 200 different applications based infrastructure and its quality, through on mobile technology to improve business innovative solutions. management in various sectors such as Transport, Health, Insurance, Banking, Public Administration or Leisure, among others.

Telefónica, S.A. | Corporate Responsibility Report 2005 87 03 Driving progress Telefónica Innovation timeline

JANUARY FEBRUARY MARCH APRIL MAY JUNE

Innovation for our clients

Telefónica movistar Telefónica Movistar Telefónica de Telefónica de Telefónica de Telefónica launches users can now use España presents España launches España launches España tests the in Peru the first IP their mobile to pay ruta movistar, the MMS web service, new service virtual private IP network with giga in food and drink first online for multimedia "solución adsl copia network centrex ethernet capacity vending machines navigation service content exchange de seguridad" (dsl service with four in Latin America for mobiles from fixed back-up copy clients Mobipay tests bus telephony networks service) Telefónica launches ticket payment Telefónica Móviles Movistar launches the first landline through mobile launches in Mexico Telefónica de Telefónica Móviles 'multivoz' in spain, phone with camera phones in Málaga 'oficina movistar',a España launches España develops a a service where and multimedia business new “ADSL mini” service for each client pays for message functions management service for high payments under six part of the call system via mobile speed navigation, euros paying only for information downloaded

Innovation in collaboration

Telefónica, a César Alierta and Telefónica Móviles Telefónica’s text Telefónica Telefónica I+D member of the other european and Microsoft sign messaging services Empresas advances develops a Wi-fi technological Telecommunications an agreement to receive Frost & its interconnection service platform corporation of company support software Sullivan award to with a new based on free andalusia, presidents ask developers leadership in generation software collaborates in the brussels to favour Marketing Strategy technology promotion of investment and Telefónica I+D leads Telefónica sponsors R&D&i among innovation a european project 'movistar emoción' Telefónica I+D’s the series "España companies from to improve the incorporates centre in méxico Innova" (Spain Andalucia The new centre of quality of voice and exclusive video celebrates its first Innovates) that is Telefónica I+D in video over IP channel with anniversary with being repeated on Banesto and Huesca promotes communications Antena 3 news for most solutions television Telefónica the development of 3G mobiles already Empresas reach an projects with EU Imagenio, chosen implemented agreement for the backing as best innovative development of an idea by the electronic billing magazine service Actualidad Económica

Telefónica, S.A. | Corporate Responsibility Report 2005 88 03 Driving progress

JULY SEPTEMBER OCTOBER NOVEMBER DECEMBER

Telefónica de Telefónica Movistar Movistar launches TelesP launches a TPI launches pilot España concludes España launches its new “tu service offering the version of Noxtrum, first worldwide Wifi internet tiempo” (your best download its internet search experience of service for clients time) contract, speed in Brazil engine simultaneous with contract offering call navigation by sea invoicing by Movistar launches Telefónica de and via the Telefónica Móviles seconds from the first pocket España launches its internet México opens its first second computer with new "dúo ADSL demonstration videoconferencing mini (2mb) + centre Movistar Argentina llamadas launches Movistar and nacionales" offer International data Telefónica de (DSL mini duo Roaming with España introduce (2mb) + national Spain and Chile the first landline- calls) mobile videoservices in the Telefónica Móviles spanish market launches third generation services in Venezuela

Telefónica Telefónica Telefónica Móviles The Chinese Telefónica Móviles Empresas is a organises an and symbian join Minister of Science creates the largest technology partner international forces to support and Technology blackberry of the seminar on conference on developer visits Telefónica’s community in Latin Electronic service standards communities stand at the first America Signature in for the digital hispanic-chinese Barcelona home Telefónica is a science and Telefónica founding member technology forum internacional and Telefónica de of the spanish the Fundación España holds a organisation itil, Telefónica and NTT Instituto de session with Apple recommended by Docomo analyse Empresa launch a within the initiative the industry ways of research grant "conectando con la strengthening their programme in Latin innovación" Telefónica Móviles strategic alliance America (connecting to españa participates innovation) in the first tests of digital television for mobiles

Telefónica, S.A. | Corporate Responsibility Report 2005 89 03 Driving progress

Its mission is to contribute to increasing Telefónica’s competitiveness by means of technological innovation, keeping in mind that the R&D results must always be transferable to customers.

Location of Telefónica I+D Centres

Mexico City São Paulo

Telefónica I+D (Research & Development)

A great part of the R&D activities is carried During the last financial year, Telefónica out at Telefónica I+D, a subsidiary fully I+D has continued consolidating its owned by Telefónica. This company works Network of Centres of Excellence, mainly for the Group’s lines of business, transforming its company into a Network and participates in other research projects, of Technological Innovation on an both nationally and internationally. international scale. On an international front, the percentage In 2005, Telefónica I+D worked on 1,800 • of activity developed in its Centres in projects (1,660 in 2004), devoting its work Mexico City and São Paulo in Brazil has to developing products, services and increased. These centres now share the processes for Telefónica’s businesses, and to mission of supporting technological applied research financed by the innovation in the Group’s companies Corporation. This activity reflects that operate in Latin America. Telefónica’s strategy, followed for many years now, of promoting its own research •In Spain, a new Centre has been opened and development activities, as a guarantee in Granada, which complements the to ensure competitive advantages with activities that Telefónica I+D carries out regard to its competitors, and to drive the in the rest of its centres in Barcelona, rest of innovation activities. Huesca, Madrid and Valladolid. •In 2005, the Barcelona Centre has grown Thus, Telefónica I+D drives the Group’s significantly, with the implementation of technological innovation, with a double a new organisational structure. The staff role: on the one hand it develops solutions, has tripled, and a new technological platforms and networks required by strategy regarding the activities to be Telefónica, and on the other hand, it developed has been established. identifies emerging technological options which could have a relevant impact on business.

Telefónica, S.A. | Corporate Responsibility Report 2005 90 03 Driving progress

Valladolid Madrid Granada Huesca Barcelona

Applied Research CASO PRÁCTICO The new innovation model has encouraged research activities aimed at obtaining Telefónica I+D’s Scientific Advisory Council results in the medium and long terms, which can be applied transversally to Telefónica has created an advisory body to support the Group’s new Technological several business lines. The goal is to detect, Innovation Model, which establishes a new framework in the development of its R&D&i understand, develop and apply specific activities. It is Telefónica I+D’s Scientific Advisory Council, an external body called upon to aspects that may influence the evolution of contribute to the creation of new ideas, formed by world-renowned experts in the fields of technologies related to networks, service science, business and Public Administrations, from different contexts and locations where and content platforms, business and home the Telefónica Group is present. solutions or information systems. The Scientific Advisory Council was created with the aim of providing guidance regarding These Applied Research activities, within the possible scientific-technical evolution of the ICT sector; identifying its most relevant the framework of Telefónica’s corporate aspects, and lastly, providing recommendations regarding the focus of Telefónica I+D’s environment, are complemented by an research and development activities. Its current structure is as follows: extensive participation in European R&D projects, backed and financed in part by the Chairman: EU, which have contributed decisively to Andreu Mas-Colell (Chair of Economy at Barcelona’s UPF) Telefónica being the first European company in terms of participation in this Members: type of project. Enric Banda (Director General of the Fundaciò Catalana per la Reserca i la Innovaciò) Carlos Enrique de Brito Cruz (Scientific Director of the Fundaçao de Amparo a Pesquisa do Telefónica I+D is participating from 2004 to Estado de São Paulo) 2008 in 71 projects promoted by the EU, Fernando Fournon González-Barcia (CEO of Telefónica I+D) focused mainly on new multimedia José Luis Huertas (Director of the Centro Nacional de Microeléctrica of Seville) services, mobile and global Julio Linares (Director General of Coordination, Business Development and Synergies, communications and software solutions to Telefónica S.A.) provide new services. In addition, it has an Gonzalo León Serrano (Vice-Dean, Research, UPM, Madrid) important role in the EU’s initiatives to Juan Mulet Melià (Director General, COTEC) promote R&D through three European Juan Pérez-Mercader (Director, Centro de Astrobiología (CAB) technological platforms: eMobility, NEM Fernando Rey (Director of Research, Marketing and Design, Grupo Antolín-Irausa) (Networked Electronic Media) and NESSI Mateo Valero Cortés (Director, Centro Nacional de Supercomputación) (Networked European Software and Juan Vázquez García (President, Council of Deans of Spanish Universities) Services Initiative). Sergio Verdú (Professor, University of Princeton) César Vohringer (Chief Technology Officer, Philips Consumer Electronics)

Secretary: Diego Ruiz Quejido (Director General, Planning and Control, Telefónica I+D)

Telefónica, S.A. | Corporate Responsibility Report 2005 91 03 Driving progress

Telefónica is aware of the importance of the need to be in contact with all the players that take part in the process. That is why the promotion of the relationship between Universities and Businesses is a priority goal for Telefónica.

In Spain, Telefónica Group carried out 100 initiatives in 2005 with Universities and Business Schools and awarded 1,100 grants to students from different Universities across the country.

Collaboration with the University Sector

Distribution of investment in initiatives The initiatives launched by Telefónica in •The creation of Telefónica Chairs. The origin with the University Sector by business this field support both basic research and of the sponsorship of Telefónica Chairs line in 2005 applied research, encourage the training of goes back to the year 2000, although it In percentages future professionals, not only in the field of was in 2001 when most of the agreements Telefónica Telefónica ICTs, but also beyond the scope of this with the Universities were signed. The Internacional I+D sector, and generally aid the expansion of Telefónica Chairs are joint collaboration 5.8 0.2 Fundación new technologies throughout the country’s projects between the Universities and Telefónica economy. Telefónica S.A., focused on specific subjects Telefónica 31.1 S.A. related to the Information Society, and 31.6 Telefónica has three great aims in its which are held by a University Chair. relationship with the University Sector: Telefónica Academic collaboration with the de España* • Contribution to innovation, supporting University through the organisation, 0.6 • Telefónica University research groups to enable participation or sponsorship of an Móviles them to innovate, train and disseminate academic course. Telefónica in subjects of their expertise. 2.4 Móviles •Technological collaboration with the España •Development of the information society, University through projects or promotion 28.3 collaborating in the design of training plans specifically created to encourage * Includes Telefónica Empresas and Telefónica activities and grant funding for projects research on specific subjects. Soluciones or theses related to the implementation The development of educational portals: of new technologies. • EducaRed and CampusRed. The •Support for the social projection of Fundación Telefónica, with the Telefónica, through awards of prizes in collaboration of the educational this field and dissemination of community —social organisations, publications and results in the media. institutions and Administrations—has been, since 1998, investing significant The agreements and collaboration efforts in the incorporation to its relationships of the different Business Lines educational portals of the most useful of Telefónica Group with Universities and and innovative tools in the field of Business Schools are mainly focused on the educational technology. following: •The financial investment of the Telefónica Group aimed at supporting University training programmes exceeded eight million euros in the last financial year, distributed among the Telefónica Chairs, grants (with a total investment of approximately five and a half million euros) and other initiatives related mainly to academia.

Telefónica, S.A. | Corporate Responsibility Report 2005 92 03 Driving progress

Telefónica Chairs University Telefónica Chairs 2002 2003 2004 2005 Politécnica de Madrid New Generation Internet Carlos III de Madrid Studies in Telecommunications Economy Studies in Telecommunications Technology Advanced Networks and Services Autónoma de Madrid Service Economy Complutense de Madrid Master APIE (Association of Finance and Economy Journalists) Las Palmas de Gran Canaria Multimedia Experimental Services La Laguna de Tenerife Unesco Chair of Telemedicine Politécnica de Valencia Broadband and Internet Politécnica de Cataluña Technological Specialisation and Knowledge Society Pompeu Fabra Multimedia Production Zaragoza Quality, New Networks and Telecommunications Services Oviedo New Information and Telecommunication Technologies Santiago de Compostela Telemedicine Telefónica Chairs The Telefónica Chair programme has been up and running since 2001, and in its fifth year, the activity has continued its CASESTUDY consolidation process. In 2005, the financial year was closed with 12 Telefónica Chairs Criteria for assessing the activity of the Telefónica Chairs and 2 master courses at different Spanish Universities. In addition, Telefónica Móviles Its degree of technological innovation, has two Chairs at the ETSIT of the bearing in mind the quantity and quality of 59 technological innovation Universidad Politécnica de Madrid and at the projects and activities carried out projects (41 in 2004) the Universidad de Deusto. within the framework of the Chair as well as the degree of collaboration of the Chair 10 projects of collaboration with with other institutions, schools and The activity of the Telefónica Chairs is Telefónica I+D (11 in 2004) evaluated on the basis of a combination of companies of the Telefónica Group in said projects. various criteria that include turnover (30%), projects in collaboration with technological innovation (20%), academia 45 (15%), training (10%), projection and other opportunities and information visibility (10%), transparency (10%) and centres (17 in 2004) initiative (5%). On the basis of these criteria, the Chairs that are best regarded Its academic contribution, bearing in mind are the Chair of the Universidad Politécnica the quality and quantity of the courses 35 courses taught (26 in 2004) de Madrid and the Chair of the Universidad offered by the Chairs, as well as the Politécnica de Cataluña. number of students attending them. 1,969 students attending (1,254 in 2004)

1,990 training hours (2,538 en 2004)

Its training contribution, bearing in mind the grant programme linked to the Chair 91 grants related to the Chairs (both for End of Degree Projects and (91 in 2004) Theses, and in general, for the collaboration with the Chair)

Its projection and visibility, assessing the repercussion of the Chair in the field, the Participation in 28 forums, quantity and quality of the relationships conferences and meetings (32 in established and, generally-speaking, the 2004) visibility of the Chair in the Autonomous Community. 37publications (26 in 2004)

Almost all Chairs have their own website

Telefónica, S.A. | Corporate Responsibility Report 2005 93 03 Driving progress

Distribution of grants by business line

Telefónica Telefónica I+D Internacional Telefónica 237 Wholesale Data Services 66 14 TPI Telefónica 112 Móviles de España Telefónica 229 S.A. 36 T-Gestiona Telefónica 14 Soluciones Telefónica 171 Telefónica de España* Móviles 209 16

Grants CampusRed Another line of collaboration of Telefónica CampusRed.net, the portal for Universities with the University is related to the award and university students, is an initiative of grants to students in the last years of sponsored by Telefónica and Fundación their degree. In 2005, Telefónica Group Telefónica.With a clearly intercampus offered 1,104 grants to students of technical approach, it provides a powerful technological degrees from various Spanish universities platform that offers not only the possibility of (1,014 in 2004). For this collaboration, the managing and administrating courses, Telefónica Group holds 178 agreements developing research or supervising doctoral with Universities and Business Schools. theses, but also the programmes and tools required to share work. In 2002, Telefónica launched a grant programme, in collaboration with the Within the framework of this initiative, Fundación Carolina with a view to collaborations have been established with establishing a line of collaboration with the Universidad Internacional Menendez institutions working in the field of Pelayo, Universidad Pompeu Fabra, postgraduate training in new technologies Universidad Complutense de Madrid, in Latin America, for the development of Universidad Politécnica de Valencia, qualified professionals with international Universidad de las Islas Baleares, UNED, interests. The twenty-six participants in Instituto Universitario de Investigación 2005 came from the different companies of Ortega y Gasset, Universidad Rovira i Virgili, Telefónica in Argentina, Brazil, Chile and Universidad Carlos III de Madrid, Peru. The grant receivers follow trainee Universidad Autónoma de Barcelona, programmes at the Group’s companies in Universidad Antonio de Nebrija and Spain, while complementing their training Universidad San Pablo CEU. with postgraduate programmes at Spanish institutions. R&D Prizes to Innovation Since 1999,Telefónica I+D annually awards Telefónica Internacional has launched a the “Premios I+D a la Innovación” (“R&D Prizes joint call for grant applications with the to Innovation”), for which all officially Centro Euro-Latinoamericano (CEULA) of registered students in their third year or the Instituto de Empresa. The programme above in the current academic year, studying promotes applied research on subjects Telecommunications or Computer Studies, related to the Information Society and the from any University belonging to the development of Latin American countries. Autonomous Communities of Madrid, Castilla The programme is aimed at Latin American y León, Catalonia and Aragon are eligible. university teachers and researchers working in fields related to the proposed The main aim of the awards is to study subjects. The call for grant encourage and reward initiative and applications for 2005-2006 is focused on innovation efforts of students at Spanish subjects related to the digital divide and Universities, within the fields of the development of Latin America. telecommunications and computer studies. The idea is to recognise original and innovative ideas of the students, either individuals or teams.

Telefónica, S.A. | Corporate Responsibility Report 2005 94 03 Driving progress

Other collaborations with the It is a board member of the ENTER studies University Sector centre, of the Instituto de Empresa, focusing on the analysis and evaluation of Together with the Telefónica Chairs, the the Information Society and Company closely collaborates with the Telecommunications. University to promote the debate about new technologies and the information society: It has collaborated for some years with the The IESE in the organisation of the “XI Universidad Internacional Menéndez Pelayo Telecommunications Sector Conference”, in the organisation of the Encuentro sobre which focused on the convergence of Telecomunicaciones (Telecommunications services. In addition, it is a member of its Conference). In 2005, the XIX Centro de Estudios Sector Público-Sector Telecommunications Conference was held, Privado (Centre of Studies of the Public and focusing on “Time for convergence” Private Sectors).

Telefónica de España / Telefónica Empresas Collaboration agreement. Universidad de España Sevilla. I Forum Ipv6 red Iris. Universidad de Valencia Collaboration agreement. Universidad de II Conference of Distance Learning of Castilla Córdoba. y León:“Promoting the Knowledge Society”. Collaboration agreement. Universidad de Universidad de Burgos Extremadura. IV Professional Guidance Exhibition. Collaboration with the Gamelab department. Universidad de Salamanca Universidad de Oviedo Party UHU: Seminar on New Technologies, Summer courses. Universidad Europea de Communications and Computing. Madrid Universidad de Huelva Festibity 2005, Universidad de Barcelona. Telefónica I+D Murcia LAN Party 2005, Universidad de Science Week of the Autonomous Murcia Community of Madrid Expomanagement 2005. IESE Universidad Politécnica de Madrid, 17th Euromicro Conference on Real Time participation in the SATELEC seminars. System. Universidad de las Islas Baleares Universidad Alfonso X el Sabio: company presentation. Telefónica Móviles SA / Telefónica Móviles Participation in several Technology and España Employment Forums: U. Carlos III de Madrid Seminar on Telecommunications and (Foroempleo-05), U. de Valladolid Disabilities at the School of (Presentation at Technical Employment Telecommunications Engineering. Forum), U. Alcalá de Universidad Politécnica de Madrid Henares (Alcajob-05), U. Complutense de Seminars on Corporate Social Responsibility. Madrid (Presentation at Employment Days ESIC. and Computecno), U. de Salamanca Agreement for expert legal advice and (Employment Forum). consultancy in the scientific-medical field. U. Politécnica de Cataluña participation in the Universidad de Valladolid Teleccomunications and Electronics Forum. Summer courses. Universidad Politécnica de U. Pompeu Fabra sponshorship of the Forum Cartagena. U-Feina 05.

Telefónica, S.A. | Corporate Responsibility Report 2005 95 03 Driving progress

Indicators of information system performance in Telefónica Group In percentages

2004 2005 99.8 99.4 98.9 99.8

74 74 71

4 4

Degree of satisfaction Availability of critical Network % of unattended of internal clients and applications availability: calls External Benchmark Information Systems

The mission of the areas of Telefónica contributes to the improvement •Integration of ERPs of the Latin American Information Systems is to of productivity of many of its clients by companies, managing to optimise their define, develop, implement means of communication solutions and operational infrastructures and reduce information systems. Information systems the number of current data processing and manage the systems are an essential resource for evolution of centres. (Candelaria project) that provide optimal the businesses and the alignment of support and competitive operations in the transformation process of In addition, important progress is being Teléfonica. made in the dissemination and application advantages to the business of common methodologies applicable to processes of the companies. In addition, the way in which Telefónica the entire life cycle of the Information often explains to its clients the possibilities Systems by means of standards such as ITIL offered by the new systems is by (Information Technology Infrastructure demonstrating the solutions on their own Library) together with CobiT (Control systems. An example of this is e-Domus, Objectives for Information and Related the Intranet of Telefónica de España, which Technology) and CMMi (Capability Maturity has served as a demonstration platform for Model Integration). These standards are all clients who requested a similar solution. acquiring increasing importance in the methods of managing the exploitation of The Information Systems costs incurred by information technologies and can benefit the different companies of the Telefónica the different areas of Information Systems, Group during FY 2005 exceeded 1.3 billion outsourcing businesses in general and all euros (1 billion euros in 2004), with a staff companies offering services based on IT of their own human resources of almost infrastructure. At the forefront of these 4,000 employees (3,300 in 2004). initiatives, Telefónica has once more become a key driving force behind The following projects are some of the technological development. milestones reached in FY 2005: The information systems department Integration of economic-financial and • evaluates performance with the aid of a logistics IT systems of Telefónica de series of indicators. The results obtained in España and t-gestiona, with the FY 2005 place Telefónica above market integration of the IT systems TeleSAP and standards: the degree of satisfaction of CorpoSAP internal clients reaches 74%, compared to •Evolution and integration of the the external benchmark of 71%; the commercial systems in Telefónica response time of the internal network the Latinoamérica (systems technically called applications run on is 13 milliseconds, the ATIS, SCL and Altamira) Availability of Critical Applications is 99.4% and the Network Availability is 99.8%.

Telefónica, S.A. | Corporate Responsibility Report 2005 96 03 Driving progress

“Information CASE STUDY Society” Report Information Society Portal

In 2000, Telefónica was a pioneer in In 2005, Telefónica launched the • Documents from round tables on the publishing the first Information Society information society portal. With the aim of Information Society report, a document that year after year, has continuing with the work carried out for Articles analysing the contribution of analysed the state of the Information the publication of annual reports and • telecommunications to sustainable Society in Spain. Together with the becoming a window for all citizens to development traditional Round Table cycles aimed at access information about the latest providing a space for debate on the technological innovations and their • Documents, links, courses, tutorials... Information Society, during 2005, the repercussion on sustainable socioeconomic Telefónica Group companies promoted the development. In order to keep users informed of the following publications: portal news, an Information Society, •Telefónica published the sixth edition of In its first nine months of existence, the Technology and Innovation Bulletin was the report on the information society.This portal has published over 1,200 information created. This Bulletin is distributed to over edition pays special attention to SMEs, entries, including: 2,000 users subscribed on a weekly or daily basis, depending on the option chosen. under the premise that the incorporation • Over 850 news items related to the of information and communication development of the information society technologies to companies is a basic pillar for development. • Opinion and dissemination articles regarding new technologies and their •Telefónica CTC Chile presented the book implications for society “La Sociedad de la Información en Chile: 2004-2007, Presente y Perspectivas” • Reports on the Information Society (Information Society in Chile: 2004-2007, published by Telefónica (and other Present and Outlook”). publications related to ICTs) •Telefónica Móviles España presented M- Sociedad, with the aim of promoting an increasingly mobile society and improving people’s lives through mobile telephony. In a Seminar, promoted by the TME Chair of the Universidad Politécnica de Madrid, projects were presented related to the possibilities offered by the new mobile telephony services in fields such as mobile administration, mobile health or new mobility trends. •Telefónica I+D, in collaboration with AHCIET, published the book “Telecomunicaciones y Movilidad en la Sociedad de la Información” (Telecommunications and Mobility in the Information Society)

Telefónica, S.A. | Corporate Responsibility Report 2005 97 03 Driving progress Institutional Collaboration

Telefónica collaborates with prestigious and recognised Spanish Associations and Bodies associations and bodies worldwide, contributing to the development of technology standards and the professionalisation •AECE (Asociación Española de Comercio Electrónico) of the businesses. The main associations and forums with which •AETIC (Asociación de Empresas de Electrónica, Tecnologías de la Telefónica participates actively are those related to Información y Telecomunicaciones de España) telecommunications, mainly in the regions where the company AESPLAN (Asociación Española de Planificación y Dirección operates (Spain, Latin America and Europe) • Estratégica) International Associations and Bodies •APD (Asociación para el Progreso de la Dirección) •AHCIET (Asociación Hispanoamericana de Centros de Investigación •AUI (Asociación de Usuarios de Internet) y Empresas de Telecomunicación) •AUTELSI (Asociación Española de Usuarios de Telecomunicaciones y •AEPIA (Asociación Española para la Inteligencia Artificial) de la Sociedad de la Información) •Benchmarking Plus •Asociación de Ejecutivos de Finanzas •BRT (Brussels Round Table) •CEOE (Confederación Española de Organizaciones Empresariales) •CITEL (Comisión Interamericana de Telecomunicaciones) •CIECAT (Círculo Español para la Calidad en Telecomunicación) •DSL Forum •Círculo de Empresarios •DVB (Digital Video Broadcasting) •Club Gestión de la Calidad •EIF (European Internet Foundation) •COTEC •ELRA (European Language Resources Association) •Foro de Comunicación Interna •ERT (European Round Table of Industrialists) •Foro de Reputación Corporativa •ESF (European Services Forum) •Fundación Iberoamericana de Gestión de la Calidad •ETP (European Telecommunications Platform) •Movilforum 2320 •ETNO (European Telecommunications Network Operators) •N-ECONOMÍA •ETSI (European Telecommunications Standards Institute) •SEDIC (Sociedad Española de Documentación e Información Científica) •FS-VDSL Forum •GBDe (Global Business Dialogue on e-commerce) Argentine Associations and Bodies •GeSI (Global e-Sustainability Initiative) •CICOMRA (Cámara de Informática y Comunicaciones de la República Argentina). •GSMa-GSMe (GSM Association - GSM Europe) AmCham (Cámara de Comercio de los Estados Unidos en la República ICANN (Internet Corporation for Asigned Names and Numbers) • • Argentina : Comité de Telecomunicaciones y Comité Legal & Tax). ICC (International Chamber of Commerce) • •COPITEC (consejo Profesional de Ingeniería en Telecomunicaciones, •Ipv6 Forum Electrónica y Computación) •MPEG (Moving Picture Experts Group) •Cámara Argentina de Comercio – CAC •MEBF (Mercosur European Union Business Forum) •Unión Industrial Argentina – UIA •OMG (Object Management Group) •Cámara Española de Comercio de la República Argentina •OSGI (Open Services Gateway Initiative) •AEA – Asociación Empresaria Argentina •SDR Forum (Software Defined Radio) •Fundación Mediterránea •Telemanagement Forum •Fundación Capital Fundación de Investigaciones Económicas Latinoamericanas – FIEL •Transatlantic Policy Network • Instituto para el Desarrollo Empresarial de la República Argentina –IDEA •UIT (Unión Internacional de Telecomunicaciones) • Instituto Argentino para el Desarrollo de las Economías Regionales – IADER •3GPP (3rd Generation Partnership Project) • •Fundación Carlos Pellegrini •Cámara Argentina de Telecomunicaciones y Afines – CATYA •Cámara de Empresas de Software y Servicios Informáticos – CESSI •Asociación Argentina de Usuarios de la Informática y las Comunicaciones – USUARIA •Cámara Argentina de Bases de Datos y Servicios en Línea . CABASE :

Telefónica, S.A. | Corporate Responsibility Report 2005 98 03 Driving progress

Brazilian Associations and Bodies Associatons and Bodies from Nicaragua AMCHAM - Câmara Americana de Comércio • •Cámara de Comercio, Cámara de Industrias de Nicaragua y Cámara •Câmara Oficial Espanhola de Comércio no Brasil Española. •CDES – Comitê de Desenvolvimento Econômico e Social, ligado à •COSEP (Consejo Superior de la Empresa Privada) Secretaria de Relações Institucionais do Governo Federal Brasileiro •INDE (Instituto Nicaragüense de Desarrollo). •CEAL - Conselho Empresarial da América Latina / Consejo Empresario de América Latina Associations and Bodies from Panama APEDE (Asociación Panameña de Ejecutivos de Empresas) •CPqD - Fundação Centro de Pesquisa e Desenvolvimento • Cámara de Comercio, Industrias y Agricultura de Panamá, Cámara •FIESP - Federação das Indústrias do Estado de São Paulo, com • participação nos seguintes órgãos: COPS - Comitê de Orientação Oficial Española de Comercio de Panamá Política e Social, COTRI - Conselho de Orientação Técnica em Relações •INDESA (Asociación para la Investigación y Desarrollo) Industriais, NAS - Núcleo de Ação Social e Instituto Roberto Simonsen

IEDI - Instituto de Estudos para o Desenvolvimento Industrial • Peruvian Associations and Bodies •ADEPSEP (Asociación Privada de Empresas de Servicios Públicos) Chilean Associations and Bodies •Cámara Oficial de Comercio España en el Perú •SOFOFA, Chilean Federation of Industry •Club Empresarial •PERU 2021. Associations and Bodies from Colombia •CONFIEP-CRECE PERU (Confederación Nacional de Empresas Privadas – •ASOCEL (Asociación de la Industria Celular de Colombia) Comité de Promoción del Perú). •CCIT (Cámara Colombiana de Informática y Telecomunicaciones). •AMCHAM (American Chamber or Commerce) •ASETEL (Asociación de Empresas de Telecomunicaciones) •COCEP (Cámara Oficial de Comercio de España en el Perú) •ANDI (Asociación Nacional de Industriales) •APESAN (Asociación de empresas patrocinadoras de la Escuela Superior •FENALCO (Federación Nacional de Comerciantes) de Administración de Negocios) •ANEP (Asociación Nacional de la Empresa Privada) •SNI (Sociedad Nacional de Industrias) •Cámara de Comercio de Lima Associations and Bodies from Ecuador •IPAE (Instituto Peruano de Administración de Empresas) •ASETEL (Asociación de Empresas de telecomunicaciones) •Procapitales •CCQ (Cámara de Comercio de Quito) •SENATI (Servicio Nacional de Adiestramiento en Trabajo Industrial) •CCG (Cámara de Comercio De Guayaquil) •Cámara Oficial Española de Comercio e Industria de Quito •Cámara de Comercio Ecuatoriano-Americana

Associations and Bodies from Guatemala •Gremial de operadores de Guatemala •CASETEL (Cámara de Empresas de Servicios de Telecomunicaciones) •Cámara de Comercio de Guatemala, Cámara de comercio Americana, Cámara de Industrial de Guatemala y Cámara de Comercio e Industria Guatemalteco Mexicana.

Telefónica, S.A. | Corporate Responsibility Report 2005 99 03 Driving progress

The 21st century will be characterised by the unstoppable spread of the Information and Knowledge Society, but also by growing concern regarding issues related to the environment, the progress of developing countries, human rights, health, education, employment and development of local communities. Driving social development

Positive Aspects Implementation Barriers

Use of energy Energetic efficiency of the networks Production and use of electronic equipment in the Digital society Effect of replacing transports Consumption of equipment with telecommunications in stand-by mode Use of ICTs as a means of creating Energy consumption of network operators awareness with regard to energy savings

Digital home Improvement in quality of life Power consumption Improvement of home health assistance Cost to citizens Improved home security Increased leisure opportunities

Electroninc Speed, comfort and flexibility Need for connectivity Administration Simplification of bureaucracy Usability and accessibility Closer approach to the citizens Lack of experience and training and higher citizen participation Higher efficiency in bureaucracy procedures Security and lack of trust Reduction of errors and increased efficiency Investments by the administration

Telecommunications at the Prevention and early warning Vulnerability of telecommunication service of emergencies systems Warning systems for citizens Dependence on geographic and social and speed of response economic setting Help for coordination tasks Mobilisation and channelling of humanitarian aid

Telecommunications and Universal access to information Design “for everyone” by manufacturers and service developers inclusion of people with Improved opportunities (study, work...) Implementation difficulties disabilities Solutions for integration of hearing, Cost of adaptation of services speech, sight, physical, intellectual, aging disabilities

Telefónica, S.A. | Corporate Responsibility Report 2005 100 03 Driving progress

Positive Aspects Implementation Barriers

Distance Learning More educational Need for equipment and resources for existing students infrastructure (investment required) Taking education to excluded groups Lack of motivation among students (rural areas, people with disabilities, areas in conflict...) Improve education in developing countries Lack of training of teachers More flexibility and wider reach “Life-long” training for universities

Use of paper in Efficiency in work place Bad printing habits the digital society Mobility and collaboration Implementation difficulties for the electronic signature Administrative procedures without paper Tired eyes due to reading on screen Dematerialisation (commercial transactions, Need for new equipment and technologies online publications, email, learning...)

Electronic Commerce Lower travel prices for tourists Lack of trust in the security of electronic Applied to Tourism purchase processes Increased information regarding Increase of greenhouse gas emissions tourist destinations (due to increase in travel) Opportunities for regional development and Improved adaptation to traveller’s needs development ofcountries with an incipient tourist market

New technologies at the Improved emergency management Heavy initial investment in equipment service of health (early diagnosis and preparation) and training Improved diagnosis and training of Interoperability problems between health professionals health centres Improved hospital management Adaptation of health staff to new (clinical records, appointments, treatments) technologies Patient attention where-ever and whenever Lack of trust in the security of personal details (privacy)it is needed (rural medicine, long-term patients, post-surgery recovery...)

Telefónica, S.A. | Corporate Responsibility Report 2005 101 03 Driving progress Credits

Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

Telefónica, S.A. | Corporate Responsibility Report 2005 102 03 Driving progress

Telefónica, S.A. | Corporate Responsibility Report 2005 103 04 Customers

Customers: Quality and fulfilment

Telefónica, S.A. |Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, driving progress for all 6

00 Telefónica in 2005 8

01 Corporate Governance 20

02 Identity 32

03 Driving progress 66

04 Customers 104 Customers relationship 106 Customers relationship cycle 106 Customer satisfaction 108 Dialogue with Consumer Associations 110 Critical processes for customers 112 Commercialisation 112 Service provision 118 Operation 120 Billing 124 Customer attention 126 Technical service 130 Excellence in service 132 Service improvement initiatives 132 Quality certificates 134 Service Responsability 136 Telecommunications secrecy 136 Protection against Internet abuse 136 Data protection and privacy 142 Protection of infancy 145 Terminal theft 148 Responsible use of telecommunications 149 Markets where telefónica operates 150 Competitive situation and market evolution 150 Regulatoy situation and free competition 154

05 Shareholders 168

06 Employees 178

07 Society 226

08 The Enviroment 252

09 Providers 292

10 Media 304

11 ANNEX I 310

Telefónica, S.A. | Corporate Responsibility Report 2005 04 Customers

Customer relationship cycle Customer Satisfaction studies relationship Dialogue with Consumer Associations

Customer relations ship cycle

Performance of quality studies with customers; in order to know their opinion on the service, their concerns and what they ask of a company like Telefónica.

Certification of the customer offer processes through the standard established by ISO 9001 customers. These certificates, maintained in time, are a reflection of the will and interest by the Company to assure that all of its operations comply with the strictest quality requirements. A

Determination of the critical processes for F B customer satisfaction The results of the qualitative studies serve to determine and prioritise the most critical processes from the perspective of the customers. In the case of fixed telephony, these processes are commercialisation, supply, operation, billing, attention and technical support. Introduction of the projects for E C improving the quality of the service The aim is to achieve significant improvements in Measurement of the satisfaction of customers the customers’ perception of the quality offered in the different processes of the Company’s action with the service offered by Telefónica. towards customers. In drawing up these studies, the result may be classified in D terms of the type of service, the process evaluated and the company’s situation with regard to the competition. Prioritisation of the critical points for improvement, based on the relative importance afforded to each process by customers and Telefónica’s classification with regard to the competition. The commercialisation and customer attention processes are those in which Telefónica traditionally has the greatest potential for improvement.

Telefónica aims to optimise its customers’ satisfaction. To do this, it has established a model for managing the relationship with its customers, which includes six stages:

Telefónica, S.A. | Corporate Responsibility Report 2005 106 04 Customers

Profitable, sustained growth

Coherence Confidence Deep knowledge in the business in the customer service from of the customer and desing management from an effective, flexible, of a value proposal adapted indicators focused on the responsible performance to their needs customer

Customer processes Capacities Organisational culture and effort

CASE STUDY Customer commitment

In 2004,Telefónica Latinoamérica turned Based on these pillars, a series of 23 the company strategy towards the regional projects were defined for the three Of particular note is the development of customer, which it considered the keystone customer segments: residential, SMES and strategies aimed at popularising broad to growth. The strategy was drawn up companies. band and the renewal of traditional under the motto of Customer business. Latin American SMES have a new Commitment, the objective of which is to The main developments led by the valuable proposal from Telefónica. assure the profitable, sustainable growth Customer Commitment initiative in 2005 of the operators. Its introduction has meant were: What makes them different is their own the inclusion of commercial and customer commercial attention structure for the The definition of a regional methodology satisfaction with the critical processes for • segment, independent of the existing one for prioritising improvement plans the consumer. for the residential segment. With respect to depending on the results of the the business sector, the Global Customer satisfaction surveys. The greater commercial orientation of Attention Model has been developed, the Telefónica Latinoamérica will allow use to •The creation of an independent introduction has been agreed of 224 be made of the new opportunities that are committee for Claims. improvement plans aimed at excellence in arising as a result of the structural change •The development of a total 98 service, and innovation continues in being caused in the telecommunications improvement projects based on Six projects related to IP Telephony and fixed- sector. This plan, lasting 1,000 days, Sigma methodology. mobile convergence. continued developing throughout 2005. Among the actions aimed at the residential Commercial employees on The programme is based on three segment we highlight those related to the whole payroll of Telefónica fundamental pillars: Awareness, optimising attention in the customer Trustworthiness and Coherence. attention centres and the greater Latinoamérica (In percentage) commercial focus of the promotional 29 activities and product launch. 2003 2004 33 Commitment 2003-2006 ~ 38

Note: Not including data on Telefónica Empresas América nor TIWS Source: Internal

Telefónica, S.A. | Corporate Responsibility Report 2005 107 04 Customers

CASE STUDY Satisfaction surveys The voice of the customer present in improvement actions in Telefónica Customer satisfaction is the priority Studies and surveys are outsourced to objective of the Telefónica Group and the companies that are shown the objectives Latinoamérica central axis of its whole strategy. In order to to be known by Telefónica. The samples are know the evolution of this satisfaction and determined at random, guaranteeing at the A system has been established as a to check the effects of the different same time that it is representative of the methodology to identify improvement measures adopted by Telefónica, the universe of customers to minimise the actions, based on the results of the companies of the Group perform periodical margin of error. Telefónica de España took customer satisfaction surveys. follow-ups of the levels of satisfaction more than 500,000 samples in its Having obtained the results of the surveys through surveys. The methodology used by satisfaction surveys of 2005. In the last for the six critical processes Telefónica Internacional and by Telefónica sample in the year (November – December) (commercialisation, provision, operation, de España is the same, and its use is to be in Latin America interviews were made on billing, technical support and attention), extended to Telefónica Móviles from 2006. 4,789 customers of the basic telephone the areas responsible for them identify and service, 3,624 SMES, 1,079 companies and prioritise improvement actions in terms of The objectives of the measurement are: 3,499 customers of the Speedy broadband. the importance that the customer gives to The number of interviewees in Telefónica To measure the overall satisfaction and the attributes associated with the process, • Móviles España studies was 27,000, 14.5% establish the improvement strategies to the satisfaction expressed and the up on the previous year; reaching in 2005 a increase satisfaction among current difference with respect to the competition. satisfaction rate of 85.6%. customers. This led to the identification of more than 300 improvement actions in 2005 in the •To measure customers' future behaviour. The customers answering the survey are region, of which the focus was placed for •To analyse the evolution of perceptions generally those responsible for paying for pursuing and introducing the TOP 10 in in time, both of their own customers and the service (residential segment) or those each country. those of the competition to find the keys responsible for contracting it (company in the market evolution. segment). The questionnaires are drawn up from general questions on satisfaction Furthermore, in 2006, the commitment with Telefónica to more specific questions was assumed to evolve this model in a on satisfaction with the processes. The standardised manner for the whole socio-economic class of the person Telefónica Group in order to: interviewed and the breakdown of the contracted services are also important. •Measure the perceived quality and establish its impact on general satisfaction. •Obtain a measurement methodology in line with the main international bodies that are referents in measuring customer satisfaction (ACSI, ECSI). •Relate the qualitative perception with 1 Calculated with regard to number of clients in the future behaviour of customers. each country: in Mexico and Uruguay are not included, due to the lockof that sort of studies with uniform methodology.

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Fixed telephony: Satisfaction of the residential segment Data in percentage

Year Satisfied Neutral Dissatisfied Spain 2005 84 7 9 2004 81 712 Argentina 2005 73 16 11 2004 68 17 15 Brazil 2005 55 25 21 2004 51 24 25 Chile 2005 66 17 17 2004 61 21 19 Peru 2005 63 24 14 2004 58 27 16

Fixed telephony: Satisfaction of the business segment 2005 Data in percentage

Satisfied Neutral Dissatisfied Spain 79 8 13 Argentina 83 12 5 Brazil 77 16 7 Chile 82 12 16 Peru 59 30 11 Colombia 81 10 8 Usa 83 10 7

Mobile Telephony: Customer satisfaction Data in percentage

Servicio Atención y postventa Spain 86 - Contrat Latam1 70 69 Prepaid Latam1 78 75

1 Calculated on a weighted basis with regard to number of customers per country. Data forMexico and Uruguay has not been included, as no studies of these characteristics and methodology were available

Telefónica, S.A. | Corporate Responsibility Report 2005 109 04 Customers

OPINION Dialogue with Consumer Associations What do our stakeholders think? Spain Latin America Telefónica has a fluid dialogue with a large In Brazil,Telefónica has permanent channels of In the RepTrak study, we asked society number of consumer and user associations, dialogue with the different consumer about their perception of whether some specialised in ICT. The Company has associations.The company relates to public “Telefónica satisfies the needs of its established a single channel of information bodies in defence of consumers,called customers”. Society’s opinion as a that deals with transferring the questions PROCON (there are 181 PROCONs active only in consumer is highly significant, as the that the associations ask Telefónica to the the State of Sao Paulo), and non governmental samples wholly identified those different companies and business lines of organisations in defence of consumers, and is interviewed with customers of the the Group. In the case of Spain, Telefónica represented in IDEC (Brazilian Institute of Telefónica Group. currently actively collaborates with a total Defence of Consumers) and PROTESTE. The results obtained in December 2005 16 associations, 12 national and 4 were as follows autonomic. TeleSP managed to receive the number of Procon claims in the city of Sao Paulo by Spain 66.7 Of these, due to the volume of activity 51.7% (503 claims in 2005 over 1,042 claims developed alongside them, we must in 2004). With 95.8% of the claims Argentina 63.9 highlight the Internaut Association (AI), the attended, Telefónica is the company of the Association of Internet Users (AUI), the public service providers that best attends Brazil 57.9 Organisation of Consumers and Users the complaints brought before Procon in (OCU), the Andalusian Federation of the city of Sao Paulo, which includes other Chile 69.7 Consumers and Users in Action (FACUA), fixed and mobile telephony operators that the Union of Spanish Consumers (UCE), the offer a service in the capital. Mexico 72.6 Association of Users of Communications (AUC) and the Spanish Confederation of Periodical meetings were held in Argentina Peru 59.9 Consumers and Users (CECU). with the “Defensoría del pueblo” and different associations in the country (Adelco - For Telefónica this relationship is of great Proconsumer - Adecua - Procurar - Prodelco - importance, as it allows us to transfer the Consumidores Argentinos - Deuco - Unión de many suggestions we receive from these Usuarios y Consumidores). Likewise,Telefónica associations to our customers in the form Móviles Argentina, along with CICOMRA of improvements to the products and carried out an informative meeting with the services we offer them. The main subjects Union of Argentine Customers (UCA). we dealt with with them in 2005 were the irregular pre-assignments, the rounding off Telefónica Móviles Colombia is an of prices in telephony, the quality of the institutional member and forms part internet access and the new ADSL offers of the Corporate Board affiliated with and packages, amongst others. the Association of Communications Users, ASUCOM. Work is under way from this association to improve dialogue and communication between customers and clients.

Telefónica, S.A. | Corporate Responsibility Report 2005 110 04 Customers

CASE STUDY CASE STUDY Proyecto Espejo in Managing the customer Telefónica de España relationship The Proyecto Espejo by Telefónica de Within this effort towards greater España consists of the operations area of customer orientation, the motivation and the Company calling customers to find out conviction of the professionals and their satisfaction with the action of the collaborators of the Company is essential. Company. This is the aim of the “Customer Commitment” programme of Telefónica Given the impact of this measure on Latinoamérica and “meta:cliente” of customer satisfaction, in 2005 it was Telefónica de España. decided to extend the calls to 100% of customers requesting any action by In 2005, Telefónica de España’s commercial Telefónica de España in supply or development programme made a survey maintenance, thus guaranteeing contact among its professionals with the following with customers. results: •More than 81% of those surveyed are Among the measures implemented by the aware of the objectives of the company as a result of listening to the Commercial Development Module. customers’ needs, is the “Customer Communication” initiative, the aim of •96% think that commercial which is to contact all customers when it is transformation is necessary. not possible to meet the times agreed with •More than 75% believe that Telefónica is them. In the calls, Telefónica will explain more and more concerned for customers. the reasons for the delay and will set a new commitment date with the customers.

Telefónica, S.A. | Corporate Responsibility Report 2005 111 04 Customers

Marketing Service Operation Billing Customer Technical provision attention Service Critical processes for customers

Marketing

Products adapted to the In the case of Telefónica Móviles España, a demands of customers great effort has been made to provide customers with the terminals and In 2005, Telefónica developed a series of applications that can made best use of the measures aimed at enhancing the potential and band width of the new 3G development of broadband and the society networks. Particular mention of the UMTS of information through the cards for laptops, the multimedia commercialisation of products adapted to messaging service and online electronic customer needs. mail, the applications of audio-visual contents or accessories for terminals. All of The free doubling of the speed of the ADSL these initiatives have been combined with service, the Dúo and Trío combined offers great activity in reducing rates and bill (ADSL, calls and Imagenio digital simplification through service packages. television), the new modes of ADSL by time or volume, the ADSL solutions for smes or the joint offers of ADSL and personal computers are some of the commercial proposals developed by Telefónica de España in 2005. In the case of Telefónica Latinoamérica, similar initiatives have been made associated with the Speedy service, and particularly: •Free duplication of the speed in Argentina, Brazil and Chile. •1,500 WiFi Hot Spots in the region to give broadband mobility. •Combination of Speedy with satellite TV such as, for instance, Speedy Skye in Brazil or Speedy TV Satelital in Chile. •Bundling of products such as: Mobile Telephone and ADSL in Argentina and Fixed Telephone and ADSL in Chile. •24 Hour assistance service for PC, Doctor Speedy, complementing the offer of broadband solutions in Peru.

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CASE STUDY CASE STUDY Imagenio, an innovative service Savings products offered by recognised by the consumers Telefónica Móviles España

The Spanish Union of Consumers (UCE) in Among the savings products offered by •Tarifa Mundial Activa, a single rate for September 2005 published a report Telefónica Móviles España in 2005: communications in roaming, regardless of the operator connecting, the time of the highlighting the advantages that Imagenio Mis Cinco: reduced prices and single rate • communication and only depending on the offers consumers and users over cable for calls, text messages, multimedia international area to which the country television. messages and video-calls to five belongs from which the traffic is sent The UCE stresses the importance of the numbers selected by the customer. development of ADSL broadband over cable Anticípame Saldo, a service aimed at Mi Familia: a rate reducing to 0.03 e/min. • to achieve convergence between voice, data • controlling expenditure, which allows the cost of the calls between a and television services in the digital pay-as-you-phone customers meeting maximum five movistar contract and/or household, and makes a comparative study certain requirements to ask for their movistar card held by the same between the Imagenio services and cable balance to be reloaded for a set amount customer. television, to highlight the following at any time. advantages of Imagenio: Mi Favorito: low, single rate for calls, text • Combi 250 combines different services, messages, multimedia messages and • Imagenio can give its offers to virtually including some Third Generation (3G), in • video-calls to the movistar number all homes. exchange for a single, invariable monthly selected by the customer. •Simpler installation. quota for customers. It includes 250 •Sub-26: enhances communication minutes of voice, 250 minutes of video- •The Video on Demand (VoD) enables the between movistar contract and prepaid calls, 250 short messages (SMS) and a users themselves to decide what they customers under 26 years of age, further 250 multimedia messages want to see and the best time to do so. with a reduction of 33% both on call (MMS), free navigation in emotion and •Allows IP voice services minutes and on SMS. 50 MB of data (internet). •Internet and interactive services from the •Contrato Club: enhances the use of the television. calls customers make in their habitual circles without any need to be concerned •Compatibility with Terrestrial Digital about time bands. Savings of up to 50% Television (TDT). on the price of other movistar contract in normal or commercial hours. •Contrato Tu Tiempo: this contract favours calls between movistar customers with a rate of 0.07 e a minute in low rate time band, with the calls billed by seconds from the first second of conversation

Telefónica, S.A. | Corporate Responsibility Report 2005 113 04 Customers

Advertising investment of the Telefónica Advertising investment of the Telefónica Advertising investment of the Telefónica Group by country (2005) Group by business line (2005) Group in media Data in percentage Data in percentage Data in percentage

Terra Rest Rest Argentina 2 Fixed 4 9.5 5.6 Brasil Press 10.2 17 19 Chile 4.7 TPI 5 México 8.9 Rest Foreign 6 18 TV Venezuela 47 4.6 Spain Mobile Internet 56.5 70 3 Radio 10

Advertising controversy, by establishing an ethical Advertising is the main means of framework where a responsible, true informing customers on new products and commercial communication is developed. services offered by the company. In business lines, mobile telephony is the The Telefónica Group is a member of the most active in the field of advertising, Spanish Association of Advertisers, where followed by the fixed and long distance it forms part of the board of management telephony businesses. As for the means and actively participates in the media used in support of this investment, the commissions. main ones mentioned are television, newspapers, radio and street boards, which In other countries, the operators of the concentrate 93% of the advertising Grupo Telefónica Móviles take part in investment. similar groups: •Argentina: Cámara Argentina de In all the countries where it operates, the Anunciantes Telefónica Group maintains its commitment to develop a clear, respectful •El Salvador. Asociación de anunciantes advertising policy. All the advertising de El Salvado carried out by Telefónica goes through a •Guatemala: Asociación de anunciantes double approval process before it is finally de Guatemala issued. On the one hand, the companies Peru: Asociación Nacional de have the approval of the legal advisors in • Anunciantes each of the companies, with a view to ensuring respect for the regulation and •Uruguay: Cámara de Anunciante de the competitors. On the other, the Uruguay campaigns have a pre-test phase with a Venezuela: Asociación Nacional de small group of people, to make sure that • Anunciantes the customers clearly understand the messages and promotions given, and that Six claims were brought against the Grupo they do not contain messages that are Telefónica Móviles for deceitful advertising offensive for any particular group. in Chile (consisting of divergences with respect to the terms and conditions In Spain, the Telefónica Group is a member applicable to the promoted plans), nine in of Autocontrol (Association for the Self- Panama (in the same promotional control of Commercial Communication), campaign), three in Peru (from made up of advertisers, agencies, media competitors) and two in Uruguay. and other commercial communication service companies, which as a whole represent more than 80% of the Spanish advertising investment. In turn, Autocontrol is a member of EJNetwork and the European Advertising Standards Alliance (EASA). Its aim is to prevent and resolve any possible advertising

Telefónica, S.A. | Corporate Responsibility Report 2005 114 04 Customers

Shops and distributors Loyalty plans In Spain, Telefónica de España has 104 We must stress the efforts made by shops of its own (Tiendas Telefónica) where Telefónica (and particularly Telefónica customers can carry out all kinds of Móviles España) in loyalty activities, processes, see the Telefónica services and launching campaigns to reward long times check out their terminals. There are also as customers by offering favourable 2,572 indirect sales points through conditions for terminal renewal and distribution agreements with other encouraging greater commitment from companies, which supposed an increase in customers at the same time. Therefore, in the network of more than 600 sales points 2005, there were more than 4.5 million in 2005. changes (+23.2% over 2004) in the Movistar points programme, which in 2005 had been TeleSP has 124 establishments of its own running for five years. and 552 attention points in Post Office shops. There are also 120 companies indirectly distributing its products and services.

Telefónica de Argentina has 51 establishments of its own, 55 attention agents and 57 indirect sales points.

Throughout the world, Telefónica Móviles has more than 30,000 shops of its own, distributors and commercial centres in the different companies where it operates. The Company has made a noteworthy effort to unify and extend its direct commercial attention channels in 2005 after taking control of the operations of the ten operators purchased in the previous year.

Given the large proportion of customers with pepaid services, Telefónica Móviles strives to facilitate and simplify the reloading of the balance in the terminal, either through electronic reloading services or by extending their reloading commercialisation network (Argentina, Ecuador, Guatemala, Mexico, Nicaragua, Panama, Peru, Uruguay, Venezuela)

Telefónica, S.A. | Corporate Responsibility Report 2005 115 04 Customers

Online channel Telefónica’s Internet introduction is Telefónica is presented on Internet as an transparent to organisation and integrated provider of telecomunications technology to achieve great flexibility and services in each of the countries where it speed to meet market demands. The operates. The “telefonica.pais” model seeks transparency in the organisation allows us to establish a single Internet access point in to adapt to the changing commercial each country that allows customers to models and maintain the operative transparently access all the commercial and independence of the businesses without institutional information of the Company. altering the model. To achieve this, since 2003 more than 200 projects have been developed in 13 In 2005, the “telefonica.pais” websites also countries, involving more than 500 people. carried out a series of technical actions to improve the accessibility of their pages and The final result is a product and service achieve a better overall position on offer in accordance with the needs of the Internet. The number of visits received in customers; offering specific solutions for 2005 in all of the “telefonica.pais” portals in individuals, professionals and companies. Latin America exceeded sixty million, with The other interest groups of the Company more than 400,000 users individually (stakeholders, investors, suppliers, partners, registered. The “telefonica.es” portal ended employees, media and citizens) also have 2005 with over three million visits a month. specific sections in each of the “telefonica.pais” websites.

Telefónica on Internet Germany http://www.telefonica.de Argentina http://www.telefonica.com.ar Brazil http://www.telefonica.com.br Chile http://www.telefonicactcchile.cl Colombia http://www.telefonica.com.co El Salvador http://www.telefonica.com.sv Spain http://www.telefonica.es USA http://www.us.telefonica.com Guatemala http://www.telefonica.com.gt Morocco http://www.telefonica.ma Mexico http://www.telefonica.com.mx Peru http://www.telefonica.com.pe Puerto Rico http://www.telefonica.pr/empresas

Telefónica, S.A. | Corporate Responsibility Report 2005 116 04 Customers

CASE STUDY www.telefonica.es www.telefonicaonline.com Telefónica Móviles España Customer Channel

The www.telefonica.es website is the The Telefónica de España commercial In 2005, Telefónica Móviles España set up Telefónica Internet access for all people who channel on Internet is called the customer channel wish to find commercial or institutional www.telefonicaonline.com and offers www.canalcliente.movistar.es which information on the Company in Spain. This interactive attention to customers seeking enables certain processes to be done by portal has increased its visits by 100% over information, the opportunity to contract Internet. These include the possibility of early 2005, and was receiving three million products and services, to contact customer seeing the breakdown of their calls, visits a month by the end of the year. attention or to access their bills online. It is reloading their card, seeing the catalogue aimed to cover the needs of all customer of points and exchanging them, modifying The www.telefonica.es has seen how some segments (residential, smes and large their personal data, changing the contract of its dependent portals, such as “Para companies or corporations), to offer all or card form, consulting and managing casa”,“Telefonía fija”,“Para las Pymes” and Telefónica products and to attend all movistar services or contracting savings “Guías” increased the number of visits from incidents in the phases of the commercial options. January to December 2005 by 50%, 197%, cycle (pre-sales, sales, post-sales and e- 18% and 423% respectively. marketing). In the first eight months in which the Telefónica Móviles España customer Moreover, it is seen that many users that in The contents are intended both for channel was up and running, it already had the first instance access the registered users recurrently accessing the nearly a million users. www.telefonica.es website to use a specific web and those seeking information service or tool remain browsing in occasionally on some product or service. telefonica.es after using it. This is the case They are available in Spanish and Catalan. of the visits to the White Pages, with 18% staying there after making their queries, At the close of 2005, the figures for the speed test with 20%, and electronic www.telefonicaonline.com were as follows: mail consultation with 12%. •2,525,743 million registered users (growth of 621,988 over 2004), of which 329,034 were active users at the end of 2005. •More than 27 million visits to complement over 520,000 sales. •148,850 eFactura customers, with an increase of almost 31,000 over 2004

Telefónica, S.A. | Corporate Responsibility Report 2005 117 04 Customers

Marketing Service Operation Billing Customer Technical provision attention Service

Service provision

Fixed telephony ADSL In 2005, Telefónica de España installed ADSL is one of the services most demanded more than 1,100,000 telephone lines and by Telefónica customers. It is therefore met the installation commitment fundamental to guarantee the utmost established by the customers in 99.17% of quality both in the installation phase and cases. Although the average time for in resolving faults. In Spain, in 2005 installing a line is under 10 days (9.68 days), Telefónica de España installed more than a the Company is working to reduce the million lines with an average installation installation times for the lines that most time of 11.53 days (9.8 in 2004). The longest fail to meet the expected time (percentile waits by customers were under a month 95 of the installation time at 23.9 days) (percentile 95 installation time = 29.9 days)

In Latin America, Telefónica is striving to In addition, Telefónica de España acquires a install lines in the shortest possible time, commitment with the customer for an with an average 5.67 days in 2005 (6.84 in installation date in practically all ADSL 2004). In this sense, the line installation installations (99.998%), a date met in target times are set in accordance with the 91.18% of cases. respective regulators, and an indicator is established associated with the percentage In Latin America, the average time for the of lines installed in under 5 days, which for installation of the Speedy service in the whole of Telefónica Internacional was December reached 5.53 days (4.8 in 2004) . 80.84% in 2005 (66.4% in 2004). The This means that 58.26% of the ADSL lines results are different in the case of installed in 2005 were made available to Argentina, as in this case, customers are customers in under 5 days. This percentage required to pay for the cost of installing the is worse than that achieved in December line before the installation is actually done. 2004, basically due to the spectacular increase in the number of lines installed by In giving the service, it is not only important Telefónica in the region, specially in Brazil. to do the work fast, but also to do it Against this, the percentage of faults precisely.Telefónica Internacional has associated with the provision of the service therefore established an indicator associated with the supply fault percentage. At the end of 2005, this indicator achieved a result of 11.62%, with an improvement of the value of 13.5% for 2004.

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fell to 22.2% from 27.6% in the previous Percentage of basic telephone lines for the residential segment year. It must be said that in the case of the installed in under 5 days only country that failed to achieve the set targets, Argentina, work is being done Argentina Brazil Chile Peru directly with the collaborating companies Dec 2005 17.6% 90.9 % 83.3 % 66.9 % to improve the indicator. Target 2005 14.9% 82.4% 92.0% 50% Dec 2004 11.8% 75.9% 75.8% 41.2% Data circuits of largest band Note. The residential segment is chosen as it is the one where the Telefónica compliance percentages are width poorest. The data circuits with the largest capacity are installed much more sporadically than Faults associated with the provision of the basic telephony service the basic telephony lines or ADSL lines. Argentina Brazil Chile Peru Furthermore, each customer demands Dec 2005 13.1% 12.3% 8.1% 8.7% different characteristics, which means that Target 2005 18% 13.4% 6% 6% the service supply times are usually longer. Dec 2004 13.4% 15.4% 8.1% 6.8% Note: number of faults in the 30 natural days following supply with respect to all lines installed In Spain, the average time for the initial Note. The residential segment is chosen as it is the one where the Telefónica compliance percentages are supply in 2005 was 28.08 days. In 62.4% of poorest. installations, Telefónica acquired an installation commitment date with its customers, which was met in 85.6% of cases. Percentage ADSL for the residential segment installed in under 5 days

Argentina Brazil Chile Peru * Dec 2005 33.1 % 56.3 % 78.2 % 88.5 % Target 2005 35.2% 30% 95% ND Dec 2004 35.7% 63.9% 90.8% ND Note. The segment is shown because it is the one where Telefónica has greater comparability between countries Peru: the measurement of the indicator started in 2005, so the objective and the historical value are not available

Faults associated with the provision of the ADSL service

Argentina Brazil Chile Peru Dec 2005 6.1 % 28.6 % 4.0% ND Target 2005 3% 31.2% 8% ND Dec 2004 3.4% 31.5% 9.1% ND Note: number of faults in the 30 natural days following supply with respect to all lines installed Note. The residential segment is chosen as it is the one where Telefónica has the greatest comparability between countries.

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Marketing Service Operation Billing Customer Technical provision attention Service

Operation

Operation of the mobile Telefónica Latinoamérica continues to work telephony networks on the directives established in the Regional Quality Plan launched in 2003. The All of the companies of the Telefónica result of this initiative was the definition of Móviles Group keep constant quality the Strategic Quality Indicators, a series of control through a series of indicators that common, similar parameters to allow allow them to periodically check the state objective quality to be pursued (operative of the networks and services. These parameters) and with a direct bearing on indicators also serve to set targets and the perceived quality (satisfaction surveys validate the results of the improvement and claims). On the regional level, the projects or network extensions. The average percentage of faults in basic weighted average of the effectiveness of telephone in Latin America in December the CDMA and GSM networks of the 2005 reached 4.17% as opposed to the Telefónica Móviles operators lies at 92%, 4.49% of the previous year. including the operators that were brought into the Group in 2005. One of the aspects identified as one of the main concerns of our customers is One of the best factors most appreciated repeated faults. Telefónica has therefore by mobile telephony customers is the established indicators intended to measure possibility of going to other places and the percentage of repeated faults with keeping their telephone number as a point respect to the total faults in the region. In of contact. In this sense, Movistar December 2005 this reached 19.43% (23.11% customers in Spain can use their mobile in the same month in 2004). phones in more than 200 destinations thanks to the 419 roaming agreements This improvement in the indicators is established by Telefónica Móviles España accompanied by growth in satisfaction with other operators. This mobility requires with the operation process of 4.3pp over an obvious effort in synchronising the December 2004 for the residential customer location systems, directing calls segment. and billing.

Operation of the fixed Operation of the ADSL / telephony networks Speedy service ADSL is one of the services that requires In 2005, the average number of faults greatest reliability, as very often customers per 100 lines of basic telephony was 2.18 do not have alternative means to access for Telefónica de España (2.07 in 2004). Internet with broadband. The average The average availability of the fixed availability of the service in Spain in 2005 networks in Spain was 99.95%. was 99.97% (99.98% in 2004), measured as the percentage of attempted calls completed with success. Furthermore, the

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average number of faults per 100 ADSL Data circuits of larger OPINION lines was 1.39 (1.13 in 2004). bandwidth (> 2 Mbps) The availability of data services with a band These service quality levels were achieved in What do our width of over 2 Mbps was over 99.95% in a year when Telefónica de España doubled stakeholders think? Spain in 2005. This availability is a critical the speed of its ADSL for its customers free factor for customers contracting these of charge. This measure, which had already kinds of services, as on many occasions In the RepTrak study, we asked the been taken once in 2004, places the basic they can not risk having any problem. The company about its perception of whether mode ADSL at 1 Mbps. number of fault reports per 100 lines in “Telefónica offers high quality products and this type was 3.98 in 2005. services”. The opinion of the company as a In June 2005, the Internaut Association consumer is highly significant, as the made its third study of the speed of the sample identified all of the interviewees Internet access and held Telefónica’s ADSL Public telephony with customers of the services of the service as the fastest and most regular In Latin America the public telephony Telefónica Group. amongst all ADSL and cable operators, with services are an essential alternative for a speed exceeding the other alternatives by users who do not have telephones in their The results obtained in December 2005 up to 32%. This study was based on more homes, which is why the availability of this were the following than 215,000 samples collected over five service is a need for society. Telefónica months. In addition to this, in September, Latinoamérica broadly exceeded the the Union of Spanish Consumers published established target of 85% service Spain 70.4 a report highlighting the advantages of availability, achieving an average Imagenio over cable television. availability of 99.4%. Argentina 61.8

In Latin America, the percentage of faults This availability is particularly important if it Brazil 62.4 per ADSL line for the residential segment in is contemplated from the double December 2005 was 4.99% (7.02% in perspective of the fact that Telefónica has Chile 77.3 December 2004). As in the case of the basic more than 600,000 terminals for public use telephone line, special attention is paid to in the region and that this equipment is Mexico 75.1 the indicators of repeated faults, which on often the victim of vandalism or sabotage. the regional level amounted to 19.36% at Peru 66.4 the end of 2005 (19.2% in 2004). Satisfaction with the process, comparing December 2004 with December 2005, rose in the region by 1.5pp.

All of these data are highly significant if we bear in mind that the ADSL plant rose in the region to 2,165,000 lines, as opposed to the almost 1.5 million lines in December 2004.

In the case of Brazil, where Speedy has more than a million users, the readers of the Info magazine chose the Telefónica service as the best broadband on the market.

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Effectiveness of mobile telephony networks. % Calls % calls % Effectiveness not completed network interruptions Argentina CDMA 2.91 1.01 96.11 GSM 1.27 1.85 96.90 Chile TDMA 1.7 1.3 97 GSM 3.1 1.9 95 CDMA 1.5 0.8 97.7 Colombia TDMA 1.42 0.22 98.36 CDMA 1.69 0.09 98.22 GSM 0.74 0.13 99.13 Ecuador TDMA 0.66 1.14 98.2 CDMA 2.83 1.09 96.08 GSM 1.08 0.93 97.99 El Salvador CDMA 6.26 2.11 91.63 GSM 1.47 1.6 96.93 Spain GSM 0.33 0.77 98.9 Guatemala CDMA 5.49 2.49 92.02 GSM 4.31 1.67 94.02 Mexico GSM 0.8 1.52 97.68 Nicaragua CDMA 1.17 1.69 97.14 Panama GSM 1.13 1.1 97.77 CDMA 1.57 0.99 97.44 Peru CDMA 0.2 0.5 99.30 Uruguay CDMA 2.52 2.19 95.29 Venezuela CDMA 4.7 1.1 94.2

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Repeated faults associated with the basic telephony service CASE STUDY Argentina Brazil Chile Peru Dec 2005 16.06% 22.15% 9.37 % 14.62% Speed test Target 2005 17% 25.1% 6.5% 10% Dec 2004 24.7% 24.4% 7.7% 10.1% One of the applications most widely used Note: number of repeated faults with respect to the total number of faults on the Telefónica website is the “speed Note. The residential segment is chosen as the one in which the Telefónica compliance percentages are worse. test”, which may be used by all people who wish to measure the true speed of their Repeated faults associated with the ADSL service broad band connection. Data as of end Fiscal Year Argentina Brazil Chile Peru The service is available at www.telefonica.es and in 2005 was used 2005 7.9% 20.13% 6.95% 22.8% Target 2005 8.2% 18,2% 9% 22% 4.8 million times. 2004 7.6% 21.2% 10.8% 16.7% Note: number of repeated faults with respect to the total number of faults Note. The residential segment is chosen as the one in which the Telefónica compliance percentages are worse.

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Marketing Service Operation Billing Customer Technical provision attention Service

Billing

As the telephone bill is of great importance the number of billing complaints from for customers and a means of permanent residential customers by 42% in September, contact to build confidence, the companies and by 31% among SMES, thus achieving of the Group work to offer clarity and the established target of 40% and precision in communications of this kind matching the level of complaints in 2004. with their customers, and offer complementary information that might be With respect to large customers, Telefónica of interest to them. Specifically, Telefónica has the objective of establishing a single de España and Telefónica Latinoamérica bill in 2006 to bring together the billing of have completed the processes of all voice and data services referring to the introducing their respective billing systems same date of close and in a single file. To (FAST and ATIS). The modification of the complement this measure, clarity is billing systems and the bill formats caused improved in the bill concepts concerning a short term increase in the complaints charges for sales of equipment and received from customers. material, and with respect to the complaints. Telefónica thus replies to one The proportion of complaints about of the greatest dissatisfactions perceived Telefónica de España bills in Q4 2005 by these customers, who had been reached 3.48 per thousand, with the receiving up to three bills a month referring objective value established by the regulator to different closing dates, which made it being 5 per thousand. This calculation considerably difficult to understand and was made for more than 28 million supervise them. bills issued in the quarter. In addition, since 2005 Telefónica de In 2005, Telefónica de España made a España has offered its customers the diagnosis of the reasons for complaints in opportunity to receive notification by the bills of the residential and SME, electronic mail of the bills pending business and professional segments. The payment a few days before they fall due. root causes identified are mainly In this way, any possible non-payment associated with functional shortcomings due to reasons beyond the control of the and incidents in the billing systems, customer is avoided. In the last month of difficulties in understanding the bill, the 2005, Telefónica Latinoamérica achieved a application of commercial bonuses percentage of complaints on basic through claims, complexity in telephony bills of 1.28% (1.59% in 2004). If commercialising new products and we determine the percentage of these discrepancies with the customer in billing complaints resulting in adjustments in the after-sales services. To reduce these favour of the customer, this value was sources of claims, Telefónica de España set 65.47% for the region in the residential up a plan of action with 21 initiatives to be segment. In the case of the ADSL service, developed in 2005 and 2006. The first this value amounts to 2.67% of completed initiatives managed to reduce complaints on all bills in the region,

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2005

Movistar 1º Q 2º Q 3º Q 4º Q Number of billing complaints 1,134 1,430 1,588 1,655 1,000 service invoices

Data provided to telecomunicatian state secretariat.

which supposes a significant fall from •Telefónica Móviles El Salvador started the 8.08% the previous year. process of developing the on line bill CASE STUDY project, which will be included in a In the line of improving the Billing process project of Web processes, through which Telefónica bill in Telefónica de and the treatment of the associated it will be possible to consult details of Argentina complaints, different certificates have been calls, balances and to cancel the service. achieved in the region, such as: certification Telefónica has not only modified its bill of Billing processes in Argentina for the •In Mexico development began on a new format, but also tries to explain the residential and sme segments; certification bill based on the results of market different elements of the bill to its of the process of collecting information, studies and the communications of the customers. The example described in the price setting and billing in Brazil. customers with the call-centre; and also following presents the explanation of the focus groups in which the bills of Telefónica de Argentina bill presented at Telefónica Móviles is also developing its different companies were analysed. http://www.telefonica.com.ar/micuenta/ billing system for its almost 100 million •Telefónica Móviles España launched the customers around the world: “efactura” electronic bill service in 2005. •In Argentina, Telefónica Móviles has •In Peru, the formats and contents of the updated the bill model by unifying the bills have been improved description of the services in the systems and with a new conceptual and graphic design. •Telefónica Móviles Chile, redesigned its bill, which helped to improve the perception of our customers. The use of Internet as an alternative means of making queries and delivering the bill has also been enhanced, and there are now 100,000 customers receiving their bills only in this way. •In Colombia the introduction began of the new system for billing and managing customers, by adopting new definitions and formats for the bill to be clearer and more transparent.

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Marketing Service Operation Billing Customer Technical provision attention Service

Customer attention

Calls attended in the telephone attention centres The telephone is the means most widely Data in millions used by Telefónica customers to communicate with the Company and send Nº calls Nº calls attends 2005 attends 2004 it their queries, requests and complaints. The calls to customer attention centres are Telefónica Móviles1 free in most countries (except for El Argentina 51.4 13.7 Salvador and Guatemala). Attention is also Chile 23.1 18.5 given in several languages in the case of Colombia 23.0 14.9 Ecuador 6.6 10.6 Argentina, Brazil, Chile, El Salvador, Spain, El Salvador 1.3 1.5 Guatemala, Panama and Uruguay Spain2 81.0 42.0 (depending on customer demand). Guatemala 2.7 1.1 Mexico 16.0 21.2 Satisfaction of customers with Nicaragua 2.4 0.9 the attention received Panama 3.8 2.0 In 2005, Telefónica modified the Peru 7.1 7.6 methodology used in measuring customer Uruguay 1.0 0.6 satisfaction with the attention offered by Venezuela 35.3 16.1 asking them whether the reason for their Telefónica de España call had been settled, just before the end of Spain 84.3 69.8 the conversation. This change in Telefónica Latinoamérica3 methodology means that the 2005 figures Argentina 13.6 19.9 are not comparable with those calculated Brazil 205.4 189.8 in 2004, but this absence of past references Chile 14.8 12.2 is compensated by greater objectivity in the Peru 97,2measurement. 1 At times, greater activity obeys an increase in the number of customers associated with the merger of several operators in the country or several promotional campaigns associated with the launch of the new In 2005, Telefónica de España attended brand. more than 84 calls from its customers, 77% 2 Information provided by Telefónica Móviles España to the SETSI for Q4 2005. 3 Calls attended in STB and ADSL included for all segments. The 2004 data are calls attended before 10s. The of which were attended in under 20 data for 2005 concern all calls attended. seconds (87% in 2004). The score given by In the case of Argentina, in 2004 all the calls were considered, whereas in 2005 only the commercial calls to customers to the service offered by bring it into line with the TISA criteria. Telefónica reached a value of 6.77 on a scale of ten points.

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Attention through the website or SMS for customers of Telefónica Móviles r a l a a o a a l a i u y d n r e a i b g a a m o o t u v a u c e m z d l n r m i n t e g a i e a e a l a x o u a i l a u n r S c n g u e

i r u r h o l p e c a e C v A C E E P U P S M N G Through the website Services and price information Queries and complaints mailbox In prepaid: card reloading In contract: online bill In prepaid: consultation of balance and list of calls made. Change of price plan Service activation Chat 24 hours Account payment

Through SMS Balance query Change of price plan

For its part, in 2005 Telefónica Automatic customer attention CASE STUDY Latinoamérica received more than 245 systems million calls from customers, 84.1% of To reduce the time for customer attention, which were attended in under 10 seconds Customer Defence Service in automatic systems are alternated for the (77.3% in 2004). Only 6.9% of the calls Spain simpler questions or to direct calls to more entering the telephone attention centres of specialised operators for the more the company for this segment were The Telefónica Group wishes to become a complex. By way of example, Telefónica unattended. The improvements made world referent as a commercial company, Móviles España attended 75% of the 81 throughout the year, such as Atento al and 2006 was a landmark in the process million calls it received from its customers Cliente, which is based on resolving with the launch, amongst others, in Spain in under 10 seconds; of these 51.7% were customer requirements on the first of the Customer Defence Service. attended by operators and 48.3% by contact, obtained the recognition of the The Customer Defence Service appears automatic systems. customers as satisfaction with the process with the purpose of maximising the quality rose 3.4 percent over December 2004. excellence commitment that the Telefónica In Telefónica we are aware that the Group maintains with respect to the automatic systems may cause a certain There is still no standard methodology in attention and service it gives its customers, rejection among customers, who do not the Telefónica Group to classify the type of by providing a way to check dissatisfied feel comfortable interacting with them. calls received in the call centres, which is customers who would previously have Therefore, whenever a customer contacts a why it is impossible to offer an overall scale resorted to the ordinary forms of making telephone attention centre, they are able of the reasons why customers call, complaints that Telefónica makes available to select the option of talking to a person. although it is clear that most calls involve for them. queries and requests for information. With the launch of the Customer Defence Similarly, there are customers who wish to Service, Telefónica becomes the first do their transactions more quickly than operator to proactively create a unit of such talking with an attention system or an characteristics. operator. Therefore, the companies of the Telefónica Group are developing parallel attention channels, such as the website or sending SMSs.

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CASE STUDY

Resolution on the First Contact they were given access to applications and The introduction process had an initial procedures that had not previously been adaptation that caused an increase in accessible in the call centre. traffic and a fall in satisfaction. However, The aim of the Telefónica Attention Centres - A modification in the contract with the two key results were immediately achieved: is to effectively reply to customer demands service provider, Atento Brasil, which a highly significant increase in satisfaction in the shortest possible time. With this enhanced the resolution capacity. This and a considerable fall in the traffic objective and experimentally within the contract is based on a price per call received in the customer attention centres. group, the “Atento ao Cliente” project was conditioned by a band of durations for each This analysed from an already appreciable developed as a joint initiative between of the calls. If the resolution capacity time period, it is detected that the traffic TelSP and Atento Brasil. The project is based improves, the price improves and the call has fallen considerably, but it is also on three basic premises aimed at duration band is increased. appreciated that the quality has reached a improving the resolution: limit that does not seem to depend on whether the call resolution increases or - A very strong training programme for not. teleoperators to improve their knowledge and attention capacity. - Access by these better trained teleoperators to a greater management capacity on subjects that previously had to be resolved in other instances. To do this,

Evolution of the customer attention programme

Trafic Satisfaction: Transactional

Launch Optimisation Permanent system from until Q1 2005 until Q2 2005 until Q3 2005

100 40 95 90 30 85 80 20 75 10 70 65 0 60

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Formal channels for making claims with Telefónica CASE STUDY Internacionall Argentina Call (112 y 0800 UNPRe) Telefónica Móviles España Boxes: Customer attention; Speedy; Infocliente; Alcancía Telefónica; contacts its customers on Complaints and claims module; Unrecognised lines; Reimbursement demand management; Sivetel Reimbursement Management; Adjustments and PC Credit Notes; Process box; GAC process box; Call centers If a customer wishes us to get in contact Notes with them to clarify any query on our Complaints book products or services, they just have to CNC complete the questionnaire available at Consumer defence www.atencionenlinea.movistar.com. This is Ombudsman the best way we can anticipate our Account executives Commercial offices customers’ queries and resolve them more quickly. Brasil Residential call centre SME call centre Company call centre Business manager Customer attention shop Virtual shop Ombudsman Consumer protection agencies Regulating agency Chile Call Center, 105 attention platforms (a platform required by SUBTEL for general claims), 104 (telephone attention), 107 (commercial attention) and TCTC customers that require attention and from telephones of the competition access through 600600105, 600600104 and 600600107. Customer portfolio Letters to direct line of the “El Mercurio” newspaper. Trades received from SUBTEL (communications sub-secretary) Trades received by SERNAC (national consumer service) Corporate web centre Perú 104 telephone line Presence through multi-centres Letter The regulation also allows it to be done virtually, but not used to date

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Marketing Service Operation Billing Customer Technical provision attention Service

CASE STUDY Technical Service Re-establishment of Deloitte operations following the fire in Telefónica customers hope not to need the the Edificio Windsor Service order returns technical service, as they expect the service Service order returns are one of the main offered to be of great quality. However, when causes of customer dissatisfaction, as while Telefónica Empresas collaborated with the the intervention of the technical service is customers expect to receive a reply from company Deloitte to re-establish its necessary, customer expectations are that it Telefónica, the Company has no indication operative activity following the fire in the should be resolved rapidly and effectively. in its registers that any action has to be Windsor building, located in the financial carried out with the customer. center of Madrid, where the auditing firm Fixed telphony had its head offices and occupied 20 of the The mean time for resolving faults in a In order to reduce the current level of 25 floors of the building. basic telephone line in Spain was 16 hours returns, Telefónica de España has planned This work was carried out under a Disaster in 2005, an identical value to that achieved two pilot experiences based on the areas of Recovery Plan that Deloitte had drawn up in 2004. In Latin America, this value was 42 greatest influence in service order returns, hardly a month before the catastrophe, hours on average between the three which are located at the beginning and the which identifies the critical nature of every segments (Residential, SMES and end of the value chain: application and the steps to be taken. The Companies). In December 2004, this figure communications and information recovery The commercial area, as a result of the was 42.75. The targets set for 2006 are • and support work was performed quickly inadequate closure of the sale (35% of based on adapting the times to the thanks to Telefónica’s skill and experience the returned service orders on gross expectations of each customer segment. in Business Continuity Solutions and BRS sales). (Business Recovery Services). Specifically The installations area, associated with determining were Telefónica’s on order ADSL • The mean time to resolve problems with an problems in contacting the customer storage and backup services, which ADSL line in Spain was 14.15 hours (10.36 in (30% of the returned service orders on provided the necessary resources almost 2004). In the case of ADSL in Latin America, gross sales). immediately, and on which the auditing the mean time for resolving problems was company began to recover its information 21.8 hours (19.45 in 2004), a small increase From the results achieved in both stored on security tapes. bearing in mind the broadband explosion experiences and the reduction of the Hardly 24 hours after starting the recovery in the region in the past year, reaching indexes of returned service orders, the work, practically all of the delegations 2,165,000 ADSL lines. adequateness of these actions and the already had an Internet connection and convenience of their territorial extension began to use their electronic mail, which will be evaluated. enabled the company to start the process Data circuits with of activating the applications supporting a larger bandwidth their business and the documentary In 2005, faults on circuits with a larger management. bandwidth in Spain were repaired in an average time of 8.39 hours.

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CASE STUDY OPINON Telefónica technical assistant for ADSL customers What do our stakeholders think? Telefónica de España has provided customers with a new Technical Assistant to solve In the RepTrak study, we asked society incidents with the ADSL service. This is a software tool to protect, check and automatically about its perception of whether “Telefónica resolve the most frequent problems that might occur with any computer user in relation guarantees its products and services”. to the use of ADSL. Society’s opinion as a consumer is highly significant, as the sample completely The functions provided particularly include: identified those interviewed with •It automatically detects and resolves connection and mail setup problems. customers of the services of the Telefónica Group. •It allows system setups previously stored to be restored to re-establish the connection with the previous parameters. The results obtained in December 2005 •It provides detailed information on hardware, software and customer PC connections. were the following •It includes simple tools to optimise the resources of the customer PC: connection tests, router rebooting, cleaning IE caché, resetting IP, etc. España 68.4 •It provides online assistance from the telephone attention centre (TAC), by opening a chat session, and also, when authorised, allows the remote control of the customer PC Argentina 64.4 from the CAT. Brasil 57.9 All of these facilities will enable the number of calls to the TAC and the time for resolving incidents to be reduced, with a direct impact on customer satisfaction and the costs of the Chile 71.5 TAC. The aim is that all ADSL customers should have this tool, so the Assistant has been México 77.1 distributed by electronic mail to 350,000 customers, and has been made available to customers through the website, the Customer Attention Centres have been trained and Peru 62.4 the application has been included on the ADSL installation CD for all customers.

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Excellence in Service improvement initiatives service Quality certificates

Service improvement initiatives

Telefónica de España Some of the Six Sigma projects developed The strategic programme meta:cliente in in 2005 were: 2005 in Telefónica de España started a new Brazil: wave of improvement initiatives structured Logistics efficiency of the Speedy in four modules, one of which is Operative self-installable Kit. Programming Speedy Excellence, focused specifically on customer installation and repair services. Reduction satisfaction and increased efficiency of repeated STB faults. throughout the value chain. In 2005, the following six transversal work teams were Argentina: established, from which around 150 Optimisation of the SME customer planned actions arise: complaints. Optimise and systematise the provision of •Residential and small business and personal protection elements. professional customer attention centres Optimise the times for giving Company •Broadband services Customers service. Large customer billing Chile: • Speedy ADSL Broadband customer •System renewal and availability complaint attention. •Effectiveness in different units Resolution of STB Household and SME complaints on the first contact. Comprehensive material management • Time for delivering quotes to customers. Telefónica Latinoamérica Peru: The Six Sigma methodology is being used in Complaints associated with new the four operators in Latin America as a key campaigns and products. tool to identify the processes and levers Efficiciency in managing installations. critical for improving quality.The bases of Incidents in the network affecting the the project are the Rules for the customer. Introduction of Six Sigma approved in 2004. 2005 saw a close collaboration between the commercial, operational and quality More than 250 Six Sigma projects were areas of Telefónica de España and carried out in 2005 (96 in 2004) involving over 2,100 professionals from Telefónica Latinoamérica in the Six Sigma training processes. The work plan established for 2006 includes the training of a further 1,000 professionals in the different tools of the Six Sigma methodology.

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The Six Sigma improvement methodology, based on controlling the variability of the processes and training people, pursues customer satisfaction and has been constituted in the reference methodology of the Telefónica Group for process optimisation.

Introduction of the Six Sigma methodology in Telefónica Latinoamérica Argentina Brazil Chile Peru Seis Sigma projects 17 197 16 28 People involved in the training 123 1,735 111 143

Telefónica Latinoamérica. With this, Chile (Six Sigma) successful experiences were shared and Increase the capacity to resolve claims for common work areas were identified in first line reloading failure subjects such as commercial intelligence, Reduce the time for generating and sales models and channels and customer approving credit notes attention, in offering broad band products and traditional business. Ecuador (Six Sigma) Guarantee the availability of the cellular Telefónica Móviles network each month In 2005, Telefónica Móviles España Reduce the time required to deal with established different work groups in order serving goods and services in the to establish improvement initiatives in the management areas service offered to its customers. El Salvador and Guatemala •Management of the service quality from Reduction of the number of claims by the customer’s viewpoint (3 projects). solving root problems through the Claims Committee Resolution of root cause of customer • Reduce repeated claims complaints (8 improvement groups). Mexico Automation of the management of the • Increase network availability and added quality of the services from the customer value service platforms viewpoint. Reduction of the percentage of failed calls •Evaluation of 6 services, introduction, Reduction of the number of rejected SMS improvements and table of indicators. Panama (Six Sigma) •Improvement of the quality Reduction of billing complaints management of the internal customer (3 Reduction of commercial attention time improvement groups). Reduction of activation time

Telefónica Móviles operators applied Peru (Six Sigma) the Six Sigma methodology to develop Reduce the amount of external customer projects and initiatives to improve the dissatisfaction service, as described below: Increase the service level of the call center to minimise customer waiting time Argentina (Six Sigma) Increase the satisfaction of customers with Increase the productivity of the call centers the process of activating pay-to-phone Reduce demands for personal attention. cards and virtual reloads Reduce the logistics time Venezuela Reduce the service centre attention times Reduce the reply time to corporate customer failure scaling Improve the price change control process

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Quality certificates

The introduction and achievement of Telefónica Latinoamérica developed quality certificates shows us that both the significantly in ISO 9001 certifying its processes and procedures of the company quality processes. These processes in the management are controlled and region involved more than 5,000 standardised, resulting in an improvement professionals of the Group and had the in the efficiency and efficacy of the following results. organisation. These certificates are drawn up by external independent entities and Telefónica Móviles is also moving forward are made under criteria determined by in the process of certifying its processes international standards to guarantee a in all countries of Latin America where quality service from different aspects. The it has operations. ISO 9001:2000 standard nourishes the company in the culture of Continuous Improvement and increases the customers’ confidence in the products and services offered by the Company.

Telefónica de España has had a quality system implemented and certified since 2001, applicable in all processes of the organisation and in the whole of the territory where the Company operates. In 2005 Aenor carried out a further follow-up audit of the quality management system for which all the transversal processes of six products were audited, from the development of the products to the billing and payment. The chosen products were Imagenio, ADSL and KitADSL for the residential segment and SolcionesADSL, Wifi and “Líneas Retribuidas” in the small business and professional segment. In addition, in 2005, the “Madrid Excelente” certificate was renewed.

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Development of the ISO 9001 certification process in Telefónica Internacional

Country Activity Certification Date Argentina Attention in queries, processes, withholdings and cancellations, receipt of customer complaints and October 2005 claims in the commercial centres of the Residential business Unit. SMEs, Wholesalers and Large Companies November 2005 Billing (Residential and SME) Activities from pre-billing calls and processing to issuing, enveloping, dispatching and distributing bills. Billing of Data / Solutions and Control of invoice delivery (TEmpresas). September 2005 Telephone attention for requests, queries, sales, cancellations, claims and complaints from preferential customers, companies and wholesalers and the commercial management of SME customers and indirect channels. Telephone attention and First Level Technical Support for Customers with Data Services and Datacenter November 2005 Brazil Guarantee of installation, operation and technical support for April 2005 ADSL technology broad band access (Speedy Home and Business). Attention and support for Ombudsman management April 2005 Maintenance of the process of collecting, recording, prices and billing (ABNT) June 2005 Chile Planning, Design and Development of Communications Products and December 2005 services for Companies (Telefónica Empresas) Peru Assurance of orders, information management and contacts November 2004 OTF billing claim management February 2004 Management of claims concerning data and value added services (TEmpresas) Cyclical billing of services of Added Value and February 2004 Packages including Added Value of Telefónica Empresas and Telefónica del Perú Provision, Management and Maintenance of Connectivity Networks and Services (TEmpresas). August 2005 OTF Billing process control. November 2003 Corrective and preventive maintenance for the Fixed and Data Transmission services. December 2004 Assignment and Installation of Fixeds and maintenance of the customer access network. December 2004

Development of the ISO 9001 certification process in Telefónica Móviles Argentina In the course of COPC-2000 PSIC certification. The process covers 100% of customer relations with Movistar (call center, retention, customer experience centres, back office and help desks...) Certification is expected for December 2006.

Chile 100% of the processes associated with customer attention are ISO 9001 certified and approximately 65% of the company activities. Colombia The main customer attention processes are ISO 9001 certified, affecting 80% of the processes associated with the transactions of the sales and service centres. The first mobile phone operator in the country to achieve this certification. Ecuador The operation and maintenance of the radio bases are ISO 9001 certified El Salvador 100% of all the business line processes are ISO 9001:2000 certified Spain 100% of activities are ISO 9001:1994 certified, from service design, network building and commercial attention to after-sales and throughout the country. Guatemala 100% of all the business line processes are ISO 9001:2000 certified. Mexico In November 2005, a follow-up audit was made of the ISO-9001:2000 Quality Management System and the ISO-14001:2004 environmental management system. Nicaragua Certification according to ISO 9001:2000 complete in 2006. Panama In 2005 the certification process began according to ISO 9001:2000. Peru 100% of the claim registering, treatment, resolution and close processes through the Call Center, Commercial Offices, Integral Agencies and Multicentres of the city of Lima ISO 9001:2000 certified. Venezuela In the process of appointing consultants and launching the ISO 9001:2000 certification process.

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Secret of telecommunications

Protection against Internet abuse

Responsibility in Data protection and privacy the service offered Protection of infancy

Terminal theft

Responsible use of telecommunications

Secret of Customer telecommunications protection against

The State jurisdictional agencies, such as “Internet abuse” the Tax Office and other bodies of the different Public Administrations, have asked Despite the innumerable advantages that for information and action from our Internet offers its users, it can also present Company in their respective areas of certain threats. The global extension of the competence, in which Telefónica is obliged networks makes it possible for users to to carry out instructions issued from them receive external attacks such as spam, or to provide the required information. intrusion, attacks on intellectual property, unsuitable contents, child pornography, The legitimate action of the mentioned fraud, phising, offence... public bodies in carrying out their functions at times comes into conflict with In 2005, a growing situation was detected the, also legitimate, rights of people. of the problems of security from people Therefore, the requirements demanded seeking recognition among the Internet with respect to the legal raising of community from making viruses, trojans, telecommunications secrecy are strictly etc to seeking an ever more obvious fulfilled both in the Constitution and in the economic benefit, as is the case of Law of Criminal Judgement, through the phishing, the fraud of the Nigerian letters, intervention and observation of spyware, etc. In Spain, phising has been one communications or the connection to the of the increasing problems, with the circuit of malicious calls. appearance of webs pretending to be banks and entities of electronic commerce.

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The document “Obligations of the Corporate policy of protection Companies of the Telefónica Group related CASE STUDY against “Internet abuse” to the Management of Abuse in Internet In March 2004, Telefónica started up a services” was approved by the Security Intelectual Property Defense corporate initiative to co-ordinate the Committee in November 2005. The policies and processes used in detecting principles included are the following: Telefónica states its solid support to and resolving IP incidents in the networks. promote the use of licit content in the To develop and introduce products, The companies making up the • Information society and its refusal to carry services and/or secure networks. Subcommittee of Internet Abuse are out criminal acts or third rights infractions Telefónica SA, Telefónica de España, •To attend any claims of abuse broughtin through digital networks. Some of the Telefónica Móviles España, Telefónica by the customers or other users. outstanding iniciatives carried out by Wholesale Services, Telefónica Empresas Telefónica during 2005 are: To start up technical measures to España, TeleSP,Telefónica de Argentina, • identify and counter the said abuse. Telefónica del Perú, Telefónica CTC Chile, Public iniciatives support: Telefónica Empresas América. •To co-ordinate actions with other Telefónica states its firm support to the companies of the group. Integral Plan of decreasing and eliminating The objectives of the initiative are the •To co-operate with other actors of the the activities against Intelectual Property, following: society of information approved by the Spanish Cabinet in 8th April, 2005. To reply to the demands for security and • To inform and/or educate customers of The objective is to establish a shared protection declared by the customers • the importance of security. opinion, in every Telefónica’s Group •To mitigate the perception of poorer •Centralisation of the “white list of companies, that could be submitted in the service by our customers Telefónica mail servers”.The objective of different Forums created by the main •To assure continuity in the service, this is to avoid blockage between affected stakeholders for this plan and with avoiding blockage by other networks addresses of customers of the Group, thus the aim of adopting a unique stance in the guaranteeing the continuity of the service. Telecommunications Industry against •To reduce the costs of network piracy maintenance The Sub-committee has developed •To manage the risks to Telefónica’s “Common procedures related to the Sectorial initiatives support: reputation management of abuse in Internet services”, Besides an internal working group which will be discussed and approved in constitution, Telefónica has also joint the In 2005 the Subcommittee of Internet 2006. This document establishes the working Group created by the different Abuse developed a series of rules actions that must be carried out by the affected agents, who are interested in concerning the management of such companies of the Telefónica Group when implementing an anti-piracy plan. incidents by the companies of the they receive reports about attacks from Telefónica Group. spam, virus, intrusion, fraud, phising...; infringement of intellectual property; child The “Policy of Acceptable Use of Internet • pornography; terrorism; xenophobia; Services” (approved by the Security unsuitable contents; blockage due to black Committee in June 2005) establishes the lists; offence... recommendation to the companies of the Telefónica Group of informing their customers of the need to make suitable use of the Internet services.

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What can our customers do? •Establishment of sanctions in the Protect their equipment contracts with integrators to avoid Contrary to what it might seem, practically unwanted messages or voice calls from all spam incidents registered in Telefónica being sent to customers (e.g.: Ecuador, de España are due to the existence of Panama, Venezuela) customer equipment with vulnerabilities Anti-spam service, thanks to which and security holes that allow others to • customers can indicate that they do not send unauthorised mail without the wish to receive Movistar campaigns (e.g. knowledge of our customers. Chile, Ecuador)

There are a large number of units Report attacks connected to Internet that do not meet Telefónica de España has more than 20 minimum security requirements as regards electronic mail addresses for reports their browsing habits and use of Internet. available for its customers and computer As a result of this, their units end up under security companies and other operators. the control of “hackers” or “spammers” from These include [email protected] for the other countries to carry out their attacks. electronic mail service and abuse@rima- tde.net for the connectivity services (ADSL, The companies of the Telefónica Group RTC, RDSI, Satélite, etc). All messages have strengthened their tools to guarantee received are sent to the Telefónica de the protection of their customers both in España Nemesys centre. Other similar the use of Internet services and to prevent services are [email protected] and them from being victims of them. [email protected]

The companies of Telefónica Móviles have Showing its leadership in the sector, in also introduced the necessary systems to 2005, Telefónica organised the first protect customers from spam as far as meeting of Internet abuse attention groups possible: in Spain, an event that received the •There are solutions that allow it to be collaboration of more than 20 Internet determined on the basis of statistical service providers, Universities and other criteria whether messages are spam, groups interested in sharing best practices eliminating those identified as such (e.g.: to combat the said abuse. The meeting Argentina, Peru, Uruguay...) analysed subjects such as undesired electronic mail messages, viruses, attacks, There are permanent traffic monitors • the sending of false messages to collect and controls that allow customers confidential data or black lists. making massive mailings or short messages to be identified and their use limited (e.g. Colombia, Panama...)

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Tools offered by Telefónica de España to protect its customers

Protection Input Output Customer PC Anti virus Anti spyware Anti Intruders Network Anti spam Customer blockage due Anti phising to complaints in Abuse Content filter Mail server Anti spam Authentication Anti virus Anti virus Black list Anti spam Punisher Punisher Customer blockage due to complaints in Abuse

CASE STUDY Advice when using Internet •Under no circumstance must links be followed that lead to the user’s banking portal or their electronic banking system. It is necessary to always use the addresses entered in our browser by hand. The banking entity never asks for codes of any kind by mail, nor sends mail messages with subjects on the need to confirm data in the event of supposed cancellations. Such messages must always be mistrusted. •The electronic mail must also be watched. Almost all fraudulent messages arrive by this means, so it is recommended to have a safe address for banking matters. This address must not be published or given in forums, chats or public media. The large majority of unwanted mail lists come from tracking through chain mails, forums, chats and notice boards on the net, so if we avoid taking part in such emails in these places, it is a guarantee that we will not receive advertising or dangerous messages. •Make sure that the name of the page corresponds to the name of the entity, for example: http://www.BancoOnLine.es. Normally with fraudulent pages, instead of this there is a numerical sequence or one of the following type: http://218.12.31.xxx, which does not belong to any entity of the bank entity. Other times there is an almost imperceptible modification in the name of the bank, a letter is inserted or repeated in some part of the name http://www.BancoOnLinee.es, or ttp://www.BancoOnLiine.es, or a spelling mistake is intentionally given which is not noticed by some users, http://www.BamcoOnLine.es or http://www.vancoonline.es/ •Be suspicious of mail and web pages where there are serious mistakes of spelling and in the grammatical construction of the sentences. In general, translations placed in mails and websites are made by people with no knowledge of our grammar, and the use is also noted of very poor automatic translators in their creation •Note that the page works with SSL protocol, or safe servers that guarantee traffic encrypting between machine and customer. This may be seen simply at sight if the address bar of our browser gives "https://" instead of "http://;" at the beginning of the address, or if the state bar shows a padlock that warns us that this is a safe page. •As a final piece of advice, we should do nothing of which we are not absolutely sure.

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CASE STUDY CASE STUDY Telefónica Empresas España Telefónica de España Nemesys Phising and its customers’ security centre Telefónica de España was informed of 52 cases of phising generated from their networks (attacks against banks and Telefónica Empresas España is a In Telefónica de España, the Centro companies). pioneering company in guaranteeing the Nemesys deals with attending and protection and security of its customers. In processing claims received from Internet In order to protect all Internet users from 2005, they strived outstandingly to protect on illicit or fraudulent activities or abuse such frauds, Telefónica de España puts into their customers from virus, spam and made from its IP network. practice that of the protocol of action other attacks such as phising. against phishing agreed with the Centre Spam for Interbanking C-operation and other In 2005, 1,418 million electronic mails were Despite having reached more than National -phishing Work Groups: analysed (+ 47.5% over 2004). The increase 400,000 complaints about spam from the in the number of mails analysed is due to Telefónica networks, there is no recognised •By detecting and blocking all phishing the inclusion of mail from employees of active “spammer” in such networks. When a webs that have been reported, new companies that are customers of spam report is received, the following is By blocking the access to these webs Telefónica Empresas España. The • done: from the net, conclusions of the analysis are as follows: •Identify the origin of the attack / spam By eliminating the phishing webs 67 million emails carried a virus (4.7%). A • • among the customers. detected in our customers’ equipment fall of 29.75% is seen in the number of Notify the customer of the sending of emails with a virus (despite the increase • spam from their computer. in the number of mails analysed). According to the “Policy of Acceptable Spam traffic was multiplied 5.8 times, • • Use”, customers are eliminated from the reaching 168 million mails (11.84%). This service who repeatedly try to make use increase in traffic is due to the explosion of the Telefónica networks to carry out of fraud on the net (phising) and the mailings. activation of heuristic detection filters (in addition to black lists and spam signatures). Telefónica Empresas España Center Nemesys is the national leader in antivirus and antispam on the net, analysing more 90,000 Spam than 56% of the traffic documented in 80,000 Virus / hacking “red.es”. 70,000 •In 2005, 291 cases of “phising” were 60,000 detected in Spanish entities (33 in 2004). 50,000 The United States is the origin of 50% of 40,000 the attacks on Spanish entities, and 30,000 Germany, Korea and Taiwan account for a further 25%. Telefónica Empresas 20,000 España collaborates with its customers 10,000 0 in resolving attacks, and solves over 60% Jan. Feb. Mar. Apr. May. Jun. Jul. Ago. Sep. Oct. Nov. Dec. of the cases in under five hours.

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CASE STUDY CASE STUDY Management of Spam Code of conduct with and Abuse in Telefónica de Mobile Spam Argentina The Code of conduct with Mobile Spam Telefónica de Argentina manages spam in reflects the commitment of the operators the mail platform used by customers of and GSMA (GSM Association) against spam residential, preferential and company in mobile phones. This code is applied business lines. This work involves specifically to commercial short or approximately 90 hours of work each multimedia messages that are sent to month. customers without their due consent, including, as required in national To control the spam, checks are made on legislation, messages that invite people to the amount of mailings in each account, contact premium services (short messages, the authentication of the sender and the telephone calls...) or messages that are control of sending times for very long fraudulent. mails. The most outstanding results in 2005 are: Telefónica Móviles signed this code, the general principles of which are the •More than 7,500 domains and 545,000 following: mailboxes are analysed •To include anti-spam clauses in all new •Approximately 400 mailboxes are contracts with service providers blocked each month as not respecting the “Policy of Acceptable Use”. •To establish a mechanism that assures the consent of the customer to such services, assuring control with respect to the marketing actions of the mobile operator •To collaborate with other mobile operators to face aspects of spam •To inform and give resources to customers to help them to minimise the levels and impacts of mobile spam •To encourage other anti-spam activities to reduce the level and impact of mobile spam •To involve governments and regulators in supporting the industry

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Data protection and customer privacy

In 2004, Telefónica started the Proyecto The use of the application reduced the MADRE (Automated Regulation exposure of the Telefónica en España Maintenance), initially conceived as a tool companies to administrative sanctions as a to facilitate the compilation of data result of shortcomings or the infringement protection material. The MADRE application of administrative and management allows the effective, efficient management procedures provided in the mentioned law. of compliance with the Organic Law on The main landmarks in 2005 were the Data Protection (LOPD) and the Safety following: Measure Regulation (RMS). •Registering the intellectual property of the computer application to show the The application is developed from initial innovative effort and safeguard the experiences in Telefónica Móviles España interests of Telefónica. and the additional requirements of the Telefónica Group Security Committee •Making personal visits to all the derived from the regulations themselves. companies (May-June) to give them The maintenance of the application in time support and attend their needs in has implied that it has to be constantly implementing and starting up the adapted to the legal framework and the service. organisational circumstances, regulations •Presenting the MADRE application in and techniques of the companies of the Securmática 2005 (26th April 2005): XVI Telefónica Group. To develop it, in 2004 a Spanish Congress of Information Security work group was set up with Telefónica, the joint sponsored by Telefónica Empresas. results of which were implemented in 2005. The application aroused interest in the sector and offered an image of Telefónica as an innovative, proactive company in safeguarding the personal data of its customers.

The rules and procedures of Telefónica companies in protecting the personal information of customers stipulate that information is only given to holders of lines and applications are only processed that refer to services given directly by them. The request for information on customers made by third parties is only attended with authorisation from the court or competent authority in each country

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Fixed Telephony Spanish Data Protection Agency has Spain released a resolution against Terra and Telefónica de España has been a pioneering other againts Telefónica Soluciones. company in Spain in assuming commitments of protection and security Latin America that guarantee the inviolability of personal Telefónica guarantees the confidentiality of data, and to this effect, in July 1994, it drew its customers and employees, etc. data in up the first Deontological Code registered all countries where it operates. The with the Spanish Data Protection Agency. Company guarantees that it will adopt and fulfil all security measures in all treatment Telefónica de España respects and fulfils centres, premises, equipment, systems, the directives established by the Spanish programmes and therefore all personnel Data Protection Agency (AEPD) concerning involved in their treatment, according to the privacy of the personal data of citizens. the functions and measures established in In 2005, Telefónica de España passed over the Safety Measure Regulation and other ten inspections and started up several internal regulations established there for. initiatives to assure compliance with these requirements. The initiatives include the In accordance with its concession following: agreement, Telefónica del Perú has given ten annual reports on activities carried out •Preparation of a Decalogue of rules on to guarantee secrecy in Data Protection, to which the Lawyers’ telecommunications. The Central Offices of Offices collaborating with Telefónica de the Operations of Telefónica Perí in the España must be subject. second half of the year started ISO •Preparation of a Decalogue of rules on 27001:2005 certification concerning Data Protection, to which the Information Security, and completed the distributors and the agents audit with “zero non-conformities” with the commercialising Telefónica de España recommendation of the certificate for the products and services must be subject. said office. The certificate was received in March 2006, and this is the first Peruvian Inspections of the files of entities • company and one of the first in Latin responsible for treatment. America to achieve it. •Proposed extension of the typical Data Protection Code of Telefónica de España A claim was brought against Telefónica CTC to all companies of the Telefónica Group. Chile, alleging damages for not having respected the confidentiality of telephone Approximately one hundred and fifty lines when it published numbers in the reports by customers determined the residential telephone directory. After the opening of different claims against appeals, Telefónica was finally sentenced to Telefónica de España by the Spanish Data compensation. Protection Agency (Inspection, Informative File, Right-holdership, Sanctions…). In 2005, Telefónica de España was sanctioned in two Cases, and the proposed sanction was reduced to a minimum. Likewise, the

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require registers to allow users consulting the mobile number to be detected. Mobile telephony •Operations with customer data leave a trace of every user who enters, with The Telefónica Móviles España S.A.U. information on the user, date and a Security Sub-committee fulfilled the comment. Strategic Security Plan 2005 and presented a new Strategic Security Plan 2006 in order •Accesses to the system are handled to increase security in the Company’s exclusively by the Computer Security systems and processes. group. In the online channels, accesses are by Likewise, in 2005 an online course in • security code and all corporate websites Security Culture was drawn up to make all have an approved certificate to workers of Telefónica Móviles España S.A.U. guarantee confidentiality in aware of the importance of respecting the communications. confidentiality of information. The Data Protection Agency has published An automatic process is being developed to 6 resolutions against Telefónica Móviles enable customers and users to control their España. personal data, in order to comply with data protection legislation. In 2005, two claims were brought against Telefónica Móviles Colombia (ordinary civil Systems containing details of customers of liability proceedings) for the supposed Telefónica Móviles are structured in the undue use of customer data. These following way to protect the information: proceedings are in the initial phase. In •The structure of the system allows the Argentina, Chile, Ecuador, El Salvador, different elements to be dealt with Guatemala, Nicaragua, Panama, Uruguay independently (example: Queries, and Venezuela the absence of claims of customer operations, etc.). this kind has been confirmed. •Each user has a profile that controls personal access to the different elements. •The profiles have confidentiality levels, which allows more delicate information to be controlled. Moreover, actions may be carried out on customer information. •Users may not use options without previous access. Certain delicate queries

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Protection of infancy

Despite the general recognition of the role Collaboration in the struggle Internet plays in modern society, activities against child pornography are developed through the net with aims Telefónica has sought the support and that are not shared by society. The use of collaboration of the most representative Internet to spread illicit contents, for the public institutions and agencies in the illicit use of contents, and for committing fight against such crimes, and also private the so-called technological crimes means entities and associations. There has long that such crimes have risen giddily. It is a been direct and stable discussion between particularly alarming fact that a large part them, and in line with this collaboration, of these attempt directly against the some measures have been taken, such as: weaker sectors of society and which must be the object of greater protection: infancy •Suppression of the service of anonymous and the young. personal pages thus making it easier to pursue child pornography. Telefónica considers that it is necessary to •A campaign encouraging users to report take a step further towards strengthening any activity that was illegal, illicit or its current collaboration with different immoral included or accessible through public and private associations and personal portals or pages entities; at the same time the crimes committed on Internet are of an ever rising •Establishment of internal procedures to degree of sophistication shown both in the give a rapid, safe and effective reply to form and speed of their reproduction, and reports and investigations proposed by in the skill to avoid any kind of control and the State Security Forces and Agencies, follow-up, especially with regard to their such as the Spanish Civil Guard authors. Therefore, in 2005, Telefónica led Telematic Crime Group. These actions, co- several Round Tables in the head offices of ordinated by the Contentious Juridical the Defender of Minors, which discussed Advice department of Telefónica S.A. are the main problems derived from the extended to all countries where the insecure use of the net. Telefónica Group develops its activities •Collaboration with the main NGOs protecting infancy on Internet, such as Protegeles and ACPI (Association against Child Pornography).

According to data from the Civil Guard and the Police, this all contributed to reducing illicit actions by 99% and very particularly the display of child pornography.

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Awareness of the good use of Adult content management Internet regulation One of the most effective measures to The Commission for HR and Corporate prevent the poor use of Internet is to make Reputation of the Telefónica Board of society aware of it, as well as the Management favourably reported on the availability of resources from parents and Adult Content Management Regulation in educators to guarantee the protection of June 2005. The general principles of these minors and at the same time nurture the regulations are: good use of new technologies. •To protect the reputation, brand and the •Dissemination through talks and institutional values of Telefónica discussion, animated scripts and leaflets To foster Telefónica’s commercial of the advantages of the use of Safe • relations with its customers, based on Internet in different schools of several the idea of confidence, the core value of Autonomous Communities. This the Group. campaign will continue in 2006. To foster the creation of a philosophy Safenet Project; of collaboration with the • • sensitive to protecting citizens from European Union concerning the contents liable to offend their sensitivity. protection of minors, prevention of illicit activities and secure use of the net. In •To guarantee the protection of citizens 2006, this agreement was materialised for whom society demands special in the publishing of specialised attention, and specifically the young and magazines, leaflets, CDs and educative infancy. websites aimed at turning the net into a •To promote the necessary preventive, secure, amusing tool... and the later technical and organisational distribution of all this to parents, mechanisms to avoid these citizens teachers and pupils. accessing unsuitable contents. •In February 2005, coinciding with the •To make possible the effective use of its International Day of Safe Internet, a new infrastructures and networks. Agreement was signed to extend the field of protection to minors. This •To contribute to the effective agreement for the first time includes development of the Information Society NGOs, institutions and different business by streamlining and hindering the entities of the sector. inclusion of unsuitable contents. •Total opposition to any type of illicit These activities have focused mainly on conduct related to adult contents. Spain, as this is the country where there is greater access to new technologies by This regulation has specific section that minors. In 2006, Telefónica had the deal with Internet, mobile telephony and objective of disseminating these materials television, and a common characteristic is in all countries where it develops the establishment of systems of access to operations, for which it made use of the contents for adults on the express wish of possibilities offered by Educared. the customer (opt-in).

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When such contents are offered by Tools for protecting infancy CASE STUDY Fixed telephony providers legally connected to the Telefónica Móviles platforms, current Telefónica de España offers its customers of Preadolescent pack ADSL a service to control access to habitual rules consist of warning unsuitable contents under the name of customers that they are accessing CanguroNet. With this service, guardians information authorised only for adults. The In Spain, Movistar has launched an may enable a filter that blocks access to associated voice and chat services are exclusive, unique product on the market so undesired contents, by selecting the generally more difficult to control, as their parents could have a mobile phone service categories they wish to block: sex, violence, contents are not always declared. adapted to the communication needs of racism, sects... There are up to 22 categories their children. The pack is designed bearing that the customer may filter or allow at In 2006, Telefónica Móviles has the in mind criteria of security and tranquillity; their own discretion. Likewise, there is a objective of sharing policies of action, control on spending and access to service mode that inhibits the undesired methodologies and systems with O2, as contents; saving; communication and advertising of websites and spyware. this operator has great experience in protection of children and parents’ managing relationships with customers in demands for security and saving. The Mobile telephony more sensitised markets such as the British initiative has the backing of the "for Telefónica Móviles operators do not offer and Irish. responsible consumption" guarantee of adult contents, although there is the the Union of Spanish Consumers (UCE), possibility of accessing these kinds of and one euro for each pack sold will be products prepared by others through the used to collaborate with Aldeas Infantiles SMS, WAP or BREW platforms. SOS de España.

Telefónica Móviles Colombia launched the Firefly telephone with Movistar plans, the first product truly designed for children in this country. It is a simple, amusing telephone that allows control of both the incoming and outgoing calls through a book of contents previously programmed by parents with a key.

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Terminal theft

In 2005, Telefónica Móviles España In other countries, Telefónica Móviles is continued to work on the programme to working in a sector manner and with the control the theft of terminals. The blocking local authorities to seek solutions that not was processed by means of an application only minimise the consequences of robbery that confirms the IMEI/MSISDN link, and if for customers, but also serve in turn to there is conformity, the terminal is blocked discourage this activity by leaving stolen in all national operators. The total number terminals completely useless. of terminals reported stolen exceeded half •In Argentina, Chile, Colombia, Ecuador, a million, and 18.5% were disabled by the Panama, Peru, Uruguay, Venezuela... files system. are exchanged with the registers of the units reported stolen between the Similarly, in the area of fraud prevention, different national operators for the the Company is taking part in initiatives to different existing technologies. warn users against techniques of deceitful obtention of card codes or reloads intended •In the case of Colombia, Ecuador and for making undue charges to accounts or Peru, given their closeness the databases balances. were exchanged between the Telefónica operators. •In El Salvador and Guatemala the systems do not yet exchange information with the other operators, although they do have the tools to deactivate the units in their own network.

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Responsible use of telecommunications

As stated in the section “Motor of social development” of this report, there is CASE STUDY considerable social consensus on the positive impact of telecommunications on Manual for understanding •Using discreet call signals, reducing the society. However, due to the speed with mobile telephony. volume or using the vibration mode. which the new technologies are adopted, •Trying to talk quietly and, if possible, in a telecommunications are having a In this field, Telefónica Móviles España has separate place. In addition to avoiding fundamental impact on people’s lifestyles, signed a collaboration agreement with the disturbing others, it will preserve their and at times can have a negative impact Spanish Union of Consumers (UCE) with privacy. on them. the aim of improving the information to citizens on mobile telephony, protecting •In surroundings where it is not possible This negative impact is usually associated their rights and seeking solutions for users to hold a conversation (cinemas, with misuse of mobile telephony, in to improve the services, applications and concerts), using the mobile to send or particular in public places such as cinemas, mobile contents for the Information receive messages, browse, etc., always in theatres, churches, conferences, academic Society. One of the first joint projects silent mode. places. Furthermore, despite the growing resulting from the agreement is the •If the mobile phone is able to take social sensitisation, many drivers use their publication of the “Manual for photographs, never photograph anybody mobile phones while driving, with the understanding mobile telephony”, a guide without their permission. In no case resulting risks to their integrity and that of intended to provide users with clear, simply must minors be photographed. the traffic. information on how to use and enjoy Specific recommendations are also mobile telephony better. • included on the use of mobiles in For this reason, different operators of hospitals, on planes, in petrol stations Telefónica Móviles have produced Amongst other things, the manual explains and in the car, and the use of mobile information aimed at sensitising what mobile telephony is and how it works, phones by children. customers on how to use the technology. the contribution of mobile telephony to Therefore, in Spain, Chile, Nicaragua, social well-being and economic Further information at Colombia and Peru, web campaigns have development, and recommendations for http://www.empresa.movistar.es/elcompromiso been developed, leaflets have been the good use of mobile telephones, such as: published and advertising supports and banners have been placed on invoices.

It is important to remember that Telefónica Móviles has also informed its customers on questions such as electromagnetic fields and health. The breakdown of the said activities is presented in the environment chapter of this report.

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Markets where Situation of regulations and free competition Telefónica operates Situation of competition and market evolution

Competitive situation and market evolution Fixed Telephony The total plant of retail accesses to Spain Telefónica broadband Internet reached Land line accesses in Spain are estimated 2,719,669 accesses at the end of 2005, to have grown by 0.9% in 2005, whereas which according to our estimates is those of Telefónica de España fell by 1.2%, approximately 55% of the whole market in leaving the Company with an estimated Spain. It is significant to see that this market share of nearly 85% of these growth was achieved in an aggressive accesses, after lining up the historical series commercial environment, both from our with recent data from the CMT cable competitors and local loop rental. (Telecommunications Market Commission) The total plant of rented local loops, 116,112 As regards the land voice analogue traffic, at the end of 2004, reached 434,759 units, the total estimated volume in the Spanish which according to our estimates is 8.8% of market, expressed in minutes, experienced the total plant of broadband Internet a fall of 3.1% over the year. After lining up accesses and 11.1% of all ADSL lines. Of all of the historical series with recent data from the local loop rental lines, 64.2% are shared. the CMT, the estimated share of Telefónica de España in this market in December Argentina would be 66%. The management of TASA adapted to a context of growing activity and The market of broadband Internet accesses consumption, and in a market of frozen in Spain reached 5 million accesses on the rates, has enabled growth of Fixed line close, according to our estimates. The accesses and voice traffic and an expansion success of Telefónica ADSL contributed of the broadband. At the end of 2005, with significantly to this growth, which as a a 34% market share and 50% in telephony, whole (wholesalers plus retailer, including TASA is still the market leader. In its area of accesses only providing the Imagenio influence, their share is 73% in broad band service) reached 3,479,824 accesses at the and almost 100% in local telephony. end of 2005. Furthermore, the local loop rental market share made Telefónica de España’s share in the ADSL market in Spain fall to 89%.

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In all markets where Telefónica is present, there is sufficient effective competition with the entity so as to limit its significant weight in the market, and on certain occasions, without it being able to be the leader. As a result of the strong competition in the markets, Telefónica is therefore obliged to take into account the competitors (current or even potential), the suppliers and the Administration in its decisions.

Brazil Peru TeleSP closed 2005 with a 46% growth in In 2005, Telefónica del Perú (TdP) saw a its broad band accesses and the alternative considerable increase in the number of plans for land lines such as Líneas accesses (+13.7%), as a result of a strong Económicas. In March the Línea de commercial activity throughout the year, Economía Familiar was launched, which in both in Fixed telephony (prepaid and under nine months exceeded a million consumption control accounts for 59% of customers, taking the total number of Fixed line accesses in December 2005) and Líneas Económicas to over two million in broadband (more than 340,000 retail accesses. accesses to broadband Internet).

TeleSP finished 2005 with a market share These figures represent a market share of of 77% in local telephony and 78% in 96% in local telephony and 98% in broad broadband (referring the the area of band. The good behaviour of the Cable original concession). Television plant (Cable Mágico) is also stressed, with inter-annual growth of Chile 18.8%, reaching 462,211 customers by the Telefónica CTC notes a total 314,200 broad end of the year. band Internet accesses at the end of the year (289,600 retail), reaching a market share of 43%. This growth reflects the commercial effort made in the year to spread broadband massively throughout the country. New forms of variable broadband have been developed (Speedy reloaded) and new packages of broadband + voice have been launched, in addition to a joint offer with satellite TV and new distribution channels.

The total traffic of the Telefónica CTC network continued to fall, mainly due to the strong replacement of mobiles and Internet. Fixed to Fixed local traffic fell by 10.5% in 2005, whereas land-to-mobile grew by 8.4%. In long distance national and international, the total market continues to fall.

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Mobile Telephony Brazil Spain Mobile phone penetration in Brazil rose to In 2005, the Spanish mobile phone sector 46.6% in December 2005, with a total 86.2 was characterised by greater competitive million customers. In an environment of intensity, exceeding 43 million lines and continued competitive aggressiveness, at achieving a penetration of 97%. At the end the end of December Vivo had reached 29.8 of 2005, Telefónica Móviles was reaching 20 million customers (+12.3% over Q4 2004). million customers (+5% over 2004). Central America We must stress the strong commercial In 2005 Telefónica Móviles México effort made throughout the year. Including continued focused on the development of a new customers, migrations and terminal quality distribution network and the changes, Telefónica Móviles España improvement of its processes, making accumulated 10.7 million actions in 2005 changes in its commercial offer, (+19% over 2004). strengthening customer attention and the quality of its services. In this context, in a In a competitive environment characterised year characterised by greater commercial by a large amount of actions in numerical activity, the number of accesses managed portability, Telefónica Móviles España in December 2005 amounted to 6.37 achieved a negative net balance, including million (+12.9% over 2004). prepaid and contract, in the yearly accumulated figure of 116 thousand lines. Guatemala was characterised by great market growth marked by intense Equally, we must stress the effort made by competitive pressure among the operators. the Company in loyalising activities, by In this context, Telefónica Móviles was the launching campaigns to reward time spent second largest operator in the country with as a customer and offering favourable a market share of 26.4%. conditions for terminal renewal, encouraging greater commitment from our In 2005 cellular penetration in El Salvador customers. Therefore, in 2005 nearly 4.5 reached 31.9%, 17 p.p. higher than that million changes were seen (+23.2% over achieved in 2004. In this context, 2004). Telefónica Móviles achieved a market share of 23%, reaching a figure of 538 thousand In the fourth quarter of 2005 new data customers, a gain of 40% over 2004. rates for connectivity were brought in, with concepts close to those of flat rates, prices In Nicaragua, the growth of the number of of 30 euros/month for 1 Giga and 58 customers was marked by the intense euros/month for 5 Gigas. competitive pressure among the operators of the competition, based on two companies under the same consortium. The year culminated with 355,705 active users for mobiles, 15,871 Fixed lines and 7,000 public telephones, representing an annual growth of 31%.

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Panama achieved a market penetration of Southern cone 53% with respect to the 39% in December The Argentine mobile market maintained 2004. A large part of this growth was its high growth rate in 2005, with a strong driven and capitalised by Telefónica Móviles acceleration driven by the favourable which, with a sustained strategy of macroeconomic environment in the accelerated growth, achieved a market country and the development of the share of 49.5. competitive surroundings. In this way, estimated penetration in December 2005 Andes region reached 55% (almost 21 percentage points In 2005, a strong commercial activity was higher than at the close of 2004). In this maintained in the mobile telephony context, the commercial efforts made by market in Venezuela, which translated into Telefónica Móviles in Argentina were significant growth in estimated positive, which allowed 8.34 million penetration, up to 48%. In December 2005, customers to be reached in December Telefónica Móviles Venezuela had reached 2005. The weight of GSM over the whole 6.2 million customers (+42.4% up on was now 51%. December 2004), after registering net gains of more than 1.8 million lines in the Despite the initial penetration, in 2005 the twelve months of the year. Chilean market continued to develop with great dynamism, advancing 10 percentage In 2005 the Colombian mobile telephony points in its estimated penetration rate to market was the one of greatest growth in over 71%. In this context, at the close of the region, with a development of almost December 2005, Telefónica Móviles Chile 25 percentage points in its estimated accounted for 5.28 million customers, after penetration rate to 48% in December 2005. achieving net gains in the whole of the Telefónica Móviles Colombia in December year of 525 thousand new customers. GSM 2005 had reached over 6 million customers, was now 51% of the total. 83% up on 2004. At the close of the year, cellular penetration The Peruvian market was characterised by in Uruguay had risen from 17% to 34%. In an increase in competitive activity in the this context, Telefónica Móviles achieved a last quarter of the year. In this context, market share of 38%, with 419 thousand Telefónica Móviles Perú in December 2005 customers, representing a net gain of more had 3.5 million customers, (+20.4% over the than 106% over 2004, and leading the close of 2004). number of new customers in 2005.

The penetration of the Equatorian cellular telephony service at the end of 2005 reached 45%, a growth of 61% over 2004. At the close of 2005, Telefónica Móviles Ecuador accounted for nearly 1.9 million customers, after achieving net gains throughout the year of 763 thousand new customers.

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Telecommunications services are considered services of public use in many of the countries where Telefónica develops its operations. This is one of the main reasons why services of this kind are regulated by public bodies. The different companies of the Telefónica Group amply meet the different service quality objectives established by the regulators.

Regulatory situation and free competition

Within the framework of a regulated Telefónica de España market, the different companies of the Telefónica de España meets 12 of the 16 Telefónica Group periodically give the quality objectives established by the CMT, objective quality results of the service as can be seen in the table attached to this given, according to the established chapter. According to the study made by indicators. Each regulating body defines the Secretary of State, Telefónica de España independent mechanisms to follow up on offers better average quality than the the quality of the service given. alternative operators in the thirteen measured parameters. With such a situation, the different operators of the Telefónica Group have The point of greatest conflict for Telefónica established common parameters to pursue de España is the instruction by the CMT quality in the service in order to be able to and the Court of Defence of Competition establish corporate objectives on a Group (TDC) of several sanctioning processes in scale and transfer the best practices relation to the action of Telefónica de between some countries and others. Some España as the established operator and the of these parameters are those presented in dominant operator. There follow the most the chapters associated with the critical important sanctioning resolutions imposed processes for customers. by the CMT and the TDC that have been the object of appeal before the competent One of the objectives of the regulating jurisdictional bodies. bodies is to achieve maximum competition in the markets. In this situation, the Contentious-Administrative appeal Telefónica operators (and particularly fixed against the Resolution of the operators) receive many claims from their Telecommunications Market competitors associated with abuse of their Commission of 23rd July 2002. dominant position. This Resolution ended a sanctioning process brought against Telefónica de The main suits brought against Telefónica España, S.A.U., in relation to the commercial in previous years and still under appeal by conditions offered to Closed Groups of the Company are gathered in the official Users, in which a fine was imposed against documentation provided by the Company it of 18 million euros. on its different stock markets. Telefónica de España, S.A.U. brought a The main regulatory resolutions against contentious-administrative appeal against Telefónica in previous years and which are the resolution, which was followed before still being appealed against by the the Eighth Section of the Contentious- Company are presented in the Administrative Chamber of the National documentation provided by the Company Audience (Court order nos. 8217/2004), in its different stock markets. which overturned the appeal with the

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sentence of 29th June 2004. On 18th CASESTUDY October 2004 Telefónica de España, S.A.U. drew up an appeal for annulment against Report on the quality the Sentence, which has not yet been resolved. of the fixed telephone service in Spain Contentious-Administrative We must also stress the greater quality appeal against the Resolution of In 2004, as in previous years, Telefónica de España maintained high levels of service demands that TdE agrees to assure in the Telecommunications Market providing the fixed service in comparison commission of 10th July 2003. quality, as is understood from the "General report on the quality of service relative to with its competitors, and the degree of This Resolution ended a sanctioning the Fixed Telephone Service in España", compliance with the regulatory objectives process brought against Telefónica de corresponding to 2004, which was required of the company. In this sense, it España in relation to the supposed presented by the Secretary of State for must be said that generally the service infringement of a resolution of the CMT Telecommunications and for the Society of quality commitments for the different concerning the prices applied to VIC Information of the Ministry of Industry, quality parameters required Telefónica’s TELEHOME. With this Resolution Telefónica Tourism and Trade in 2005. Its preparation current regulations, as the operator de España, S.A.U. was fined 8 million euros. included the collaboration of the designated for the provision of the Against this resolution Telefónica de Commission for the Pursuance of Quality Universal Service, are more demanding España, S.A.U. brought a contentious- in providing telecommunications services, than the average minimum quality levels administrative appeal against the in which alongside the Administration, for the year 2005, which the main national resolution before the Contentious- representatives of the operators and the alternative operators have voluntarily Administrative Chamber in the National users also take part. This report includes agreed to offer their customers Audience, under Court order number details from fifteen fixed operators which, 731/2003, thus requesting the suspension on the close of 2004, had a joint market The data have been audited by independent of the execution of the sanction. The share of 99% with regard to direct entities, which have made sure that the Appeal is pending vote and decision. accesses. measures have been carried out according to what is provided in the Quality Order Contentious-Administrative Telefónica de España obtains above- and that all the data have been obtained appeal against the Resolution of with a precision of over 95%. the Telecommunications Market average results in the thirteen parameters commission of 24th October 2002. considered than the average level achieved by the main alterative operators in the The challenged Resolution was given in the country (Auna, Uni2, Jazztel and Grupo sanctioning process brought against Ono). TdE’s strengths stress the parameters Telefónica de España, S.A.U. for the related to the operation of the Red supposed infringement of the resolution of Telefónica (0.22% average 2004 in failed the CMT concerning interconnection international calls against 0.81% by Uni2 obligations for voice + data capacity, and and 0.61% by Jazztel) and in line for which Telefónica de España, S.A.U. was installation time (17.25 days average 2004 given a fine for 13.5 million euros. in the percentile 95 against the 71.75 of Jazztel or the 67.25 of Uni2). Telefónica de España, S.A. brought a contentious-administrative appeal against the resolution before the Contentious- Administrative Chamber in the National Audience (Court orders no. 97/2003), in

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which on 5th July 2005, the sentence Opening of proceedings against overturned the appeal. On 24th October Telefónica by the European 2005, an appeal for annulment was drawn Commission (EC) up against the mentioned sentence by The European Commission (EC) informed Telefónica de España, S.A. of its decision to open formal proceedings against Telefónica, by sending a set of Contentious-Administrative appeal charges with their preliminary conclusions against the Resolution of the Court on the past 22nd February as of 2006. of Defence from Competition on 1st April 2004. In the mentioned charges, the EC considers On 1st April 2004, the Court of Defence that Telefónica S.A. and its subsidiaries from Competiton (TDC) passed a sentence Telefónica de España S.A.U., Telefónica Data in which it estimated that Telefónica de de España S.A.U. and Terra Networks España España, S.A.U. had incurred in conducts S.A might be incurring, at least since 2001, restricting competition and in abuse of its in abuse of their dominant position, dominant position, imposing a fine of 57 consisting of undercutting prices in the million euros. market of broadband internet access. On 16th April 2004 Telefónica de España, S.A.U. brought a contentious-administrative appeal, which was processed before the 6th section of the Contentious-Administrative Chamber in the National Audience (appeal 162/2004), in which the suspension was requested of the execution of certain decisions of the Resolution of 1st April, including that concerning the application of the fine. By Court order of 29th June 2004, the Chamber granted the cautionary suspension of the execution of the sanction, upon provision of bail for the same amount by Telefónica de España, S.A.U.

At the current time, the main proceeding in pending indication of a date for voting and decision. Based on the opinion expressed by its advisors, the Company understands that there significant factual and legal arguments that might lead to a total or partial upholding of the presented appeal.

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Fulfilment of the objectives established by the CMT. 4th quarter 2005 Parameter Measurement Value Quarterly Fultilment Q4 2005 targets Supply time of the initial connection for Time for 95% of lesser 21.0 25 all request duration (all customers) % supplied on the agreed 99.0 85 date with respect to all agreements

Proportion of faults in the Fault notifications /100 access lines / quarter 4.2 4 access network per access line

Proportion of faults in the rest Fault notifications /100 access lines / quarter 0.4 4 of the network per access line

Time to repair faults in the Time to repair 95% with less duration 65.2 48 access network % repaired within the target time 88.5 90 Time to repair 95% of least duration 51.9 48 % repaired in target time 92.4 90

Proportion of overall failed calls % failed calls for domestic calls 0,3 1

% failed calls for international calls 1.19 2.5 % failed calls for calls to mobiles 0.2 2.5

Overall time to establish calls Overall mean time 2.0 3

Reply time for directory enquiry services Mean time to attend calls 17.6 18.3

% attended in under 20 seconds 94.0 90

Percentage of public Telephones in service % in full service 96.4 95

Percentage of claims on invoice correction Per thousand 3.5 5 Cumplido No cumplido

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Telefónica del Perú competition. The few processes started Osiptel supervises of the Telefónica Group’s against any of the companies of the Group observance of the regulations. In December concluded in resolutions that overturned 2003, Telefónica del Perú asked the the claims. In the same period, other Peruvian State for the renewal of their telecommunications companies were concession agreements for a period of five sanctioned for infringing advertising years. In accordance with the planned regulations. procedure, Osiptel issued an evaluation report in which it recognises that the The main questions pending in this area are: company has met the measurable targets •In 2002, an Official Osiptel Agency and objectives established in the imposed a fine in first administrative agreements and makes observations only instance on Telefónica del Perú of 1,097 in 6 of the 24 obligations analysed. UIT for presumed acts of abuse of its Osiptel’s evaluation report finds that the dominant position affecting AT&T Latin company has deserved sanction in under America. The Company took the claims 2% of the claims brought against the head on before the Judicial Powers, company due to presumable infringement where the corresponding contentious- of the rules of interconnection, on all the administrative action has been interconnection relations, amongst others. processed. As a result of the claim made in 2001 by As Telefónica del Perú has informed the • the company Comunicaciones Alfa E.I.R.L Ministry of Transports and (Alfatel), Osiptel ordered Telefónica del Communications (MTC), Osiptel’s Perú in 2003, to lease its posts to the observations do not in any way impair the claimant so that it might use them to high level of the obligations, so the renewal support a coaxial cable network to give a of the time of the concession agreements, radio broadcasting service in the town of in the view of the Group, must be granted. Huaycán. Although it disagreed with the analysis of the regulating body, the The companies of the Group that hold a Company complied in full with the dominant position in the markets in which provisions and approved a policy, which they take part are subject to intense is currently being applied, of leasing supervision by the Agency of Supervision infrastructure to third parties. of Private Investment in Telecommunications (Osiptel). This is the •In addition to the mentioned cases, in entity entrusted with the application of 2004 cases were brought against the Law of Free Competition in the Telefónica Multimedia, for supposed telecommunications market. abuse of its dominant position. The proceedings, now concluded, exonerated In the past two years, none of the the companies of the Group in all cases. companies of the Telefónica Group in Peru has been sanctioned by the National Institute of Defence from Competition and Protection of Intellectual Property (Indecopi) for infringement of regulations that control both advertising and

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Fulfilment of the objectives established by Anatel Average 2005 Concept No. of Months of % Fultilment indicators non-fultilment Local service quality 232.6 9 0 Domestic long distance service quality 196.5 6 0 Attention to requests for repair 107.4 4 5 Attention to requests for line transfer 102.3 3 0 Telephone attention 104.9 3 0 Public telephony 138.7 2 0 User access code information 103.1 1 0 Attention by post 100.0 1 0 Personal attention 104.0 1 0 Billing 140.5 4 6 Network modernisation 104.6 1 0

TeleSP There are some working processes in TeleSP Telefónica periodically informs the National by Economie Administrative Defense Boby, Telecommunications Agency (Anatel) on Secretary of Economic Right (SDE) and the the fulfilment of the indicators established National Telecommunications Agency in the General Quality Plan. In 2005, this (ANATEL). TeleSP strives for preventing plan included 35 targets, and Telefónica possible processes and resolving the complied with 97% of the indicators existing ones. throughout the year. Currently, an anti-Trust fulfilment In the first half year, the infringement • programme is ongoing in TeleSP, fact that was associated with the number of bills has been released to the Court of Defense receiving complaints from customers, of Competition. This programme pursue with the maximum value being two per the objective of resolving competition thousand. After starting up an indicator issues together with Anatel, CADE and SDE; revision committee, Anatel’s objective TeleSP joint the the “Termos de Cessaçao de was met in the second half-year. Conducta” agreements, which allow to •In the second half-year, the indicator was interrupt, whitout any fine for the not met of “97% fault repair requests Company, the following processes: attended in under 24 hours”. Seasonal Embratel´s claim against TeleSP factors such as rain and storms, together • (Representaçao 53500.005770/200) for with vandalism and the theft of cables supposed abbuse of its dominat position caused the deviation from the target. To in the local loop provision. correct this, the Company put 35 million reales into the preventive maintenance •Oneworld´s Administrative process of the external network, created (Administrative process contingency plans to attend critical areas 08012.007667/2004-48) for supposed and strengthened actions against calling blockade to Oneworld´s network vandalism and cable theft. In the last twelve months, the company On the past 22nd December, Telesp signed proved its commitment with the Defense the renewal of its concession agreement, of Competition Law, achieving to file which expired on 31st December 2005, for a important processes. period of 20 years. The conditions of the •Embratel / Intelig against TeleSP new agreement were approved by Anatel in (Representaçao 53500.001821/2002) for December, and include the obligation to supposed discriminatory practice in the invoice local traffic in minutes instead of collection of the fare for using local pulses (although on the past 23rd February, telephony network (September 2005) Anatel announced a 12 month delay in the Federal State Ministry against TeleSP,TPI enforcement of this measure), the new • and Listel for supposed anti-Trust reference index for price revision (IST), and conduct of TeleSP in relation to the new productivity factor applicable in Telephone Guides. price revisions, the new interconnection price regulation and the provision of a new form of service to facilitate access for low- income customers (AICE).

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Telefónica CTC Chile Voissnet presented a claim before the The Chilean regulator (Subtel) periodically Court of Defence of Free Competition requests information from all (TDLC) on 14th March 2005 for supposed telecommunications operators in the acts that would attempt against free country to produce national statistics and competition, the development and growth as a way to supervise the observance of the of Internet technology, basically broad regulations. band technology and access, to establish the prohibition of passing voice through •The number of lines in service and traffic the Internet access broad band service are statistical information for the provided by Telefónica CTC Chile. Voissnet regulator to be able to draw up national hopes that the TDLC might oblige statistics. They are therefore not an Telefónica CTC Chile to allow third parties indicator and have no objectives (only to to provide IP Telephony via Internet on inform on the true current situation). Telefónica ADSL lines. •The remaining items (network disintegration facilities, Fixed Charge Telefónica CTC Chile rejected each and Returns and Reports of network faults) every one of the claims of the claimant by are information that the regulating body giving market, legal and regulatory reasons requests to be able to protect compliance on the market, legal and regulatory with certain regulations established in backgrounds on the development of the law. These reports that are delivered to broad band market in Chile, indicating that Subtel are not an indicator either. large investments have been made to develop broad band in Chile and that they have facilitated the participation of all the ISP through an open model, and that they are not opposed to IP Telephone but rather to the anti-competitive practices that companies try to carry out by taking advantage of others’ investments.

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Telefónica de Argentina Fulfilment of the objectives established Telefónica de Argentina meets the 16 by the Argentine regulator 2005 quality objectives established by the regulating body, as can be seen in the table Concept No. Indicators with % Fultilment indicators non-fultilment attached to this chapter. Service installation 307.7 1 0 Faults and repairs 113.0 4 1 Historically, Telefónica de Argentina has (Repairing delays: 99%) nineteen open processes related to Customer Associations, within the Public Telephony 106.0 1 0 Administrative Chamber from Argentina, Telephone attention 113 3 0 although only two of them correspond to Fiscal Year 2004 and 2005. •Consumers and users Union claimed agains Telefónica de Argentina in 2004, with the aim of returning to users all the liquidated and received amounts by way of tax to credits and debits in current bank account, and other operations (Law 25,413) in each period before 02.07.03 •The Deaf’s Argentine Foundation presented a claim against Telefónica and Telecom in 2005, by which they are asked for the fulfilment of public and semipublic phones provision, installation and operation obligation aimed to hipoacustic and speech disabality persons in public places.

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Mobile telephony Spain Telefónica Móviles España led four of the Claims against settlement of the tax for six parameters evaluated in the study of reserving the public radio-electric domain the quality of mobile telephony services in corresponding to the GSM, DCS-1800 and Spain, drawn up by the Spanish Ministry of UMTS services, and to the year 2001. Industry, Tourism and Trade. The study is Faced with the modification of the formula based on a campaign on 8,000 for proceeding to calculate the tax for measurements per operator in towns of reserving the public radio-electric domain over 5,000 inhabitants, made by Ericsson with a significant increase, applied by Law on the request of the State Secretary for 13/2000 of 28th December concerning the Telecommunications. General State Budgets for the year 2001, Telefónica Móviles España, S.A. brought in Telefónica Móviles España is highlighted in three economic-administrative claims this report in the section on blocked calls, against the settlements corresponding to that is, the percentage of calls that a user the GSM, DCS-1800 and UMTS services for tries to make in areas of cover, but which the year 2001, which were overturned so can not be completed as 0.52% of attempts Telefónica Móviles España, S.A. proceeded are blocked. The company also leads call to make administrative contentious establishment in voice services, with the appeals before the National Audience and, lowest time, that is, 3,514 milliseconds. at the same time, against the payment of Among the current challenges of the the settlements before the State Secretary company is the optimisation of the dual for Telecommunications. At the present GSM/UMTS service, in which it is hoped to time, in the proceedings against the continue to expand the frontiers of settlement of the DCS-1800 and GSM improvement. taxes, an edict has been given by which it is agreed to raise the question of Telefónica Móviles España, S.A. and the unconstitutionality. In the proceedings companies of its Group are involved in against the UMTS tax, Telefónica Móviles several suits the unfavourable resolution of España, S.A. has presented a letter to the which, in the opinion of the Company, National Audience, asking for the question would not significantly affect the of unconstitutionality to be brought for a economic-financial situation or the second time before the Court of Justice of solvency of the Group, based on the reports the European Union. The quantities of the advisors dealing with the cases. claimed for undue income amount to 228,357 thousand euros. Of these cases, those for which an unfavourable outcome is expected have Economic-administrative claim against the been adequately covered. With respect settlement of IAE (Tax on Economic those with respect to which a possible Activities – 2003) unfavourable outcome might be expected In December 2003, Telefónica Móviles and which do not require provision, there España, S.A. made and Economic- follows a list of those which could be Administrative Claim before the TEAR in considered particularly significant either Madrid against the settlement of the IAE because of their subject or due to the size tax for 2003 for 26,000 thousand euros. of the sum claimed. Telefónica Móviles España, S.A. understands

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that the Tax Administration made a mistake Germany in the administrative act of settling the tax, Ostheimer by annulling a previously transferred In 2003, the expert company Ostheimer amount of 3,226 thousand euros. GmbH brought a claim against Quam Telefónica Móviles España, S.A. has paid the GMBH for compensation of 100 million amounts requested so the object of the euros for damages deriving from the claim is the return of the amounts termination of the framework agreement it considered unduly paid. had signed with Quam. In 2005 a resolution was passed in favour of Quam Prices of terminating the interconnection GMBH with the mentioned resolution of Retevisión Móvil, S.A. recently appealed against by Ostheimer. By resolution of 12th January 2006, an end was put to the conflict of the Termination of the licence granted to interconnection posed by RETEVISIÓN Quam GMBH MÓVIL, S.A. against Telefónica Móviles In December 2004, the Regulatory España, S.A. concerning the prices of Authority for Telecommunications and Post terminating the calls on the network of the /(RegTP) terminated the UMTS licence former. This obliged Telefónica Móviles granted in 2000 to Quam GMBH. After España, S.A. to regularise the RETEVISIÓN achieving the suspension of the MÓVIL termination prices from 4th termination order, on 16th January 2006, February 2005 in line with those holding the company Quam brought a claim before on the previous 7th October 2004. the German courts against the Telefónica Móviles España, S.A. made an termination, which consisted of two main administrative appeal for reversal which parts: the first defends the annulment of was wholly upheld by the CMT by the termination order determined by the Resolution of 16th February 2006. This RegTP, and the second, if the first is not determines that the termination prices for accepted, calls for the total and partial RETEVISIÓN MÓVIL, S.A. previous to 7th reimbursement of the price paid for the October 2004 are not applicable for licence. Telefónica Móviles España, S.A., and that, therefore, Telefónica Móviles España, S.A. is Italy not obliged to regularise the payment of Before the refusal of the Italian such prices for an amount higher than that Government to accept the return by Ipse effectively paid during the period of 2000, S.p.A. of the additional 5MHz of conflict. A contentious-administrative spectrum that they had been adjudicated challenge may be brought by RETEVISÓN with the concession of the UMTS licence, MÓVIL, S.A. against the Resolution of the Ipse 2000, S.p.A. presented the CMT within a time of two months. corresponding claim based on the basic right to waive the rights granted by the administration and requesting the reduction of the amount pending payment by 826 million euros (corresponding to the aforementioned 5 MHz).

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Alongside this, in view of the new regulatory payment of an annual levy for the use and framework that establishes a maximum operation of frequency bands that have annual price for every 5MHz below that set been granted from the year 2003. As a in the adjudication of the licence to Ipse, result of the participation of Telefónica S.p.A., in December 2003, it presented a Móviles México, S.A. de C.V. in a suit carried claim before the same body against the out in 2005, it was adjudicated frequencies Italian Ministry of Communications, asking in the 1900 MHz band in April 2005, with for the cancellation of the amounts pending respect to which they are obliged to pay payment derived from the adjudication of the said contribution. the UMTS licence, which might determine a reduction with respect to the initial amount Telefónica Móviles México, S.A. de C.V. to 1.2 and 2.3 billion euros. Equally, on 31st promoted a protection judgement by May 2004, Ipse, S.p.A. brought a claim claiming the unconstitutionality of the rate against the assignment by the Italian on the rights contained for the use and Government of GSM frequencies free of operation of the bands that had been charge. awarded to it.

All of these claims are currently in a single Telefónica Móviles México, S.A. de C.V. process. In August 2005, the TAR brought an appeal for revision against the overturned the first 2 recourses and Sentence overturning the claim in postponed its decision on the last of them December 2005. (assignment of GSM frequencies). Telefónica Móviles México, S.A. de C.V. has Mexico paid all corresponding rights, so the aim of Law on income Tax, interest deduction the suit is to have the amounts paid Telefónica Móviles México, S.A. de C.V. and returned or paid. companies of its Group promoted a protective claim against certain Transitory Kargo, Inc., ACK Ventures Holdings and Provisions of the Income Tax Law that limits United Mobile Technologies,LLC the deduction of interest from capitals taken Kargo, Inc. is claiming from Telefónica in loan, under certain circumstances. Móviles México, S.A. de C.V., Pegaso PCS, S.A. de C.V., Pegaso Telecomunicaciones, S.A. de In January 2006, the sentence was notified C.V.,Telefónica Móviles, S.A., Telefónica S.A. in which the judgement is rejected as the the payment of damages for court costs Judge considers that it is not the right time and lawyers’ fees and anything that the to uphold the unconstitutionality of these Court might establish, for the presumed precepts. The Companies will present the non-fulfilment of a licence contract for corresponding appeal for revision as they systems and hosting negotiated by Pegaso consider that the claimed precepts cause PCS, S.A. de C.V. harm to the companies from the time they come into force. The case is being processed before a federal court, and Telefónica Móviles México, S.A. de Annual levy for the use and operation of C.V. in January 2006 presented a motion for frequency bands the case to be waived due to a lack of The Federal Law of Rights contemplates the elements.

Telefónica, S.A. | Corporate Responsibility Report 2005 164 04 Customers

Brazil against this law and to ask for provision of Universal Fund of the Telecommunications all amounts, except for the case of Celular Service CRT, S.A., where they opted to make The operators of the VIVO Group brought payment according to Law 9.718. an appeal against the decision of ANATEL to modify the income that have to make up With respect to the increase of the tax the tax base for the calculation of the FUST base of the PIS and COFINS, two of the (Fundo de Universizaçao de Serviços de companies of the VIVO Group (Tele Centro Telecomunicaçaos), a fund that pays for Oeste Celular Participaçaos S.A. and compliance with the obligations derived Telergipe Celular S.A.) have achieved from the universalisation of the favourable final sentences. In the coming telecommunications service operators year, the remaining companies are (fixed and mobile). expected to receive favourable outcomes.

Lune Venezuela Lune Projetos Especiais em Contentious Tax appeal brought by TELCAL, Telecomunicaçaos Com has brought a C.A. in 2002 against a Resolution of the claim against the companies of the VIVO Integrated National Service of Customs and Group, alleging that they have the patent Tax Administration (SENIAT) that obliges for the caller ID, and that they are the TELCAL, C.A. to pay approximately holders of the register of the “Bina” 54,364,291 euros due to lack of checking, trademark, requiring the interruption of expense rejection, lack of withholding of the service and asking for compensation unrecoverable taxes from the financial equivalent to the amount paid by the years between 01-11-94 and 31-10-95, 01-11- consumer for its use. 95 and 31-10-96 and between 01-11-96 and 31-10-97. Several cellular infrastructure manufacturers, and subsidiaries of the VIVO Group have started an administrative process before the National Institute of Industrial Property to annul the patent on which the claim is based.

PIS and COFINS The COFINS (Contribuiçao Social para o Financiamento de la Seguridade Social) and the PIS (Programa de Integraçao Social) are taxes that encumber companies’ gross income. In 1998, the calculation of the PIS and COFINS was modified by Law 9.718, which (i) increase the tax amount of the COFINS from 2% to 3% and, (ii) increase the amounts making up the tax base. The operators of the VIVO Group opted to claim against the Unión de Estados Brasileños

Telefónica, S.A. | Corporate Responsibility Report 2005 165 04 Customers Credits

Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

Telefónica, S.A. | Corporate Responsibility Report 2005 166 04 Customers

Telefónica, S.A. | Corporate Responsibility Report 2005 167 05 Shareholders

Shareholders and investors: profitability and transparency

Telefónica, S.A. | Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, driving progress for all 6

00 Telefónica in 2005 8

01 Corporate Governance 20

02 Identity 32

03 Driving progress 66

04 Customers 104

05 Shareholders 168 Profitability 170 Transparency 172 General Shareholders’ Meeting 174

06 Employees 178

07 Society 226

08 The Enviroment 252

09 Providers 292

10 Media 304

11 ANNEX I 310

Telefónica, S.A. | Corporate Responsibility Report 2005 05 Shareholders

According to information obtained on April 3, 2006 from the Spanish Securities Registration, Clearing and Settlement System, S.A.U. (Iberclear), Telefónica has 1,570,039 shareholders.

Profitability

CASE STUDY Profitability 80 years of Telefónica in the Stock Exchange: 1925-2005 Progress has continued in 2005 and the An investment in 100 shares in January 2003 In 2005, Telefónica completed 80 years Company is situated as one of the most at 8.53 euros involved an investment of 853 presence on the Madrid Stock Exchange. attractive in the sector, and stronger since euros which, at December 31, 2005, would be The Compañía Telefónica Nacional de the purchase of O2. A dividend was paid in 1,372.7 euros as a result of the increase in the España (CTNE) was set up as a limited 2005 corresponding to financial year 2004 market price, with a cash dividend received e company on April 19, 1924, with an equity of 0.5 /share, own shares of Telefónica S.A. in the past three years of 129 euros. of one million pesetas. The following year, representing 4% of equity have been on March 31, 1925, it was launched on the distributed in the proportion 1x25, and the A shareholder purchasing 100 shares on Stock Exchange. share buyback programme has continued. January 1, 2005, would have obtained a profit of -0.94% in financial year 2005. Telefónica was the first Spanish company The increase in the dividend in 2005 – to quote on the principal world exchanges showing Telefónica as one of the most (Paris, Frankfurt, London and Tokyo). This attractive securities in the happened in 1985, before the business telecommunications market in this regard became internationalised some years later – and despite the negative trend seen in with its entry into Latin America. In 1987, the stock market in 2005, that affected the the security was also incorporated into the whole telecommunications sector, implies New York Stock Exchange. a total accumulated profitability of almost 76% for a shareholder who invested in Between 1995 and 1997, through a series of Telefónica on January 1, 2003. IPOs, all the shares of the company Evolution of the listed value of remaining in the hands of the Owners Telefónica shares Data in euros were completely privatised. Telefónica is currently quoted on the Continuous Market of the Spanish Exchanges (Madrid, 13.86 Barcelona, Bilbao and Valencia) and in the 12.71 Exchanges of London, Paris, Frankfurt, 11.64 Tokyo, New York, Lima, Buenos Aires, São Paulo and the IRS of the London Stock Exchange. 8.53

January 1 January 1 January 1 January 1 2003 2004 2005 2006

Telefónica, S.A. | Corporate Responsibility Report 2005 170 05 Shareholders

Profitability per share 2003-2005 CASE STUDY Nº Net amount shares euros Telefónica in the DJ Global Value of 100 shares as at January 1 2003 100 853.0 2 Increases in capital issued 1x50 in 2003 104 - Titans 50 and “The Global 2 Cash dividends 2003 (0.13€ July, 0.12€ Oct.) 104 26.0 Spanish Entrepreneur” Prize Dividend in kind (1 A3 share for each 295.6 TEF shares)1 104 8.87 2 Cash dividends 2004 (0.20€ May, 0.20 € Nov.) 104 41.60 The Spain-US Chamber of Commerce gave Cash dividend 2005 (0,23€ May) 104 23.92 the president of Telefónica, César Alierta, Increase in capital issued 1x25 in June 2005 108 - "The Global Spanish Enterpreneur" Prize in Cash dividendo 2005 (0.27 € November 2005) 108 29.16 recognition to the Telefónica Group for its recent entry in the Dow Jones Global Cast dividend (total) during 2003 - 2005 108 129.55 Titans 50 stock chart in New York. Value of 108 shares as at January 1, 2006 108 1,372.68 Telefónica is the first Spanish and one of Profitability 76.11% the few European companies to form part 1(0.35 A3 shares sold at 25,2 ? equivalent to value set in the settlement of the fractions) of this important index of the 50 largest firms in the world. As well as this recognition, César Alierta, accompanied by the president of the New York Stock Exchange, Marsh Carter, opened the New York Exchange trading session Profitability per share 2005 with the famous “Opening Bell”. Nº Net amount shares euros

Value of 100 shares as at January 1 2005 100 1.386 Cash dividend (May 13) 100 23 Dividend in kind (June 20) per share (1x25 shares) 104 Cash dividend (November 11) 104 28.08 Value of 104 shares as at January 1, 2006 104 1,321.8 Total portfolio value for 104 shares 1,372.9 Profitability -0.94 %

Telefónica, S.A. | Corporate Responsibility Report 2005 171 05 Shareholders

Breakdown of queries made via shareholders' helpline 2005 Data in percentages

General Annual Shareholders Meeting remuneration 30.6 20.5 Transparency Results and stock relevants exchange facts news 20.9 27.8

Others1 0.2 1Includes Bonds and promissory notes

Transparency

The Regulations of Telefónica’s Board of Shareholders’ and investors’ Shareholders Directors devote several articles to Toll-free shareholder Website regulating the channels through which information line number The number of visits to the website of relations are established between the Helpline Shareholders and Investors rose to Company and its shareholders, whether 1,182,729, an estimated increase of 150% individual shareholders or institutional compared to the previous year’s figure. 900 111 004 investors, and ensures that these relations are conducted with the maximum The Shareholders’ and Investors’ website transparency and equity. includes specific spaces on: In 1997, Telefónica set up its Shareholder •Dividends, results and communications to Attention Service with a view to the markets, relevant facts or General establishing transparent and fluid Annual Meetings, among others. communication with individual •Equity data, ratings, debt profile and corporate shareholders. Currently a total of 194,784 presentations to the investment community. shareholders are registered in this service, and receive all the Telefónica Group •Consulting and downloading documents, information, results and any other including the Annual Reports, the Company news that may be important for Regulations of the General Shareholders their investment. Meeting and of the Board Directors, Company By-laws and the Official In order to give personalised attention to Company Information Registers. institutional investors, Telefónica has an •The Stock Exchange section features the Investor Relations Area, to maintain online share prices of the Group, and constant communication with national and allows users to generate interactive international financial markets. Its main graphics, compare share prices with those function is to explain the main of other sector companies, calculate the organisational, operating and business profitability of Telefónica in any given strategies of the Company, helping to form period chosen by the user, and compare it expectations about its future performance, with the main indices. and thus to set suitable prices for the The Shareholders’ Corner offers small securities issued by the Company. • investors a personalised interactive area to make queries and receive specific information, a configurable ticker and an alerts service with important Company information. •Online audio and video webcasts of conference calls and significant statements by the Company´s Senior Managers top Company executives.

Telefónica, S.A. | Corporate Responsibility Report 2005 172 05 Shareholders

Queries handled by shareholder helplines Information downloaded by Telefónica investors Thousands of downloads

105,963 103,255 1,224

88,251 964 963 859

2003 2004 2005 2002 2003 2004 2005

Shareholder Information Line Other channels of CASO PRÁCTICO Helpline communication with analysts Telefónica has a free Shareholder Helpline and investors The Website for shareholders that answered 88,251 queries in 2005. As A high level of activity was maintained in and investors and of the well as the calls to this service, it also 2005 with institutional investors and Telefónica Annual Report, attended 3,139 email and/or postal queries. financial analysts; through presentations in forums, meetings and conference calls, the awarded as the best in Spain. Annual Report organisation of roadshows in the main The main tool means of communication financial centres and the convening of the The 2005 edition of the World Awards for with analysts and investors is the Annual Fifth Investors' Conference, held in May Investor Relations websites and Annual Report, and its 2005 edition received more 2006. Reports Online (known as the MZ Awards) than 20,000 queries through the web and gave first and second prize in Spain, 300,000 file downloads, as well as its print There were also important Company respectively, to the Internet pages for edition of more than 18,000 copies. All the presentations made to minority Shareholders and Investors of Telefónica annual reports published by Telefónica, shareholders in the 2005 Bolsalia Forum in S.A. and of Telefónica Móviles S.A. and that since its foundation in 1924, are available Madrid (Salón de la Bolsa y Otros Mercados for Best Annual Report Online in Spain to on its website. Financieros) and in Borsadiner (Barcelona). the latest online report of Telefónica.

“Acción Telefónica” magazine The awards judged such factors as content, design, technology, interactivity, The physical means of periodically timeliness and flexibility. The online pages communicating with registered of Telefónica were considered not only the shareholders is the quarterly Telefónica best in Spain, but also better than the shareholders’ magazine, called “Acción world average in the telecommunications Telefónica”, and in 2005, 165,000 copies sector in most of the criteria. were sent quarterly to their homes.

Telefónica, S.A. | Corporate Responsibility Report 2005 173 05 Shareholders

Quorum at the General Proxy voting requests channelled by the Shareholders’ Meeting Shareholders Office for the General Data in percentages Shareholders’ Meeting Data in units

69,467 68,816

General 56,767 Shareholders’

Meeting 59.1

41.1 43.2

2003 2004 2005 2003 2004 2005

CASO PRÁCTICO General Shareholders’ Meeting Quarterly presentation results and Business evolution The By-laws of Telefónica’s General Apart from those required by current Shareholders’ Meeting aim to offer the applicable legislation, among the specific shareholders a framework which will measures included in the Meeting By-laws The Investor Relations area is in charge of ensure and facilitate the exercise of their in order to ease shareholder attendance designing and running the rights in relation to the governing board of and participation in the Meeting, are the communications strategy for national and the Company, paying particular attention following: international financial markets. This to the shareholders' right to information Everything that the Company considers includes particularly the quarterly and to participation in the discussions and • useful for these purposes, in addition to publication of Telefónica’s financial votes, aiming to make the call and the the legally required documents and statements which, to meet transparency proposals presented for agreement to the information, is placed on the Company and equity requirements, uses various General Meeting as widely known as website, from the date of announcing distribution channels: website, the CNMV possible. register, publication in Acción magazine the call. The shareholders can obtain this documentation and information directly and quarterly conference calls to present The 2005 General Shareholders’ Meeting from the website, or can request it to be the results. was held on May 31, and the quorum of sent to them free of charge, through the attendance was 59.163% of the equity. The mechanisms set up on the site related to Anttendees at quarterly results shareholders are supported by the the Meeting. presentations Shareholders' Office in all issues related to Conference Call Webcast the Shareholders' General Meeting. In the •The shareholders can make suggestions. 1Q05 130 137 2005 meeting, the shareholders’ office At any moment, and after showing their 2Q05 99 101 handled 56,767 proxy voting requests. identity as shareholders, they can make 3Q05 116 153 suggestions about the organization, 4Q05 144 282 According to the provisions of the By-laws running and competency of the General of the Company General Meeting, those Shareholders' Meeting, through the shareholders may attend the General Shareholder Helpline. Shareholders can Meeting who own at least a number of also request any kind of information, shares representing a minimum nominal documentation or clarification that they value of 300 euros. Every share present or may need about the General Meeting, represented in the General Meeting has either through the Company website, or the right to one vote, unless they are non- through the Shareholder Helpline. voting shares, as stipulated by the Law. On the other hand, no shareholder can exercise a number of votes above 10% of the equity with voting rights at any time, regardless of the number of votes they may possess.

Telefónica, S.A. | Corporate Responsibility Report 2005 174 05 Shareholders

The General Shareholders’ Meeting is an opportunity for those shareholders who CASE STUDY wish , to be able to present their queries to Leaflets registered by Telefónica in financial year 2005 the Company Administrators, This is confirmed by the 24, interventions raised The Company has provided information through the various information leaflets it has by of shareholders in the General Meeting published, either annually, which offer complete and exhaustive information about the held in 2005. Company, or as abbreviated ones, that were registered with security market regulatory bodies when specific operations have taken place. At the same time, Telefónica puts all its Complying with the provisions in the legislation, Telefónica keeps each and every communication channels at the service of regulatory body in which its securities are traded aware of the specific information about its shareholders so that they can make any important event related to its business. During financial year 2005, a total of 51 queries about the Meeting. In financial year significant events have been registered with the CNMV. 2005, 25,293 queries were dealt with concerning the General Shareholders Leaflet Body Date Meeting on the free shareholder help-line. Annual Information Leaflet Securities Exchange Commission (USA) 15.04.2005 Both enquiries made by private in 20F Format shareholders and opinions of the analysts and institutional investors, are analysed Annual Information leaflet Japan Securities and Clearing Corporation 29.06.2005 qualitatively and quantitatively in order S.R.S Tokyo Stock Exchange to keep the management of the Company informed about the concerns and Annual Information Leaflet Comissão de Valores Mobiliarios (Brazil) 12.07.2005 opinions of its investors. IAN

Registry Document Comisión Nacional del 22.12.2005 about financial year 2004 Mercado de Valores (Spain)

Abbreviated information leaflet Comisión Nacional del 12.01.2006 on Telefónica’s Programme of Mercado de Valores (Spain) Company Promissory Notes

Telefónica, S.A. | Corporate Responsibility Report 2005 175 05 Shareholders Credits

Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

Telefónica, S.A. | Corporate Responsibility Report 2005 176 05 Shareholders

Telefónica, S.A. |Corporate Responsibility Report 2005 177 06 Employees

Employees: Clarity and professional development

Telefónica, S.A. | Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, driving progress for all 6

00 Telefónica in 2005 8

01 Corporate Governance 20

02 Identity 32

03 Driving progress 66

04 Customers 104

05 Shareholders 168

06 Employees 178 Telefónica employees 180 Description of the workforce 180 Generation of employment 182 Workplace environment 184 Internal communication 186 Involvement of employees in strategy 187 Compensation policies 188 Compensation 188 Health plans 190 Pension plans 191 Other benefits 192 Professional development 194 Training 194 Tele-training 196 Management by skills 197 Professional career 198 Professionals and persons 200 Human rights 200 Freedom of association and collective bargaining 202 Work-life balance 206 Abolition of child labour 208 Equality of opportunities 209 Health and safety 211 Employment demands 219 Employee solidarity 220 Telefónica volunteering 220 ATAM 221 District C 222

07 Society 226

08 The Enviroment 252

09 Providers 292

10 Media 304

11 ANNEX I 310

Telefónica, S.A. | Corporate Responsibility Report 2005 06 Employees

Description of the workforce Generation of employment Telefónica Workplace environment employees Internal communication Involvement of employees

The management of Description of the workforce personnel is one of the key values in the new Telefónica culture. Thus, within the five Telefónica closed the 2005 financial year The outsourced workforce of Telefónica strategic axes of the with a physical workforce of 207,641 in Spain was estimated at 33,000 transformation process, an professionals, meaning an increase of 19% persons at December 2005, 25,000 of over the previous year. The most significant them corresponding to Telefónica de axis has been defined aimed changes to affect the workforce during the España and the rest to Telefónica Móviles at strengthening leadership financial year are the following: España. This data was estimated according to the contractual volume of and the commitment of Purchase or creation of new companies: • services to third parties. professionals to Telefónica. the workforce increased as a result of the creation of Edinet Europa and Edinet The main characteristics of the Telefónica America and TPI Direct in the Directorio Group workforce throughout the world are Group, the purchase of the company Azeler as follows: Automoción and Terra Business Travel and the creation of Terra Asociadas, and the •85.4% of the equivalent workforce has a purchase of Cesky Telecom and the creation fixed or indefinite contract (86% in 2004). of Sociedad de Cobros in Brazil by T The remaining amount is distributed Gestiona. among employees with temporary contracts (13.6%) and interns (0.9%) •Closure of companies: The businesses affected are Terra (Lycos Group, Terra •The employee hierarchy rate stands at Latam, One Travel and Caribe), Telefónica 4.3% (4.2% in 2004). This indicator is the UK, T Gestiona Mexico, Lola Films and T. percentage which represents senior Short in Contenidos . management, administration and middle managers over the total staff. •Change in the workforce: due to an increase in the workforce of Atento and •The distribution of the Telefónica an increase in the average workforce for workforce by functions, without taking Bell South operators in the mobiles into account the Atento workfoce, business. indicates that 37.2% is engaged in sales functions (33.2% in 2004), 48.3% to Continuity of the Employee redundancy • production functions and 14.4% to plan in Telefónica de España, approved by support functions. Of note is the the Department of Employment of the increase in the sales workforce for the Employment and Social Affairs Ministry. second year running. The plan is governed by voluntary principles and those of non •47% of the workforce of the Telefónica is discrimination, affecting 15,000 made up of women (48% in 2004), in employees. During 2005, a total of 1,945 particular Atento, with 66% of the employees had requested access, added workforce made up of women, and to the 7,906 requests for separation Contenidos with just 7%. accumulated up to 2004. •The average employee seniority for the Telefónica workforce is 7.3 years (8 years in 2004), the average age being 32.7 years.

Telefónica, S.A. | Corporate Responsibility Report 2005 180 06 Employees

Physical workforce of the telefónica group1

by country 2003 2004 2005

Spain 58,189 59,978 60,405 Europe - 4,322 14,326 Czech Rep. --10,051 Netherlands - 3,789 3,789 Germany - 533 480 Luxemburg -33 Switzerland -33 Latin America 80,041 94,204 131,968 Argentina 14,100 15,177 18,856 Brazil 42,496 51,741 63,743 Chile 8,795 10,060 12,375 Peru 9,422 10,733 11,548 Mexico 5,228 6,493 8,506 Colombia - - 4,487 Venezuela - - 5,983 US - - 1,166 Uruguay - - 536 Ecuador - - 747 Panamá - - 601 Nicaragua - - 285 Central America - - 3,135 Morocco - 1,075 942 Other countries 10,058 13,469 - Telefónica 148,288 173,554 207,641

By business 2003 2004 2005 Fixed spain 38,464 36,425 35,053 Fixed latin america 25,762 25,905 28,856 Terra 2,229 1,584 - Telefónica Móviles 13,093 19,797 22,739 Directories 2,787 2,876 2,942 Content. and Media 4,638 5,860 5,734 Atento 54,394 74,829 95,907 Cesky Telecom - - 10,051 Others 6,921 6,278 6,359 Telefónica 148,288 173,554 207,641

1 Physical workforce: number of employees who work in the company Equivalent workforce: number of employees proportional to the number of hours

Characteristics of the Telefónica workforce

Type of contract % hierarchy % Function % Experience Diversity Fixed Temp Interns Sales Operations Support Seniority Average Women age Fixed - Spain 98.5 1.0 0.6 3.3 31.4 56.5 12.1 18.7 42.3 27.4 Fixed business -latam 95.9 2.0 2.0 6.5 33.9 53.5 12.6 13.5 39.7 28.3 Mobiles 96.9 1.1 2.0 10.5 56.2 25.6 18.1 5.0 30.0 40.5 Content and Media 98.3 1.6 0.1 5.4 12.0 72.8 15.2 3.5 38.7 7.7 Directories 91.8 5.9 2.3 7.9 73.7 11.4 14.9 8.3 38.5 43.9 Atento 71.4 28.5 0.1 1.4 0.2 98.5 1.3 1.5 27.1 66.3 T-Gestiona 94.2 1.1 4.7 7.4 1.0 93.6 5.4 8.3 25.8 26.2 Çesky Telekom 95.2 4.8 0.0 5.3 38.8 49.0 12.2 12.2 37.8 34.4 Others 84.1 6.9 8.9 18.0 9.9 52.4 37.7 4.9 28.9 47.2

Telefónica, S.A. | Corporate Responsibility Report 2005 181 06 Employees

Generation of employment

The companies of the Telefónica Group •Telefónica de España and the Fundación (excluding Atento) hired more than 10,000 SEPI, as part of the 2005 internship employees during the 2005 financial year, program, officered 52 internships to of which 10% were from the Telefónica young people qualified in Professional Group itself. In relation to redundancy, 50% Training in the specialities of was forced and another 50% voluntary. Telecommunications systems and IT, Sales and Marketing Management, Within this personnel rotation, there were Administration and Finances and more than 1,600 intra-group movements: Administration of IT systems. This period employees which left one company and of internships, over a long period of time, joined others within the Telefónica Group. is integrated into employment creation processes associated with the Social Plan The Telefónica Group has launched of the Employee redundancy plan, as it is numerous programs for the inclusion of predicted that in 2006, a large amount young people into its workforce or the of those selected will joinTelefónica. One employment market in general. of the aims of this incorporation is to boost customer attention centres in the Business and Professionals Segment.

Hiring and firing by business

Hiring Firing Change of Total External Company Total Forced voluntary perimeter

Fixed Spain 934 725 209 2,710 2,000 710 - Latam business 3,541 3,154 387 2,128 1,035 1,093 211 Telefónica móviles 3,427 3,231 196 3,410 1,361 2,049 886 Directories 788 633 155 710 248 462 - Content and Media 226 225 1 212 81 131 152 Cesky business 44 44 0 179 0 179 10,186 T gestiona business 312 283 29 253 164 89 157 Others 807 757 50 671 162 509 95

Total Telefonica 10,079 9,052 1,027 10,273 5,051 5,222 13,203 (excluding Atento)

External hiring: people who had no relationship with Telefónica Company hiring: personnel who had a prior link with Telefónica (temporary, internships) Forced redundancies equivalent to incented redundancies (firing, incented redundancies and application of Employee redundancy plans) Joining and departure of companies equivalent to the impact of the change in perimeter of the workforce, with the significant impact of the acquisition of Çesky Telecom in this section.

Telefónica, S.A. | Corporate Responsibility Report 2005 182 06 Employees

•Telefónica de España has implemented a new Employment Creation process to CASE STUDY incorporate people from outside the In other areas, Atento is characterised as company as Diploma Level Sales Contribution of Atento to being a company which offers equality of persons. These new incorporations generation of employment opportunity to groups which have associated with the social plan of the traditionally had problems accessing the ERF are framed within the Sales In 2005, Atento Group, a company made labour market. Motivation Model for the Meta:Cliente up of people working in the service of program. people, again showed its capacity to •In 2005, Atento continued to hire young generate employment. At the end of the people in its workforce (the average age Telefónica CTC Chile and Fundación • financial year, the organisation had 96,000 of the workforce standing at 27 years), Telefónica Chile have developed a employees, 28 percent more than in the encouraging their access to their first program of employment skills and the previous year. job. use of new technologies with the aim of contributing to the insertion of young At the same time, aware of their This ability to create jobs and thus • people into the workplace, in conditions responsibility as en employer, the continue the development of the company of equality of opportunity to create organisation continued to develop has been of great value in the 12 countries productive and quality jobs. The various initiatives to employ disabled where the Group is present: beneficiaries - men and women persons, of note the Atento Special between 18 and 30 years old - will carry •Atento Brasil was recognised by the Employment Centres in Spain. out their professional practice under the economic publication Exame as the Finally, in 2005 Atento encouraged company's employment skills model or third private company in the country in • gender equality in the workplace. In fact, in different contracting companies. terms of employment generation; 66 percent of Atento employees were Training activities will be for in Peru it was awarded the distinction as women. approximately four to six months. • one of the 15 “Great Places to Work”, with •The Telefónica Group in Argentina the best employment environment, and launched its First Program of Telefónica In Puerto Rico, the town of Caguas gave Internships For Argentinean • Atento several awards in this area: best Universities, whose aim is to encourage employer, best newcomer and best links between the academic and company for hiring unemployed or corporate sectors, supporting advanced displaced persons. students in degree courses, graduates commencing post graduate studies and professionals who, in the context of technical specialities, are specialising in Communications Law. The program has a budget of 1,300,000 pesos, and will benefit 72 students in the fourth year of their degree courses, 54 graduates starting their masters and 30 Legal professionals, all with technical orientations. It will take place from 2005 to 2007.

Telefónica, S.A. | Corporate Responsibility Report 2005 183 06 Employees

Development of workplace environment surveys1 Data in percentage 2004 2005 Overall Sat. Overall Sat. Management 73 78 Mid management 63 64 Employees 48 57 1 Presented on the 29 standardised questions for 2004

Workplace environment

In the period from November 2005 to After the results were notified to all February 2006, the second joint workplace employees, in 2006 design commenced on environment survey in Telefónica was action plans to improve the workplace carried out. This year, as well as the 7 environment. The priority lines of action on corporate indicators measured in 2004 which the action plans for the improvement (clarity of communication, leadership of of the workplace environment were: Immediate Superiors, Confidence in Professional Development, Leadership, Management, Professional Development, Innovation and Customer orientation. Or Customer orientation, Internal goal is to continue improving to make the Collaboration and Perception of the Group), objectives set in the strategic plan a reality, four additional questions were included making Telefónica the best place to work. (increasing the number from 29 to 33) to get a new indicator to measure innovation Workplace in Group companies. environment observatory During 2004 the workplace environment 66 people participated in the survey observatory was established, comprising (19 more than in 2004) with a participation workplace environment representatives of 71% (10 points more than in 2004). For from the main Telefónica companies. Its 2005, the aim of increasing the Global mission is to share and encourage Satisfaction Index by 5% was set, which was workplace environment improvement exceeded, increasing by 7.11% (3.91 percentage initiatives in the Group and, definitively, points, going from 55% to 58.91%). If we provide a space for debate and innovation consider the 4 values introduced in 2005 to help improve employee satisfaction and (reaching 33 questions), the resulting their motivation in terms of the project for satisfaction value stands at 58%. the future of Telefónica. The workplace environment observatory started off in The most important improvement (average Spain and has been repeated in Argentina, increase of 9 points) was seen in the area of Brazil, Chile and Peru. perceptions of employees, especially in aspects relating to Clarity of Communication and Confidence in the Management. With this progress, the gap between perceptions of the management and the workforce has lessened. The improvement in management has been seen mainly in areas related to Internal Collaboration and Professional Development.

Telefónica, S.A. | Corporate Responsibility Report 2005 184 06 Employees

Most positive questions in workplace environment survey

I would recommend the products and services 2005 36 44 13 4 2 1 80 M of this company to an acquaintance. 2004 33461442179

I think it is a positive thing for my company to 2005 42 37 14 2 2 3 79 M belong to the Telefonica Group 2004 37 39 16 3 2 3 76

I think the Telefonica Group is a solid Group 2005 37 42 15 3 2 1 79 M which is successfully moving forward 2004 29 44 19 4 2 2 73

There is cooperation between the people in 2005 33 45 12 6 3 1 78 the group they work in 2004 31471363078

Overall, I am satisfied to work in this company 2005 35 43 15 5 2 0 78 M 2004 30 47 16 5 2 0 77

I would recommend this company as a good 2005 37 37 16 6 4 0 74 M place for an acquaintance of mine to work. 2004 32 40 18 6 4 0 72

My work is interesting and motivational 2005 30 40 16 95070 M 2004 25 42 16 9 4 1 67

Overall I am satisfied with my boss 2005 30 38 16 8 7 1 68 2004 26 42 18 8 5 1 68

Very satessfied satessfied Indiferent unsatessfied Very unsatessfied

OPINIÓN

What does society think?

Studies on corporate reputation have Results included the WORK dimension as one of the November - December 2005 seven factors making up a person's Spain 71.9 perception of the company. As a result, for Telefónica not only is it important to find Argentina 66.5 out the opinion of its employees, but also of society.The better the perception of the Brazil 71.1 quality of the workplace environment in Telefónica, the more opportunities human Chile 69.2 resources representatives will have of attracting the best professional talent for Mexico 71.2 the company. Peru 63 Results show Telefónica in Spain as the second ranking company in terms of workplace environment, unlike in Latin America, where good results in the workplace environment survey have not been reflected by society as a whole.

Telefónica, S.A. | Corporate Responsibility Report 2005 185 06 Employees

Internal Communication

Telefónica's transformation strategy, •Coordinating all communication “Accelerating to strengthen our leadership” initiatives between business developed during 2005, gave lines/countries and the corporation communication a key role in said process. Make corporate policy consistent with In this context, the Internal • internal communications practices in Communication Master Plan established each country for 2005 the plan to give the Group a single dynamic which would integrate the •Design and propose to the Telefónica requirements and specific needs of the Group actions which meet the needs over two hundred thousand employees of and/or specific requirements of each Telefónica. country, in an integrated manner.

The objective is to encourage their active In Spain specifically, at the end of 2005 “the participation in achieving the company's Telefónica news” was established as an goals and strengthening its internal integrated communication dynamic for all cohesion under the message “Accelerating Telefónica employees, with real time to strengthen our leadership”. To do this, updating of information. It is aimed to specific communication campaigns in the progressively expand in all countries where master plan were carried out, also in Telefónica operates. coordination between the countries, as well as bringing current objectives existing in Another of the initiatives developed over different business and countries into line the year was the launch of the trail version with new joint objectives. of the “Management Portal”, a new channel for Group managers which is aimed at Against this backdrop, the action plan becoming the communication channel par carried out in 2005 involved the excellence for management. implementation of numerous initiatives: the creation of teams and new Notable advances have also been made, communications dynamics, remodelling of throughout 2005, to the new Intranet tools and the creation of new channels, the model, Unica, already in application in implementation of new personal district C, with the aim of being communication dynamics and the progressively implemented in all countries commencement of a communication where Telefónica is present. In relation to training plan, both for management and district C, communication actions were professionals involved in this field. carried out around a “new space for a new way of working”. One of the key initiatives of the plan was the establishment of an Advisory Board for internal country communications in Spain, Brazil, Mexico and Peru. The objectives of this Advisory Board are as follows:

Telefónica, S.A. | Corporate Responsibility Report 2005 186 06 Employees

Employees involvement in the strategy

During the 2005 financial year, employees After this presentation of the Strategic were involved in the transformation process Map, the next step is communicating same of Telefónica, under the slogan “Accelerating to all middle management of the to strengthen our leadership”. In this Telefónica Group. respect, both internal communications channels and presentations to directors Directors and middle management are the were aimed at disseminating the five main key to communicating strategy to the axes of transformation which have been employees of a company. Communicating worked on since 2004. The process of and involving employees in a strategy is a aligning all messages under the slogan task that cannot be carried out with one “Accelerating to strengthen our leadership” way communication media, as is significant; more specifically the professionals usually require responses to “meta:cliente” program from Telefónica questions and a detailed explanation of de España and “Customer Commitment” different matters. from Telefónica Internacional.

Additionally, during the 2005 financial year, of particular note is the dissemination among directors of the Telefónica Strategic Plan. This activity, lead from the President's office in collaboration with the Communication department, involved the following aspects in 2005: •Presentation of the Strategic Map in 34 Management Committees of Group companies, located in 7 countries and involving over 400 directors. •Training courses for directors on the CASE STUDY methodology of Strategic Maps, with over 300 participants in Spain Sharing knowledge (15 sessions) and 750 in Latin America (35 sessions). e-MARCO: Portal for sharing knowledge and Practicing Community methodology, Cascade communication through specific • with an active community of Weblogs communication materials, such as under way. This is a dynamic tool available triptychs which summarise the to all companies and countries in the group Telefónica Strategic Map, its objectives and specialises in sharing internal and and indicators. external knowledge through documents - currently 30,000 -, videos and weblogs on Publication on Intranet of the Strategic • the Information Society, Expert Forums and Map portal, which contains the latest Conferences, Sponsors, Regulation, news on its progress, with information Marketing and Advertising among others. on indicators.

Telefónica, S.A. | Corporate Responsibility Report 2005 187 06 Employees

Compensation

Compensation Pension Plans Policy Health plans Other benefits

Compensation

Personnel expenses in the Telefónica Group competitive, fair and consistent through in 2005 totalled 5,045 million euros (4,346 the establishment of a compensation million euros in 2004), representing around package based on the following points: 13.3% on the Group's income in 2005 (14.4% Adaptation to the reality of each market in 2004). From this total, salary package • and each Business Line. expenses (fixed and variable salary + benefits + pension plans and commissions) •Consistency with the Telefónica Group's came to 78%, 69.2% of which corresponded values. to fixed and variable salary and 4.3% to •Focus on key persons according to their benefits. Additionally, Telefónica has performance and contribution. incurred workforce restructuring costs of 611.20 million euros. •Relevance of non-monetary compensation: social and in-kind During 2005, both for fixed and variable benefits. salary, the Telefónica Group has drawn up a total pay packet framework common To define this compensation system, salary to all directors. This framework is aimed benchmarks have been established which at achieving defined results and strategies, allow comparisons with companies of providing the necessary flexibility similar scale and relevance. Said analysis and transparency to maintain maximum was carried out by directors and middle internal equality and the maximum management in Spain, Europe and Latin external competitiveness possible, America. with the aim of encouraging mobility, attraction, motivation and retention For the general Telefónica workforce, of management talent. compensation conditions for employees are described in the different collective Telefónica Group's compensation system is agreements in force. At the close of 2005, aligned with the Group's global strategy over 142,700 employees in the Telefónica and best practices of the marketplace to Group had their status regulated on the motivate the employee while being basis of collective agreements compared to 120,000 in 2004.

Telefónica, S.A. | Corporate Responsibility Report 2005 188 06 Employees

Percentage of employees with collective agreement and variable salary by country in 2005 Data in percentage

with variable salary with collective agreement 100 100 98 88 99 92

75 71 63 63 59 56 48 50 46

33 26

0 Spain Europe Argentina Brazil Chile Peru Mexico Colombia Venezuela

Variable salary Percentage of employees with collective agreement and variable salary by business line in 2005 For years, the Telefónica Group has been Data in percentage working on designing and implementing with variable salary with collective agreement variable compensation policies that reward effort and the fulfilment of its employees' 86 97 objectives. 83 80 81 These policies seek, on the one hand, a 76 greater commitment and involvement by 67 employees with company objectives, and 54 on the other, greater fairness in the compensation system. Variable 43 39 compensation is designed to mobilize attainment of the Group's global objectives 30 and to compensate in function of 20 14 according to contribution to results 8 based on achieving individual, company and Group objectives. T España Latam T Móviles T Contenidos TPI Atento T Gestiona Group Group Group Group Group Group Group

Variable salary is based on a model which, linked to global Group results, combines the perspective of objective achievement (what has been done) with perception about achievement methods (how it has been done).

Over 147,000 employees (105,000 in 2004) are covered by variable salary based on the fulfilment of individual, company and group targets.

Telefónica, S.A. | Corporate Responsibility Report 2005 189 06 Employees

Health plans

The Telefónica Group offers private In Peru, most of the companies in the medical insurance to over 98,000 Telefónica Group have health plans that employees throughout the world. This supplement those that other workers in includes 100% of Telefónica de España the country generally have. The Group employees, 76% of the Telefónica Móviles companies have agreements with Private Group, 62% of T-Gestiona, 48% of TPI and Health Provider Companies (EPS), which 40% of Telefónica Internacional. In relation act as private insurers to look after the to Atento, in Brazil, such plans are offered needs of the employees and their family to over 25,000 employees, bringing the members. Similarly, at Telefónica del Perú a figure for the company to 31%. group of employees and their families are covered by a self-insurance system (PAMF) In Spain, Telefónica de España and that offer services similar to private Telefónica S.A. underwrite insurance insurance. The total number of employees policies for their employees with the having access to this type of service is Antares Group, consolidating the more than 2,300. complementary health coverage from the Social Security General Regime for active TeleSP in Brazil offers all its employees and employees, their wives and children, early their dependents the chance to be included retirees and those who have left the in the health and assistance plan from company. Other employees, up to 40,000 Plamtel, which offers more comprehensive throughout the country, have health plans services than those generally found on the in other private institutions. market and has been recognized by Accoesp (State of Sao Paulo Association of In Argentina, over 6,800 employees of the Medical Clinics and Doctors'Offices). Over Group have private health access, double 35,000 employees throughout the country the 2004 figure. In Chile, the former health have access to health services of this type. insurance system based on an internal institution has been changed and has now moved towards a private institution (ISAPRE) that competes in the market and provides more comprehensive health coverage. Currently over 2,100 employees participate in same.

Telefónica, S.A. | Corporate Responsibility Report 2005 190 06 Employees

Pension plans CASE STUDY Fonditel

Employees of the Telefónica Group in Spain, Pension plans for employees of the Additionally, employee funds for the Peru and Brazil participate in pension plans Telefónica Group in Spain are managed by Telefónica Group, with the knowledge of promoted by the Group, meaning costs for Fonditel and in 2005 obtained annual their respective Control Commissions, Telefónica of 94 million euros. In the rest of profitability of 12.38% for the Employee have strengthened their commitment to the countries, employees participate in Plan of Telefónica de España and up to make investments in ethical, sustainable public pension plans. 14.56% in the case of Fonditel B, which is and responsible fund until reaching 1% of the pensions fund which groups together all assets managed. Specifically, at the In Spain, 60% of employees of the pension plans for the other companies in close of 2005 the volume of investments Telefónica Group participate in Group the Telefónica Group. The volume of assets of this type reached 48.1 million euros, pensions, managed by Fonditel. 84% of managed at the close of 2005 reached meaning 1.01% of all equity in employee employees of the Telefónica de España 4,528 million euros in the Employee plan of plans for the Telefónica Group. From this Group are covered by plans, as are 91% of Telefónica de España and 209.5 million amount, 33.7 million euros were invested Telefónica Móviles España (there are no euros in Fonditel B. in socially responsible investments, 10 programs of this type either in TPI or million euros in social housing Atento). On a monthly basis the company Fonditel has continued to get public developments and 4.44 million to a contributes 6.87% of gross salary of recognition at home and abroad due to its forestry development company. employees to the plan and each excellent results in pension fund contributes 2.2% of same, except management. Thus, for the fifth year employees contributing after June 1992, running it was awarded the prestigious IPE whose percentage is 4.51%. prize (Investment & Pensions Europe) for Spain and reached the final three In Brazil, 83% of TeleSP employees and 65% candidates for the overall European prize. of Telefónica Empresas have private Also, prizes awarded by Intereconomía- pension plans to which employees make a Morningstar gave two awards to plans personal contribution matched by the managed by Fonditel: to the best manager contribution of the company. of mixed fixed income. In terms of national ranking by profitability, individual plans Almost all employees of Telefónica del Perú managed by Fonditel continued for yet participate in the pension programs offered another year to get excellent results and in the country. Most do it through the reach the top positions in their categories private pension system operated by the for three and five years. Pension Funds Administrators (AFP).

Telefónica, S.A. | Corporate Responsibility Report 2005 191 06 Employees

Other benefits

All Telefónica employees have a package of Purchasing club for Telefónica social benefits which complements their employees in Spain salary package and which varies depending on the company. It is planned, during the Telefónica de España employees may make 2006 financial year, to carry out a online purchases of various products and comparative analysis of the different social services, with additional benefits compared benefits existing for the management to market price, through the purchasing group, with the aim of collecting good club. The purchasing club highlights those practices and standardising the range of offers related to Telefónica products and benefits, maintaining the necessary services, and which are in the homogeneity necessary for different telefonicaonline.com employee store, corporate realities. which can also be accessed directly.

The objective of this new channel is to encourage online business, providing employees with interesting offers. Also in this space, the customer will enjoy special attention provided directly by the service provider. Since this initiative was implemented, over 500 monthly transactions have been carried out, for the purchase of automobiles, technological goods, food and banking and property services

Telefónica, S.A. | Corporate Responsibility Report 2005 192 06 Employees

Additional benefits for employees of Telefónica Group1 (Datos en unidades)

N. of people who receive N. of people who receive food tickets studies are financed Spain 11,108 161 Europe —— Latin América 24,491 613 Argentina 13,763 67 Brazil 9,808 108 Chile 98 296 Peru — 13 Mexico — 129 Colombia 86 — Venezuela 736 —

1 Including Atento employees

Additional benefits for employees of Telefónica Móviles r a l a a o a l a a i u y d n e r a i b g a a m o a o t u v a u c e z l m d l ñ n r m i i t e g e a a a e a l a z x o u a i l u n S n r c g u p e a

i r u r h o r e l c s e a G M U A B C C E E E N P P V

Private medical insurance Life insurance Family help (children, college etc.) Food tickets Pension plans Financing of studies Stock option plans

Telefónica, S.A. | Corporate Responsibility Report 2005 193 06 Employees

Training

Professional Tele-training Development Management of Skills Professional Career

CASE STUDY Training Training to improve sales focus In 2005, the Telefónica Group invested over Training of employees in Atento is so 70 million euros in training its employees, intensive due to the size of its workforce, During 2005 Telefónica encouraged its an average of 380 euros per employee. its greater turnover of professionals workforce sales focus through several Professionals in the Telefónica underwent compared with other companies in the training programs: over nine million hours of training in 2005, Telefónica Group and the particular meaning an absolute increase of 5% characteristics of the business it carries •Directors' program: “Making the out. Atento employees receive both company customer focussed”, already By business lines, for yet another year, training in recording contacts with commenced in 2004 and attended by Atento made notable efforts with over five customers and related directly with over 1,000 directors in all group and a half million hours training its customer service. business, this course was given in Spain, employees. Considering the Telefónica Argentina, Brazil, Chile, Peru and Mexico, Group without counting customer Considering the rest of the workforce with participants having the relations, absolute growth in training hours (excluding Atento), the distribution of opportunity to take part in different was around 15%. hours by function places training hours at training actions going in depth into the 37 hours for employees carrying out sales importance of making Telefónica an Annual training hours per equivalent functions, 38 for operative functions and 30 operator which creates solutions of employee exceed 48, which breaks down for support professionals. value to its customers. into 33 hours per director, 58 for middle •Training schedule:“Commitment to our management and 48 for the rest of the customers” was taken by over 5,000 workforce. The decline seen compared with middle managers from the Group in the the 60 hours for 2004 is due mainly to less main countries where it has a presence intensive training in the Móviles and (Argentina, Brazil, Chile and Peru), and directorios business, added to the effect of the program has contributed to specific training actions for mid improving the skills and know-how of management carried out by Telefónica de participants to successfully fulfil their España in 2004. The number of individual Number Employees with students exceeds 650,000 (600,000 in commitment to making the company personalised training plans1 more customer focussed. 2004), meaning an average of more than three training actions for each employee. •Actions aimed at all Group employees: Spain 35.242 all employees have access to specific Latin America 7,441 courses to improve their sales skills Argentina 1,858 through the training Portal. Brazil 1,576 Chile N.D. The different businesses in the group have Peru 1,060 strengthened sales skills with specific Mexico 153 actions. Of note are the Telefónica de Colombia 430 España Sales Schools and programs Venezuela 2,364 associated with the program “Compromiso Rest of America 367 Cliente de Telefónica Latam” (Telefonica Total 43,050 Latam customer commitment". 1 including Atento

Telefónica, S.A. | Corporate Responsibility Report 2005 194 06 Employees

In line with its ambition to be the biggest and best integrated telecom group in the world, Telefónica has set itself the challenge of offering the best future for all its professionals. Telefónica aims to start up the individualised training plan in the 2006 financial year.

Distribution of training hours by employee and business line

2004 2005 Mid Rest Mid Rest Directors manag. workforce Directors manag. workforce Fixed spanish business 48 187 40 46 187 44 Fixed latam business 50 48 31 29 69 32 Mobiles business 123 58 71 54 38 39 Directories 145 132 35 27 67 30 T-Gestiona Group - - - 21 57 31 Other companies 38 95 25 13 12 7 Negocio Atento - - 84 --64

Training hours by business line

2.003 2.004 2.005 Fixed spanish business 1,907,743 1,566,794 1,668,527 Fixed latam business 719,307 812,665 983,392 Mobile business 671,504 684,094 905,699 Directories 223,317 111,105 93,180 T-Gestiona Group - - 94,875 Other companies 390,344 168,072 98,246 Atento 2,457,017 5,567,453 5,505,098 Telefónica Group 6,369,232 8,910,183 9,349,017

Distribution of training hours by employee and country 2005 Data in hours per employee 87,1 without Atento with Atento 63.5 61.7 54.3 50.7

40.6 42.4 34.9 26.9 31.1 18.7 23.6 22.3 10.4

Spain Brazil Argentina Chile Mexico Peru Rest of América Training hours by employee and function 2005 (w/o Atento) Data in hours per employee1. Support 29.8 Operations 84.3 Sales 74.9

56.2 51.2 50.8 19.1 23.9 37.6 36.3 36.5 37.5 34.7 31.2 28.8 11.1

1.9 3.9 Fixed spanish Fixed LATAM Mobile Directories T-Gestiona Other business business business business Group companies

1 Without Atento.

Telefónica, S.A. | Corporate Responsibility Report 2005 195 06 Employees

Online training by business line Online training by country Breakdown of online training Data in percentage Data in percentage1 hours by subject Fixed Data in percentages Spanish Rest of Telefónica Group business Spain IT excluding Atento 23.6 Chile America 25.8 15 19.8 9.1 2.9 Others 19 Other Fixed Companies LATAM Argentina Telfónica 6.4 business 3.6 Languages Mexico Group 12.8 16 1.5 4

Mobiles Company business Brazil Skills 12 T-Gestiona 21.5 25.0 19 Group Directories Peru Colombia 38.6 4.7 27.2 4.9 Telecommunications 15

CASE STUDY Tele training Mobile learning

Mobile learning is the next generation of In 2005, professionals from the Telefónica Indicators of training use showed falls online training, with access to content Group (excluding Atento due to the specific compared with 2004, which was unique in through mobile devices giving characteristics of its training programs, its very intensive use of online tools. This independence and immediacy to training. carried out 20% of their training via online indicator has encouraged us to renew In said type of training, which is normally tools, particularly in T-Gestiona (where contents and more actively promote the combined with standard online training, training comes to 38% of total training). portal, with the aim of increasing its use by the structure of content should be Telefónica employees. modular, with reduced estimated study During 2005, the a+ service offered times per module (maximum of 10 through Educaterra consolidated its visions As a positive detail, it is important to minutes) so the student can access them of standardising the skills and abilities of highlight the fact that the percentage of without disrupting his normal activity. employees, ensuring flexible access to training actions passed, compared with training and acting as catalysts in actions initiated, has increased from 60% Telefónica, through Educaterra, has been knowledge sharing. The portal is available in 2004 to 67% in 2005. investing throughout 2005 in the in two languages (Spanish and Portuguese) development of a series of tools and and is accessible from Spain, Argentina, 2005 saw investment in the development applications based around the a+ service, Brazil, Chile, Peru and other countries in of 125 new content sets, including 371 which enable mobile access to training Latin America. modules, meaning an additional offer of resources. There are currently 98 lessons 800 new training hours. Among the most with contents produced for “mobile The results of activity in 2005 were as notable projects are: follows. learning”.Typically, Telefónica Móviles España •Cisco technology training for Telefónica is leading the Group in this type of training. •The number of students registered with companies online training services exceeded Individual training plans for para 130,000, with a reduction of 14% • Telefónica de España compared to the figure of 150,000 the previous year. •Mixed training program (attendance - online) for management secretaries •The number of hours used has declined by 38%, from 650,000 hours of •Giving up smoking program connection in 2005 to 406,000 in 2004. •Engineering portal •The number of simultaneous training Portuguese for Spanish speakers house through the virtual classroom • (centra) reached 8,460: Said tool •Environmental management course simulates a traditional class through developed by Telefónica de España and the computer, enabling real time Telefónica Móviles España interactivity between the trainer and students. This tool makes it possible to combine voice and image, share applications, work in a group, carry out surveys or evaluations en vivo, etc.

Telefónica, S.A. | Corporate Responsibility Report 2005 196 06 Employees

Commitment to our Working together with customers (internal and external), customers understanding and bringing forward to their needs, and offering them quality solutions with a high value added

Environment Integration Understanding and participating in the social context (society, customers, companies, employees and shareholders), adapting adequately to new situations and encouraging change Communication and Knowing how to use communication to create a positive environment transparent relations

Collaboration Actively cooperate to achieve common goals

Professional development A commitment to the professional and personal development of others and yourself

Results contribution Effectively managing resources and always seeking, with initiative, to improve the company's results

Telefonica employees Management by skills evaluated on the basis of their skills in 20051 Spain 38,857 All lines in the Telefónica Group share a The development of skills will boost a Europe 10,007 system of generic skills for all employees, process of cultural development towards Latin America 27,203 strengthening the values of the group and a professional model of greater Argentina 6,711 acting as a basis for implementing strategy. employability, facilitating efficiency, the Brasil 9,313 vision of internal customers and trans- Chile 3,835 Skills are the markers which make it functional empathy. Peru 5,599 possible to know what the company Mexico 1,615 expects from each employee, also acting as All employees in the group have access Colombia 130 a personalised guide for professional to a training portal where there is a section Rest of America 2,294 development. on self-development of corporate skills Total 78,361

where numerous actions can be found 1 Without Atento In 2005, all companies of the Telefónica to increase skill levels Group participated in an evaluation process which involved, at least, The human resources department is self evaluation and the evaluation of making progress in implementing a 360º representatives of the hierarchy. The evaluation model for group directors, which results of this evaluation enabled to date has been completed with the identification of areas for improvement evaluation of management talent in 2005 for each employee and the appropriate and the 180º minimum feedback process. actions to be carried out each year. 360 º evaluation involves the evaluation of a professional by his superiors, those During 2005, over 78,361 employees from reporting to him, and his peers, the Telefónica Group were evaluated on the complementing the self-evaluation process. basis of their skills, meaning a During the next financial year a range of consolidation of the model compared to corporate policies will be developed around the 68,677 in 2004 and the 35,758 in 2003. this initiative.

Telefónica continues to make progress in management by skills, integrating this within different human resources management systems (selection, training, development), thanks to a corporate skills model which facilitates horizontal and vertical mobility between departments, units and countries, encouraging organisational development and improving the suitability of personal skills.

Telefónica, S.A. | Corporate Responsibility Report 2005 197 06 Employees

The Telefónica Group is aware that its employees aspire to a professional career which will help them develop in terms of their functions and responsibilities. For this reason, the Group's Human Resources departments have developed various initiatives to encourage this objective.

Professional career

Career initiatives for directors over 350 vacancies in the Group have been published. This tool is available for Rotation of directors. Telefónica has • the publication of management and non established a framework for the rotation management vacancies. of directors, which is determined by a range of established criteria, among •Project interchange program between which are aspects related to the Telefónica de España and Telefónica potential and development of persons, Latinoamérica. The sales areas of both succession plans, previous experience companies have encouraged a year long and career in other companies, projects professional exchange program, with the implemented, know-how, motivation. twin objective of transferring good project management practices and Rotation of directors enables the transfer • developing professionals with a vision of of good management practices between an integrated telecom group. During the different units of the company, offers 2005, 25 professionals participated in opportunities for professional this initiative. development to employees and helps share existing talent within the Group, in •Participation in the Fundación Carolin this way making it possible to reach scholarship program, in which 26 management levels when management professionals from the Telefónica Group positions become vacant which are in Latin America have developed their mainly to be filled internally. professional activity in companies within the Telefónica Group in Spain at the During the 2005 financial year, 171 • same time as taking year long post directors have rotated internally (12% of graduate studies. the total) and another 54 have left Telefonica (4% of the total) •Establishment of Project Management professional career in Telefónica de España Career initiatives for other employees •General publication of all vacant positions on the Intranet. Through this initiative, Telefónica aims to inform all Group employees of the professional opportunities which exist in the different companies of the Group. This action is also aimed at encouraging clarity and transparency of procedures for filling vacancies and the transfer of talent within the group. The first phase of the project started in 2005, and since then

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The end of 2004 saw the approval of the development of the expert career model CASE STUDY towards a new project management professional career. The development of the JAP (High potential youth) previous model was aimed at adjusting the program functions of the expert to the needs of the company, identifying the most suitable The program's aim is to identify and experts for each position, offering a more develop young talent at the outset of their attractive professional outlook contributing professional careers. This program, begun to improving satisfaction and basically in the 90s and revised in 2003, has the positioning this group in accordance with following objectives: the company's main strategic lines. Retaining and promoting loyalty in Project Management, Sales and Technical • persons with talent from the outset of Advisor to Customers (ATC´s) were their professional careers. integrated into a model for development and professional careers involving around •Speeding up their process of 4,000 professionals in the company. development within the organisation. •More rigorous personnel selection •Training agents who will promote procedures at Telefónica de España. change towards the new desired culture. Through the participation of a second •Forming a pool of future managers for hierarchical superior alongside the the Telefónica Group. person responsible for the vacancy increases objectivity in the process of At the close of 2003 the selection process deciding on the most suitable candidate. for the new Telefónica Group High •Encouragement of rotation in internal Potential Youth Program began, which was selection processes. Telefónica de España completed in 2004 with the selection of rotates personnel between departments 138 JAPs. in 30% of internal selection processes and 44% of cases within the same In 2005, JAPs carried out temporary department. rotations (3 to 6 months) during which they worked in other functional areas within the same company, other Group companies and, in some cases, other countries. This action has contributed to increasing their overall vision and knowledge of the Group.

In 2006 it is planned to carry out additional development actions, putting the final touches to the 2004-2006 session of the JAP Program.

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Human rights Freedom of association and collective bargaining Work-life balance Professionals and persons Abolition of child labour Equal opportunities Health and safety Workplace demands

Human Rights

For Telefonica the defence and promotion March 2002 and since then has reported, of human rights, beyond a mere obligation, through different communication is one of the values on which our human channels, on progress in implementing resource management is based. its 10 principles.

Express commitment Supervision mechanisms Formally, this commitment by Telefonica to Telefonica supervises, checks and reports guarantee human rights includes: on compliance with human rights in all its activities through different mechanisms: •Telefonica Group code of ethics, which expressly refers to respect for human •Code of ethics office, which has different rights in relation to employees and channels for consultation and complaint, providers and whose processes are verified by the internal audit department. This office is Code of ethics agreed between Telefonica • fully functioning within companies in and the Union International de the Telefonica Moviles Group and is Sindicatos (UNI) in 2001 and renewed aimed for establishment within the rest annually. This code applies to the whole of the Group during the 2006 financial Telefonica Group and is inspired by the year. Among its functions are the Global Compact and the Fundamental drawing up of an annual report. Agreements of the ILO. It includes joint recognition by both parties of the •Workplace audit, in companies fundamental rights in the community themselves, considering relationships in and workplace, namely freedom to first and second lines of contracts. choose employment, absence of Annual meeting with the Union discrimination in the workplace, • Internacional de Sindicatos to review abolition of child labour, union freedom compliance with the UNI-Telefonica and the right to collective bargaining, code. minimum salaries, working hours, environment, workplace health and •Report on progress in the Global safety and improvement of community Compact, drawn up annually and conditions through training actions, and included in corporate responsibility stability of employment. reports and the Telefonica web site •United Nations Global Compact. Telefonica signed this declaration in

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The success of a company lies in its employees. Telefónica treat its employees as persons who join both professional and personal challenges. That why, Telefónica wants to become a company where its employees feel as persons.

The different departments of the Telefónica Group develop different initiatives aimed at guaranteeing human rights, equality of opportunity, work-life balance and maximum protection for health and safety.

CASE STUDY

Workplace audit in Telefonica

The object is to ensure compliance with applicable employment regulation of basic Reporting lines •Presentation of the workplace audit human resources policies and procedures, Compliance with and respect for human carried out in the Telefonica Group as a as well as knowing, evaluating and rights is the responsibility of each and case study in Global Compact correcting any workplace contingencies. every Telefonica employee. Functionally this workshops, based around points 1-3. is the responsibility of the human •Participation in HCRA, Human Rights In the first phase (04/05), 26 companies resources department with cooperation Compliance Assessment, developed by were audited in 6 countries, During 2005, from the corporate responsibility the Danish Human Rights Institute, with workplace audits were carried out in T- department when it comes to detecting the collaboration of 40 Human Rights Gestiona Spain, TSoluciones, T-Móviles de risks, promoting and encouraging experts. Venezuela, T-Móviles Colombia. improvement and coordinating the drafting of reports. Along the same lines as in 2004 (in the 23 As a corrective measure on a corporate most important companies in the Group), level, in February 2005 a joint audit and Both departments report every two all companies audited have had to draw up human resources instruction was months to the Commission set up by the an action plan to correct any workplace approved with action criteria for the Board of Directors in 2001 to directly contingencies. control of workplace risks in the supervise all matters relating to human contracting of works and services. The resources and corporate reputation, As a corrective measure on a corporate challenge for 2006 is to complete the third including human rights (comprising four level, in February 2004 a joint audit and and final phase of the workplace audit in independent directors). human resources instruction was approved Telefonica. with action criteria for the control of External collaboration workplace risks in the contracting of works This is an internal standard which For Telefonica, the benchmark partner in and services. includes: human rights is the UN. Its different A list of pre-contractual requirements agencies have developed numerous specific • Below are the main actions guaranteeing (approval of providers and contracts) collaborations and projects during 2005.In respect for the principles contained in the the specific area of human rights, the Global Compact relating to Human Rights •List of the information to be provided at following are of note: and the working environment (see the beginning of the contract •The ongoing participation of Telefonica in chapters on environment and providers to •Obligations in terms of prevention of working groups created on an ad hoc complete the information). workplace risks for the principal and the basis by international bodies such as the contractor ILO, the International Employers' Obligations in terms of information to Organisation or the International • legal representatives of employees Chamber of Commerce. Measures to adopt during the validity of Participation at the headquarters of the • • the contract ILO in a special working session with John Ruggie, Special UN Representative •Measures to adopt after the cancellation for Human Rights, providing the process of the contract with internal documentation and Supervision and control measures comments. • Another of the corrective measures taken during 2005 was the obligation of training in human rights for employees of security companies working for Telefonica.

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CASE STUDY Freedom of association and Social dialogue in the collective bargaining Internacional Arena Search for efficiency is the cornerstone on Collective bargaining which Telefónica's labour strategy is In relation to social dialogue in the Likewise, labour relations as a whole have founded. It is a strategy that takes into international arena, it is worth mentioning been very satisfactory. At the end of 2005, account factors that closely influence the that Telefónica and UNI (Union Network over 142,700 employees of the Group had transformation of the business to ensure International) have agreed to meet their conditions regulated on the basis of that social dialogue and negotiation annually so that Telefónica management collective bargaining, compared with definitively constitute key elements in our can inform unions of general information 120,000 in 2004. The breakdown of these development as a Group. about the most important Group topics details by country and business line is in which affect its position on the market, its the section on compensation. future and priorities. Dialogue with unions The meeting corresponding to 2005 was Social dialogue and collective bargaining Some of the achievements in this area held in Mexico DF on 14 February 2006. are irreplaceable instruments for labour merit special consideration: Among the topics covered was an updated relations management and governance, as presentation on the Telefónica Group, its well as enabling collective bargaining to Spain positioning in Latin America, with adapt to the changes occurring at the Telefónica de España and workers' particular emphasis on the boost given, in companies. Its sound functioning is clearly representative signed the extension of the 2005, to the process of internationalising evidenced by the meetings held 2003/05 collective agreement until 31 Telefónica (Cesky telecom, alianza China periodically between all parties. December 2007. The agreement to extend Netcom and O2). the collective agreement was adopted with Freedom of association 12 votes in favour by the company, the The final part of the presentation focused Freedom of association is an employee response of the Inter Centre Committee on the company's future strategy, right at Telefónica, as shown by the more being very positive, with the votes in favour especially the need to effectively involve all than 45,000 employees with labour union of CC.OO. (4 votes), U.G.T. (4 votes) and U.T.S. employees and for union leaders to play a affiliation. By company, those with the (1 votes), STC (1 vote) and votes against from leading role in reaching the objectives largest number of affiliated personnel are CGT (1 vote) and AST (1 vote). established. Telefónica de España with 15,876, Telefónica Latinoamérica with 13,227 and Atento with The company is committed to maintaining 7,579. By country, particularly notable are the acquisitive power of workers of Spain, with 16,246, Argentina with 12,275 Telefónica de España, S.A.U, so at the end of and Chile with 3,957 affiliated employees. each year, the difference is reviewed if the real CPI is higher than the predicted CPI. Employee participation of employees of the Telefónica Group in the labour union elections rose to over 106,000 employees (95,000 in 2004), electing over 6,300 union representatives

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Both parties, sharing their concern about The collective agreement includes a range the rise in absenteeism and in order to of material and content from a perspective CASE STUDY reduce absentee rates during 2006 and of renewal and even innovation, and which 2007, have agreed that within the hope to achieve an overall improvement Evolution of the Employee Interpretation and Supervision Committee, both in the areas of productivity of the redundancy plan of Telefónica absenteeism rates for the last two years company and life and work conditions of de España will be evaluated, so that an extra day's the professionals which render their holiday will be awarded as long as a decline services in same. Thus it included measures Agreement on the Social Plan in the in the aforementioned rate compared with seeking to make working hours more Employment redundancy plan of the previous year is observed. flexible and compatible with improvements Telefónica de España (E.R.E.) for the In Telefónica de España, the number of in the quality of life of workers, bringing period 2003-2007. hours for labour disputes fell to 3,724 in about improvements to customer service 2005, showing a downwards trend and the company's productive processes. The program is based on voluntary compared with the 15,794 in 2004 or Along these same lines, new rights were redundancies, affecting a maximum of 54,500 in 2003. incorporated aiming for a better work-life 15,000 workers, and with a commitment to or guaranteeing, strengthening, the replace up to 10% of positions. This plan The management of tgestiona España and principles of equality of opportunity. enables Telefónica de España to reduce the the Works Committee (with the advice of number of employees, maintaining its union members represented in same, CC The number of hours of labour dispute in competitiveness. OO and UGT) have signed the first Atento España stood at 7,902 hours in collective agreement for tgestiona, for the 2005, a tenth of the 75,918 in 2004, the The plan is non discriminatory, voluntary and 2005-2007 period. The collective agreement year in which the third collective applies to all employees of the company. At was signed by the works committee of agreement for the sector was reached. 31 December 2005 a total of 1,945 employees tgestiona and the company management. had asked to join the scheme, added to the Latin America 7,906 requests for departure. This fulfils one of the main objectives During 2005, social dialogue was suggested in negotiations: standardising significantly improved throughout the the working conditions of the whole region. Almost all matters raised were workforce, especially in terms of resolved, significantly reducing professional categories, basic salary controversies, disagreements and conditions, right to contributions, social litigations. Likewise the matters which benefits and working hours. The were subject to negotiation in all aforementioned conditions differed companies have expanded both depending on the existence of applicable in quality and quantity. employment regulations (those for tgestiona and TPTI), as well as prior hiring Possibly related to the above is the conditions in different Group companies. significant improvement in working environment surveys for the region among T. Latam companies.

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Chile. Peru It is important to emphasis that collective 2005 saw satisfactory conclusions to bargaining was carried out in line with the collective negotiations pending with the law, respecting the times established and Federación de Trabajadores and the without resorting to strike action. Among Sindicato de Empleados, signing the these negotiations, of note are respective collective agreements for a period of 3 years. Bearing in mind the fact Telefónica CTC Chile S.A. with Grupo • that the previous year a collective Negociador (60 persons) agreement was signed with the Sindicato •Telefónica Mundo S.A. with Sintelfi (33 Unitario de Trabajadores for the same persons) period, the signing of these agreements •Telefónica Mundo with Sindicato OITT (78 will define employment benefits for the persons) whole workforce up to 2006.

•Globus 120 S.A. with Sindicato OITT (9 May saw the signing of an agreement for persons) reconversion of manpower with the •Telefónica CTC Chile S.A. with Sindicato Sindicato Unitario, which is the majority OITT (92 persons) organisation, and in which it was agreed to support the Dr. Speedy project. The aim of There was also negotiation of this project is to train company technicians complementary health insurance with all in integrated solutions for broadband unions, affecting around 438 persons. customers.

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Argentina Brazil In Telefónica de Argentina it is important to The most significant facts in 2005 in indicate that the number of hours lost to relation to unions were the following: labour disputes fell to 69,715, from the January ´05: Renewal of the Agreement 170,000 hours in 2004. At the same time, in • with Sintetel relating to the the relation to unions in Argentina, the Conciliation Committee, whose aim is to following notable agreements were settle disputes with workers and reached: management. Salary agreement Jan 06 - Mar 07 • April ´05: External and internal network (Foeesitra - Foetra/Fatel) • companies negotiated a collective •Reduction of potential liabilities for agreement. claims for equal payment for equal work Negotiation of regional CIPA (Internal (Foeesitra-Fatel) • Commission for the Prevention of •Reduction of working hours as of 1/3/06 Accidents) and POE (Emergency (Foeesitra-Foetra/Fatel) Operation Program) by Telefônica/SP together with unions and the Creation of category 6 (Foeesitra- • Employment Ministry. Foetra/Fatel) September 05: Negotiation with Sintetel Art. 15 incorporating the basic salary • • in relation to the Assist exclusion in the (Foeesitra-Foetra/Fatel) Collective Employment Agreement for •Salary advance up to mid March 06, Telefônica/SP and negotiation of a new when the holding of a new CCT will be agreement up to May 06. discussed alongside the definitive salary agreement (Fopstta/Upjet) It is also worth noting that TELESP and T- Empresas negotiated together with SINTETEL (Telecom union) and SEESP (Engineering union) the collective employment agreement for 2005/2006.

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CASE STUDY Work-life balance Work-life balance in Telefónica Móviles España Working hours Duration of maternity leave The last collective agreement of Telefónica (weeks) The number of hours worked by employees Móviles España (2004-2006) contained Telefónica de España Group 16 new measures to improve work-life is regulated by collective agreements, balance of employees to complement which affect over 120,000 employees, Telefónica Latinoamérica Telefónica de Argentina 12 those already in force, such as flexible different in each country and business line TeleSP (Brazil) 17 working hours, child assistance, better in accordance with the requirements of the Telefónica CTC Chile 18 paternity leave, etc. Among the new business and legislation in each country. Telefónica del Perú 12 measures are: The collective bargaining policy of the Telefónica Group expressly includes the Telefónica Móviles School help, extending child assistance • limitation of extraordinary hours. Spain 16 to children between 6 and 12 (30 euros a Argentina 12 month for each child) Work-life balance Chile 18 •Special leave of absence (2-4 years) to look The collective bargaining policy for Central America 12 after children or family members, with companies in the Telefónica Group Colombia 12 12 the position in the company being held identifies the needs to manage working Mexico Panama 13 time, the duration and distribution of Addition of paternity leave for Peru 12 • working hour, making them compatible hospitalisation and for time spent in Venezuela 18 hospital during caesarean birth. In this with personal and family life. Atento case, paternity leave is 5 days. In December 2005, 14,026 employees of Spain 16 •No minimum limit to the reduction Telefónica companies (10,263 in 2004) Argentina 12 of working hours, improving the rendered their services under a regime of Brazil 17 provisions in the Workers Statute reduced working hours. Employees claimed: Central America 12 (minimum 1/3 reduction). sickness (25%), maternity (9.8%) or studies Colombia 12 18 (11%). Part time contracts were not Chile Morocco 14 considered, although these make up a high Mexico 6 proportion of the Atento workforce. Peru 12 Venezuela 18 The number of employees receiving family assistance stands at more than 27,943 employees, particularly in Spain (18,868), Argentina (2,694), Chile (3,201) and Peru (1,818)

The duration of maternity leave accords in each country with legislation in force, ranking between 12 weeks in some countries and 18 in others.

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Mobile working In the first half of 2005, several Telefónica Number of hours worked For Telefónica, mobile working is more and companies setup “pilot” schemes based on Telefónica de España Group 1,658 more important, one further step in its the policies and guidelines established in strategy of technological, cultural and the mobility policy, which will be evaluated Telefónica Latinoamérica 1,920 organisational change. In this way, during 2006. Among the most notable Telefónica de Argentina Telesp (Brazil) 1,948 Telefónica aims for factors such as trust, experiences in this area were those of Telefónica CTC Chile 2,025 responsibility, commitment and innovation Telefónica de España, which since 2002 has Telefónica del Perú 2,145 allied with efficient management of been running a tele-working scheme called working time targets and greater eWready! in which over 750 persons have Telefónica Móviles autonomy in the organisation of activities participated outside the agreement and Spain 1,766 to be determinant factors in the new way 200 from within it. Argentina 1,967 of working and the consequent change in Chile 2,142 managers and employees. To achieve this, Other companies which have implemented Central América 1,761 employees have been provided with tele-working include TeleSP (126 Colombia 2,280 different types of spaces and technological employees), Publiguías (36 employees), TPI Mexico - Panama 2,288 media, in such a way that their activity España (185 employees), I+D (80 Peru 2,304 does not have to be carried out solely in employees), Telefónica Móviles España (32 Venezuela 2,040 the office or work station, in the traditional employees). way. With the implementation of this new Atento way of working, Telefónica aims to increase Employees taking part in this program have Spain 1,511 its employees' motivation, help them to commented on its flexibility, the Argentina 1,950 find the right balance between their opportunity to improve work-life balance Brazil 2,160 personal and professional life, while and the savings made in travelling time. Central América 1,761 improving productivity at the same time. Colombia 1,977 Chile 2,496 Morocco 2,304 To encourage this new way of working, in Mexico 1,560 July 2005 a Corporate Policy on Mobile Peru 1,792 Working was approved. Mobile working Venezuela 2,184 enables professional activity to be carried out without the physical presence of the worker at the work station for a significant part of the working day/week. The aforementioned policy defined the process for establishment of this policy and sets targets for the 2005-2008 period.

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CASE STUDY Abolition of Child labour Brazil.- Empresa amiga da criança Telefónica has a zero tolerance policy when Additionally, four companies of the Group it comes to child labour in all countries in in Brazil were granted the “Empresa Amiga In Brazil, four companies in the Telefónica which it operates, A policy which extends de los Niños” certificate. group were granted the “Empresa Amiga to its supply chain through the contractual de los Niños” certificate by the Fundación requirement for strict compliance with the Proniño is the social initiative of the Abrinq por los Derechos de los Niños y los laws of each country. Fundación Telefónica, which seeks to help Adolescentes (working for the rights of Latin American child workers go to school, children and adolescents). In 2004 the Telefónica Group carried out a in this way contributing to the eradication workplace audit with an external of child labour in the area and giving these TeleSP, Telefónica Empresas, Telefónica consultant in 23 companies of the Group, children the opportunity for development Assist and T-Gestiona have complied with located in six different countries and to allow them a better future. This the ten commitments, summarised below: representing 86.4% of the Telefónica initiative, described in the chapter on Group. Child labour was not among the Society, is developed jointly by Telefónica 1. Rejection of child labour risks detected and leading to corrective Móviles subsidiaries and NGOs, currently 2. Respecting young employees measures. In the general contract award offering scholarships to over 11,000 3. Inclusion of contractual clauses for conditions of Telefónica, respect for children. Funds are used to pay registration providers requiring the rejection of child employment legislation is expressly fees, school material, uniforms, transport labour and allowing termination of the included, as well as in the Group's Code of and food. The Proniño program also holds contractual relationship in the event of Ethics and the Code signed up to by workshops with families and educators, non compliance. Telefónica and the Unión Internacional de medical checks and cultural and sporting 4. Offering nursey services for children of Sindicatos. activities. employees. 5. Ensuring that employees register all children under 18 in school and encouraging school attendance. 6. Providing pregnant employees with pre- partum training 7. Encouraging breast feeding, establishing conditions where employees can breast feed their children (under six months). 8. Raising awareness among employees to register employees who have recently given birth. 9. Social investment aimed at benefiting children and adolescents. 10.Contributing to the Fund for the Rights of Children and Adolescents with an amount equivalent to 1% of the company's income tax

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Distribution of employees in the Telefónica Group by gender and business line 2005 Data in percentage:

% women % women in management

66.3

46.8 43.9 38.5 39.6 36.2

27.4 28.4 22.6 24.8 20.8 22.0 20.8 17.9 12.2

4.2 T España LATAM T Móviles T Contenidos TPI Atento T Gestiona Others Group Group Group Group Group Group Group

Equality of Opportunities CASE STUDY Equal opportunities prize

Equal opportunities are, for Telefónica, one Gender equality The Telefónica I+D centre in Boecillo, of the transversal values which governs its On average 49.3% of the workforce of the recognised as a company sensitive to relationship with stakeholders. Thus, it is Telefónica Group is made up of women, an equality of opportunities by Valladolid expressly included in the Telefónica Code of increase compared to the 48% for the 2004 Council. This recognition rewards Ethics, Principles of Customer Relationships, financial year. By business line, of particular the Valladolid company with the best agreement signed with worker note is the high level of integration in work-life balance. representatives, the Advanced Purchasing Atento, with a female workforce of 67%, with System Manual (providers) and many other lowest numbers being found in the fixed regulatory documents issued by the telephone companies.Without considering Telefónica Group. the effect of Atento, the percentage of women in the company is 33%. Telefónica actively manages equality of opportunity for disabled persons within the In terms of management levels, there are framework of its “Telefónica Accesible” over 1,700 women in superior and mid program. The company does not have an management positions in the company, active policy of encouraging women to join representing 21.8% of the total. Companies the Telefónica Group and their internal with the greatest percentage of women at promotion. Likewise, there is no program these levels are the Atento Group, for measuring the percentages of diversity Telefónica Contenidos and Telefónica by ethnic origin, as this is not included in Móviles. The lower proportion of women in employee records, as any question in this fixed telephone companies is reflected in respect could be deemed discriminatory. It the proportion of women at management is significant that no incidents of this levels inn Telefónica de España (10.6%). nature have been reported in the Group.

In Telefónica we consider that each new Distribution of employees by gender and country hiring and promotion must be assessed on With Atento Without Atento personal and professional merits, without %men %women %men %women recourse to quotas. For this reason we feel Spain 56.3 43.7 68.6 31.4 the application of a policy of non Europe 65.6 34.4 65.6 34.4 discrimination will enable a balance to be Latin América 46.5 53.5 65.3 34.7 struck over the years in terms of gender Argentina 60.2 39.8 68.5 31.5 and ethnicity to bring Telefónica into line Brazil 38.0 62.0 65.3 34.7 with the society in which it does business . Chile 50.2 49.9 64.4 35.6 Peru 58.7 41.3 67.5 32.5 Mexico 54.6 45.4 68.5 31.5 Colombia 48.1 51.9 53.3 46.7 Venezuela 46.0 54.0 49.9 50.2 Rest of América 53.7 46.3 58.3 41.7 Rest of world 51.5 48.5 - - Total 50.7 49.3 66.5 33.5

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Distribution of Companies with the largest disabled employees in disabled workforce the Telefónica Group 2004 2005 Spain 556 Telefónica de España Group 150 166 Europe 152 TeleSP Group 363 209 Latin America 356 Telefónica Móviles España 28 28 Argentina 14 Atento España 248 345 Brazil 315 Atento Brasil 137 95 Chile 12 Other companies 58 236 Peru 5 Total 984 1,079 Mexico 3 Colombia 2 Venezuela 5 Rest of America 15 Total 1,079

Equality for the disabled •Development of training agreements to CASE STUDY Telefónica's commitment to the social and qualify disabled persons in Brazil, where employment integration of disabled people the labour market does not meet the Special Job Centres in Atento goes back to 1973, when at the initiatives of demands for qualified personnel in the workers and their representatives the companies. In 2004, three SIAA (Integral Help and ATAM was created, an initiative described in •Monitoring and internal audit of all the Assistance Services) Special Job Centres the section on caring employees. above measures were put into operation. Currently, around 1,079 disabled ATAM offers support to Telefónica in The three Centres, located in “Comunidad professionals work in the Telefónica Group, analyzing the various alternatives available de Madrid” (Madrid and Getafe) and in 0.54% of the global workforce. The number and assessing companies in matters of Seville, provide special customer services of employees is 9.6% higher that in 2004, compliance with the prevailing law in this for top-level institutions and entities. At despite Brazilian regulations raising the bar respect. A collaborative system is thus the end of the year, it had a group of 200 for the consideration of a person as generated for employment, with synergistic employees, most (98%) of whom were disabled, meaning that figures for Brazil are effect and benefits for the companies, their disabled persons of very different on face value lower than those for the employees and the very people with backgrounds: over 25 taking their first job, previous year. disabilities, all born of respect for rights of housewives, professionals retained to the disabled. adapt to their disability, etc. Despite this positive trend in the integration of disabled people into the ATAM offers the different companies the As part of the SIAA project in 2004, Atento Telefónica Group, the company knows that possibility of using any of the formulas Spain signed an agreement with the there is much to do to achieve full considered in the LISMI (Disabled Persons Adecco Foundation for Integration into the integration. For this reason, as part of its Labour Integration Act) and other Labour Market with a view to choosing integrated plan for support of disabled legislative developments. In addition to people with disabilities for our Special persons (Telefónica Accesible), the company ATAM's Labour Integration Service (SILA), Employment Centres and establishing the is developing a range of measures aimed ATAM also has several special employment bases to achieve future training classes for at helping the integration of disabled centres staffed entirely by the disabled, telephone operators. With an outlook persons into the workforce: operating in three sectors of activity: towards 2005, Atento Spain's objective is industrial laundry, electronic component Corporate policy of maximum rigour in to promote expansion of SIAA and open a • assembly and telemarketing. Special Employment Centre in Cáceres in compliance with the LISMI (Disabled the next few months. persons' Labour Integration Act) in Spain through direct hiring. •Policy of strengthening the policy of hiring products and services through special employment centres. •Channelling all offers and vacancies to the ATAM Labour Integration Service.

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Health checks in the prevention service in Spain

Activity Number of checks Diagnostic checks 142,156 Health campaigns 36,860 Health consultations 65,447 Vaccination 8,651 Health examinations 36,666

Prevention of risks for health

Activity Number of checks Technical activity 5,314 Technical reports and studies 1,373 Fire prevention 1,043 Risk evaluations 323 Evaluation of psychological and social risks 20

Health and Safety

Commitment to employees of Workplace Health the Telefónica Group in The maintenance and promotion of workers' health is central to the daily work matters of health and safety. of basic health units that the Common The commitment that the Human Workplace Risk Prevention Service runs in Resources Department has made to all each province and is achieved via the employees of the Telefónica Group in the following actions: promotion of health is structured in Spain around the Common Workplace Risk •Medical health checks making it possible Prevention Service along lines of action to check changes in the health of aimed at maintaining and increasing workers to ensure at all times the prevention of workplace risks in all our medical APTITUDE of each of them. companies. •Preventative health campaigns to improve health faced with common Prevention of illnesses. Acting in the prevention of the workplace risks inherent most frequent infections through in daily work, with the aim of eliminating or vaccination campaigns. at least minimising them with the adoption of corrective measures, collective •Health assistance for workplace and/or individual, preventing them from accidents. Health workers in the affecting workers. Common Risk Prevention Service provider, in their capacity of self insurers •Risks and workplace re-evaluation, for accidents, the health assistance including psychosocial issues, as well as necessary for all accidents, both in the workplace evaluation, base stations and workplace and when workers of new workplace evaluation. Telefónica de España and Telefónica S.A. are travelling •Fire prevention - including a particular focus on emergency simulations, as well as frequent informative talks for employees as well as the preparation of action plans for emergency situations and reports on the compliance of buildings with current legislation. •Technical advice for the business lines of the different companies and in particular relationships with public authorities.

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Workplace accident rates in Spain Data in percentages 2002 2004 2003 2005

7.04 7.01 6.49

4.99

0.27 0.2 0.24 0.13

Serousness Frequency index index

Workplace accidents Coordination of business activities Research and assessment of workplace With the aim of spreading our prevention accidents and frequency and seriousness policies to external collaborators and indices have allowed us to increase promoting health with the aim of reducing corrective measures with the aim of accident rates, Inspection and Supervision reducing not only the number of accidents Audits were carried out, as well as but also the harm caused to workers, a Coordination meetings with the technical target we have been meeting each year, as support of the Common Workplace Risk can be seen by comparing annual indices, Prevention Service. Although not in the such as those from the Communications direct ambit of this service, it should be Sector published by the National Institute emphasised that as a complement to the for Health and Safety in the Workplace. commitment undertaken by the Corporate Human Resources Division to all workers, Health and Safety Committees companies in the Telefónica Group have Among the model agreed with the Social taken out private health insurance to Representative, a total of 84 Health and complement the public health system, Safety Committees have been set up in contributing to improving and speeding up companies within the Telefónica Group. diagnosis and cure of pathological These are peer committees, comprised in processes. equal numbers by worker and company representatives. All committees receive technical advise from the Common Prevention Service.

As well as in Spain, there are Health and Safety Committees in Argentina, Chile and Peru.

Telefónica, S.A. | Corporate Responsibility Report 2005 212 06 Employees

Good preventative Workplace Risk Prevention Commission practices in Spain Comprises workplace risk prevention representatives from those units at A commitment to prevention of greatest risk. It is presided over by the workplace risks Director of the Labour Relations and Employment Division. It meets every six Telefónica de España's managementto months and its functions revolve around comply with Law 31/1995 on the Prevention the effective development of policies, of Workplace Risks takes shape on an objectives and strategies approved by the organisational level in the operation of a Board of Directors range of bodies framed, in turn, within a specific organisation which seeks to Health and Safety Committees develop a system of prevention which These are peer social representation bodies facilitates the planning, setting up and which monitor the actions of the company monitoring of said system, and above all its in terms of prevention of workplace risk. In integration into all hierarchical levels of the Telefónica de España there are 51 company. committees (1 for each province, plus a central committee). The Chairman of the The main planks of the system Central Health and Safety Committee is Workplace Risk Prevention Committee also the Coordinator of the Prevention Made up of representatives of the Committee, thus closing the circle that Management Committee whose skills have interconnects the whole system. a special impact, direct or indirect, on the prevention of workplace risks. It is presided Management of the Common Workplace over by the Human Resources Director and Risk Prevention Service meets every six months or whenever This unit coordinates the Prevention deemed appropriate, and among its System and also holds the secretariat of functions are: the Workplace Risk Prevention Commission. •Approving and analysing the Its main function is to identify and assess preventative policy in Telefónica de workplace risks implicit in all work and España. activities carried out in the company •Drawing up the Prevention Plan •Incorporating preventative criteria into management. •Approving the Annual Preventative Plan of Telefónica de España.

Telefónica, S.A. | Corporate Responsibility Report 2005 213 06 Employees

Coordination of business activities in Coordination meetings with providers Telefónica de España As a complement to such supervision To comply with RD 171/2004 of 30 January, activities, Telefónica de España has set up, which develops article 24 of law 31/1995 of as a means of coordination, a system of 8 November on Prevention of Workplace regular meetings between companies with Risks, in matters of coordination of the presence of the Common Workplace business activities, Telefónica de España, as Risk Prevention Service. These reunions principal employer, carries out activities to enable compliance with three of the ensure compliance in relation to employees measures established as “coordination of collaborators, and by way of coordination measures” in article 11 of the holds regular meetings with the aforementioned royal Decree: the holding representatives of same. of periodic meetings between competing companies, the passing on of instructions Monitoring external providers and the joint establishment of specific With the aim of ensuring compliance with preventative measures or action protocols regulation on matters of workplace risk which might affect collaborators. Meetings prevention by external providers, discuss the following topics: supervision is carried out during execution Review and analysis of the results of the of work, involving specific periodic • supervision inspections carried out. inspections carried out "in situ" to ensure the level of compliance with prevention •Analysis of accident rates recorded in this regulations by said companies. period. These actions are carried out jointly with •Prevention instructions, specific the interlocutor representing the external measures and coordination, actions to provider and representatives from the apply. Contract Management Division and the Common Workplace Risk Prevention Service •Relevant facts envisaged. of Telefónica de España. The action carried out and the deficiencies Emphasis will be placed on the most observed are summarised in a document serious events and considerations dealt drawn up for this effect. with in said meetings and the corresponding document will be drawn up. The detection of inadequate actions may constitute an infraction which, depending All the above is to promote prevention in on the scope and gravity of same in terms external providers. of the physical integrity or health of workers, may be classified as a minor, serious or very serious infraction and may lead to a range of penalties being applied to the external provider

Telefónica, S.A. | Corporate Responsibility Report 2005 214 06 Employees

Evaluation and control of Stop smoking awareness campaign psychological and social factors in Telefónica, through the Common the Telefónica call centre Workplace Risk Prevention Service, has Risks deriving from exposure to damaging developed a stop smoking campaign, psychological and social factors are a anticipating the entry into force of the Law constant source of concern, analysis and regulating the Sale, Supply, Consumption control in companies within the Telefónica and Advertising of Tobacco (Draft Law Group, more so in the future given that, 121/000036) which will begin the according to experts, factors such as prohibition of smoking in all workplaces. mental load, time pressures etc. and the This campaign, available on the health and pathologies associated with same - safety channel, offers guidance and advice depression, anxiety, stress and even in quitting: a course through a+, called muscular and bone disorders will be the “quit smoking” which is given by health illnesses of the XXI century not only in the personnel to help you give up; a mail box workplace but in all areas of human dealt with by the Common Workplace Risk activity. Prevention Service where you can ask any queries you have with respect to this As in other fields of workplace risk process, and which will be answered in a prevention, Telefónica has been a pioneer in personalised and anonymous way, always the identification, evaluation and proposal via e-mail. There will also be information on of measures to correct psychological and how to get a medical appointment at social risks, as since the beginning of the clinics of the Common Workplace Risk century, 2001, said factors have been Prevention Service, as the campaign is of evaluated. national scope.

Specifically, during 2005 twenty Work at height in Telefónica Móviles psychological and social risk evaluations España and Telefónica de España were carried out in Telefónica de España Maintenance personal in radio facilities and Atento Teleservicios España, companies and infrastructure personnel who in whose common denominator is that they Telefónica Móviles España and Telefónica have the largest workforce in the Telefónica de España carry out work on towers and group and part of their activity is focused antennae will attend course on safety and on call centres. As an example of a series of safety practices at height. actions, it is in Telefónica de España where the most evaluations and re-evaluations of this type have been carried out, reporting on results and proposals for improvement to both Health and Safety Committees and The Commercial Committee, which in the final instance must determine the most appropriate actions, as most preventative actions to implement are related to aspects of workplace organisation.

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The objective of training is for personnel Good Preventative Practices involved to know how to handle personal in Latin America protective equipment for work on towers, analyse risks of falling from a height from Argentina towers and high workplaces, master the Anti tobacco: Smoke free offices were principles of vertical movement when launched, with expert talks on the matter. working on towers in the framework of individual protection, knowing the Risk audit in all offices of the company. This requirements for collective protection, considers improvements to processes, confirming knowledge of safety matters for analyses of work stations, signposting of work at height in general. escape routes, etc.

These workers will carry out health Emergency and evacuation plans. These are checks at the beginning of their work carried out twice a year in CABA buildings, and subsequently, annually and on a and once a year in others. This includes mandatory basis, in relation to the simulated evacuations, the make up of pecific risks of work at height. emergency crews, training of emergency coordinators. Determining each year medical aptitude for work at height is one of the most Training in workplace risks. effective preventative actions to reduce Aimed at workers with greatest exposure workplace accidents. to risk such as: working at height/ evacuation of buildings/ fire fighting/ Work with Biological Risks electrical risk/ first aid/ safety in fuel Telefónica de España has defined a specific stores/ use of personal protection protocol on biological risks to protect its equipment/ defensive actions/ risks on workers from infections, particularly from public highways etc. HIV. Health workers in the Common Workplace Risk Prevention Service are Provision of personal protective equipment. offered blood tests and examinations when This is protective equipment for workers in they start their work and whenever there is fuel stores or workers travelling around a risk of HIV, HCV or HBV infections, as well sites or carrying out work at height, or as Hepatitis B vaccinations. subject to a certain risk. Among the most common personal protective devices are: Likewise, there is a procedure in place in helmet, safety boots, gloves, dielectic the case of a specific accident by health gloves, lumbar support, harnesses for work workers: at height, masks, ear defenders etc. This includes protocols for the actions to carry out, considering both general and specific actions depending on the immunological status of the victim in terms of HBV and HIV as well as the source of the exposure.

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Brazil Chile The companies have a Joint Occupational ATENTO takes part in a program called Health and Safety Commission - “Empresa Competitiva 2.0" run by the Mutual CIPA). de Seguridad (Chilean social security body for workplace accidents and occupational illness). In 2005 Atento Brazil carried out AIDS This program involves a range of activities prevention campaigns. For one week during during the year with goals to be reached as carnival, and also on World AIDS Day in part of the same program. The PEC program December, Atento distributed leaflets with has been approved by the management and guidelines as well as condoms to has been registered with the Mutual de employees. Seguridad. It is aimed at contributing to the improvements of member companies of the Colombia C.Ch.C Mutual de Seguridad, seeking to Work at height workshop for technical vice provide real protection for the physical presidency personnel. integrity and health of workers. Module 10 of the program deals with control Medical examinations for executives. of epidemiological illnesses. The program Provision of protective equipment. has received excellent ratings, with 97% 'Active pauses' program in different compliance. company divisions.

Health and Safety Week with anti-stress CTC and Móviles prepare an annual program workshops, talks on medical care and pursuant to law 16744 and the employment checks for employees. Cardio-vascular risk code establishing objectives signed up to campaign. and in line with Chilean laws and the Flu vaccine day. recommendations of the ILO. The program includes activities to be carried out, the Sports medicine program, sight, hearing persons responsible, the chronogram of and voice conservation program, visits and a special section on risk prevention ergonomics program, updated risk outlook management involving training, medical in all company headquarters. examinations, emergency plans, internal Unification of industrial health and safety regulations, peer committee, procedures on a national level. telecommunications projects, environment.

Maintenance of fire fighting systems Ecuador (FM200, hydraulic extinguishers). Evacuation simulations were carried out in Meetings of Occupational Health Peer each building to update emergency plans. Committee Updating the safety committee and representatives by floor in the event of emergency. Training of management in personal safety matters. Implementation of a national flu vaccination program with the participation of family members. Work focussed on providing information to

Telefónica, S.A. | Corporate Responsibility Report 2005 217 06 Employees

employees in health matters, in all matters out with the participation of all personnel relating to prevention of illness. Medical nationally. All premises have safety signage examinations carried out, laboratory tests and certification from INDECI (Civil Defence and eyesight checks for 88% of employees Institute). They also have health and safety nationally. committees in all company divisions.

Summer sports programs launched so There is a chronogram of preventative and employees can participate in various corrective maintenance for all safety teams disciplines. in different company premises to ensure they function correctly. Training of floor safety representatives in matters related to first aid. Venezuela In 2005, the Workplace Health and Safety Bi-annual contribution to the national Division focussed its efforts on: blood donation program. Installation of signage (escape routes, electrical risk, fire extinguishers, among El Salvador-Guatemala others) Workplace health and prevention courses. Evacuation volunteers program, evacuation Improvement of the fire detection and alarm simulations, first aid workshops, corporate system (migration to systems with anti-smoking program, currently intelligent devices - Radionic system). implementation of ISO 14,000 certification Installation of extinguishers. processes, volunteer program for reconstruction of schools. Social In health and prevention matters contribution program (Proniño). •Vaccination days for prevention of illness Panama •Breast Cancer prevention day (September) Together with the Health Ministry, a •HIV prevention day (December) campaign of vaccination against tetanus Cholesterol/ Triglycerides / Glycaemia / and rubella for around 350 employees. • Anaemia/ Obesity prevention days (July and September) Health fair held, where around 300 persons benefited from medical and dental services •Design and implementation of drug such as: vaccination, blood pressure, weight prevention program and height, nutritional evaluation, •Design of primary health care service at massage, glucose, blood examinations, Torre 42 Telefónica, S.A. 06 dental and optometry evaluation.

Peru The company responsible for providing health and safety services to companies in the Telefónica Group in Peru is T-Gestiona. In 2005 25 simulations were carried out in different Telefónica premises in Peru. Once a year, evacuation simulations are carried

Telefónica, S.A. | Corporate Responsibility Report 2005 218 06 Employees

Employment claims

Despite the efforts made by the company Employment claims received (2005 total) to resolve claims brought by its employees, there are currently 3,247 claims brought by Number of claims % of workforce employees against the company (2,191 Fixed Spain 306 0.9 claims in 2004). Fixed Latin America 713 2.5 Telefónica Móviles 105 0.5 The two procedures opened in relation to Directories 117 4.0 4 0.2 alleged mobbing cases resulted in clear Content and Media Atento 1,495 1.9 rulings in favour of Telefónica de España T gestiona 196 9.9 and Telefónica Móviles España. Others 2 0.9

Telefónica, S.A. | Corporate Responsibility Report 2005 219 06 Employees

Telefónica Volunteers, Notable facts in 2005. Argentina 723 employees from the 18 business units and Group companies signed up 243 projects carried out during the year 2000 in the whole country. Brazil 285 employees participated in the 'Incentivo Niño - Medida Legal' program. 12 Telefónica volunteer projects in the 11 Annual Project Competition. Chile Around 500 Group employees participated directly in the program. Employee 240 social actions to celebrate 125 years of Telefónica in Chile. solidarity Spain Around 840 voluntary workers from different Group companies have signed up, and 3000 collaborating in different joint campaigns and initiatives. 11 large voluntary projects. 10,000 hours a year on average dedicated to said activities. Mexico 366 employees participating in 16 different social programs. Peru 150 employees participating in the program. Venezuela 300 employees participating in 13 different social projects. 8 large volunteer programs.

Telefónica Volunteering

Of note among actions developed by The Telefónica Group corporate volunteer Telefónica volunteers are: program goes back to the year 2000 when a common network of Group employees •Educational programs: children, young was set up in Argentina. people, adults with limited resources, Said network has been established in immigrants, the elderly etc. other companies where Telefónica has a •Solidarity vacations: exchanges between presence (Venezuela in 2002, Chile volunteers participating in the different and Spain in 2003 and finally in Brazil, countries where Fundación has a Mexico and Peru in 2005). presence.

The Telefónica Group corporate volunteer •Participation in events held by social program is a trans-national initiative open to organisations: competitions and different active, pre-retirement and retired employees, sporting activities for disabled people, as well as family members if they wish. and sporadic initiatives aimed at children Managed by Fundación Telefónica, its or the elderly. objective is to encourage and strengthen •Support for the Proniño program: social actions, offering its members the eradication of child labour in Latin necessary resources to meet its objectives America. and have a positive effect on society. •Solidarity campaigns: collection of economic donations, articles and 2005 saw a significant boost for the material such as clothes, foodstuffs and program. From a strategic viewpoint, this other goods. has become one of the corporate areas which are fundamental to the social action •Volunteer for a Day: find out more about of the Telefónica Group. The objectives set the work of an experienced volunteer in for the 2006 financial year are as follows: a not for profit organisation. •Physical and online training for •Elderly companionship program: volunteers so they can suggest and 'Teleoperador@s Solidari@s': joint undertake their own joint initiatives. • campaigns and telethons in which the •Local committees as a Telefónica Group participates . driver of the program: Projects for the recovery and support of Local volunteer committees are groups of • the environment: employees, active or retired, who want to support specific social causes in cooperation with local not for profit organisations. •Development of projects implemented at the initiative of volunteers themselves.

Telefónica, S.A. | Corporate Responsibility Report 2005 220 06 Employees

ATAM

ATAM was formed in 1973 through the ATAM is currently one of the most solid and decided effort of a group of Telefónica palpable initiatives of the Telefónica Group employees, together with the help of in corporate responsibility matters and the Medical Services and Social Assistance, the principal reference for Group companies in Telefónica Prevention Institution and matters related to disabilities, as an expert employees' labour representatives. In 1974 and integrated association in that sector. the institution was included in Telefónica's Details of its activity can be found at the collective bargaining agreement, becoming website www.atam.es and in its Annual one of the first examples in Spain of the Report, available at creation of a legal entity between a www.telefonica/publicaciones. company and its workers. The Bylaws of the Association establish its own governing During 2005, Telefónica implemented a bodies and operational mechanisms. policy to encourage the employment of disabled people through the Telefónica ATAM's governing bodies are comprised of accessible program, available on company and labour union representatives www.telefonica/accesible. Framed within (in proportion to union representation). this project, ATAM is the interlocutor between Telefónica and the disability The institution also has regional advisory sector. Through the Employment groups that act by delegation of their Integration Service (SILA), ATAM provides governing bodies throughout the country technical assistance to companies of the and are coordinated by managers from the Group in Spain with the aim of increasing Human Resources area of the Company in employment rates of disabled persons in each zone. Telefónica.

ATAM is financed largely by the willing and voluntary contributions of some 61,000 employees from 22 Telefónica Group companies. The workers contribute 2 per thousand of their fixed wages and the companies double this contribution.

During 2005 the total number of assistance actions subsidised by ATM was more than 2000, its own centres dealt with over 400 disabled persons, its clinical team dealt with over 3000 consultations and its Special Employment Centres employed 250 disabled persons.

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District C

Telefónica, S.A. | Corporate Responsibility Report 2005 222 06 Employees

CASE STUDY

District C: a new space for a new way of working

The campus covers an area of 200,000 Landscaping also plays an important role. Technology and a new way of managing square metres and will house around The different shrubs and trees, personnel have made it possible to 14,000 professionals from the different together with waterfalls and a lake implement the concept of “mobile working”, companies of the Telefónica Group, who have been designed to improve with more efficient time management as will be arriving between autumn 2006 and humidity and freshness. well as a better work-life balance. summer of 2007. It is located in the new neighbourhood of Las Tablas, to the north A significant commitment has also been District C, a project for innovation of the city of Madrid, bordering made to a paper free office and the and a factor for change. Alcobendas. reduction and adequate treatment of waste. District C exemplifies the new working culture at Telefónica. It is located at the confluence of three The architecture and technology has been Spaces, technologies and new ways of important highways: the M-40, the A-1 designed to facilitate a new way of working are the three main levers for motorway and the M-603 from Fuencarral working which will be characterised by innovation and transformation, which are Alcobendas. As of April 2007 it will have a more horizontal relationships, greater encouraged through policies and station on line 10 of the Metro, referred to mobility, flexibility, team work and processes, progress being measured as "District C". management by targets. through the corresponding indicators and targets. Directors and managers work alongside An open space and a commitment Different types of work stations and their teams and have access to a wide • to the environment spaces better suited to different needs. District C was designed as a space open to range of space designed to facilitate Key: the advanced workstations. the city and its neighbours, a space to communication and collaboration. share with our customers and our • Connectivity which favours mobility partners. The technological resources assigned to and flexibility and enables work from work stations are defined not according to any location and in a range of The campus lacks barriers; it is integrated the hierarchical position but rather situations. into its surroundings and will be a show professional profiles. Thus, mobile workers • New leadership meaning progress in case for an innovative, open, transparent use advanced work stations, laptops and management by targets and and close Telefónica. fixed-mobile connectivity making it performance; towards greater possible to work in different locations autonomy in time and activity Telefónica's commitment to the both within and outside of the campus. management. environment means that District C was Personnel having a traditional or basic designed ideas along the lines of profile have flat screens and a In summary, spaces and technologies to “sustainable architecture”, facilitating the conventional computer, although encourage talent, creativity and innovation, reduction of C02 waste, the optimisation integrated into shared use multiple development, motivation and balance, of climatic conditions and a more efficient function systems which substitute generating efficiency and productivity. use of resources. printers, scanners and faxes.

Telefónica, S.A. | Corporate Responsibility Report 2005 223 06 Employees Crédits

Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

Telefónica, S.A. | Corporate Responsibility Report 2005 224 06 Employees

Telefónica, S.A. | Corporate Responsibility Report 2005 225 07 Society

Society contribution y proximity

Telefónica, S.A. | Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, driving progress for all 6

00 Telefónica in 2005 8

01 Corporate Governance 20

02 Identity 32

03 Driving progress 66

04 Customers 104

05 Shareholders 168

06 Employees 178

07 Society 226 Commitment with the countries 228 Digital Inclusion 230 Universal Service 231 Geographic divide 232 Economic divide 234 Education-training divide 236 Social and cultural activity 238 EducaRed 240 Proniño 242 Cooperation 244 Art and culture 245 Telefónica Accesible 246

08 The Enviroment 252

09 Providers 292

10 Media 304

11 ANNEX I 310

Telefónica, S.A. | Corporate Responsibility Report 2005 07 Society

In Chapter 03 of this report it´s presented the role of Telefónica as an engine of economic, technological and social development in the countries in which it operates. Without wanting to repeat the information in that chapter, Telefónica presents its explicit commitment to the various regions and Commitment countries where it is present. with the countries

Spain Latin America In Spain, Telefónica is collaborating with In different countries of Latin America, the National Government and with the Telefónica has also demonstrated its various Autonomous Governments in commitment through its long-term drawing up their respective Information investments, and its willingness to become Society plans, and particularly the a strategic partner in their socio-economic initiatives that are part of the Plan Avanza. development: In addition, with the aim of responding In Argentina, Telefónica celebrated its 15 more directly to the demands of the • years of presence in Argentina with an different autonomous communities, institutional campaign and organising Telefónica has set up the Telefónica events and meetings to thank the Consultative Councils. collaboration of all those who have made it possible to reach this figure. In 2005, If there is one service that is representative Telefónica also celebrated the arrival of of Telefónica’s commitment to investing in optic fibre in Tierra del Fuego, managing the whole territory of Spain in 2005, that to connect one of the most distant service is Imagenio (television by ADSL). At regions of the planet with the future. the end of 2004, the service was commercially available only in Alicante, •In Brazil, Telefónica has led the setting-up Barcelona and Madrid, but as from July of the “Alianza Brasil-España”, created to 2005 it is available in all the provincial encourage cultural, economic and social capitals and in more than 150 cities of relations between the two countries. Spain. Telefónica has set as its long-term •In Chile, the celebration of 15 years of aim that 60% of households should have Telefónica in the country coincided with broadband of up to 50 megas by 2010. the 125th anniversary of the company Telefónica CTC. •In Peru, Telefónica is taking an active part in the “Crece Perú” programme, aimed at the professionalisation and development of a powerful entrepreneurial network in the country as a key to its sustainable development. At the same time, given the large number of Peruvians resident in Spain, movistar was the sponsor of Peru Day in Madrid. •In Mexico, Telefónica Móviles’ commitment to invest was seen in the extension of its available coverage, by starting up almost 1,200 base stations during financial year 2005.

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•In Colombia, the President of Telefónica conveyed to the President of the Republic CASE STUDY the strategic importance of the country for the Telefónica Group. This message Telefónica leads the “Alianza was put into effect with the Brasil-España” commitment of investments of over 300 million dollars during 2005 and in the Telefónica, the largest Spanish investor in acquisition (in 2006) of Colombia Brazil, has asked more than 30 Telecom, the state operator up to that personalities from different sectors moment. (culture, business, education, economics, international relations, media and tourism) Europe from the two countries to take part in this In Europe, Telefónica’s purchase of Çesky project, with the aim of drawing up a Telecom stands out, which received the report with working proposals about the unanimous recommendation of the existing potential for relations between Privatisations Commission of the Czech Spain and Brazil. Telefónica’s aim is to Republic. The Czech Prime Minister was contribute to the building of bridges present at the signing of the contract. between the two countries.

In addition, Telefónica’s purchase of O2 In recent years, relations between Brazil helps it to balance its profile as both a and Spain have moved into a new phase, European and a Latin American company. and have become broader and deeper. Its more than 26 million customers in the This is basically due to the existence of United Kingdom, Ireland and Germany, common interests in the area of together with the dynamism shown by O2 international relations and to mutual trust. in such competitive commercial markets, This has been reflected in the higher level guarantee Telefónica’s commitment to of investments of Spanish firms in Brazil developing the information society in these and in a huge potential for bilateral trade. markets. A clear sign of this mutual trust is the risk taken on by Spanish firms that, in the last China 15 years, have invested around 30,000 Finally, an important event in the context million dollars in Brazil. Foreign investment of Telefónica’s strategic alliance with China from Spain is thus second in volume after Netcom was the visit of the President of that of the United States. the Republic of China to Telefónica’s National Supervision and Operations Centre in Spain. He was shown the procedures and tools for network control and was given a practical demonstration of how the communications networks function between Spain and China.

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Digital inclusion

CASE STUDY Digital inclusion Llaqt@red

The concept of the digital divide is defined The idea of the initiative is to stimulate the Telefónica del Perú has launched the as the existing differences in access to new development of new projects and Llaqt@red project, to connect up rural areas technologies. However, digital technology is collaboration between public and private of the country and to offer them access to not in itself the cause of the digital divide: bodies, to make it possible to bridge the information, meeting the needs and the main factors causing it are the digital divide. Connect the World has 22 expectations of its citizens. The first stage provision of communications infrastructure founding partners, among which are such of the plan linked 17 populations, providing in all the territory, as well as income level global companies as Telefónica, the only permanent Internet access with a flat-rate and training in using the new technologies. integrated operator present, Alcatel, Intel tariff. and Microsoft, governments and other Telefónica, as a significant operator in its organisations. Llaqt@red is set up through alliances markets and meeting its commitments to between Telefónica and local entrepreneurs proximity and trust, not only complies with As part of this commitment, Telefónica took who can invest in the installation of a tele- the regulatory requirements associated part in the round table on Digital Inclusion centre as a profession and as a tool in the with the universal service, but also takes on held in the second phase of the World service of society. numerous initiatives aimed at reducing the Summit on the Information Society in digital divide in its zones of influence. Tunis. This project was awarded a prize for Business Creativity in Peru during 2004, in As an example of this commitment, in the category of Public Services and is one of 2005, Telefónica joined the Connect the the case studies of the "Connect the world" World initiative, launched by the alliance. International Telecommunications Union (ITU). Its main objective is to give access to For further information: Information and Communications http://www.telefonica.com.pe/llaqtared Technology to the nearly 1,000 million people in all the world who cannot yet even make simple telephone calls.

Telefónica, S.A. | Corporate Responsibility Report 2005 230 07 Society

Main cost components of the Universal Service in Latin America 2005 % Tef. Net amount of Universal services revenue business figure contribution Brasil 1% 4,853 48,527 Peru 1% 1,031 10,314 Argentina 1% 891 8,909 Total 67,750

Universal Service

Spain Latin America In Spain, Telefónica de España is taking on In Latin America, the Telefónica companies by itself the net cost of providing the collaborate with the various public Universal Service, even though its initiatives for universalising the service, estimated quota of the market for access is with a contribution of over 65 million euros 85%, that for voice traffic is 66% and for to the universalisation funds: retail ADSL is 55%. •In Argentina, the Universal Service Fund, to which each operator is expected to The net cost of the obligations of the contribute 1% of its invoiced income, has Universal Service in 2004 was 131 million not yet been set up. The amount Euros according to Telefónica de España. provided since 2001 reaches more than This breaks down into the net cost in 42 million euros. unprofitable areas (65 million Euros), special needs users (61 million Euros), and •In Brazil, the Telecommunications the cost of the information services and Services Universalisation Funds (FUST) directories (5 million Euros). are formed from 1% of gross operating billing; by the end of 2005, its funds had The Telecommunications Market not been used by the government. Commission (CMT) has yet to pronounce •In Chile, CTC on its own account carries on the definitive amount of the Net Cost out programmes promoting services and incurred by Telefónica in the year 2004. The applications (for example, giving Internet net cost does not incorporate the whole of access to 5,500 schools) which the real cost involved for Telefónica de complement the programmes of the España in meeting these obligations. Telecommunications Development Fund (FDT) directly financed by the For methodological reasons established by government. the CMT, the losses are compensated associated with the maintenance of 18,949 •In Peru, a Telecommunications cabins in places where their use does not Investment Fund (FITEL) has been cover maintenance costs, and this is around established, formed by the contribution 62 million euros. from the operators that is equivalent to 1% of the total gross income billed.

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Investments of Telefónica de España for migrating TRAC technology1 Data in millons of euros Total Copper GSM LMDS VSAT Dec 2005 Regions EU2 OBJECTIVE1 92.52 13.42 22.75 3.87 132.57 Other regions 8.97 2.73 1.18 0.78 13.67 Total 101.49 16.15 23.94 4.65 146.24

1 including dismantling costs and repercussions of multi-provincial costs 2 Telefónica recieved 31 million euros in FEDER funds

lines and 97% of households, which places CASO PRÁCTICO Geographic divide Spain in a position ever closer to total broadband accessibility. Financial year 2005 Geographic divide has been decisive for extending the Spain availability of digital television to more The geographic divide can be described as To meet its obligation to provide a than 150 cities of Spain, when it was the barrier that prevents individuals from universal service, Telefónica must offer a available in only three of these in 2004. accessing basic means of communication service in high-cost areas, and subsidise The long-term aim set by Telefónica is for or broadband as a result of the physical service provision in rural zones and 60% of households to have broadband of location from which they wish to access underpopulated provincial capitals, as the up to 50 megas by 2010. them. This divide may be international service is available at the same price as in (services that exist in some countries and urban areas. In terms of mobile services, Telefónica not in others) or national (services that Móviles was one of the two operators that, exist in some regions and not in others). At the end of 2005, the number of TRAC together with the Ministry of Industry, access lines in operation was 169,512 signed the Mobile Telephone Extension Development of population ADSL coverage (195,000 in 2004). This is the number of 1. Plan, which will put national coverage at by Telefónica accesses that remain in service after having Total population coverage the head of the European countries with an migrated a good number of them to Data in percentages objective value of 99%. The plan, linked to various technologies, so that service supply the concession of the contest of the 900 in rural areas should not now be associated MHz GSM frequency band (June 2005), 94.9 96.6 97.3 with only this type of access. includes a joint investment of 833 million 89.4 90.9 euros, with the following objectives: Telefónica de España is replacing the TRAC Coverage to 2,270 population centres 69.8 technology used to provide services in rural • with populations equal to or less than areas with other different technologies 1,000 inhabitants that up to the present (LMDS, GSM/GPRS, satellite or especially do not have any. copper), for which, up to December 2005, it has invested 146.24 million euros. The Improved coverage in 2,727 population 15,2 • 11,3 accesses belonging to provinces centres with populations equal to or less established as a European Union “Objective than 1,000 inhabitants, with the 1” receive EU subsidies to help in starting starting-up of a second operator. 3,9 7,1 1,3 them up (31 million euros in FEDER funds). 0,2 •Provision of coverage in strategic areas such as nuclear power stations or 16 2000 2001 2002 2003 2004 2005 This effort of investment by Telefónica de petrochemical plants. España means that the already significant 1 Calculated by municipalities, considering that a ADSL coverage has increased to 96% of municipality (and all its inhabitants) have coverage when one of the exchanges attending it is open for ADSL service. Not considering loop quality. For all the years of the series the inhabitants are considered as in INE (National Statistics Institute) 2001

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Broadband coverage in Latin America Mobile coverage in Latin Data in percentages America TASA TeleSP CTC TdP Population coverage 2005 Digitalisation 2005 100 100 100 97 Argentina 92 ADSL Coverage 2005 90 97 96 97 Chile 95.7 ADSL Coverage 2004 88 95 90 95 Colombia 68 Ecuador 76.1 El Salvador 77.4 Guatemala 56 Mexico 69 Nicaragua 25 Panama - Peru 61.6 Uruguay 80 Venezuela 93.3

•Improved coverage in major •After the merger with BellSouth, communication routes (motorways, Telefónica Móviles Perú committed itself highways, national routes, high-speed to implementing and improving the rail infrastructure). cellular communications service in 2,000 localities in Peru over a period of 3 years, Priority actions for the municipalities • making access to the mobile telephone involved in the emergency measures available to one and a half million related to forest fires. Peruvians. The first stage, that will take up to June 2006, consists in expanding Latin America coverage in 540 population centres of 17 The investment effort of Telefónica in Latin departments in the country, including America to push forward broadband can be the department of Apurímac, thought to seen in the digitalisation of the telephone have one of the highest levels of poverty network that has reached 100% in in the country. Argentina, Brazil and Chile, and 96.8% in The spread of GSM by Telefónica Móviles Peru. • México has been particularly significant in rural areas, reaching a total of 49,304 This network digitalisation has made it populations and extending the service possible to reach high coverage of along 60,634 kilometres of highway. In broadband services over the fixed urban areas, coverage was extended to telephone network, reaching 97% in Sao 155 cities, reaching a total of 401 (60% Paulo (Brazil, TeleSP) and Peru (TdP), 96% in more cities than in 2004). This implies Chile (CTC) and 89.5% in Argentina (TASA). that practically all the important cities of the country are covered and that 96% of In Latin America, Telefónica Móviles has the possible interconnection points with strengthened its position as the main the operator are available. operator in the region, widening its coverage in all the countries in which it •Telefónica Guatemala ended the year operates: covering 147 cities, which is equivalent to a total coverage of 63% of Guatemalan Telefónica Móviles Argentina has carried • territory. out an important investment plan for extending the GSM network during •Telefónica Móviles Nicaragua, as well as 2005, giving coverage to cities and towns broadening its cellular coverage to reach where up to then they did not have a 25% of the population of the country, mobile telephone service. In the North, leads the market in public telephones, GSM coverage was widened significantly, installing 7,000 units in the whole of the from 6.8 million inhabitants in 34 national territory, and is the operator localities to 10.5 million inhabitants in with the most public telephones 248 localities. installed in Nicaragua.

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Prepaid lines and control consumption lines in Latin America Data in thousands 2004 2005 % of total lines5 TelesP1 1,954 2,294 18.6 TASA 2 1,200 1,328 29.3 CTC3 409 534 21.9 TdP 4 1,157 1,385 58.9 Total TISA 4,720 5,541 25.6 1 Includes the Linha da economia 2 Includes the Líneas Control, Cero and Recupero 3 Includes the línea económica and supereconómica, full variable, línea control, plan solución.... 4 Includes the Fonofácil plus, popular, limited consumption, social lines... 5 Includes public telephones in the calculation

The characteristics of this type of services Economic divide include: •Control of consumption by the users, limiting the number of calls that they Public terminals, The special social rates, together with can make or restricting the kind of calls prepaid plans, the public telephone system to local ones. Latin America. and restricted line services, are the (Thousands) •The possibility of making calls to mobiles, 2003 2004 2005 fundamental pillars on which Telefónica inter-city or international calls by buying has based its array of services aimed at low Argentina 107 105 121 prepaid cards (that can also be used in income groups. According to studies made Sao Paulo (Brazil) 327 331 330 phone-booths). 118 129 137 by the Group, such initiatives are essential Peru Debt repayment plans to avoid Chile 33 28 24 to encourage digital inclusion, since social • classes D and E (those with the lowest customers having the service cut off if incomes) would hardly be able to meet the they are late paying. basic cost in any other way. •Virtual mailboxes where messages can be recovered from a number not So it is vital to make products and services associated with a line. available that match the real social and economic situation of the countries in Public telephones which Telefónica operates and thus meet The public telephone is an option instead the needs of the sectors that, for financial of the home telephone that eases access to reasons, do not have access to communications for all the population, telecommunications services. avoiding the need to pay a connection or maintenance charge. Given the increase in Rates for low income groups in the use of mobile telephones and the plans Latin America for low-income groups, it is a service that is The growth of the basic telephone service used only by individuals with scarce among the lower income segments in Latin resources. However, it is critical for these America is based on developing and people that it should work well, and this making available products adapted to the requires a great commitment by Telefónica, needs of the consumer and their financial due to the difficulties of dealing with capabilities. repairs as a consequence of the acts of vandalism that the equipment suffers out The more than 5.5 million prepaid and on the street. restricted consumption lines in Latin America represent more than 25% of the In Latin America, where penetration of total. If this proportion is compared with telephones in the households is at lower that of income generated by the lines, but levels, Telefónica offers access to also with the income generated from the telephones through more than 612,000 sale of prepaid cards, it can be seen that public terminals. In Spain, there are 56,065 this type of services is offering a real telephone booths in the street, without alternative for the lower-income strata of counting the public telephones available in society. commercial establishments.

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Mobile telephones telephones. The cost of the terminal was Generally, the billing system based on the identified as the main barrier for people CASE STUDY prepaid system and the reduced cost SMS with lower resources to have access to service have been determining factors in mobile telephones. The Rentas Bajas Mundo Movistar': buy in Spain the spread of cellular mobile telephones to project evaluated traditional and your mobile for Ecuador all social levels, as is seen in the usage alternative financing plans, the figures of these services. The strategy of development of new, non-traditional direct In 2005, Telefónica Móviles launched Telefónica Móviles, anyway, has always distribution channels (door-to-door sales), ‘Mundo movistar’, a set of integrated been to achieve the greatest client base special plans with more competitive rates mobile telecommunications services without concentrating exclusively on the on calls originating in low-income without borders between countries, which segments with higher purchasing power. residential areas (Plan Conos), as well as implied a new step in its policy of the creation of virtual voice-mail boxes to transferring to its customers the With this strategy, commercial policies receive messages and being able to acquire advantages of being part of the greater have always been based on reducing the the terminal with special discounts, community of Spanish- and Portuguese- cost of terminals and on making a variety keeping the same telephone number. Some speaking mobile telephone services. of billing schemes available which have of these projects have been carried out in enabled millions of users to choose the collaboration with financial bodies that The first commercial programme of formula most suited to their provided micro-credits for purchasing ‘Mundo movistar’ means that any movistar communication needs or economic level. terminals. customer in Spain will be able to buy a There has been a significant popularisation terminal and a prepaid card with a balance of the plans with a savings option that Abono Social (Social Plan) in more than 3,000 sales points of the offer large discounts in calls to specific Telefónica de España offers the Special movistar network in Spain. And as from the numbers chosen by the customers and Social Rate, in order to enable customers following day, the same terminal and card that, in many cases, include not only calls with financial difficulties to have access to would be available in Colombia or Ecuador. to other “movistar” mobiles but also to basic telecommunications services in fixed and even international telephones. Spain. It consists in a discount of 70% of The mechanism of the operation is very the current connection and installation simple: the customer resident in Spain just The commercial offers accompanying the charge of the network terminal equipment has to choose the terminal that they want launch of the new unified brand included a (PTR), as well as a 95% discount on the to “give” to their relative or friend in wide variety of products, making it easy for monthly telephone line fee (free of any Ecuador or Colombia, and provide the any customer profile to gain access to maintenance contract). The number of lines personal data and a contact telephone mobile telephones. Many customers thus benefiting from the Social Rate in Spain in number for that person. As from the took advantage of launch promotions or December 2005 was 327,243 (386,430 in following day, the receiving customer in the popularisation of services to obtain 2004). Ecuador or Colombia will be able to contact terminals with more options or to have the free telephone attention service to additional minutes of communication free. receive the terminal and the card.

At the same time as these commercial-type initiatives, Telefónica Móviles Perú studied various alternatives to make it possible for the segments with fewer resources in the country to have access to mobile

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It is not only technological barriers that can be the reason for the digital divide. There are skills and knowledge barriers that can be even higher than the technological ones, especially in developing countries and among older or disabled people. Telefónica, together with its Foundation, has been running programmes that aim to train people to use the new technologies.

CASE STUDY Education-training divide Internet Educativa in Chile

Internet Educativa began in 1998 as a Interest in the new Getting in touch with new Telefónica project complementary to the technologies technologies in school "Red de Enlaces" of the Chilean Ministry of In Spain, Telefónica took an active part in This is one of the strategies most used by Education, to give Internet access to all the celebrating Internet Day, which aims to Telefónica to encourage the use of schools. In 2003, it began migrating from popularise the Internet and make it more technology among school communities in commuted access to broadband Internet accessible. The Day was promoted by the every country in which it operates. AS well under preferential conditions. As a result of AUI (Internet Users’ Association) and as EducaRed and “Internet en las Escuelas” this sustained effort, by December 2005, supported by the Secretary of State for we can point out: Telefónica CTC Chile was making Telecommunications and by the In Colombia, Telefónica Móviles broadband access available to 3,435 schools Information Society. It included • collaborates with the Programme of the and commuted service to 2,265 schools, demonstrations of the technology, free President of the Republic to provide giving Internet access to 2.6 million pupils. Internet access and commercial computers and technology to educational promotions. establishments for young people with The Internet Educativa service is free for scarce resources. In 2005 a total of 2,040 establishments that have commuted The publicity strategy adopted by the machines were handed over. access and its preferential cost via multi- Telefónica Group in Peru presents user broadband (1 Mbps) was 37.5 dollars applications and concrete services that are •In Mexico, as part of the FuTuRo (CH$19,900) in 2005. In 2005, the transforming people's lives, with the slogan programme, Internet training classrooms contribution of Telefónica Chile to school “We didn’t notice, but life has become have been equipped in different schools Internet access was equivalent to US$3.6 easier for us”. Through this type of around the country. million, taking into consideration the campaign and the availability of public In Nicaragua during 2004 and 2005, as a commuted access lines, and the price • booths, Peru is one of the countries with the result of a commitment made with the differential of the educational broadband greatest penetration in use of the Internet. Regulatory Body and the Ministry of compared with its commercial price. Education, Telefónica Móviles has been Since 1999, Fundación Telefónica Chile has running a project to install computers The Internet Educativa programme is been running an Internet Training initiative, with Internet in 700 public schools, enabling access to Internet and to new with the support of Fundación Vida Rural of benefiting more than 100,000 children technologies for the young students of the Pontificia Universidad Católica de Chile. throughout the country, as well as the Chile as well as their teachers. This is Fundación Telefónica has trained more school community. encouraging their digital inclusion, so that than 40,000 people (6,652 in 2005) Internet for them is an extra educational including students, educators, community •In El Salvador, Telefónica Móviles sponsors resource within their formation and in their agents, housewives, women micro- the CyberOlimpiadas initiative, aimed at possibilities for future development. entrepreneurs, elderly people, etc. encouraging the use of new technologies in many of the country’s schools. Telefónica Móviles Panamá sponsors the •In Peru, Telefónica is one of the Telecommunications hall of the EXPLORA organisations financing the Huascarán Centre for Arts and Sciences, showing the project, which aims to incorporate advances in technology, their origin and information and communication development, and how telephones and technologies in the Peruvian education communications work. system.

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Difficulty of access to a Disability, age or gender CASE STUDY computer divides Another of the most common reasons for Disability is one of the barriers that the Schools of Information justifying the high or low penetration of Telefónica Group is working hardest to Technology and Citizenship in broadband in a region is the figures about overcome. Through projects such as the number of computers available. Since Telefónica Accesible (described below in Mexico 2004, Telefónica has made PC + ADSL this chapter) Telefónica is offering products packages available that have enabled many and services designed specifically to Since 2004, Fundación Telefónica has been customers to get into IT with the aid of promote equality of opportunities. providing support to the Committee for Telefónica. the Democratisation of Information Telefónica de España through the Elderly Technology (CDI), a non profit-making As a complement to this initiative, in Group Association has given courses in organisation that promotes educational Argentina, Telefónica de Argentina joined in information technology to elderly people and professional activities with the aim of the “Mi PC Argentina” programme set up by and provides the premises, the telephone socially incorporating the members of the government. The objective set is to lines and a subsidy. underprivileged communities, mainly incorporate ten million PCs with the children and young people, reducing the possibility of Internet connection within The data of new technology penetration by levels of social exclusion they are immersed five years, and all the main companies in gender reflect its lower use by women. The in, both in Mexico and in other countries of the technology sector, banks and service possibility that there is a gender divide, and the world. The main activity of CDI is the companies are taking part. about the low proportion of women in the creation of Schools of Information network high technology and Internet Technology and Citizenship (EIC), with the In Brazil, Telefónica is collaborating with the professions, were debated in a conference aim of facilitating the access of these Ministry of Development, Industry and devoted "Women and the New people who have low purchasing power, in Trade of Brazil to set up 20 information and Technologies" in the headquarters of this case marginalised indigenous business tele-centres, with the aim of Telefónica de España. communities in the state of Oaxaca, to the encouraging digital skills training in micro- techniques and use of the new information firms in the region. Lastly, the training sometimes concentrates and communication technologies. not on technologies but on the In Chile, Telefónica Móviles is collaborating development of entrepreneurial initiative In the past year Fundación Telefónica has with the literacy programme for rural or basic training that can help to reduce continued its contribution to the program communes in the IV Region of the National other social problems found in some of the “Systematisation of the Process of Digital Training and Employment Service, countries in which Telefónica is operating. Inclusion in Rural and Indigenous providing the Mobile Internet service. The Communities in the State of Oaxaca", by project works with an inter-city bus donating 20 computers with Internet converted into a mobile classroom. At the connection to each of the 11 EICs that the same time, in Peru, as part of the MuniNet CDI has installed on the Costa Chica of the programme, a bus has been going around state. Thanks to these schools or different areas of the country presenting “technology hostels”, up to now 1,065 young the possibilities of Internet in remote people and adults have benefited. Likewise, localities. the project has indirectly benefited nearly 30,000 inhabitants of this community, who use the installations to communicate with other neighbouring towns.

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The Telefónica Group does a significant amount of social and cultural work in all the countries in which it operates.

Social and Cultural Activity

Telefonica’s investment in Social and cultural activity ATAM culture and social action ATAM started in 1973, under the impulse of Data in thousands of euros projects of the Telefónica Group The companies of the Telefónica Group run a group of Telefónica employees, with the 2005 collaboration of the Medical Services and 2004 various projects of social and cultural 2003 activity that complement the activities of Social Assistance, the Institución Telefónica 54,113 Fundación Telefónica (budget above 16 de Previsión and the workers' union 46,494 million euros in 2005) representatives. In 1974 the institution was 46,829 incorporated into the Telefónica collective •Support from Telefónica Móviles to the bargaining agreement, and thus became Proniño Project of Telefónica. one of the first experiences in Spain of 25,011 •Projects of events to raise awareness creating a legal body between a company 28,999 14,271 about social problems, such as the Child and its workers for social purposes. 12,500 Worker Programme of Telefónica Móviles 23,447 9,111 16,045 8,983 in Ecuador or the Seminar on Terrorism ATAM is largely funded by the solidarity 9,069 and Security, Center on Law and Security, and voluntary contributions of around New York University School of Law. 61,000 employees of 22 companies of the Telefónica Group. The workers contribute 2 Collaboration with the Instituto • per thousand of their basic salaries and the 1 Cervantes and the Real Academia Fundación ATAM Social Total companies double the contribution. The Telefónica1 and cultural Española. sponsorships amounts provided to ATAM by all the firms Sponsorship of the Elcano Royal Institute of the Telefónica Group in 2005 reached 1 Contribution of Telefónica to the budget of • Fundación Telefónica and ATAM for International and Strategic Relations. 9,069,072, directly benefiting around 4,000 people. •Activities to promote digital inclusion and the progress of society such as the This amount includes both the Digital Cities Forum. contribution of 4 per thousand of the •Support to Foundations and Awards, amounts paid by the member firms of the such as the Príncipe de Asturias Awards Association, and the contributions of the or the Argentine Award of the World firm for pensioners, pre-pensioners and ex- Summit on the Information Society employees of Telefónica de España as well •Programmes in support of the as the contributions for working expenses environment such as the Telefónica de of the government bodies included in the España project: 1 Invoice - 1 Tree (2005- statutes. 2007) The details of their activity can be found in •Promotion of theatrical events (2005 the web-page www.atam.es and in its season of the Teatro Real in Madrid, and Annual Report, also available in of the Artistic Culture Society in Brazil). www.telefonica/publicaciones, as well in •Artistic and cultural shows, such as the the sub-section Employees Solidarity in the Juan Gris or Gaudí-Mompou exhibition sixth chapter of this report. in Venezuela. •Support to research activities. •Sponsorship of town feast-days.

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Beneficiaries of Fundación Telefónica by Activity Area Participant bodies Collaborating Bodies1 / Beneficiaries2 Participant Persons / Beneficiaries (estimate)3 Nº of persons Nº of persons Área of Activity Nº of bodies Nº of bodies in internet Other projects Collaborating % Particip./ Benef. % proyects (Thousands) ( Thousands) total Education 106 21.7 21,552 69.3 19,801 5,164 24,966 Telefónica Volunteers 38 7.8 266 0.9 0 66 66 Art, Culture and Heritage 128 26.2 2,957 9.5 7,580 4,924 12,504 Cooperation 149 30.5 4,564 14.7 833 1,180 2,013 Telemedicine,Helpline 68 13.9 1,769 5.7 493 1,556 2,049 and Disability Total 489 100 31,108 100 28,707 12,890 41,597

1 Social and cultural activity bodies with whom a collaboration agreement has been signed.

2 Educational (school and university centres), social and cultural bodies that have had direct relationships with any of the activities offered by the Fundación Telefónica programmes and projects during 2005

3 People who have had a direct relationship in any of the activities offered by the programmes and projects of Fundación Telefónica during 2005

Fundación Telefónica During financial year 2005, Fundación Telefónica has completed a process of strategic review of its activity.With the idea of helping to improve life in society and bring its performance into line with the demands and needs of society, as from 2006 it will concentrate its activities on supporting education, the social integration of children in Latin America, the Total of Programmes Run by Fundación drive towards the knowledge society and 1 the running of the corporate volunteer Telefónica by Activity Area programmes. Activity Area Nº Programmes % Education 17 24.3 Fundación Telefónica spent 29 million Telefónica Volunteers 8 11.4 euros running 763 projects. These activities Art. Culture and heritage 15 21.4 have taken place with the support of 489 Cooperation 15 21.4 collaborating bodies, to the benefit of more Telemedicine, Helpline and Disability 15 21.4 70 100.0 than 31,000 organisations and more than Total 1 41.5 million people. 69% of these Social and cultural action programmes run by Fundación Telefónica during 2005 beneficiaries are people who accessed contents, services or social information through Internet, which reflects the role of Total of Projects / Initiatives Run by Fundación Telefónica by the new technologies as an engine of Activity Area1 social development. Activity Area Nº Programmes % Education 114 14.9 As well as the descriptions of the main Telefónica Volunteers 431 56.5 projects realised in this chapter, all the Art. Culture and heritage 55 7.2 detailed information about the projects run Cooperation 107 14.0 by Fundación Telefónica can be found in Telemedicine, Helpline and Disability 56 7.3 the Fundación Telefónica Annual Report Total 763 100.0 2005 or in www.fundacion.telefonica.com. 1 Proyectos e iniciativas de acción social y cultural realizados por Fundación Telefónica durante el año 2005

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Evolution of the EducaRed project 2003 2004 2005 EducaRed España Nº de Centres Registered 11,091 11,218 11,426 Nº of visitors 2,717,975 4,733,312 9,195,516 Nº de Pages Consulted 13,091,918 16,650,829 39,500,277 EducaRed Argentina Nº of Users Registered 3,687 7,437 10,650 Nº of visitors 132,803 742,275 5,738,619 Nº de Pages Consulted 1,312,320 2,939,923 11,464,130 EducaRede Brazil Nº of Users Registered 13,534 28,743 51,853 Nº of visitors 469,664 739,910 1,354,670 Nº de Pages Consulted 6,218,899 11,990,137 19,538,736 EducaRed Peru Nº of Users Registered - - 8,884 Nº of visitors 326,000 725,268 2,338,783 Nº de Pages Consulted 1,252,352 3,113,227 12,433,496

EducaRed

Since it was founded in 1998, Fundación Throughout 2006, EducaRed will become Telefónica has continuously given its firm the brand covering all the Foundation’s support to the world of education through education programmes. From now on, the the creation of EducaRed, the fruit of strategy of EducaRed will concentrate on collaboration between Fundación the following objectives: Telefónica, Telefónica and most of the Concentrate the activities of Fundación organisations in the educational world, • Telefónica on infant, primary, secondary including the main professional and high school teaching. associations, parents’ associations and trades unions. •Promote the educational use of the Internet in the classroom and the home Its principal purpose is to contribute to through the EducaRed portal. improving the quality of education and to •Develop new activities in the EducaRed encourage equality of opportunities portal that can become face-to-face through applying the new technologies to activities with wide participation and teaching and learning processes. In Spain, high visibility. Argentina, Brazil, Chile and Peru, EducaRed has made available to primary and •Increase the on-line and face-to-face secondary education the most advanced participation of teachers, educators, educational technology in terms of uses, pupils and parents through mass events applications, exchange of knowledge and with considerable social projection. intelligent information searching. These •Launch mobile exhibitions on topics tools have brought pupils, teachers and within the ambit of education. researchers from the Latin American Create a network of model centres of context together in virtual communities. • academic excellence. •Develop a plan of training in the educational use of Internet with various levels of intensity, aimed at teachers, educators and parents, with the aim of improving the quality of education.

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•The FuTuRo Project forms a virtual The Fundación Telefónica Report describes network for meeting and working of 14 the numerous initiatives that are centres that welcome street children and specifically included within EducaRed, young people in 7 countries. Some 400 classified in the following activity areas: children and young people benefit. 22 •Innovation and Educational Use of ITC in educators are involved in the project. the Classroom and the Home. •The Aulas Educativas en Hospitales •Tools, Resources and Services to Facilitate project, developed in Peru, has benefited Educational Tasks. more than 5,500 Peruvian children and young people in hospitals. •Training for Teachers, Pupils and Parents in the Educational Use of Internet. In recent months it has won the “Business •Information and News about the Creativity” Award, and the "Peru 2021 Prize" Education Sector. for Corporate Social Responsibility and Sustainable Development. •Virtual Communities of Teachers, Pupils and Parents. As a complement to the EducaRed program, Telefónica has continued its As a complement to EducaRed, Fundación efforts to connect the greatest possible Telefónica has realised programmes that number of education centres to the have placed ICT at the service of Internet, as is described in the sub-section educational efforts in especially difficult on "digital inclusion" in this report. situations (street children, long-term hospitalised minors, etc.). Projects such as FuTuRo or Aulas Hospitalarias have found information technology and Internet to be a key element in their fight against social isolation and exclusion, and have helped to generate entertaining programmes for education in such values as respectfor tolerance, fellowship and care for one’s health.

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Proniño

According to the ILO’s International The Proniño programme was created in Programme on the Elimination of Child 2001 by the mobile telephone operators in Labour (IPEC), there are nowadays about Latin America, with the aim of contributing 250 million young and adolescent boys and to the elimination of child labour in the girls in the world who are working. The region. In 2005, the programme was situation is particularly dramatic in Latin incorporated into the strategy of Fundación America, where it is calculated that the Telefónica, which runs the project in figure is 19 million boys and girls between 5 collaboration with Telefónica Móviles. The and 14 years of age, with one in three aims behind every activity of the Proniño performing one of the worst forms of child programme are: labour classified by the ILO. •The progressive elimination of child labour that goes against children’s Proniño aims at the elimination of child rights. labour through quality schooling for children and adolescents. Defined this way, •To successfully complete a basic schooling of minors must be understood as education that meets minimum quality their inclusion or remaining within the requirements. basic formal education system. In its fight •The opportunity to have access to and against child labour, Proniño acts from the follow middle and higher education. certainty that only a quality educational structure will manage to guarantee the •The improvement of social skills. fulfilment of the programme's mission. •Access to knowledge of ICTs, generating new opportunities and avoiding new

Population Assited in 2005 by the Proniño programe

Country Nº Persons Argentina 1,739 Chile 405 Colombia 3,138 Ecuador 1,187 Guatemala 1,100 Nicaragua 702 Panama 400 Peru 1,923 Uruguay 600 Venezuela 346 Total 11,540

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CASE STUDY Recognition of Proniño

forms of social exclusion by the ILO •Selective development of income opportunities for adolescents and/or Proniño's model of working is a families. comprehensive intervention in the child's environment, thus managing to affect all Fundación Telefónica not only provides the spheres of the life of the child each child with the funding necessary to (individual, family, school, community). The receive a quality education. Its contribution involvement of Fundación Telefónica and of also covers health monitoring and food the employees of the Telefónica Group in that, in many cases, would not otherwise the programme also provides an example be covered. In addition, to make the of social activity shared by all levels of the schooling of the children possible, the company. family’s commitment must be won over. Such a commitment presupposes a For these reasons, in 2005, Proniño received transformation, recognising the minor’s the recognition of specialised international rights and giving a new dimension to study bodies such as the International Labour as a strategy for individual and social Organisation (ILO) and the Organisation of progress. Ibero-American States (OEI).

For running the Proniño programme, Fundación Telefónica seeks the cooperation of educational bodies and the third sector, whose specialisation and closeness to the problems makes them the most appropriate local actors for each initiative.

Fundación Telefónica has set the year 2008 as the horizon for meeting a series of challenges in terms of quality schooling. One of the goals set for this new stage is to quadruple the number of beneficiaries and achieve a coverage of around 40,000 children assisted by the programme by 2008. In 2005, Proniño covered ten countries, but the aim is to bring it to all those of Latin America in which Telefónica operates by 2008. This extension will reach Brazil, El Salvador and Mexico, and Fundación Telefónica in Argentina, Brazil, Chile and Peru will take part.

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Support programmes for groups in situations of risk Pro-Direitos (Brazil).

Medida Legal (Legal Measures) (Brazil).

Information and Communication Technologies for the Street-Children Programme (Mexico).

IT classroom in the Child Education Centre of EDNICA (Mexico).

IT classroom in the I.A.P. Social Development Centre Promoting Youth Support (Mexico)

Multi-purpose hall in San Juan Ajusco (Mexico).

Family Violence Prevention Programme (Peru). Includes the “Telephone of the Aid to the Child and Adolescent at Risk Foundation (Teléfono ANAR)”, the “Pilot Plan of Support to Battered Women: Until When?” and “Technology within Reach of Street Children. Instituto Mundo Libre”

Cooperation

Fundación Telefónica knows that the It should be mentioned that the overall Information and Communication activity of Fundación Telefónica in the Technologies are a tool with great potential context of Latin America pays special for contributing to all the different attention to groups related with childhood, dimensions and kinds of work carried out young people, women or people with by Third Sector organisations, and scarce financial resources whose social therefore, from the beginning of its activity, situation makes them especially the Foundation has worked to place the vulnerable. ICTs at their disposition as a resource for One of the lines of activity in this context is improving the processes and activities of development aid through education and social cooperation and promotion. job training, using Information and Communication Technologies to try to The new technologies and especially reduce the knowledge divide in these Internet are a prime instrument for groups, thus promoting equality of obtaining resources, whether human or opportunities between people and their financial. Internet has become more and integration in society. more a privileged means of communication for disseminating the organisations’ Fundación Telefónica also supports various messages, generating and strengthening production projects that involve the everybody’s commitment to their progress and financial independence of the respective missions. The work of the most needy and of organisations International Solidarity Network supporting them. Details of all the Programme (Risolidaria) stands out in this programmes in which Fundación Telefónica context, a transnational platform whose is participating can be found in its Social aim is to facilitate the task of social Report 2005. organisations by bringing them together in a network that eases contacts and collaboration between them.

During 2005, Fundación Telefónica has collaborated more closely with the Third Sector, non-profit making organisations and all the agencies working on cooperation, in order to help them to work as effectively as possible, offering them training, technology and equipment, funding and methods for improving their relationship networks and the dissemination of their messages.

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Art and culture CASE STUDY Most visited museums in the city of Madrid The development of Information and historical technological heritage, made up Data in thousands of visitors Communication Technologies (ICT) has had of pieces and equipment that have made 2004 2005 great impact in the area of contemporary telephone service provision possible over so Museo del Prado 2,001 1,966 culture and art. many years. This history, which stretches Reina Sofia 1.445 1,590 from the telegraph to the latest Thyssen 683 643 In this context, Fundación Telefónica is information and communications Arqueológico Nacional 251 159 working intensively in the area of technologies, is communicated by the Museo Telefónica 122 132 contemporary art and culture, and the core Foundation in an entertaining and Sorolla 85 66 of all the activities that the Foundation educational form, especially for children, in undertakes in this area is the transmission the Telecommunications Museum in Spain of culture and its values through the use of and the Telephone Memory Centre in Brazil. new technologies and the most advanced media. Fundación Telefónica supports the spread of Spanish language and literature in Fundación Telefónica manages and various initiatives that make known its maintains the artistic and cultural heritage principal works and the most important of the Company. The collections making up reference texts. the artistic heritage of the Telefónica Group are composed of works of various The Foundation also continues working on prestigious artists from different art the project to place in Internet the most movements, which the Foundation representative monuments of the art- conserves, catalogues, increases with new historical heritage of its surroundings pieces and shows in permanent through arsVIRTUAL, a project that carries exhibitions. important works of architecture into everybody’s homes through virtual reality During 2005, Fundación Telefónica techniques that are able to pick up even designed a programme of temporary the smallest detail. exhibitions at international level for the spaces and halls open to the public in such Since 1999 in Peru, Fundación Telefónica cities as Buenos Aires, Santiago de Chile, has been promoting and maintaining the Madrid or Lima. In this context, the “Peru Cultural“ portal that aims to bring Foundation has established important the wealth of Peruvian culture closer to the exchange and loan agreements with other citizen. In 2005, this portal received more national and international bodies so that than four million visits. these exhibitions could travel to different cities and countries.

Since it started this activity, Fundación Telefónica has also taken care of the growth and conservation of the Company's

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Telefónica Accesible

Telefónica Accesible: close to people with disability

In 2004, Telefónica set up the Accessible govern the activities, techniques and Telefónica programme as a comprehensive means for correcting accessibility project for people with disability. The aim problems, as well as the lived experience of this programme is to make Telefónica a of people with disability themselves. Group that is fully accessible in all its •Together with CEAPAT and coordinated processes and to actively contribute to full by the Economic and Social Development equality of opportunities for people with Alliance, the guide "Ask me about disabilities (as described in the chapter on Accessibility and Technical Aids” has been society). written, with the aim of helping to apply Design for All. Alliances In 2006 the Accessible Telefónica Telefónica drew up the Comprehensive • Collection will start circulation, with the Accessible Telefónica Plan in collaboration aim of making known information of with the Spanish Committee of general interest related to disability, and Representatives of People with Disabilities which is included in the agreement (CERMI), the platform that brings together signed with the CERMI. The first two the main associations of people with titles are the “Manual of Psychological disabilities, representing the situation of and Teaching Practices for Special this population of 3.5 million Spaniards and Education Centres”, and the “University their families. and Disability Guide to Resources", both drawn up by ATAM. Awareness-raising The Telefónica Group shows great social •In collaboration with Feaps-Madrid, the capillarity and its channels of publication “You and me alike” has been communication with the stakeholders issued, to better understand people with reach a large part of the societies in which intellectual disability, and a guide to it is present. It has thus promoted and special education has been published written various documents for improving together with Ferececa. people’s training, with the aim of •Telefónica Móviles, the Fundación encouraging Design for All as a way of Telefónica and the University of Comillas creating an inclusive society. have carried out the study “New •In collaboration with the Spanish Technologies and Social Exclusion”, an in- Committee of Representatives of Persons depth analysis of the potential of the with Disability (CERMI) the “Manual of ICTs in the struggle for social inclusion in communication for all” has been Spain. published, examining current problems in accessibility of communication, the guidelines that should be followed to overcome these, the values that should

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Fixed telephony and broadband Products and services CASE STUDY The work done by the Telefónica Group in Under the Design for All concept, Telefónica setting up Accessible Telefónica implies an has developed products that enable all improvement in everyone’s quality of life, kinds of users to have access to fixed www.telefonica.es/accesible especially those with some kind of telephone and broadband services: Telefónica has developed the “Telefónica disability, through telecommunications for The Teclón is a terminal that prevents • Accesible” portal, all. Telefónica works constantly to improve coupling with hearing-aids, has large www.telefonica.es/accesible, as a tool the accessibility of its processes, products keys, rapid dialling, and lights to signal available to society which shows what the and services, and to ensure that they are incoming calls. This model can help Telefónica Group is doing in the area of clearly an improvement in the social and people over 65 and people with slight disability, as well as anything that may be workplace inclusion of people with visual and/or auditory disability. disability. of interest to this sector of people and their •The Video-telephone screen has been families, like a formation and legislation Fundación Telefónica has published developed, that works with any centre, sector-related news, or access to “Communication solutions for elderly conventional telephone adding images specialised publications. people and those with disability”, to the conversations, and aiding identifying barriers that hinder the communication between people with existence of real equality of opportunities auditory disabilities. for elderly people and the disabled. •Telefónica de España offers the possibility of delivering the telephone bill to the Mobile telephony public in Braille, transcribed by the ONCE, Telefónica Móviles España has also for people who have sight problems. published the “Catalogue of mobile Invoices in Braille are also available in services for social integration”, including Chile and Argentina. more than 30 services already in operation to ease social inclusion and to improve the quality of living of people with disability, elderly people, victims of domestic violence, people with health problems and foreign residents in Spain.

In addition, the Movistar Accesible portal has been set up where information can be found about the more accessible services and telephones of Movistar. News about mobile telephone services, disability and Design for All can be found there.

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Applications and technical aids •Telefónica Soluciones also provides labels The information and communications with magnified characters for the technologies (ICT) are a particularly keyboard in two versions, black suitable means to aid social and workplace characters on a white background, and integration and to enhance the quality of white characters on a black background life of elderly people and those with (high contrast), for people with visual disability. Telefónica, together with disabilities. representative organisations in the •Lastly, a Keyboard Sweep Emulator has disability sector, has developed solutions to been developed, which is an IT aid the access of people with disability to application that enables writing on any computers and to communication. application compatible with Windows, •This is the purpose of the SICLA and a mouse emulator (improving the communicator (Communicator System handling and writing of computer for Alternative Languages), developed by programmes for people with reduced the Fundación Telefónica, which enables mobility). people with cerebral palsy or with motor or reading and writing difficulties to New technology accessibility have access to the computer and to observatories communicate through an Alternative With the aim of analysing the development Communication System. and state of the Information Society and of, •Within the Framework Agreement of Information and Communication collaboration with the Ministry of Work Technologies, Telefónica Soluciones reports and Social Affairs, through Imserso on the accessibility of products through its (Institute of Migrations and Social New Technologies Accessibility Observatory. Services), and the Fundación Telefónica, the Adapted Equipment Demonstration Information technologies are complex and Unit has been set up of the State Centre to understand them requires a high degree for Personal Autonomy and Technical of specialisation, so not just one Aids (CEAPAT), where there is equipment Observatory is offered but a set of configured with adaptations for different Observatories, each focused on a different kinds of disability. type of technology. Initially three observatories are available: an Observatory Telefónica Soluciones is developing the • of Telephone Accessibility, an Observatory “Beethoven” artificial conversation of Web Accessibility, and an Observatory of system, which aims to implement and Technical Aids. study the feasibility of a comprehensive telephone communication service (fixed network, mobile and Internet) between deaf and hearing interlocutors, working in real time and over the conventional telephone network.

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As well as keeping up with knowledge of the Workplace Integration CASE STUDY latest technology, Telefónica wants to be The Telefónica Group meets the legal social ally, leading the debate on the social obligation established by the Lismi Sign language in the impact of technology and transforming (Disabled Persons’ Social Integration Law) Shareholders Meeting itself from a product- and technology- of hiring two per cent of people with focused Group into a Group focused on the disabilities among the personnel. customer and on quality of life. As a result of Telefónica’s commitment to accessibility for all its stakeholders, Firstly, through the Mercadis portal, •Telefónica I+D makes the manual of interpretation in sign language will be www.mercadis.es, advice, information and “Design of Accessible Web-pages: organised for everything that takes place in resources are offered, related with the Procedures and Tools”available to users the Telefónica Shareholders’ General employment of people who have some through the portal Telefónica Accesible. Meeting. kind of disability, and the Workplace •Telefónica Soluciones has taken part in Integration Service of ATAM develops improving the draft version of the norm methodologies, activities and resources “Guidelines for the use of Sign-language with the aim of encouraging the access to in the Web” within the Sign Language in employment of people with disabilities. the Web Group. The document complements the norm UNE The Telefónica Group has Special 139803:2004, defining the specific Employment Centres of SIAA requirements for the situation when (Comprehensive Help and Assistance Web contents are videos with sign Services) in Atento, specialising in customer language. A majority of deaf people, attention services through multi-canal users of sign language, consider that platforms or contact centres (telephone, with this language, information can be fax, internet ...), and with EEC electronic perceived more comfortably and reliably components. than in written language. •Telefónica Soluciones takes an active part Servitelco devotes itself to management in AENOR Sub-committee 8 “Systems and support services for firms employing and Devices for Third Age and Disability people with disabilities in special Groups” for the “Standardisation of User employment centres. Its activities are Interfaces of Computer Applications for mainly connected with the use of People with Disability”, and the information technologies and “Standardisation of Internet Accessibility telecommunications. for Elderly People and those with Disability”, developing the procedures Lastly, Laveco is a special employment manual for applying the WAI (Web centre of ATAM that runs industrial Accessibility Initiative) guidelines. cleaning activities and laundry services for hotels, residences and hospitals, provides industrial cleaning services for buildings and, in general, auxiliary services for building conservation and maintenance. These services are directed towards the social and workplace integration of people with disabilities.

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Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

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Telefónica, S.A. | Corporate Responsibility Report 2005 251 08 The environment

The environment: respect and Protecti0n

Telefónica, S.A. | Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, driving progress for all 6

00 Telefónica in 2005 8

01 Corporate Governance 20

02 Identity 32

03 Driving progress 66

04 Customers 104

05 Shareholders 168

06 Employees 178

07 Society 226

08 The Enviroment 252 Environmental commitment 254 Environmental management 256 Monitoring and follow-up of environmental aspects 260 Electromagnetic emissions 261 Impact of installations 265 Control and management of waste 268 Energy consumption 271 Emissions into the atmosphere 277 Paper consumption 280 Water consumption 284 Consumption of poles 285 Environmental impact of Telefónica’s services 286

09 Providers 292

10 Media 304

11 ANNEX I 310

Telefónica, S.A. | Corporate Responsibility Report 2005 08 The environment

Environmental commitment

Telefónica views a commitment to respect companies carrying out operations in Spain OPINION for the environment as an essential part of and by mobile telephone operators in Latin its corporate responsibility. To this end, the America. What do our stakeholders companies in the Telefónica Group have think? had a public commitment to the As Telefónica is progressing in the environment for several years. transformation process into an integrated As part of the RepTrak study, we global group, the objective has been investigated public opinion as to whether Various companies of the Telefónica Group established of passing a corporate “Telefónica protects the environment". in Spain have been publishing environmental policy in 2006, so that this environmental reports since the end of the will become the general policy of all the The results obtained were as follows: 1990’s. These reports have been operations. This policy will provide support transformed into corporate responsibility to the “Minimum Environmental Spain 64.3 reports, which include the environment as Requirements” put into place by Telefónica one of their essential elements. in 2004. The main commitments included Argentina 54.6 in this policy would be as follows: In 2002, the Telefónica Group signed the 1. A guarantee of compliance with current Brazil 67.3 Global Compact of the United Nations, legal requirements in the countries of thereby undertaking as part of the operation, with the adoption of Chile 66.9 principles of this pact to: maintain an complementary regulations and internal environmental prevention focus, encourage 68.6 directives in cases where no appropriate Mexico initiatives promoting greater legal development exists. environmental responsibility and Peru 58,0 encourage the development and 2. The evaluation of the environmental dissemination of environmentally impacts resulting from our activities and respectful technologies. from the products and services that we develop, in order to reduce and prevent 2002 also saw the Telefónica Group join negative impacts and to promote the GeSI (Global e-Sustainability Initiative), an creation of telecommunications services initiative fostered by the UNEP (United that contribute to the sustainable Nations Environment Programme) and the development of society. ITU (International Telecommunications 3. To make sustainable use of natural Union) aimed at promoting the sustainable resources, using energy efficiently, development of the Information Society. In minimising the consumption of raw addition, the Group has been a participant materials, fostering the recycling of in the environment group of ETNO materials and the appropriate treatment (European Telecommunications Network of waste. Operators Association), which in 2004 launched the "Sustainability Charter", since 4. To communicate the applicable its beginnings. environmental procedures and requirements to the Group’s suppliers In addition to this, various companies of and to ensure their fulfilment. the Telefónica Group have been putting this commitment into practice through their environmental policies. These policies have been implemented mainly by

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Telefónica’s commitments to the environment

Year Company Commitment 1996 Telefónica de España ETNO environmental commitment (European Telecommunications Operator Association) Telefónica joins the ETNO working group on the environment

1997 Telefónica I+D Telefónica I+D environmental policy (revised 2003) AENOR certification Environmental Management System ISO 14001

1998 Telefónica Móviles España Telefónica Móviles España environmental policy AENOR certification Environmental Management System ISO 14001

1999 Telefónica de España Telefónica de España environmental policy

2002 Telefónica Group United Nations Global Compact

Telefónica Móviles España Sustainability Excellence Club Founded with 15 other companies with the aim of fostering Sustainable Development amongst companies

2002 Telefónica Group GeSI (Global e-Sustainability Initiative) Initiative supported by the UNEP (United Nations Environment Programme) and the ITU (International Telecommunication Union) 5. To put continuous improvement into Groups together manufacturersand operators in the sector with practice through the systematic and the objective of promoting theinformation society periodic evaluation of the environmental aspects concerned, together with the 2004 Telefónica Group Corporate Regulations: Minimum Environmental fostering of the implementation of Requirements that must be contemplated in the management systems in each of the operations of the company subsidiaries companies of the Group. Telefónica Móviles Approval of an environmental policy applicable 6. To establish the channels necessary to to operations undertaken in Argentina, Chile, Colombia, guarantee communication, awareness Ecuador,El Salvador, Spain, Guatemala, Mexico, Nicaragua and training in environmental matters Panama, Peru, Uruguay and Venezuela for all of the Group's employees. 7. To make the environmental activities Telefónica Soluciones Approval of the Company environmental policy carried out by the company public each Telefónica Gestión de year and to provide information on the Servicios Compartidos Approval of the Company Environmental Statute, as a first objectives attained and work in progress. step towards the implementation of an environmental . management system In the majority of cases, these commitments are manifest not only in 2005 Telefónica Group Internal standardising of environmental internal management, but also through management processes and protocols collaboration with different bodies dedicated to environmental protection. One example of this is clear in the fact that Collaboration with different bodies in the financial year 2006, Telefónica is to sponsor the CONAMA (National Country Company Collaboration with Environment Congress) to be held in Argentina Telefónica Móviles The Wildlife Foundation Madrid, thus continuing along the path IDM (battery recycling) begun in 2005 of collaboration with Colombia Telefónica Móviles CECODES (Colombian Business CONAMA in its Latin American event, which Council for Sustainable Development) took place in Panama. This participation in CONAMA is particularly representative, as Spain Telefónica Móviles Fundación Entorno (since 2002) collaboration is not only financial; the Soria 21 Forum (since 2004) company is also involved in the working Ambientum (environmental legislation and groups and in the organisation of round jurisprudence for town councils of Andalusia) tables. CONAMA Telefónica de España Nature Foundation(reforestation linked to the promotion of electronic billing) Mexico Telefónica Móviles Asociación Hombre-Naturaleza (environmental awareness campaign) Fundación Telefónica “Reforestemos México” Foundation Nicaragua Telefónica Móviles Earth Fair

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Environmental management

Minimum Environmental Level of implementation of the Requirements regulations In the year 2004, the management of A project of diagnosis of the state of Telefónica voluntarily approved the advancement of the implementation of regulations for the "Minimum internal environmental regulation in each Environmental Requirements”, the objective of the companies of the Telefónica Group of which is to advance in environmental was carried out in 2005, in collaboration management with a common with the Internal Audit Area. methodology throughout the Group, ensuring behaviour that is environmentally The level of advancement varies greatly responsible. In addition, the requirements between the different companies and is make it possible to standardise practices greater in the case of Spain and in the case between the different companies in the of those companies that have attained the Group, regardless of their activity, the objective of certification of their geographical area in which this activity is environmental management system in carried out and the applicable legal accordance with ISO 14001 Standard. This requirements. With these internal analysis will be repeated in the second regulations, Telefónica moved ahead of the semester of 2006, with the aim of having growing regulatory requirements that have advanced at least one step in each of the been put into place in the different companies. countries in which the Group operates. To guarantee the sufficient In accordance with the principles of implementation of the Environmental flexibility and adaptability, each company Requirements, regardless of whether the implements the regulation depending on company has a certified environmental the environmental impacts generated by management system, the Internal its activities. To facilitate compliance with Corporate Audit area carries out regular the regulations in the different companies analyses with regard to their fulfilment. In of the Group, five broad steps for action 2005, audits were carried out in two have been established to ensure the correct Spanish companies (Telyco and Telefónica medium term implementation of the Telecomunicaciones Públicas), the regulations and the external certification of companies of the TPI Group and the the environmental management systems. activities of ATAM. These audits were complementary to those that had been carried out in previous years in the main fixed and mobile phone operators in both Spain and Latin America.

Telefónica, S.A. | Corporate Responsibility Report 2005 256 08 The environment 5 steps for implementing the Environmental Requirements regulations Environmental Communication of the environmental 1 commitment commitment, preliminary evaluation, environmental indicators, awareness-raising and training.

Identifying Identification, monitoring and fulfilment of the environmental 2 legal requirements requirements applicable to the organisation. Methodology.

Follow-up and Identifying and evaluating environmental 3 measuring aspects, establishing objectives and establishing operational controls. 4 Improving Defining responsibilities, generating plans and registers, behaviour documenting processes resulting from environmental management, establishing channels of communication, capacity to respond to emergencies.

5 ISO Audits to verify the level of implementation, Certification management system for those aspects that are off course.

Environment Committees The Environment Committees are bodies To encourage advances to be made in intended for the regular and periodic implementing the Minimum Requirements consultation of Company actions regulations, Environment Committees will concerning environmental matters and be set up throughout 2006 in each of the they will also serve as the body responsible main countries in which Telefónica for ensuring fulfilment of valid legal operates, coordinated by a Corporate requirements and agreements that are Environment Committee. These adopted on environmental questions. In Committees will be led by the Internal addition, they should study, agree and Audit and Corporate Responsibility areas. propose those measures that they deem appropriate in terms of environmental protection and the fulfilment of the Environmental Requirements.

Level of implementation of the Minimum Environmental Requirements regulations in Telefónica

12345Environmental Identifying legal Follow-up and Improving ISO commitment requirements measuring behaviour certification Argentina Móviles JKLLL TISA JKLLL TGestiona JJJJJ Atento J J K LL Brazil TISA JKLLL TGestiona JKLLL Chile Móviles JJKLL TISA KL KL L Colombia Móviles J J KKL Ecuador Móviles JJJJK Salvador Móviles JJKLL Spain Móviles JJJJJ T España J J J JK T I+D JJJJJ Soluciones JJJJJ TGestiona J K L L L Guatemala Móviles JJKLL Mexico Móviles JJJJJ Nicaragua Móviles JKKLL Panama Móviles JKKLL Peru Móviles JJKLL TISA J JKLL Venezuela Móviles JJKLL

Finalised In progress Not started

Telefónica, S.A. | Corporate Responsibility Report 2005 257 08 The environment

Environmental Training in Telefónica Group Country Company Description Argentina Telefónica Móviles Training given to 12 employees who work directly with the environmental management system

TGestiona Training given to 100 employees in the logistics centre

Chile Telefónica Group Training as Environmental Management Systems Auditors given to 9 people with the aim of effectively developing the internal environmental audit tasks in the company.

Colombia Telefónica Móviles e-learning training Training in ISO 14001 (25 employees)

Introduction to ISO 14001 (98 employees)

General environmental training (83 employees)

Ecuador Telefónica Móviles Environmental skills training in the management of solid waste, non-ionizing emissions and the implementation of the Environmental Management System. (700 people, including outsourcing personnel and suppliers)

El Salvador Telefónica Móviles Courses in implementing environmental management systems, waste management (50 participants)

Guatemala Telefónica Móviles Courses in implementing environmental management systems, waste management (50 participants)

Spain Telefónica Móviles e-learning training intended to allow all employees to get to know the Company’s environmental management system and who is responsible for its application (739 employees in 2005)

Telefónica Soluciones Training in Project Leader courses Communiqués and presentations on the Intranet (900 employees)

Telefónica de España Training courses on environmental audits, waste management andenvironmental legislation (37 employees) Tele-learning course on environmental management (61 employees)

Telefónica I+D Environmental training (14 employees)

Mexico Telefónica Móviles Environmental themes in inductions for new employees

Self-study environmental manual on the Intranet

Audio conferences on environmental subjects (420 employees)

Nicaragua Telefónica Móviles Seminar on identifying environmental aspect (25 employees)

Panama Telefónica Móviles Training on ISO 14001 Standard and on the identification and evaluation of environmental aspects (25 people)

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Internal Training Environmental requirements OPINION The training and sensitisation of personnel for suppliers is one of the necessary conditions for In addition to managing the environmental What do our stakeholders ensuring correct environmental impact of its own operations, Telefónica think? management. During the course of 2005, also contributes to the promotion of 3,348 professionals in the Telefónica Group responsible practices throughout its supply received training in environmental chain. For this reason, environmental Within the supplier satisfaction material. clauses obliging the fulfilment of questionnaire, a question was included environmental legislation and particularly regarding “Telefónica is a company that is of legislation related to waste concerned about the environmental management are now being included in performance of its suppliers”. contracts for the purchase of goods and some services. 63% of suppliers answered in the Telefónica de España includes general affirmative, with an average mark of 3.8 out causes by which collaborating companies of 5 points. commit to fulfilling environmental legislation, together with specific clauses to ensure that waste generated is managed by authorised waste managers. It is also anticipated that in 2006, environmental criteria will be included in the audits of collaborating and maintenance companies, as until now only documentary monitoring of the information provided by these companies has been carried out.

Applicable environmental legislation is taken into account in the design of new products and services, defining environmental criteria in the development of products and services, which were provided to suppliers through the respective marketing areas.

Special clauses are included for the different operators of Telefónica Móviles, depending on the activity of the supplier.

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Most relevant environmental aspects for telephony companies

Fixed telephony Mobile telephony Electromagnetic emissions Monitoring and Visual impact follow-up of Energy consumption Waste lead batteries environmental Noise from electromagnetic equipment aspects and/or air conditioning equipment Discharges from generators Masts consumption

Identification of relevant environmental aspects Throughout 2005, the majority of Telefónica’s fixed and mobile telephony operators carried out a preliminary environmental diagnosis with the aim of identifying the environmental aspects that are relevant to their activity. The preliminary diagnosis was based on three aspects: the legal framework to be applied for each line/country, an internal analysis of company management of environmental aspects, and the queries received from different groups of interests. This identification process helped to establish specific actions and control plans.

The following sections show Telefónica’s follow-up to the environmental impact of each of the environmental aspects, complemented by other aspects that are traditionally required by analysts and environmental reporting standards.

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Electronic Emission Measurements in Telefóncia Group companies (Figures in units) Sites Sites measured 2004 measured 2005 Telefónica Argentina 334 519 Móviles Chile 532 2,348 Ecuador - 18 España 4,214 3,262 Panama 15 - Peru 15 - Colombia - 709

Telefónica Argentina - 44 Internacional

Electromagnetic emissions

Dialogue with groups of interests showed Levels of electromagnetic electromagnetic emissions to be the main emissions from antennae environmental worry for Telefónica ensures the fulfilment of all telecommunications companies. Society’s regulations and the respect of all concern for potential health risks from international and national limits for the electromagnetic emissions, despite the lack countries in which it operates, with of evidence in this regard from scientific systematic checks, for legal reasons or on research into this topic, originates from a the request of interested parties, of the general lack of knowledge concerning the strength of emissions from its installations. operation of equipment that operates In 2005, a total of 6,900 mobile telephony using electromagnetic waves. sites and 44 radio electric infrastructure sites for fixed telephony networks were In response to this situation, the measured. The number of measurements companies of the Telefónica group take on made showed an increase of 32% with a double role: firstly, to ensure that the respect to numbers for 2004. It is levels of electromagnetic emissions from important to highlight that in 100% of the our installations comply with all measurements taken, existing regulations international regulations and were fulfilled by a broad margin. recommendations, and to ensure compliance with these regulations and It should be noted that these recommendations in the acquisition of measurements took place for the most part terminals. Secondly, Telefónica is carrying in collaboration with the regulatory bodies out a strong campaign to inform society of each country. about the operation of mobile telephony and its potential impacts on health. In Argentina, a total of 519 sites were measured in 2005 and of these, 436 were measured by Telefónica Móviles Argentina and 83 by CNC (the National Telecommunications Commission). In addition to this, Telefónica de Argentina measured 44 sites. All of the procedures were carried out in accordance with Resolution 3690/04 of the CNC and 100% compliance was shown.

In Chile, a total of 2,348 sites were measured, measurements in Chile being taken every 6 months. Measurements focus on new stations or on those that have been modified. The standards against which

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measurements are taken are set by the FCC CASE STUDY (Federal Communications Commission) and the ICNIRP (International Commission on what electromagnetic enough energy to generate heat, but not Non-Ionizing Radiation Protection), with emissions are? to product the ionization of matter. For 100% compliance obtained. this reason, this type of radiation is known as non-ionizing radiation (NIR). To transmit sound, mobile telephony uses In Colombia, 100% of stations measured radio waves, which are in fact were in compliance with the set standards, As can be seen in the figure below, which electromagnetic waves of a similar nature with 709 sites measured. represents the electromagnetic spectrum, to light rays. There are many, diverse uses electromagnetic emissions can be classified for these emissions, such as television, radio In Ecuador, Telefónica Móviles measured according to their frequency.The waves broadcasting, microwave ovens or RADAR, to 100% of stations internally, in accordance used for mobile telephony throughout the cite just a few examples. The only difference with national regulations, which sets world are included among what is known between them is the frequency and the permissible limits against which emissions as radio waves, specifically of frequencies power used in each case. throughout the country are measured and between 900 and 2,000 MHz. Light is also a certified. 18 sites were certified in 2005. form of electromagnetic radiation, but at a There are two types of radiation within higher frequency. Lastly comes ionizing electromagnetic waves: ionizing and non- In Spain, 100% of base stations comply radiation, with frequencies greater than the ionizing. with the limits established by current frequency of light (millions of times higher legislation. Throughout 2005, the company In very high frequency radiation, such as • than the frequencies used by mobile took a total of 3,262 measurements for in the case of X-rays and gamma rays, the telephony). different sites. The number of sites that energy from the electromagnetic waves were certified by external agents was 968 is such that it can produce what is known Mobile services at present use the following with site variations and 2,294 without as an ionizing effect, that is, it can break frequency bands: the Global System for variation. chemical bonds. For this reason, this type Mobile Communications (GSM), which uses of radiation is known as ionizing digital technology and operates in the In the Environmental Country Committees, radiation (IR). frequency bandwidth of 900 MHz and an the current annual Action Plan will be •Lower frequency radiation, the extension of this system, the European decided on depending on legislation, the frequencies at which mobile telephony Digital Cordless System (DCS-1800), which demands of groups of interests and the works, do not have sufficient energy is very similar to GSM but which operates in internal requirements set by the company, under any circumstances to modify the the 1,800 MHz band, and lastly the so that there are certain minimum molecules of living cells. They have only Universal Mobile Telecommunications requirements for action that are common System (UMTS-2000). to all the countries. Elctromagnetic spectrum

Frequencies 0 10 100 1 10 100 1 10 1001 10 100 1 Hz khz Mhz Ghz Thz Visble Radiation X-rays Gamma light rays Wavelength 10000 1000100 101 100 10 1 10 1 Km m cm mm

Non-ionizing radiation Ionizing radiation

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Ondas radio 08 The environment

Informing society In Spain, Telefónica Móviles CASE STUDY Although there is no scientific evidence to carried out the following prove that antennae and mobile actions throughout 2005: Agreement with the Federation telephones, when they respect the of Municipalities on the established emissions limits, pose any •Training of all employees concerning health threat, the worries of some citizens electromagnetic waves and their impact development of infrastructures suggests that it is wise to continue on society. A one-hour session, available improving training and information on the internet or via mobile telephone. The Spanish Federation of Municipalities available for both employees and the •Joint initiatives with AETIC (Spanish and Provinces (FEMP) and AETIC signed a general public. Association of Electronics, IT and collaboration agreement in 2005 setting the Telecommunications Companies). criteria governing the spread of mobile Continuing with the task of Drawing up of a Code of Good Practice as telephone antennae, which was signed by communication undertaken in previous a tool for improvement in relations with the mobile telephony operators Amena, years, a constant dialogue is maintained Local Administrations, reflecting the Vodafone, Xfera and Telefónica Móviles with the different groups of interests, environmental awareness of operators in España. providing information on the operation of developing the network “reduction of the mobile telephony, measurements taken, visual impact of telecommunications The Government was the driving force level of compliance, etc. Some of the infrastructures". behind this agreement between activities carried out in 2005 in this respect administrations and operators, taking into The task of providing information to are listed below. • account compliance with regulations groups of interests (town councils, guaranteeing the safety of emissions from residents’ associations, landlords) The different websites of Telefónica Móviles antenna, environmental protection and continued throughout 2005, as a result in each country, along with the town planning. of demand from the groups themselves, institutional portals, include information providing a response to their concerns concerning the operation of mobile With this agreement, the operators about the operation of mobile telephony, telephony networks and electromagnetic undertake to draw up a Code of Good the conclusions of official bodies in emissions. Complementary to this, on the Practices for the harmonious development matters of health and Intranets to which all the Company’s of infrastructures, along with the creation of telecommunications and the regulation employees have access, information, a technical consultation information service. and control of electromagnetic studies and courses related to the theme emissions. are published periodically. •The process of obtaining authorisation before an installation is constructed is publicised to residents' associations, along with practical examples of technical projects, certified and approved by the Official Guild of Telecommunications Engineers.

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•As part of the dialogue with groups of Other initiatives of this type interests, a 24 hour telephone hotline for carried out in Latin America landlords has been set up, where, among other things, the doubts and worries of have been: landlord or anyone else interested in Argentina: matters of health and electromagnetic Telefónica collaborated with CICOMRA emissions are dealt with. Documentation (Chamber of Information Technology and is also sent to those interested with Communication in the Republic of information concerning electromagnetic Argentina) on the publication of a book fields, authorisations and certificates of with information on electromagnetic fields conformity with emissions levels of and non-ionizing radiation. mobile telephony installations. •There are initiatives of communication with the Chilean Mobile Telephony Association (ATELMO), an institution with which Telefónica Móviles is affiliated. •Through the association of companies of the guild in Colombia (Asocel), a series of initiatives are being designed to inform the community on the subject, using video, brochures, and a national campaign about telecommunications.

Mexico A course was given to those suppliers responsible for obtaining permits for base stations on negotiation and subjects relating to health and electromagnetic fields.

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Telefónica Móviles environmental impact studies Impact studies Impact studies 2004 2005 Argentina 155 296 Chile 0 0 Colombia - 66 Ecuador - 236 El Salvador - 83 Spain 34 29 Guatemala 247 350 Mexico 548 4 Nicaragua - 0 Panama 5 5 Peru 15 28 Uruguay - 0 Venezuela - 1

Note: There are significant differences between the levels of development of mobile telephony networks in different countries, and also between the definition of an environmental impact study between different legislation. Impact of installations

Telefónica maintains a commitment to The planning, construction, maintenance making the extension of its services to the and operation of these installations implies maximum area of the territory compatible environmental aspects such as visual with the minimisation of the impact of its impact, the occupation of land and infrastructures on the environment. As acoustic impact, among others. described above, the visual impact of and the generation of noise by infrastructures The evaluation of these aspects, prior to are two of the relevant environmental the installation of new equipment, takes aspects identified both in terms of fixed place by carrying out an environmental telephony services and for mobile impact study. 1,098 studies were carried telephony activities. out in 2005, thus fulfilling the legal requirements set by the different Land occupation administrations or by voluntary Mobile telephony requirements when installation is in To offer the maximum, good quality protected areas or areas of natural interest. coverage in the regions in which Telefónica Móviles has a licence to operate, it is 16.8% of installations in Spain are located imperative to develop networks of base in zones delimited by Natura 2000 stations and antennae that, although they network. occupy a small area of land, should be located at relatively high points in relation Fixed telephony to their surrounding environment, usually The activities of Telefónica de España were in towers or buildings. carried out over a network of 6,515 buildings and network infrastructures at The Telefónica Móviles network had over the end of 2005 (this figure was 6,256 in 30,300 sites throughout the world at the 2004) and over 9,222 telecommunications end of 2005, 27% more than at the close of antennae (8,829 in 2004). Telefónica de 2004. When it comes to developing these España carried out one environmental networks in natural areas or urban areas of impact study in 2005. special interest for their landscape or their historic and artistic heritage, Telefónica takes into account options such as camouflage in the surroundings, the reuse of existing infrastructures or the reduction in size of equipment.

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Telefónica Móviles sites throughout the world Sites Sites 2004 2005 Argentina 1,647 2.423 Chile 950 1,398 Colombia 503 1,483 Ecuador 237 254 El Salvador 147 276 Spain 15,304 17,000 Guatemala 417 315 Mexico 2,854 5,780 Nicaragua 286 116 Panama 115 359 Peru 386 492 Uruguay 100 165 Venezuela 745 743

Telefónica de Argentina had 1,750 buildings this methodology will be adopted by all dedicated to network infrastructures and operators. 725 telecommunications towers at the end of 2005. It was not necessary to carry out In 2005, in Telefónica Móviles as a whole, a any environmental impact studies in 2005. total of 456 environmental adaptations were made to minimise visual impact, and TeleSP had 2,043 buildings dedicated to 342 sites were shared. network infrastructures and 1,129 telecommunications towers at the end of Acoustic impact 2005. During 2005, it was not necessary to Mobile telephony carry out any environmental impact The noise generated by the air conditioning studies, as no new towers were installed. equipment of the huts and buildings However, there is still one open procedure, containing equipment is one of the aspects due to the expansion of the network in a that Telefónica monitors most strictly and protected area. on which it is working with its equipment suppliers. This monitoring takes place by At the end of 2005, Telefónica Peru had 913 means of acoustic measurements, which in buildings dedicated to network 2005 were taken for 1,617 sites. The infrastructures and 779 fundamental objective of carrying out telecommunications towers, of which 4 are these measurements is to verify in protected areas. 2 environmental impact compliance with valid legislation in studies were carried out in protected areas matters of noise, with the aim of taking the in 2005. appropriate corrective measures in those cases where non-compliance is found. Visual impact In addition to this, throughout the whole of In addition to the above, during the phase Telefónica Móviles, 113 citizen complaints of planning of the network, Telefónica have been received due to equipment Móviles España and Mexico apply their noise, and 93% of these have been resolved. own methodology to provide an objective quantification of the visual impact of base Fixed telephony stations. The parameter for evaluation is In Argentina, the noise of 4 sites has been “Visual Fragility”, which measures measured following complaints received alteration to the landscape. This value is about them and all of the complaints were the result of the analysis of different satisfactorily resolved. parameters, obtaining a final range of Visual Fragility that ranges from 1 In Spain, there are 10 administrative (minimum) to 5 (maximum). procedures open at present due to noise pollution. In this way, the company analyses the level of visual incompatibility that the In Peru, the level of noise emitted has been installation causes to the environment, measured for 40 sites, including 12 citizen using different minimisation measures to complaints, of which 3 have been resolved. correct this. Throughout 2006 and 2007,

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Visual fragility of mobile telephony base stations Scale de 1 to 5 Urban areas Rural areas

3 3 2.4

2.8

Spain Mexico

Spillages CASO PRÁCTICO The fuel tanks that provide fuel for generators, together with possible leaks from these tanks, can imply a certain Plan for visual and acoustic impact reduction and environmental impact related to soil minimisation of the environmental impact of infrastructures pollution due to possible spillages, which (Telefónica de Peru) are particularly serious, if an accident occurs. In 2005, a new piece of environmental In addition to this, Telefónica de Peru has legislation was passed in Peru. Telefónica taken measures to reduce the acoustic It is therefore important to have a de Peru, as the largest company in the impact of its installations to permissible prevention policy in this respect and this country, quickly put a plan to reduce the levels. Some of the measures taken in 2005 has been part of the objectives of the impact of infrastructures into place, which were: Environmental Management System of has already covered the following points: 1. Investment in acoustic insulation of both Telefónica de España and Móviles 1. Conservation Plan for metal structures electrical generators in the Camino Real España. Actions taken resulting from this and minimisation of their visual impact 208-San Isidro site, following notification are outlined below: by painting the antenna support towers by the Municipality. Identification of the situation of and the elimination of risks. • 2. Investment in the modification of the electricity generators, checking that Interventions took place on 130 towers at composition of air conditioning tanks comply with current legislation. a national level. equipment in URD Las Causurinas, • Periodic in situ visual inspection in order 2. Building Conservation Plan, through following complaints from residents. to check the state of the site. maintenance, focusing on the external 3. Investment in the modification of the facades of technical and administrative Implication of supplier companies in composition of air conditioning • buildings to maintain an image that is putting preventative measures into equipment in URD Cedros de Villa, due to appropriate to the surroundings. practice. the temporary closure of the site. 3. Approval of paints and additives with • Containment measures in order to 4. Investment in the modification of the manufacturers’ accreditations, avoiding control possible leaks. composition of air conditioning the use of zinc chromates, as these are equipment in URD Santa Patricia, due to carcinogenic. 4 products from 4 the threatened closure of the site. manufacturers have been certified. 5. Implementation of operating hours in 4. Control of paint losses during centralised high capacity air conditioning maintenance, requiring greater efficiency (Chiller) equipment in Surquillo, Basadre from suppliers of materials and the and Dean Valdivia locations due to workforce in their tasks in order not to complaints from residents. affect the environment. 6. Putting low capacity electricity 5. Netting of metal towers with nylon mesh generators with sound insulation in 4 sites nationally, following complaints capsules for low noise levels and for from local residents concerning perching outdoor use into place in 22 sites where birds, which were making noise and spaces with solar panel systems were depositing dangerous waste. saturated and migration was to take place to conventional energy due to the growth in services.

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Waste managed at Telefónica Group companies 2004 2005 Non- Hazardous Non- hazardous Hazardous Electrical hazardous waste kg waste kg waste kg and electronic waste kg waste

Telefónica Móviles Argentina ND 20,000 ND 71,682 36,000 Chile 29,400 15,500 340,379 2,510 20,000 Colombia ND ND 212,542 12,187 3,535 Ecuador ND 5,000 ND 800 ND El Salvador ND ND 50,144 232 500 Spain 481 1,038 111,913 2,390 170,740 Guatemala ND ND 66,197 332 ND Mexico 307,481 71,596 89,095 6,720 23,970 Nicaragua ND ND ND 1,363 ND Peru 29,600 48,000 ND ND ND Venezuela 20,090 ND ND ND ND Telefónica España Spain 12,504.862 1,004.789 12,220.000 1,549.500 3,565.000 TeleSP Brazil 247,665 474,705 4,052.190 868,575 3,500 TdP Peru ND ND 245,304 90,290 ND T-Soluciones Spain ND ND 12,107 886 2,307 I+D Spain 91,355 10,151 59,252 19,903 14,220 Atento Argentina ND ND 24,000 NA ND T-Gestiona Argentina ND ND 143,000 150 ND

Control and management of waste

The generation of waste is one of the main Spain environmental aspects resulting from the Once it has been selectively collected, the activities of the Companies. Depending on hazardous and non-hazardous waste is the activities carried out by each Company, managed in accordance to the regulations exclusively urban waste and office waste established by valid environmental (paper, toner cartridges, automated office legislation (delivery to authorised equipment, etc.) may be generated, or other managers, the use of the established specific types of waste may be generated documentation in this respect, etc.). by the activity, such as electrical or electronic waste. As can be seen from the Telefónica España is the company in the figures shown, the waste associated with Telefónica Group that manages most the activity of Telefónica is more waste, due mainly to its 80 years of history representative by volume than the waste and to the demanding environmental from the offices. regulations it faces in Spain. The Company has evidence of the reuse and recycling of The occasional generation, in greater or cable and paper waste and of a very high lesser amounts, of waste containing certain percentage of electrical and electronic compounds that makes it hazardous to the apparatus waste, approximately 70%. Some environment is not uncommon. Such waste of the characteristics of the waste is tested in order to ensure that it is management system are: managed appropriately. •Instructions regulating the administrative management of Of the waste generated, 73% corresponds hazardous waste. to non-hazardous waste and 11% to hazardous waste. The rest is electrical and •Specific procedures for the management electronic waste. of static lead-acid battery waste and waste from the maintenance of electricity generators.

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CASE STUDY Client waste

The operators of Telefónica do not only In 2005, Telefónica Móviles Argentina re- manage waste from their networks; they launched its Battery Collection and are also proactive in the collection and Recycling Programme, which has already •Procedures regulating the inverse management of those terminals and items recycled over 1,200,000 units. This logistics of waste (from the client to the of equipment that clients no longer use, programme, which is in collaboration with manufacturer). thus encouraging their correct recycling the Argentinean Wildlife Foundation, was and minimising negative environmental of particular importance in 2005 due to the All those contracts involving waste • impact. technological transition of many clients management contain clauses to ensure between CDMA and GSM standards. that management takes place in Telefónica Móviles España participates in accordance with legal requirements. initiatives such as “Tragamovil” (“Mobile The company began an adaptation process Swallower") organised by the association of over eighty containers installed in its Telefónica Móviles España has an ASIMILEC, the objective of which is the commercial buildings and offices, in which Integrated Waste Management System recycling of disused electrical and clients and non-clients of the company that enables the identification and removal electronic equipment. To December 2005, could deposit their spent batteries, thus of waste originating from both the almost 104,287 kg of waste mobile collaborating with the conservation and construction and installation of base telephone items had been collected, care of the environment. stations and of Company buildings, reaching a total of 305,481 kg since the complying with valid legislation at all initiative was started in 2001. Telefónica Telefónica de Peru has recovered 1,500 kg of times. To facilitate this activity, containers Móviles España contributed 22% of the waste from public and home telephone are placed in Company buildings and stores material received by the initiative for the use. This equipment is destined for reuse in for the management of urban/municipal year 2005. other parts of the network, with the waste (paper, card) and hazardous waste, withdrawal process beginning with the such as cells, mobile telephone batteries Telefónica de España has recovered removal of the connection cable, the and fluorescent lights. 1,325,000 kg of waste from clients, for the recovery of the equipment and finally the most part telephone equipment from intervention of specialised companies to The management of waste in Telefónica clients’ homes. When a client wishes to get provide the treatment and recovery of the I+D is included in the operational control rid of a rented telephone, it is handed in to equipment. procedure of the environmental a Telefónica Store or sent to the Company’s management system. Waste generated installations. At present, all items of that is suitable for recycling makes up equipment removed from homes or 79.2% of total waste sent for management businesses are taken to Telefónica’s by TID (Madrid and Boecillo). installations or to the installations of collaborating companies and are managed appropriately, in some cases repaired and in the majority of cases delivered to an authorised waste manager. A large proportion of telephone equipment, particularly metal components, is recycled.

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Latin America In Argentina, terminal batteries are The operators of the Telefónica Group in delivered to a supplier who deals with their the different countries of Latin America are final disposal. Accessories and terminals making progress in waste management in are sent to a service provider who is accordance with the Minimum authorised to treat electronic waste and Environmental Requirements laid down by who proceeds to export the recycled and the Telefónica Group. Waste management recovered materials. It is estimated that is carried out by authorised companies, 40% of waste generated is recycled. which are controlled by public law regulations and which have all of the In Chile, cellular equipment (excluding certificates to guarantee that the batteries and chargers) together with companies are in compliance with legal electronic network operation equipment, is requirements. It is Telefónica’s objective for delivered to an electronic waste reduction 2006 to continue making progress in the company. The hazardous waste from implementation of homogenous batteries and chargers is delivered to an procedures for waste management in all of authorised service provider, who treats the the different countries. waste so that it does not affect the environment.

In Mexico, the area responsible for the generation of waste, should manage and dispose the waste generated by its activity appropriately through authorised waste managers.

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Fuel consumption in the Energy Telefónica Group companies consumption (Figures in thousands of litres)

Group fuel Vehicle fuel Fuel Company Country Thousands of litres Thousands of litres The consumption of fossil fuels linked to 2004 2005 2004 2005 energy use is an aspect that, due to its repercussions on the environment, is subject to ever-greater attention in global, Telefónica Argentina - 126 - 123 European and national policies. The Móviles Chile 42 20 103 151 telecommunications sector is not a sector Colombia 1,034 522 164 156 100 296 140 159 that generates a great deal of direct Ecuador El Salvador 39 47 121 126 demand for fuel consumption, with these Spain 4,868 4,735 504 378 associated mainly with tasks related to the Guatemala 39 73 175 73 creation and maintenance of the network, Mexico - 229 - 546 such as vehicle fleets or electricity Nicaragua 56 134 63 166 generators. The latter are used for Panama 101 71 54 109 emergency actions or in places where Peru 317 369 85 91 access to other sources of energy is Venezuela - 2,137 - 723 difficult. Telefónica Spain 570 31 7,515 7,260 de España Total fuel consumption in 2005 was approximately 30 million litres, 20 of these TeleSP Brazil 500 258 2,813 3,441 in vehicles and 10 in electricity generators. Telefónica Chile 184 340 127 1.222 Consumption is constant with respectto CTC the previous year if the increase in Telefónica Argentina 220 - 3,348 3,000 operations is taken into account. de Argentina TdP Peru 134 895 - 1,992 Atento Argentina 1,200 - - 2 Tgestiona Argentina 540 - - - Telefonica Spain - 11 I+D

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Electrical energy consumption in the Telefónica Group companies (Thousands of KWh)

Company Country Electrical energy Electrical energy consumed in operations (KWh) consumed in offices (KWh) 2004 2005 2004 2005

Telefónica Spain 648,504 554,969 235,045 231,836 de España TeleSP Brazil 534,217 555,965 46,453 38,038 Telefónica Peru - 76,505 15,500 9,483 305 del Perú TASA Argentina 140,550 158,766 - Telefónica CTC Chile 70,253 117,191 4,436 Tsoluciones Spain 2,678

Telefónica Spain 307,003 354,632 47,766 47,420 Móviles Argentina - 113,946 6,008 22,639 Chile 29,337 41,803 1,867 1,655 Colombia 34,257 39,255 7,824 9,654 Ecuador 7,709 87,301 1,263 36,403 El Salvador 11,334 1,056 1,729 2,128 Guatemala 10,881 11,970 1,108 12,196 Mexico - 42,842 10,621 16,140 Nicaragua 2,550 3,443 1,863 2,411 Panama 6,660 6,476 4,770 4,834 Peru 21,623 43,940 5,998 4,293 Uruguay 5,600 1,400 Venezuela - 84,598 20,986 28,382 Telefónica I+D Spain - 97,778 12,401 13,151 Telefónica Spain - 699 1,100 GSC 1 Argentina - 4,481 4,539 Brazil 0,935 Atento Argentina 3,852 Terra Argentina - 164 Chile - 336

1 GSC: Gestión de Servicios Compartidos

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Fuel consumption Electrical energy consumption Figures in thousands of gal/year Figures in thousands of gal/year

712 8,261

549 6,589

371 305

1,556 1,815

Diesel Diesel Offices Network electricity vehicle generators fleet

The company that consumes most fuel for Electrical energy consumption vehicle fleets is Telefónica de España, which The power supply to communications consumed 7.2 million litres in 2005 for a networks involves the highest area of fleet of 6,081 vehicles. If these figures are energy consumption for compared to 2004, an absolute reduction telecommunications operators. Energy can be seen of 0.3 million litres which, consumption is one of Telefónica’s main when consumption per vehicle is environmental concerns, as its reduction considered to have remained stable, comes has a direct effect on saving scarce natural from the reduction in the vehicle fleet. The resources and on the reduction of total consumption of Telefónica Móviles pollution. During 2005, Telefónica advanced resulting from its vehicle fleet is 2.8 million notably in putting measures into place for litres for a total mobile fleet of 1,115 the reduction of energy consumption and vehicles. A reduction in consumption in for a greater control of energy Spain of around 25% must be highlighted. consumption through its measurement.

The Company that consumes most fuel in Electricity consumption in network electricity generators is Telefónica Móviles operations have increased by 8% and in España, with 4.7 million litres, due mainly offices by 16% with respect to the to the greater geographical spread and previous year. greater coverage of its network, which results in the need for alternative energy sources to the usual energy supply for emergencies or remote areas.

Direct energy consumption of the Telefónica Group in 2005 Calculated according to the GRI Energy Protocol

Direct consumption Indirect consumption Fossil fuels Renewable energies/ other sources Country Coal Natural Oil Crude Biomass Solar Wind Geothermal Hidroelectric Nuclear Gas products oil Spain 4.341 5,626 200 1,184 0 108 0 87 0 661 5,331 Argentina 1,080 67 1,853 200 0 8 0 5 0 387 386 Brazil 2,138 218 10 274 0 8 0 4 0 2,445 103 Chile 633 708 245 124 0 8 0 4 0 266 0 Peru 483 0 98 198 0 8 0 4 0 454 0 Other countries 1,574 199 612 505 3 8 0 4 43 1,453 95

Dates in Mega Joules

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Relative energy efficiency indicators for Telefónica de España

Type of electricity GJ Reference Quantity Relative unit Ratio size

Electrical TTelephony use 2,183.126 Invoicing (Û) 10,695.96 GJ(network/g 204.1 energy consumption invoiced

Electrical Administrative use 834,612 Staff 32,116 GJ(management)/employee 26 energy consumption staff

Energy efficiency Telefónica Móviles The operators of the Telefónica Group have Telefónica Móviles España has made major made significant improvements in the advances in the implementation of energy energy efficiency of their networks and efficiency measures throughout the offices throughout 2005. network, by means of different prototypes: •The manufacture of two prototype fuel Telefónica de España cells and the conditioning of two base To reduce consumption in offices, an stations for their installation, with the internal awareness campaign was aim of carrying out two pilot tests in launched, which consisted of the placing of 2006. small stickers beside switches in those Passive cooling: the number of rooms where user intervention can have a • prototypes has been increased to eight more notable effect (equipment rooms, sites. offices, warehouses, services and small buildings). A project was also undertaken of •Use of solar and wind power: to date the substitution of switchboards for there are 17 base stations operating with ferroresonant technology, manufactured in this combined energy supply system. the 1980’s, for other high-frequency •Installation of 32 beacon systems based technologies. The aim of this is to make on LED technology. significant savings in electricity Reduction by 11 units of the number of consumption, as with the passing of time • generators installed to supply electricity the yield from the rectifiers has declined, to base stations. resulting in noticeable energy losses. The cost of this investment for 2005 was 1 In addition to this, Telefónica Móviles million euros, for a total of 36 sets of España has participated in the PNEUMA equipment. (Pneumatic Uninterruptible Machine) project, which is funded by the European Telefónica Soluciones carried out internal Commission through the European Life awareness-raising campaigns by means of Project for environmental protection. The the Intranet, posters and stickers objective of this project is to develop a encouraging energy saving. product using compressed air as a source of clean energy to supply base stations should there be a cut in the usual power supply. At present, acid batteries are used, which generate an environmental impact in their recycling. The system developed as part of this project is intended to eliminated these batteries and to present a solution that is more environmentally respectful, more economical and that requires less maintenance and space. In Latin America, efforts were made to reduce the consumption of the networks through the use of renewable energies,

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Vehicle fleet of Telefónica de España

-17% in 3 years 7,260 6,621 6,309 6,081

2002 2003 2004 2005 with seven solar cell systems and two wind •Optimisation of air conditioning systems power systems put into place in Chile in to reduce losses (Colombia, Mexico, 2005. On the contrary, in Peru the theft of Panama, Peru). solar panels means that this alternative is not viable, as in addition to the financial T Gestiona costs associated with replacement of the T-Gestiona Argentina is the most advanced panels, there is also the cost of interruption Company of the shared centres and to the service. Nevertheless the services, as it has ISO 14001 certification. In consumption of these sources is 4,636 GJ. 2005, it put certain measures in place Efforts to reduce consumption were based intended to reduce consumption that may on the optimisation of control and of be transferred to other countries in 2006. switchboards and the use of external These measures include the adjustment of temperatures to set the operating demand contracted, the correction of temperature of the rooms, thus optimising power factors, the optimisation of air the use of air conditioning. conditioning equipment, the progressive replacement of lighting in buildings with In other countries, such as Colombia and low-energy lighting, restricting the Venezuela, measures to optimise the illumination of facades and posters, the network according to load were also taken, restriction of times for air conditioning and through regular measurement. In Mexico, heating, and staff training. on the other hand, efforts were focused on the installation of 1,000 air conditioning units with “free cooling” technology, which uses the ambient temperature for cooling. In addition, maintenance was scheduled and carried out of generators, transformers, batteries and other equipment with the aim of reducing losses.

Different measures were taken in the different operations of Telefónica Móviles in order to reduce energy consumption in offices: •Communication campaigns to encourage the saving of electrical energy in offices (Chile, Mexico, Panama). •Restriction of times in office buildings through the electric light or air conditioning (Chile, Peru). •Automatic control devices for switching lighting on and off, together with the installation of low-energy lamps (Colombia, Venezuela, Nicaragua, Panama, Peru).

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CASO PRÁCTICO Telefónica will install the largest rooftop solar energy production park in Europe in Distrito C

Telefónica will install the largest solar the project for Telefónica will be the energy production park in Europe and one equivalent to the total electricity of the largest rooftop solar energy parks in consumption of Distrito C. the world at its new headquarters which are under construction in Madrid (Distrito The installation of the panels will be C), with the support of Iberdrola, the completed towards the end of 2006. The company that will construct and maintain project will be developed in 4 phases of the plant, as technological partner. approximately 3,520 panels per phase, plus a fifth phase, corresponding to the part of The park will have over 16,600 photovoltaic the project to go on the roof over the solar panels that will run the length of the Corporate building, of approximately 2,540 entire office complex on the building panels. rooftops. At over a kilometre in length, the rooftop will have an area of over 57,000 Distrito C, located in the Las Tablas square metres, if which 21,000 will be business park, to the north of Madrid, is to occupied by solar panels. The power be Telefónica’s new operational installed will be of approximately 3 MW headquarters. With a total area of 200,000 peak, which will generate over 3.6 GWh per square metres, it will have space for 14,000 year. The project involves an investment of employees in a space for offices and for 21.8 million euros. various services similar to a campus in concept: an open space, with services that The “solar roof” is the final milestone in a will be shared with the local residents. The project that has been conceived since its complex has been designed according to origins within the context of sustainable innovative concepts of both interior and architecture, understanding this to be exterior space. architecture that allows the reduction of atmospheric emissions of CO2, the main cause of the greenhouse effect.

The electrical energy obtained from the solar roof will enable CO2 emissions to be reduced by approximately 1,600 tonnes per year, in line with the objectives established by the Kyoto Protocol. The energy generated by the park will be sold to Iberdrola, which will incorporate it into its distribution grid. The income generated by

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Emissions into the atmosphere

The optimisation of fossil fuel consumption Some substances, used as coolants, linked to the use of energy goes hand in solvents, propellants in fire protection hand with a reduction in the emission of equipment, etc. damage the ozone layer. greenhouse gases (CO2, NOx and CH4, These include CFC’s, HCFC’s and halons. The among others), thus contributing to a Companies of Telefónica are working on reduction in one of the main problems the progressive elimination of this type of facing the planet today. material.

The Companies of the Telefónica group In Telefónica de España, all fixed and have for some years been taking portable extinguishers containing halon improvement actions to reduce 1301 and 1211 were eliminated. With regard greenhouse gas emissions: to air conditioning equipment, it is •Renewal and reduction of the vehicle anticipated that legislation for its fleet, replacing vehicles without catalytic elimination will be fulfilled before January converters with others that fulfil current 1, 2015. legislation on emissions. Within the Telefónica Group, equipment •Electrical energy saving measures, such using R22 gas will be gradually replaced as increasing the maintenance with equipment using R-134. temperature in equipment rooms to 23?C, disconnecting underused rectifiers, reducing the hours of use of management buildings, reducing illumination in circulation areas in Total energy consumption within the telephone centres, etc. Telefónica Group Optimising occupied spaces in buildings, • Type of energy Quantity in (GJ/year) isolating unoccupied areas to remove the 2004 2005 need for air conditioning in such areas. Electricity generators 305,679 371,117 Internal energy saving awareness • Vehicle fleet 549,060 712,096 campaigns. Electrical energy 8,145,757 10,076,313 •The use of alternative energy sources to Total energy consumption 9,000,496 11,159,526 supply the networks. Of the total energy consumed by Telefónica de España, approximately 12,000 KWh come from renewable energies.

Telefónica, S.A. | Corporate Responsibility Report 2005 277 08 The environment

CASESTUDY

Telefónica Internacional energy efficiency programme

EThe Telefónica Internacional Energy A multidisciplinary team identified 26 good Efficiency Programme, launched in 2004, practices in order to transfer them from consists of the optimisation of electrical one operation to others. energy management (reduction in price and • Buying energy on the free market consumption) by means of the • Self-generation of energy identification and application of best • Adjusting the energy contracted practices within the group. This exchange of • Tariff adjustment good practices has a direct impact on the • Parallel measuring of demand energy accounts of the areas of operation of • Automatic control of demand Telefónica de Argentina, TeleSP,Telefónica • Controlling abnormal consumption CTC Chile and Telefónica del Perú. • Correcting the power factor • Reducing THD (Total Harmonic Distortion) • Compacting centres • Optimising continuous current systems • Optimising air conditioning equipment • Set point of room temperatures • Energy diagnosis • Action in administrative buildings • Action on external points • Prioritising the purchase of efficient equipment • Substituting equipment • Making the most of external temperatures • Training the workforce • Recovering outlay for the development of electricity networks • Tele-measuring • Verifying the measuring factor • Segmentation (isolation of spaces) • Hurrying accounts • Obtaining preferential client status

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Summary of emissions by the Telefónica Group (in t/year) Summary of emissions (mT/year) Year 2004 Year 2005 Total Fuel Fuel Total Fuel Fuel consumption electrical consumption consumption consumption consumption consumption energy (a) generators vehicle electrical generators mobile vehicle fleet Total energy (a) (b, c) fleet Total SOx 14,426.135 4.938 8.870 14,439.944 17,845.151 5.995 11.504 17,862.650 NOx 4,439.437 261.023 154.213 4,854.674 5,491.591 316.902 200.005 6,008.497 COVNM 122.186 49.383 42.070 213.639 151.145 59.954 54.562 265.661 CO 268.810 112.875 159.662 541.347 332.518 137.038 207.072 676.628 CO2 1,403.448.739 22,151,686 39,408.664 1,465,009.088 1,736,068.184 26,893.805 51,110.539 1,814,072.528 CH4 24.437 1.411 1.521 27.369 30.229 1.713 1.972 33.914 N2O 57.020 3.527 5.652 66.199 70.534 4.282 7.330 82.146 CO2 equivalent 1,421,638.214 23,274.790 41,192.571 1,486,105.575 1,758,568.591 28,257.338 53,424.154 1,840,250.083 a)Estimates based on the pollutant atmospheric emissions inventory corresponding to the year 2002 from the Ministry of the Environment on net production of electrical energy, printed in the Statistical Bulletin of Electrical Energy of December 2002 (Ministry of the Economy and Electrical Grid of Spain). b)Source: Guia CORINEAIR c) Estimate based on the sulphur content of fuel used

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CASE STUDY Paper consumption

Paper figures for Telefónica de Paper consumption is another of the main •Consolidation of photocopying and España environmental aspects related to the printing equipment as multifunction •Only 10% of documentation that is operations of Telefónica, with consumption equipment, which enables greater printed is read. for offices and billing traditionally efficiency in the management of considered separately. equipment. This type of equipment is If I print, I am being highly inefficient. • contracted as an external service. The indirect costs associated with paper Consolidation involves the removal of are 30 times greater than the cost of the Offices personal and networked printers. An sheet. In 2005, Telefónica put the “Efficiency in the Use of Paper and Electronic Information in objective was set of reducing the During 2005, office paper consumption • the Workplace” project into practice. This number of printers in offices in Spain by dropped by around 14% was aimed at cutting the ties with paper in 5,000; thus from over 17,000 printers, the •In Telefónica, 132 million A4 sheets were Telefónica offices. This had two number was to be reduced to 12,000. By consumed in 2005. fundamental objectives: on the one hand, the end of the year, there were only 9,769 printers. •A Telefónica user prints an average of 14 to improve the mobility and efficiency of sheets per day. work and on the other, to contribute to a •Reduction in paper consumption by less reduction in environmental impact. As a printing (only 10% of material printed in 51% of paper purchased in 2005 was • number of areas are implicated in the the office is read) and encouraging recycled. subject of paper and information, the Paper double-sided printing and even the •7,269 personal printers were eliminated Efficiency Committee was set up and met printing of 4 sides per sheet. In May in 2005, although there are still around 14 times throughout 2005. 2005, the Companies set the objective of 4,600 left. reducing the amount of paper consumed •85% of Telefónica’s paper consumption is The project began with the analysis of in the offices by 10%. In 2005, a reduction divided between Fixed and Mobile initiatives taken by other multinationals, in the purchase of paper of 14% of the business in Spain reaching the conclusion that these figure for the previous year was achieved. initiatives could not be directly transferred Each employee stores 0.6 m3 of paper in Increased purchasing of recycled paper, • to Telefónica’s situation. During the first • the office as the improved quality of this paper and quarter of 2005, the report concerning the the robust nature of new equipment results of best practices implemented in means that this can be used in the same over 30 units of the Telefónica Group was conditions as new paper. This action has presented. This report proposed a drastic a very positive environmental impact. At reduction of paper consumption in the the start of the year, only 20% of paper office, while always maintaining efficiency used was recycled paper, with an of work, as with existing technology and objective of 40% set. By the end of the the media available, it would not be wise to year, a figure of 51% had been reached. eliminate paper entirely. The following actions were taken throughout 2005:

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•Monthly monitoring of paper consumption within the Companies, in CASE STUDY order to produce a report enabling the contrast of objectives with expected The cost per sheet is not the results. Along with the reduction of cost of the paper l paper use, activities are encouraged to avoid losses in productivity. It is agreed Although expenditure on paper is not a that the 12,000 professionals working in spectacular figure (in 2005, Telefónica Distrito C will have 17”TFT monitors. spent 600,000 euros on the purchase of •Various communication actions were paper), it has been shown that each sheet taken: an article on the subject in the that is printed costs the company 30 times extranet, a website and the preparation more than the price of the sheet of paper of a communication campaign to be run itself. In addition to direct costs of throughout 2006. consumable materials and filing space, there is the proportion of indirect costs in During 2006, the focus will be on wasted time on unnecessary activities. encouraging the elimination of filed paper in the office, which will make use of the The cost of the paper is only 3% of the cost move to Distrito C as a reason to reduce generated each time an employee uses a filed paper, to run communication sheet. Material costs of paper (3%) campaigns, the provision of common 97% of the costs: solutions for the management of Total costs from paper are 30 times more Savings on printing digitalised information and carrying out than the cost of a sheet. Savings on photocopies paperless office pilot projects. Savings on distribution Cost per 100 sheets Savings on storage In other countries, isolated similar Productivity Productivity losses initiatives are getting underway. In Savings Argentina, for example, the Apolo Plan has Indirect Direct been put into practice. This consists of managing documentation in electronic 16Û 9Û format and using both sides of the paper in printers and photocopiers. For 2006, the objective is to transfer the good practices developed in Spain to the Country Environmental Committees.

0.6Û 0.8Û 0.6Û 1.7Û 1.2Û 0.8Û 1Û

Total Time on Time on Time on Paper Printing Photocopying Distribution Storage profits copies, distribution consulting costs costs costs costs costs printing of paper filed paper

Telefónica, S.A. | Corporate Responsibility Report 2005 281 08 The environment

Billing As part of the “One bill, one tree” project, It is clear from the figures for Telefónica de Telefónica de España intends to plant one España that the consumption of paper tree for each client who signs up for the e- associated with issuing bills is far greater billing service. It is important to underline than the impact of paper in the offices. As the environmental sponsorship linked to a complementary measure to the double- this concept, through which the saving on sided printing of bills, in 2005 a campaign paper used for billing is redirected to the was launched to encourage Telefónica reforestation of riverbank woodland, in customers to contract "Paperless Billing". collaboration with the Natura Foundation. The e-billing service enables clients to Both organisations will focus their efforts consult, print and download their on projects for the recovery of riverbank telephone bill on-line, with the same legal woodland of the inland basins of Catalonia, status as paper versions currently have. Castilla la Mancha, the Basque Country and This service is free and the only cost to the the Principality of Asturias. In all cases, client is the internet connection. reforestation will take place with native species, which take root easily in riverbank By the end of 2005, this service was used areas. by almost 150,000 clients with an increase of 30,000 in 2005. It is therefore necessary With this initiative, Telefónica is enabling to raise the awareness of clients of the its clients to play a special role, as the more environmental benefits of substituting the clients sign up for e-billing, the more trees paper format of the information with can be planted. If the almost 84 million electronic information. paper bills that Telefónica will send to its clients in 2005 were to convert to e-bills, it would be possible to reforest an area equivalent to 840,000 football pitches. Moreover, since this is riverbank forest, the rivers carry the seeds all along their length, replanting them and thus maximising their effectiveness.

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Breakdown of paper consumption by use 2005

Country Total Paper consumption Paper consumption Paper consumption consumption for administration for billing for advertising and operations and leaflets

Telefónica Móviles Argentina 1,158,625 220,800 457,825 480,000 Chile 1,589,349 49,069 60,280 1,480,000 Colombia 353,889 61,218 292,671 Ecuador 6,165 2,675 3,490 El Salvador 73,423 9,166 54,257 10,000 Spain 120,086 120,086 Guatemala 42,075 30,000 2,075 10,000 Mexico 18,181 18,181 Nicaragua 101,162 14,378 86,784 Panama 28,133 18,273 4,860 Peru 3,143,760 2,896,145 47,190 200,452 Venezuela 82,440 82,440 TASA Argentina 490,000 Telefónica de España Spain 4,127,986 453,999 3,673,987 TdP Peru 144,470 TelSp Brazil 1,465,608 174,440 1,291,168 CTC Chile 547,175 99,903 447,272 Tsoluciones Spain 24,293 24,293 Telefónica I+D Spain 31,194 31,194 T-Gestiona Spain 11,111 11,111 Argentina 46,480 46,480 Atento Brazil 39,525 39,525 Argentina 12,900 10,287 13 2,600

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Water consumption

Water consumption in the However, given the importance of water in telecommunications sector is of little the context of the planet’s environment, significance in comparison with other various specific awareness-raising actions industries or the service sector. Its greatest have been developed in order to rationalise impact consists of water consumption in water consumption and sensors have been offices and by air conditioning systems. installed in toilets. In some cases, studies have been carried out on the water cycle in the buildings concerned in order to maintain those points most prone to leaks in perfect order.

Water consumption (thousands of litres)

Line of Business Country Water consumption Water consumption 2004 2005 Telefónica Móviles Argentina ND ND Chile 23,019 30,393 Colombia 19,035 ND Ecuador 1,808 ND El Salvador 1,679 151,120 Spain 55,173 44,893 Guatemala 12,544 46,897 Mexico ND 10 Nicaragua 16,200 15,515 Panama 600 13,633 Peru 19,330 30,393 Venezuela ND 69,231

Telefónica de España Spain 906,927 913,452 TeleSP Brazil 1,165,045 1,057,225 Telefónica del Perú Peru 327,521 133,241 Telefónica CTC Chile 880,990 Telefónica de Argentina Argentina 421,241 1,280

Atento Argentina ND 29 Telefónica I+D Spain 37,404 39,213

T-Gestiona Argentina ND 480,000

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Masts Consumption

Masts are used for aerial hanging and are usually made from wood or concrete. At one time the main environmental problem associated with wooden posts was related to their periodic re-impregnation with creosote, in order to protect the wood from the action of beetles and to prevent the destructive effect of these on the Masts. Nevertheless, at present this process is not carried out by Telefónica de España and any maintenance is carried out by specialised companies in their own installations, with precautions taken that are in line with current legislation, and therefore there is no negative effect on the soil. This is considered to be a potential environmental aspect as it could have an effect on the soil.

Masts installed

Type of post 2001 2002 2003 2004 2005 Variation 05/04 Wood 3,679,915 3,704,434 3,747,032 3,804,187 3,838,658 +0.9% Concrete 218,300 219,754 222,281 225,672 232,029 +2.8% Total 3,898,215 3,924,188 3,969,313 4,029,859 4,070,687 +1.0%

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In order to encourage the debate Environmental surrounding the role of impact of telecommunications in the sustainable development of the planet, Telefónica has Telefónica’s services begun publishing a series of monthly articles on its website that analyse the The telecommunications sector has a relationship between the use of new major influence on the environment. technologies and sustainability. Nevertheless and in contrast to what is usually the case in other business sectors, Among the different studies outlining this impact is mainly positive. some of the positive impacts of some Telecommunications contribute to telecommunications services on efficiency and to savings in such valuable sustainable development and the barriers resources as energy, to the preventing their widespread adoption by dematerialisation of products and to the society, the following conclusions can be optimisation of transport processes, highlighted: making them more effective. •New information technologies have an influence on what is known as Some of the services traditionally “dematerialisation”. It is estimated that considered to have a positive in the best case scenario, 50% of the environmental aspect are tele-working, energy used in manufacturing processes remote offices, audio and video conference, for products within the EU of the 15 tele-education, e-commerce, personalised would be saved by 2020, thanks to the mobile information services, networked possibilities offered by ICT to users of answer machines and call identifiers. The access a service instead of acquiring a impact of these services is greater when product. transport and distribution services, energy efficiency in buildings, paper savings from •The use of renewable energies, together on-line catalogues and electronic billing, or with energy efficiency measures, can dematerialisation, are taken into account. reduce the environmental impact of the energy consumption of ICT. In addition to these things, advanced •Information technologies can contribute mobile telephony services can contribute to the more efficient use of paper in the to reducing environmental impact. For office, resulting at the same time in example, thanks to third generation (3G) increased productivity and lower costs. mobile telephones, it is possible to send Technology can help to protect and care environmental monitoring figures in real • for nature and to prevent its more time using UMTS mobile devices. These harmful effects on humankind. devices have a wide range of uses, such as Communication between measurement pollen measurement, noise measurement, stations in the field, networks of ozone level measurement, water quality environmental sensors and measurement or fire control. Other uses for meteorological satellites enables the 3G in the environment are, for example, remote monitoring of important monitoring wildlife and the control of parameters that can affect our health or waste discharges.

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CASE STUDY CASE STUDY

Local PVR on IMAGENIO New facilities of the SG-2000 management system A project aimed at the incorporation into Imagenio of a system to enable viewers to This projected is aimed at improving the “pause” the television and continue to Public Telephony System STP-2000. Among watch it, and to record television the new applications that this incorporates programmes. This would eliminate the is the possibility of carrying out certain need for video recorders as it would be operations that are currently carried out accessible as a function of the TV itself. This manually by operators, via modem and is a clear example of dematerialisation, in with no need for human intervention. which a specific functionality is provided by Moreover, it offers greater precision in a software application and not by a piece of detecting alarms, which means that repair physical equipment, which would operations can be optimised, eliminating necessitate the use of resources for its unnecessary journeys by staff to points manufacture, distribution and later where terminals for public use are located, disposal as waste, with the corresponding and thanks to remote control, atmospheric environmental consequences. emissions, the consumption of fuel and other resources associated with the maintenance of public telephones can be reduced.

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quality of life or can help to reduce the CASE STUDY Articles published in 2005 loss of human life and damage to “Energy use in the digital society" property in the case of natural MaCS (Multimedia catastrophes. “Will the digital household be a sustainable household?” Communication Services) The work carried out on this project has “The impact of e-administration on The European MaCS project, in which been awarded two prizes, the AUTELSI prize sustainable development” 2005 for the Project or Initiative for the Telefónica I+D is participating together “Telecommunication for emergencies” with the University of Valladolid and other care and protection of the environment organisations (telecommunications and 2nd prize from the AHCIET Journal “An information society for all” 2005, specifically for the article “The operators, manufacturers, etc.) aims to put “Tele-education for development” a new broadband telephone service into contribution of telecommunications to “The reduction in paper consumption in practice for the residential market, sustainable development: tele-working”, the Information Society” integrating multimedia communication originally published on the Telefónica services such as video telephony, website and then in 2005 in the AHCIET “E-commerce applied to tourism" multimedia messaging, presence and journal. “Getting to know and watching over the “reachability” services, etc. earth better”

Within the framework of this project, “Do telecommunications contribute to Telefónica I+D is developing a software business productivity?" telephone (softphone) known as Tifon, which allows the user to make multimedia calls (including video and messaging). This telephone makes videoconferences between individuals connected to different new generation platforms possible, without the need for additional equipment.

The possibilities for dematerialisation offered by this development are clear, as it enables improved communication between individuals without the need to use videoconference equipment or additional telephone terminals. The development of this type of software telephone is therefore an important contribution to the reduced consumption of resources in the "digital household".

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CASE STUDY The environmental influence In 2005, 364 projects were analysed, in of new developments comparison with 318 projects in 2004 and 353 in 2003. The most frequent environmental benefits were: In January 2002, Telefónica I+D put a process into place that aimed to systematically •The possibility of future updating or evaluate the environmental influence of its repair of components, which has a new developments. To do this, a periodic positive impact on the reuse of evaluation is carried out of the equipment and therefore on the environmental impact of the Company's reduction of mainly electronic waste. The projects, based on a questionnaire sent to updating of components also enables supervisors, which also approaches the the best use to be made of technological possible social benefits. advances that on occasion improve the energy efficiency of these elements. In 2004, the methodology was revised in The reduced need for equipment, which order to be able to evaluate the • is strongly linked to the point above implications of projects in the most concerning the reduction of waste. objective way possible. To so this, an environmental evaluation was made of an •The improved remote control of Intranet application together with the installations, related to the reduction in collection of bibliographical information on transport needs and therefore with the the environmental evaluation of advantages associated with lower fuel information and communication consumption and as a result lower technologies. emissions into the atmosphere.

Environmental evaluation of projects 2005 Environmental advantages % of projects Update/repair of components 50 Reduces equipment needs 32 Better remote control installations 24 Reduces transport needs 23 Reduces other raw materials 18 Reduces energy consumption (inst/equip) 17 Reduces energy consumption 16 Better access for disabled people 14 Promotional advantage 14 Better access to education 9 Better healthcare 7 Better energy efficiency 7 Other improvements 3

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Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

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Telefónica, S.A. | Corporate Responsibility Report 2005 291 09 Suppliers

Suppliers: equality of opportunity and mutual benefit

Telefónica, S.A. | Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, driving progress for all 6

00 Telefónica in 2005 8

01 Corporate Governance 20

02 Identity 32

03 Driving progress 66

04 Customers 104

05 Shareholders 168

06 Employees 178

07 Society 226

08 The Enviroment 252

09 Suppliers 292 Purchasing volume 294 Telefónica purchasing model 296 Supplier satisfaction 298 Encouraging ethical standars 300

10 Media 304

11 ANNEX I 310

Telefónica, S.A. | Corporate Responsibility Report 2005 09 Suppliers

Distribution of purchasing volume by countries Data in percentage of total purchases

52.3 Purchasing 45.8 volume 32.1

11.8 9.1 6.7 6.0 5.6 4,8 4.1 - 4.6 --4.6 4.1 4.4 4.0 Argentina Brazil Chile Colombia Spain Mexico Peru Venezuela Other countries Purchasing volume1

The purchasing volume awarded by the Telefónica classifies its purchases into five Telefónica Group in 2005 rose to over 13 major categories (network infrastructures, billion euros (12 billion in 2004). Its services and works, market products, distribution by country saw Spain remaining information systems and advertising the country with the greatest volume of and marketing). Most of these are destined purchases with Brazil in second position. for the category of market products (including mobile terminals) which, Said purchasing volume was awarded to together with the category of services over 18,834 suppliers throughout the world and works, make up more than 60% (15,539 in 2004). The ten main suppliers for of purchases. The remainder is distributed the Telefónica Group worldwide were between network infrastructures, (in alphabetical order) Alcatel, Brightstar, information systems and, to a lesser Carat, Ericsson, IBM, Lucent, Motorola, extent, advertising and marketing. Nokia, Siemens and Vitelcom. Telefónica is a company committed to the economic and social progress of the companies in which it is present. This commitment takes the form of Distribution of purchasing a high percentage of awards to suppliers volume by product lines in the country itself, on average 90% Data in percentages in 2005 (92% in 2004).

34 30 30 28

21 17 13 13

6 7

Network Services Market Informat. Publicity infrast. and products systems and works marketing

1 Data does not include Vivo or Telefónica companies in the Czech Republic.

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Distribution of awarded suppliers by country Data in units

3,930 1,763 4,114 4,243 3,420 1,698 1,965 2,948 2,163 2,369 1,429 1,523 1,276 594 1,102 Argentina Brazil Chile Colombia Spain Mexico Peru Venezuela Other countries

Distribution of local purchasing by country Data in percentages

94 98 99 96 93 94 92 83 86 83 86 79 76 74 68 53 52

Argentina Brazil Chile Colombia Spain Mexico Peru Venezuela Other Total countries

Local awards by country Data in percentages

99 96 99 91 90 95 95 93 94 90 91 89 92 85 92 90 82

Argentina Brazil Chile Colombia Spain Mexico Peru Venezuela Other Total countries

Telefónica, S.A. | Corporate Responsibility Report 2005 295 09 Suppliers

Opinion of the supplier on the Telefonica purchasing model Data in percentages

Is good Is good for for both Telefónica 47 52 Telefónica Purchasing model Is good for me 1

Advanced purchasing Model

Suppliers registered in the Telefónica Conscious of the importance of purchasing •All the areas affected by the purchase Catalogue suppliers and relations with suppliers in business participate in the Purchasing Boards, and Data in units results, Telefónica handles purchasing in decisions are made unanimously. all its companies through a common Telefónica has a Style Manual that management model: the Advanced • describes the general principles and Purchasing System (SAC). The goal of this rules of conduct to be fulfilled by all 42,142 model is to optimise purchases in its triple those who participate in the purchase dimension of: price, quality and service, process. Among such principles, the most 34,688 endeavouring to reduce costs, improve 33,153 noteworthy is the equal opportunity competitiveness and create value. afforded to all bidding suppliers. In December 2005, the purchases of 141 •Furthermore, the e-business applications Group companies, distributed throughout used and developed by the Telefónica the 19 main countries where Telefónica is Group also allow the automation and present, were all managed through this optimisation of the processes, as well as model. The purchase process, according to greater transparency in the the model, centres on Purchasing Boards, management of suppliers' bids. forums where the various areas involved 2003 2004 2005 analyse the purchase, establish their target In Brazil, specifically, in compliance with prices for the same and finally decide resolution 155 of ANATEL, TeleSP is required unanimously on the award. There are to publicly advertise all its purchase currently nine Purchasing Boards located in processes for communication services and Madrid, São Paulo, Río de Janeiro, Lima, the acquisition of equipment valued over 1 Buenos Aires, Santiago de Chile, México D.F., million reales. For this reason, all public Bogotá and Caracas, enabling a global or tenders are posted on the website to local management of purchases depending guarantee and encourage equal on the most suitable model. opportunity.

The Telefónica Purchasing Model has a series of features that facilitate objectivity and transparency: •The opportunity for global registration in the Telefónica Catalogue of Suppliers is open to all those firms interested in working with Telefónica. This catalogue is valid for all the Group companies and registration is done through the Supplier website. At the end of 2005, there were 42,142 suppliers registered as possible bidders in the Telefónica Catalogue of Suppliers.

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Distribution of Purchasing Volume by Product Lines e-Sourcing Auctions Purchasing volume Nº Purchasing Purchasing volume Nº Purchasing (million euros) processes (million euros) processes

Argentina 755 2,303 49 126 Brazil 1,527 2,661 324 229 Chile 544 1,450 60 56 Spain 4,272 10,174 193 372 Mexico 506 870 8 27 Peru 492 3,154 52 138 Total 8.099 20.612 685 948

Electronic commerce CASE STUDY Supplier website Telefónica uses the latest cutting-edge Electronic management of bids for certain The Supplier Website, accessed at: technology in its relationships with its products and services is currently a reality www.telefonica.es/proveedores, is the main suppliers to automate and optimise the in Spain, Brazil, Argentina, Peru, Chile and channel of information between Telefónica entire purchase process and to establish Mexico. The purchasing volume negotiated and its suppliers. It furnishes potential new and better lines of communication in 2005 through the electronic market suppliers access to general information on with its suppliers. amounted to 8,264 millions of euro (399 in how to become a Telefónica Group supplier, 2004), corresponding to 20,612 purchasing on Telefónica's purchase process and the In this respect, through Adquira España, processes (12,675 in 2004). main projects Telefónica is undertaking Telefónica has already implemented a in relation to e-business. global ebusiness platform for the The format of purchase negotiation management of the purchase and supply through electronic auctions used since Furthermore, registration in the Catalogue process. Adquira España is a leading 2004 offers greater transparency and of Suppliers may also be handled through company in negotiation and supply of objectivity in the purchase process and full the Supplier Website, which also provides solutions and services, in which four large equal opportunity to all bidding suppliers, access to the Adquira e-business platform Spanish corporations hold stakes: BBVA, as well as making the process more agile (primary operational channel for relations Iberia, Repsol-YPF and Telefónica. This e- and simplifying purchase management. with suppliers). The website also includes business platform enables: In 2005, 685 million euros was awarded access to other, specific websites for through this system, through 948 The electronic management of bids and the Telefónica Group companies, such as • purchasing processes. negotiation of same, as well as auctions e-Agora, from Telefónica de España. (e-sourcing). It is worth emphasising the significant • The electronic preparation, approval and improvement in results obtained for digital signature of commitments electronically negotiated purchases (contracts and award letters). compared with conventional means. •The electronic management of goods and services orders by the relevant areas Also, 2005 saw a continuance of the through catalogues previously implementation of e-procurement in negotiated by Purchasing Departments companies of the Telefónica in Spain, Brazil (e-procurement), dispatch of delivery and Peru. An electronic invoicing solution notes by the supplier and acceptance of was also implemented in Spanish the goods or services at their destination. companies. Finally, during 2005 an electronic contracts tool was setup in •The supplier invoicing process from the companies in Spain, Peru, Mexico, orders placed and accepted electronically. Colombia, Venezuela and Ecuador, involving 756 million euros

Telefónica, S.A. | Corporate Responsibility Report 2005 297 09 Suppliers

Supplier satisfaction

Satisfaction surveys

Satisfaction surveys Electronic Commerce: Telefónica wishes to establish long term More than eight out of ten suppliers think relationships with its suppliers, in which that Telefónica e-commerce tools have both Telefónica and its suppliers are added dynamism to the purchasing process satisfied. To assess the satisfaction levels of (7.8) and greater transparency (6.8) and that suppliers with Telefónica, in 2005 the first they encourage competition and equality of online survey was carried out, confidential opportunity between suppliers (7.4). and sent to all providers registered providers in the Telefónica catalogue. In relation to auctions, 51% of suppliers feel that products and services sold could Confidentiality of responses was be contracted through this negotiation guaranteed by using Atento intermediary model (5.6) suppliers and the absence of an individualised record of each response. Most providers liked the idea of expanding e-commerce tools for electronic Over 2,700 response were received, forming management of invoices (93% of suppliers a significant results base for Spain, like its implementation), for electronic Argentina, Brazil, Mexico, and Peru management of orders (93%) and for electronic signing of contracts (88%). Purchasing Model The main strengths of the Telefónica purchasing model according to providers can be found in the establishment of an ethical and unambiguous purchasing process where the divisions involved have clearly defined roles and work in cooperation (7.4 points on a scale of 10 points).

The time spent on each purchasing model was seen by providers as an area which would be improved, although it was generally deemed adequate (6.6 points)

Telefónica, S.A. | Corporate Responsibility Report 2005 298 09 suppliers

Level of satisfaction of suppliers for the Telefónica Group Data in units

7.9 7.3 6.9 6.9 6.5 6,7 6.4 6.1

Argentina Brazil Chile Colombia Spain Mexico Peru Total

The Purchaser Compliance with payment terms for Purchasers had a high opinion of the third party bills suppliers' ethics and honesty (8.6) and its 2004 defence of the interests of Telefónica (8.8). 2005 Training as an interlocutor in the technical 96.9 aspects of purchasing also received positive Percentage of total bills assessments (7.6) 98.1

88.2 An area which could be improved (a mark Percentage of 6.6) is the purchaser's concern as to the of amount quality of the product and not just the 96.5 price, as well as a greater understanding of Data corresponding to over 700,000 bills of the situation of the suppliers in the Telefónica de España and Telefónica Móviles España negotiation (6.8 out of 10). for an amount over 9,389 million euros

Administrative Processes Fulfilment of Scheduled payment conditions to suppliers received positive assessments (7.8 out of 10)

Suppliers consider that there is a suitable communication process about purchasing outcome (7.8), although they request more information regarding the reasons in case of not being selected (5.6). Order placing in time and form received also positive assesment (6.6)

Telefónica, S.A. | Corporate Responsibility Report 2005 299 09 Suppliers

Encouraging ethical standards

The Telefónica Group endeavours to Said working group has been collaborating OPINION contribute to the encouragement of since 2004 with a range of American responsible business practises throughout companies, signatories to the EICC, What do suppliers its entire supply chain by its collaboration “Electronic Industry Code of Conduct”, with think about Corporate with other companies and in initiatives the aim of cooperating with a wider range Responsibility? that go far beyond the legal requirements. of companies and thus ensuring more effective action. (from 0 to 5) In the case of suppliers from the telecom • The main achievements of this working sector (typically “market product”, group in 2005 were: It is important for companies to exercise “network infrastructure” and corporate responsibility 4,6 “information systems” product lines”), of • Drawing up a methodology for the note is the company's work with the identification of risks associated with the Generally, I would be very pleased to see GeSI supply chain working group. RSC in the supply chain, based on Telefónica establish a purchasing code 4,5 products and services, size and location In the case of local and smaller suppliers • of supplier facilities. (typically suppliers of “services and I consider the activity the suppliers carry out works”), Telefónica directly draws up Development of a self assessment should be considered 4,4 • specific conditions with its suppliers to questionnaire for suppliers, so that they ensure responsible behaviour by same. can indicate their level of compliance I consider that Telefónica requires compliance with employment, ethical, health and of minimum employment standards at an As part of the supplier satisfaction study, safety standards. Said questionnaire was international level 4,2 they were asked about the appropriateness published in English, Spanish and of introducing corporate responsibility Mandarin in 2005. codes and standards, a proposal which Design of an etool so that different received a high level of acceptance among • industry suppliers and purchasers can fill Telefónica suppliers. in questionnaires, with clear savings of time and effort for the whole sector. Said GeSI Supply Chain tool should be implemented in 2006. Working Group Establishment of tools to audit the Many companies in the ICT sector • performance of companies, with respect (Information and Communications to the declarations made in their self Technology) share the same suppliers assessment questionnaires. throughout the world. Aware of the fact that joint actions carried out by several companies are more effective than the same Requirements of suppliers carried out individually, in 2003 GeSI in employment and human (www.gesi.org) established a working group rights matters on the supply chain. This was unique in that In the General Conditions for the Supply of both Telefónica and O2 participated in same. Goods to Telefónica SA, Telefónica requires compliance of legislation in force in relation to employment conditions, health and safety at the workplace and the environmental impact of its suppliers.

Telefónica, S.A. | Corporate Responsibility Report 2005 300 09 Suppliers

Criteria are of general application, Another of the corrective measures taken notwithstanding the possibility of during 2005 was the obligation of training in additional criteria in some countries Human Rights for employees of the security or companies. Likewise, in the case companies that work for Telefónica. of specific products and services, contracts may include additional Requirements of suppliers in aspects more directly related to the environmental matters product or service being purchased. The most notable initiatives in environmental matters are described in Additionally, as a measurement of chapter 08 of this report. They include improvement deriving from the training activities for employees of employment audit in the Telefónica Group collaborating companies, the positive and the risks detected in same, in 2005 weighting given to environmental Joint Corporate Action Criteria for the management certificates in the contract Control of Employment risks in the award phase or activities of evaluation and Contracting of Works and Services were control of suppliers having an drawn up and approved. environmental impact.

This is an internal regulation which includes: Requirements of suppliers in matters of equality of • A list of pre-contract requirements (standardisation of suppliers and opportunities contracts) As a notable initiative in terms of integration, Telefónica requires compliance • A list of the information to be provided with the Law on Integration of Disabled at the beginning of the contract persons of all suppliers who render services • Obligations in matters of prevention of in District C. For those companies which do employment risk for the main company not comply with requirements, the ATAM and the contracting company. Employment Integration Service is offered.

• Obligations in matters of information to In 2006, Telefónica aims to establish a policy be given to legal representatives of of purchasing from “social or minority” workers. suppliers which may involve groups which • Measures to be adopted during the have traditionally had difficulty accessing contractual period the employment market. • Measures to be adopted after the termination of the contract • Supervision and control mechanisms

Telefónica, S.A. | Corporate Responsibility Report 2005 301 09 Suppliers Credits

Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

Telefónica, S.A. | Corporate Responsibility Report 2005 302 09 Suppliers

Telefónica, S.A. | Corporate Responsibility Report 2005 303 10 Media

Media: Information and transparency

Telefónica, S.A. | Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, driving progress for all 6

00 Telefónica in 2005 8

01 Corporate Governance 20

02 Identity 32

03 Driving progres 66

04 Customers 104

05 Shareholders 168

06 Employees 178

07 Society 226

08 The Enviroment 252

09 Suppliers 292

10 Media 304 Information and Transparency 306 Investment in publicity 307

11 ANNEX I 310

292

Telefónica, S.A. | Corporate Responsibility Report 2005 10 Media

Press Coverage of the Telefónica Group in Spain Letters tol Year News Reports Opinion Interviews the Editor 2005 92.7 3.1 3.1 0.2 0.9 2004 87.4 7 1.8 0.5 1.7 2003 79 15 2 2 1

Media Distribution of Telefónica Group Press releases in Spain by Topics 2004 2005 Telefónica S.A. 55 71 Telefónica de España 206 53 Telefónica Móviles 1,313 1,747 Telefónica Latinoamérica 765 1,045 Fundación Telefónica 65 70 TPI 25 21 Cesky Telecom* - 130 Eurotel* - 53

* Both Cesky Telecom and Eurotel became part of the Telefónica Group in June 2005.

CASE STUDY Information and Transparency Online Press Room

The Telefónica Group encourages a policy Noteworthy among the more than 3,000 In order to foster transparency and make of communication based on truthfulness press releases issued by the Telefónica information more accessible, the Telefónica and transparency, with constant interaction Group to the media in 2005 is the Group offers journalists and the media an with the media. Its relationship with the dissemination of information about the Online Press Room media is an important tool for the products and services offered by the (www.telefonica.es/saladeprensa) with the Telefónica Group as a means of open Company (42.2%), followed by financial following services available: communication with all its audiences: information (20.1%) and strategic and •Publication of all the press releases customers, shareholders, professional team related to the Company’s investment since 1997. and society in general. Telefónica, aware of capacity (10.8%). Agreements with third •Press release search, classified by its corporate responsibility, thus maintains parties, whether suppliers or technology country, business line and dates, a communications policy based on partners, among others, are also the including a direct search service. closeness to the media, and on rigour and subject of press releases. transparency in information. •Download of more than 300 Regarding the journalistic treatment of the photographs, management organigram, The Corporate Communications area has information from the Telefónica Group in graphs and results. the task of coordination in order to ensure Spain by the media, a 92.7% of the press •Real-time consultation of Telefónica the coherence of the strategic, financial coverage of the information issued by the share prices. and operations messages. It works closely Telefónica Group in Spain is in the form of with the Communications areas of all the news. Other forms such as reports (3.1%) •Link to websites of the Telefónica Group subsidiaries, and all together maintain a and opinion (3.1%) occur at similar levels, companies. policy of continuous, planned and agreed but far from that of news. •Contact list for journalists. communication, that means that information flows regularly and constantly This channel received 176,052 visits from between the Company and the media. As a users in 2005 (82,073 in 2004) which fruit of this close communication strategy, shows the increasing interest. the Telefónica Group in Spain has held more than 300 meetings with the media, including news conferences, breakfast briefings, and social events -organised through Fundación Telefónica.

Telefónica, S.A. | Corporate Responsibility Report 2005 306 10 Media

Investment in CASE STUDY publicity The Telefónica website as a means

Telefónica is a company that has intense of communication with society publicity activity, making it one of the main The telefonica.country model of portal has become the single point of access to the investors in the media. All the investment Company in each country, offering the visitor a broad view of the Company, not only activity is channelled through the commercially, but in its economic, social and technological impact. corporate media area, following criteria of maximum publicity effectiveness. To develop this model, more than 200 projects have been carried out in the past three years in 13 countries under the "Alquimia" project. This portal model is currently set up in For this a unified policy of negotiation and Germany, Argentina, Brazil, Chile, Colombia, El Salvador, Spain, United States, Guatemala, hiring of publicity media has been Morocco, Mexico, Peru and Puerto Rico. established in the Group, with the technical area of the Departments of The end result is that it makes a range of products and services available to customers Marketing and of Purchases in each suited to their needs, and offers specific solutions aimed at private individuals, country working together on this. professionals and companies. At the same time the portal helps interaction with other groups such as shareholders, investors, suppliers, partners, employees and By media type, television is the means communications media. The model has now become a benchmark for the sector. most used with 47% of the Group’s investment in publicity, followed by the •The Telefónica S.A. website won the prize of websites for Investor Relations and Online press (19%), external support (18%) and Annual Reports (known as the MZ Awards) in February 2005: First prize in Spain for the radio (10%). By country, given the highly Shareholders and Investors page of Telefónica S.A. and that for Best Annual Report commercial character of publicity, Spain Online in Spain for the Telefónica online report. concentrates 56.5% of the publicity In October, 2005, www.telefonica.es was the website that won the highest points for its investment, followed by Brazil with 10.2%, • handling of its social impact, in the report "Social action in the websites of large Mexico with 8.9%, Argentina with 5.6% and companies and savings banks", written by Empresa y Sociedad based on a comparative Chile and Venezuela with 4.6% each. The analysis of 65 large companies and 10 savings banks. chapter on customers contains more information about the intense publicity The telefonica.country websites have become the means by which citizens consult activity of Telefónica. information of interest about Telefónica, as seen in the fact that the number of visits (single sessions) received in 2005 was over sixty million in Latin America and three million per month in Spain.

Telefónica, S.A. | Corporate Responsibility Report 2005 307 10 Media Credits

Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

Telefónica, S.A. | Corporate Responsibility Report 2005 308 10 Medios

Telefónica, S.A. | Corporate Responsibility Report 2005 309 Annex 1 About the Report

Telefónica is firmly committed to transparency, in accordance with the demands of its stakeholders and the main international guidelines

Telefónica, S.A. | Corporate Responsibility Report 2005 Letter from the chairman 4

Contents Telefónica, driving progress for all 6

00 Telefónica in 2005 8

01 Corporate Governance 20

02 Identity 32

03 Driving progress 66

04 Customers 104

05 Shareholders 168

06 Employees 178

07 Society 226

08 The Enviroment 252

09 Suppliers 292

10 Media

11 ANNEX I 310 About the Report Dialogue with Stakeholders 312 Reporting Principles 316 Boundary of Consolidation of Included Information 320 Information Consolidation Process 322 United Nations Global Compact 324 Independent Assurance

Telefónica, S.A. | Corporate Responsibility Report 2005 11 Acerca del informe

Dialogue with Stakeholders Annex 1: Reporting Principles About the Report Boundary of Consolidation of Included Information Information Consolidation Process

Participating organisations in the panels Dialogue with on Telefónica's CR Report 1. UN (United Nations) Stakeholders Employees 2. CCOO, (Comisiones Obreras Trade Union) Participants in the dialogue 3. Asociación Mayores de Telefónica In March 2006, Telefónica called meetings (Association for Telefónica's Elderly) of two panels of corporate responsibility 4. Federación Española de Hostelería experts representing Telefónica's different (Spanish Hotels and Catering Federation) 5. Fundación + Familia, stakeholder groups in order to find out 6. Conexión Social (Auditor) their opinion with regard to the “Corporate Consumers Responsibility Annual Report 2004”, and 7. CECU, (Spanish Confederation of Consumers and Users) gather any suggestions and comments. 8. Federación de Consumidores y Usuarios Independientes (Federation of Independent Consumers and Users) Over 40 experts in corporate responsibility 9. Federación Española de Hostelería took part in this dialogue process, from (Spanish Hotels and Catering Federation) almost thirty relevant organisations and People with Disabilities institutions within Telefónica de España's 10. CERMI, (Spanish Committee of Disability Representatives) stakeholder groups. This dialogue was 11. Fundación ONCE organised by CR experts from the Noós NGOs for Development Institute, an organisation that had already 12. Fundación CODESPA worked with Telefónica on the adaptation 13. Red Cross into Spanish of the “Good Practice Guide 14. Fundación Carolina for Relations with Stakeholders”. NGOs for the Environment 15. Fundación CONAMA, The participants in the panels expressed (National Environment Commission) high regard for the transparency of the 16. ECODES, (Ecology and Development Foundation) company, who subjects itself openly to the 17. Fundación Entorno criticism and opinion of its stakeholders. Finance Sector 18. FTSE Telefónica thanked all the panel participants 19. Triodos Bank Corporate Responsibility Analysts for their collaboration, especially for their 20. Observatory of Social Responsibility careful analysis of the reports and the spirit 21. AECA (Spanish Business Accounting of constructive criticism underlying all the and Management Association), comments made. Academia 22. Fundación Social Universidad Francisco de Vitoria, 23. ICADE 24. IESE 25. Instituto de Empresa 26. UNED 27. Universidad Complutense de Madrid Business Organisations 28. AETIC (Spanish Association of ICT Companies) 29. CEOE, (Spanish Confederation of Business Organisations)

Telefónica, S.A. | Corporate Responsibility Report 2005 312 11 About the Report

According to the stakeholders, the CR Reports should achieve a balance betwee

Thoroughness and Conciseness Clarity of the information Degree of specialisation of the report Access to the general public Positive aspects Areas for improvement Local information Global information (main country of operations) Results Goals

Main conclusions regarding Telefónica's CR Reports Telefónica seeks to adapt the content of its Corporate Structure and Format of the Report Opinion Comment Responsibility Report to the Quality, completeness, structure and degree of detail provided in report. The report expectations of its appears to offer a good general view of Telefónica and its stakeholders stakeholders. For this reason, it The stakeholders valued the case studies because of their anecdotal value and also because they specifically reflect more or less widely recognised complaints, as well as holds an open dialogue with the reality of the countries of Latin America them and has tried to address The report is excessively long and not easy to read for the non-specialised public most of the demands The report lacks transversality in those horizontal issues that go beyond one single stakeholder (the way in which Telefónica is positioning itself, both internally expressed by its stakeholders. and externally with regard to different Social Responsibility aspects, or which are its key values) Scarce use of new multimedia technologies that would allow a higher degree of flexibility and speed in reading and handling with the report The report does not have a numbered contents page General Contents of the Report Opinion Comment The report includes data and degree of performance of CR policy in all countries where it operates, in spite of which there is still room for improvement The “executive summary” of the infography “You Come First External verification of the report Comparatively, the Report is one of the best in its business sector Selection of stakeholders of the annual report. While some participants considered that the Report adequately reflected the reality of Telefónica, other participants requested that more stakeholders be included (e.g. governments, competitors...) or others be excluded (e.g. media). Inclusion in the report of aspects where improvements should be made, as well as addressing the “myths” that society has about Telefónica. This way the company would present itself as a more “human” company The report should include a table of achievements of Telefónica within the field of CR, as well as its future aims. These aims should also appear in the course of the text of the report and should better reflect what Telefónica intends to achieve with the Report Criticism was voiced with regard to a certain self-congratulating tone of the Report and a unilateral vision of the company. Lack of transparency with regard to the points of view of the stakeholders and little attention paid to the more conflictive issues Include more historical results data, in order to gain better insight into the company's performance over time, as well as data regarding the degree of fulfilment of the aims established the previous year Accompany the company information with information regarding the sector

Telefónica, S.A. | Corporate Responsibility Report 2005 313 11 About the Report

In the meetings with the stakeholders, the content of each of the chapters was analysed. What follows is a summary of the main criticisms and requests expressed, without including positive aspects for conciseness purposes. Telefónica's commitment was to try to apply the recommendations in its 2005 Report, and the fulfilment of this commitment is presented in these pages. Demands that have not been include for reasons of time constraints in the preparation of the report have been set as goals for 2006.

Criticism to the content of the different chapters

General Aspects of Sustainable Development Opinion Comment page Information regarding the impact on results of Telefónica's sustainable development strategy 15, 34-35 Higher degree of classification into sectors of the different collectives in society (senior citizens, people with disabilities, etc.) 234-237 References to the role of the company as a “global citizen” with regard to the great world problems / challenges (e.g. Millenium Development Goals, Climate change...) 40, 100-101 Reference to ethics and practices against corruption and bribes 54-55

Corporate Government Opinion Comment page Response to the main information demands from readers (e.g. Board Member's remuneration) 26 More emphasis on the way in which information transparency is achieved from the Company to the Board, and from the Board to the shareholders 28

Identity Opinion Comment page Clarify whether the values that Telefónica claims to abide by are the same ones as those perceived by society 38

Innovation Opinion Comment page Information regarding Telefónica's alliances for joint innovation 88-89, 92-95, 98-99 Information regarding R&D activities outside Spain 84

Clients Opinion Comment page Telefónica's customers do not identify with the content of the Report 106, 112 More specific information regarding Telefónica's policies for customer relations 106, 110-111 More specific information regarding service quality and fulfilment, customer rights and customer service (claims) 118-119, 126-129 More information on customer satisfaction 108-109 Information regarding the degree of compliance with the goals established by the regulating authorities 154-165 Address excessive use of automatic response systems, rather than personal customer service 127 Reflect the efforts in terms of dialogue that Telefónica is developing with users and consumers associations 110-111 Information regarding Telefónica's efforts to improve quality and solve conflicts with other operators 132-135 Information about competitive and regulatory situation of Telefónica in the markets where it operates 150-165 Information on evolution of rates 74-75 Information on data protection 142-143

Telefónica, S.A. | Corporate Responsibility Report 2005 314 11 About the Report

Employees Opinion Comment page A debate arose as to whether a company should include voluntary work activitie of its employees as part of its CR Report 220 Include case studies of those groups of employees with highest turnover rates (e.g. call centres) or who work in conflictive countries (e.g. Morocco, Colombia...) 182-183 Specific information regarding complaints, claims, fines, strikes... 219 Information regarding the reconciliation between private and professional life, as well as models for compensating and avoiding extra hours 206 Breakdown of results of work climate by level, company... 184-185 Include more information on diversity (gender, disabilities, age...) 209-210 Information regarding generation of indirect employment by Telefónica 87, 180 Goals for improvement following the employment audit carried out in previous years 201 Global health and safety statistics 211-212 Information on degree of implementation of telecommuting 207 Information on the way Telefónica manages its staff reduction plan and on the relationship it holds with former employees 39, 182 Subcontracting of activities to third parties 180 Society Opinion Comment page Telefónica's relationship with NGOs (Despite this information being available in the Fundación Telefónica Report) It would be desirable for there to be a higher degree of interrelation between both reports 244 Information about Telefónica's contribution to the promotion of access to telecommunications among all social classes, especially in Latin America (e.g. phone line fee before, and phone line fee now) 234-235 Information about the contribution of Telefónica (and its services) to the social integration of people with disabilities 237, 246-249 More information about how Telefónica works to bridge the digital divide affecting the elderly 236-237 Information about how Telefónica helps to solve the immigration phenomenon from Latin America to Spain 235 Environment Opinion Comment page Establish a priority of issues dealt with in the chapter on the basis of their actual impact on the environment 260 More emphasis on the development of specific policies and degree of compliance with environmental goals of the Company 257 More emphasis on the design of products and services with a positive effect on the environment, as well as Telefónica's activities with its customers to this regard 286 nformation on the degree of progress in environmental management in the company 257 Suppliers Opinion Comment page More emphasis on the implementation of codes of ethics and requirements regarding suppliers, as well as mechanisms to prevent corruption and bribery 300-301 Include more information about control of compliance with the terms and conditions of supply established for its suppliers 296 Include further information about how the information regarding compliance with human rights and environment criteria is used in the preparation of the report 300-301 Information regarding the degree of fulfilment by Telefónica of its payment commitments 299 Media Opinion Comment page Include information regarding Telefónica's activities as an advertising investor 307

Telefónica, S.A. | Corporate Responsibility Report 2005 315 11 About the Report

In the drafting of its 2005 Corporate Responsibility Report, Telefónica has applied the principles proposed by the GRI for decisions regarding the contents and structure of the report.

Reporting Principles Principles for Defining Report Content Inclusivity The reporting organisation should identify its stakeholders and explain how it has responded to their issues in the report.

Tests recommended by GRI G3 Telefónica's Response Fulfilment1 The organisation can describe the stakeholders to whom All the report structure is based on the main it considers itself to be accountable, and identifies the stakeholders of Telefónica stake-holders that it expects to use the report The report content draws upon the outcomes The report includes the results from different studies, of stakeholder engagement processes used surveys and focus groups carried out by Telefónica by the organisation to manage its activities regarding their stakeholders The report content draws upon the outcomes Dialogue with stakeholders for the preparation of the report of any stakeholder engagement process undertaken specifically for the report The stakeholder engagement processes that The dialogue processes with regard to the Report inform decisions about the report are consistent have been carried out with Spanish stakeholders with the scope and boundary of the report (there are specific reports in each country)

Relevance and Materiality The information in a report should cover issues and indicators that would substantively influence the decisions of the stakeholders using the report.

Tests recommended by GRI G3 Telefónica's Response Fulfilment1 Major sustainability interests/ Dialogue with stakeholders for the preparation of the report issues raised by stakeholders Principales problemas del sector, tal como informan las Use of GRI sector supplement for telecommunications by peers and competitors Reasonably estimable sustainability risks identified Communication for progress of the United Nations by people with recognised expertise or by expert Global Compact Information regarding compliance bodies with recognized credentials in the field with legal aspects in different countries Reasonably estimable sustainability risks identified Analysis of corporate responsibility opportunities and risks, by people with recognised expertise or by expert as a first phase of the corporate responsibility project bodies with recognized credentials in the field Internal Factors Chapter 02 describes Telefónica's identity and Corporate -Key organisational values, policies, strategies, operational Responsibility strategy. management systems, goals and targets Each chapter associates Telefónica's values with the stakeholders -Major risks -Critical factors for success -The organisation's core competencies and the manner in which they contribute to sustainable development The report prioritises material issues and indicators Executive Summary Report Data

The assesment include in this section, column "Fulfilment" , is exclusively from Telefónica and it hasn´t being include in the independent verification section of this Report.

Very High High Medium Low Not applied

Telefónica, S.A. | Corporate Responsibility Report 2005 316 11 About the Report

Sustainability Context The reporting organisation should present its performance in the wider context of sustainability, where such context has significant interpretative value.

Tests recommended by GRI G3 Telefónica's Response Fulfilment1 The organisation presents its understanding of Presentation of the role of Telefónica as a driving force behind sustainable development and draws on the best economic, technological and social progress available information and measures of sustainable Articles of telecommunications and sustainable development development for the issues covered in the report The organisation presents its performance with The key issues in sustainable development are included reference to broader sustainable development (GRI, sector supplement, dialogue with stakeholders...) conditions and goals as reflected in recognised but no objective and quantitative data local, regional and/or global publications. The organisation presents its performance in Data regarding the influence of Telefónica on the local a manner that attempts to communicate the economies, as well as the influence of the company on the magnitude of its impact and contribution in local telecommunication markets appropriate geographical contexts The report describes how major sustainability issues Corporate Responsibility at Telefónica relate to long-term organisational strategy, risks, an Suppliers opportunities, including supply-chain issues

Completeness An organisation should make public its performance with sufficient detail as to allow stakeholders to evaluate the information. Completeness covers mainly its scope, boundaries and time period.

Tests recommended by GRI G3 Telefónica's Response Fulfilment1 The report covers issues and indicators prioritised on The report covers the entire value chain (chapter by chapter) the basis of materiality, sustainability context, and but does not establish a priority of some aspects over others stakeholder engagement, and was developed taking into account taking into account the whole value chain. The report includes all entities controlled or significantly Boundary of information included influenced by the organisation unless otherwise declared The information in the report includes all significant The report includes historical quantitative impact data, actions or events in the period reported on, and but does not include projections of said data. reasonable estimates of significant future impacts of past events when those impacts are reasonably foreseeable and may become unavoidable or irreversible The report does not omit relevant information that As with Dialogue with Stakeholders, there were some would affect stakeholders' decisions stakeholders who demanded further information with regard to the 2004 report. The same could occur in 2005.

The assesment include in this section, column "Fulfilment" , is exclusively from Telefónica and it hasn´t being include in the independent verification section of this Report.

Very High High Medium Low Not applied

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Quality of Reported Information Balance The report should provide a balanced and reasonable presentation of the reporting organisation's performance.

Tests recommended by GRI G3 Telefónica's Response Fulfilment1 The report discloses both favourable The 2004 report was criticised in this sense. We believe and unfavourable results that the 2005 report offers a much more balanced view. The information in the report is presented in a The report includes many data charts and tables format that allows the user to see positive and negative trends in performance. The emphasis on different contents of the The report includes more material issues, report is proportionate to the relative materiality in spite of there being no direct proportionality of the issues or information. between emphasis and materiality

Comparability The information reported should remain consistent and be compiled and presented in a manner that enables stakeholders using the report to analyse the changes in the organisation's performance over time, as well as relative to other organisations.

Tests recommended by GRI G3 Telefónica's Response Fulfilment1 The report and the information contained within it The structure followed in the 2005 report is the same can be compared on year-to-year basis structure of reports since 2002 The organisation's performance can be compared with The benchmarks are not included in the report. The report appropriate benchmarks (comparative analysis). contains the indicators of the main international standards. Toda variación significativa en los contenidos básicos de la All the data included in the report has a clear respect to boundary, cope, length of reporting period, reference to its reference boundary. or information covered year-to-year, can be identified and explained. Where they are available, the reporting organisation The report has used the technical protocols recommended applies generally accepted protocols for compiling for the GRI G3, although not in an exhaustive manner information, including the GRI Technical Protocols for indicators contained in the Guidelines. The report uses GRI Sector Supplements, A sector supplement of the telecommunications where available sector has been used

Accuracy The reported information should be accurate and sufficiently detailed for stakeholders using the report to make decisions with a high degree of confidence.

Tests recommended by GRI G3 Telefónica's Response Fulfilment1 The report indicates what data has been measured GRI Tables of the Corporate Responsibility Report The report indicates what data has been measured. Explanation of processes of consolidation of information. for calculations are adequately described, and can be replicated with similar results. The margin of error for quantitative data is not sufficient Decisions regarding the boundary and processes ofconsolidation to substantially influence conclusions on performance of information have been made to ensure this The report indicates what data has been Explanation of the processes of consolidation of information estimated and what assumptions and techniques have been used to produce the estimates. The qualitative statements in the report are The report has been verified by Ernst&Young, valid on the basis of other reported information with the scope detailed in their report. and other available evidence.

The assesment include in this section, column "Fulfilment" , is exclusively from Telefónica and it hasn´t being include in the independent verification section of this Report.

Very High High Medium Low Not applied

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Timeliness The information is presented in time, and on a regular schedule, for stakeholders using the report to be able to make informed decisions.

Tests recommended by GRI G3 Telefónica's Response Fulfilment1 Information in the report has been disclosed while The report is published in the semester following it is recent relative to the reporting period the end of the financial year The sustainability reporting schedule is aligned The Annual Report covers the same period with the financial reporting cycle The collection and availability of key performance information Data collection is carried out once the financial is aligned with the sustainability reporting schedule year subject of the report has concluded The information in the web-based reports clearly indicates All corporate responsibility reports the time period to which it relates, when it will be are available on the website updated and when the last updates were made

Clarity Information should be made available in a manner that is understandable by and accessible to stakeholders using the report.

Tests recommended by GRI G3 Telefónica's Response Fulfilment1 The report contains the necessary level of The report includes an executive report, and is presented information for the needs of report users, in extended format in the online and CD version but avoids excessive and unnecessary detail. Report users can find the specific information that The preparation of the report has taken into account they want without unreasonable effort through the recommendations for the presentation tables of contents, maps, links, or other aids., of the information expressed by their stakeholders The report includes a glossary or explanation for There is a glossary available on Telefónica's website technical terms, acronyms, jargon or other content that is likely to be unfamiliar to report users The data and information in the report is available to major The report is published on paper in an executive version, stakeholders including those with special accessibility in three languages. The electronic format is published needs (differing abilities, languages, technology...) in two languages in the extended version

Assurability Information and processes used in the preparation of a report should be recorded, compiled, analysed and disclosed in a way that can be subject to review and assurance.

Tests recommended by GRI G3 Telefónica's Response Fulfilment1 There is a statement from management The Report credits state that the Subdirectorate General taking responsibility for the content and of Reputation, Brand a CSR is the unit responsible process of preparing the report for the content and and preparation of the report The scope and extent of assurance, and the stakeholders Information about the boundary of the report, and expected to use the report are identified dialogue with stakeholders with regard to the report The original source of all the information in the report Traceability of all the information has been confirmed in can be identified by the organisation the preparation and verification process of the report The organisation can attest to the reliability of the In some cases, it is necessary to improve the original source, and, if not, this fact is disclosed definition of indicators to ensure their homogeneity Representation is available for the original data or The statements of reliability of the sources of information owners, attesting to its reliability information are implicit in the inclusion of or accuracy within acceptable margins of error all the information in the report There is external evidence available from reliable The reliability of the calculation methods is externally sources for supporting assumptions or approaches verified by the external auditor, in accordance to technically complex calculations with the scope detailed in their report

The assesment include in this section, column "Fulfilment" , is exclusively from Telefónica and it hasn´t being include in the independent verification section of this Report.

Very High High Medium Low Not applied

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Telefónica considers itself to be a global company, with presence in Spain, Europe and Latin America. The 2005 Corporate Responsibility Report includes the performance of the fixed and mobile telephony operators in Spain and Latin America under Telefónica's control.

Consolidation Boundary of the Information Included

Multinational Company Definition of consolidation Since the publication of its first corporate boundaries responsibility report in 2002, Telefónica has In order to define the scope of Telefónica's strived to present itself before its report, the following decisions were made. stakeholder groups as a multinational company. This is why, since this first report, Impact of companies on it has always included data of its their environment operations outside Spain. The analysis of the impact of the different business lines on their stakeholders This commitment to transparency was a concludes that the fixed telephony and determining factor in the application of the mobile telephony business units have the same corporate responsibility criteria in all highest impact on the Group's stakeholders. countries, thereby avoiding double standards. According to this criterion, the Telefónica de Contenidos Units (Endemol, Telefe, Telefónica's interest in accurately reflecting Telefónica Servicios de Música or Telefónica its impact on society has led to taking Servicios Audiovisuales), Atento, TPI, three actions in the last financial years: Telefónica I+D or t-gestiona are not •Participation in the GRI work group included in the scope of this report, unless devoted to the study of information explicitly mentioned. boundaries of companies (Boundaries Working Group). However, for each stakeholder group, there has been an analysis as to whether any •Preparation of local corporate units within the Telefónica Group could responsibility reports in Latin America have a significant impact on them, (Argentina, Brazil, Chile and Peru).These concluding that this is the case with the reports constitute a tool for closer following: communication with local communities and allow Telefónica to share the •Telefonica I+D in the innovation section. responsibility regarding information •Atento in the chapter on employees. provision and consolidation. •T-gestiona in the chapter on the •Use of corporate information environment. consolidation tools, available throughout the Telefónica Group, where and when •Telefonica SA as the corporate centre in the possible. This applies to financial, chapters on shareholders and the media. customer, employee, shareholder, supplier and innovation information. The rest of information regarding society, the environment or the media is compiled by means of specific tools.

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Control over activities Lastly, it is important to mention that in Telefónica's corporate responsibility report spite of the fact that in 2005 TPI was a includes the units where a high level of Telefónica Group company; the divestiture impact has been identified, and over which of this business unit has since been the Group has control, being companies announced. For this reason, it is believed where Telefónica holds a share of over 50%. that the degree of control over the unit in future will be lower than that at present. The only exception in this sense is the European companies. Cesky Telecom is the Unless explicitly mentioned in the Report, company that provides Telefónica does not include the above- telecommunications services in the Czech mentioned companies in its 2005 report. Republic and was acquired by Telefónica in Other companies Telefónica does not report 2005. After the acquisition of O2 at the on are Sogecable (23.83% share), Lycos Europa beginning of 2006, Cesky Telecom and (32.1% share) or Amper (6.10% share). Telefónica Deutschland will be managed by O2, and the performance of these Influence on activities companies will be included in the 2006 Telefónica can have influence on the report. O2 will publish its own report behaviour of its suppliers and clients with corresponding to FY 2005, as it has done in regard to certain sustainable development recent years, without including the aspects. That is why its 2005 Corporate activities of Cesky Telecom and Telefónica Responsibility Report reports in a Deutschland qualitative manner on: •The establishment of environmental, There are some telephony operators whose employment and human rights information is not included in the report requirements for Telefónica suppliers. due to the fact that Telefónica's shareholding percentage is under 50%: •Recommendations to clients as to how to use Telefónica's products and services •Vivo: mobile telephony company in Brazil, correctly. managed as a “joint venture” with Portugal Telecom, on a 50% share basis. •Adoption of corporate responsibility This company has been publishing its criteria in the investment of pension own Corporate Social Responsibility funds of Telefónica employees. Report since 2004. •Meditel: joint venture with Portugal Telecom, in which Telefónica holds a 32.18% share. •China Netcom, company where Telefónica holds a strategic 5% share. •Portugal Telecom, with which Telefónica holds an alliance that has led to it holding a stable share of 9.84 percent of its capital.

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With a view to encouraging Consolidation Process of the Information maximum transparency, Telefónica explains the way in which the information is The economic and financial information Telefónica Internacional and Telefónica consolidated in the different included in the report is taken from the same Móviles. chapters and aspects sources used for the preparation of the included in the report. Annual Report for shareholders and investors. The information regarding social and cultural In this information, the boundary corresponds action is taken from Fundación Telefónica, to all the companies of the Group, as is ATAM and the sponsorship unit of Telefónica specified in the financial information. SA. The only consolidated data are the financial data, which are aggregated by The information regarding innovation is simple sum. consolidated through the corporate department of Innovation of Telefónica SA, in The information on the environment is taken collaboration with Telefónica I+D. The from the department of environment or investment data for innovation are taken quality of each of the operators. This from the purchasing systems and are information is gathered by means of forms consolidated without applying any that are distributed electronically to the proportionality criterion. Given that they are different companies and is consolidated by financial data, the boundary corresponds means of simple sum. exactly to that of the financial information. The information regarding suppliers is taken The information regarding customers is directly from the contract awarding system taken from the quality control and through the purchasing department. The operational systems of Telefónica de España, consolidation of the information is carried Telefónica Internacional and Telefónica out without applying any criterion as a Móviles. The information is presented proportionality factor, presenting the individually for each operation, and where information broken down by country or line there is consolidation, it is carried out using of business. As in the previous cases, this revenue as a proportionality factor. chapter includes all the financial boundary of the Telefónica Group. The information on employees is taken from the Human Resources management systems, The information on media is from the and in this Report, the concept of “person” is departments of communication of the used, rather than the equivalent concept of different lines of business. “employee” that is normally used in the financial reports.Where the information is In the preparation of the report, news items presented in a consolidated manner, the published across the internal communication number of employees is used as the media of the company have been used. It is proportionality factor. considered that all sensitive information liable to be included in corporate The information regarding digital inclusion is responsibility reports must have been taken from the management and regulation communicated to the employees, as a control systems of Telefónica de España, guarantee that the information is relevant.

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Independent Assurance In order to guarantee stakeholders the exactness of the information,

The Audit and Control Committee of the The verification work was commissioned Ernst&Young was asked Board of Directors of Telefónica SA from Ernst&Young, following the criteria to verify the report. approved the verification of the 2005 that the corporate responsibility Report on Corporate Responsibility of the information should be verified by the same Telefónica Group. This process includes the Firm that is in charge of the financial following: information audit. In selecting this Firm, the fact that it used the international Verification under standard AA1000/AS • standard ISAE3000 and that it is the of the Telefónica Groups's behaviour checker of O2, the company acquired by towards its stakeholders in Spain and on Telefónica. in 2006 and selected “best-in- a corporate scale. class” in the DJSI Evaluation carried out in •Verification of GRI indicators included in 2005, were factors that influenced the the report for all the boundary of data decision to choose Ernst&Young. included (Spain and Latin America) •Verification of GRI indicators included in This commitment to external verification the report on corporate responsibility of of the Reports on Corporate Responsibility Argentina, Brazil, Chile and Peru. reflects Telefónica's commitment to continue increasing the transparency and veracity of the information included in the reports.

Evolution of the verification of Reports of Corporate Responsibility

2002 2003 2004 2005 Telefónica CR

Report Not verified Verification by Verification by Audit by E&Y AA1000/AS AENOR of the Deloitte de of data for Spain GRI report datos GRI Verification by E&Y of GRI data Country CR Report -- Not verified Verification by E&Y of GRI data

Very High High Medium Low Not applied

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United Nations Global Compact Table of Communications on Progress

Telefónica signed the Global Compact Letter from the Chairman Principles in 2002. Since it joined, the A description of the practical measures Company has reported annually on its • adopted by the participants in order to commitment to this initiative, on the apply the principles of the Global application of its 10 Principles, and on the Compact during the previous FY. evaluation of the results obtained in the policies implemented for its compliance. •A quantification of the results obtained or projected, using, where possible, In 2004, the United Nations Global indicators or systems like those Compact Office published the Integrity developed by the GRI (Global Reporting Measures. The aim of these measures is to Initiative). safeguard the credibility of the initiative and of the signing companies. Thus, the This section includes the main milestones signing companies are requested to in the progress of the implementation of publish the “Communications on Progress”, the Global Compact Principles in 2005. For that is, to make public through their more detailed information and details of annual reports, websites or other means, the indicators associated to the compliance the progress of the implementation of the with the Principles, please refer to the GRI Principles in their company strategy. tables and their verification.

The Communications on Progress must include the following three elements: •A declaration of the continuity of support to the Global Compact in the opening letter, statement or message from the CEO, Chairman, or other senior executive.

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Communication on progress in the United Nations Global Compact

Aspect GC Principle Most relevant Principles 1-2 GRI indicator Milestone in 2005 Challenge for 2006 Human HR1, HR2, HR3, •Manual for non-discriminatory •Definition and Approval of Corporate Integration Rights 1-2 HR4, HR8 communication with disabled people . Policy for people with disabilities (Spain) Q1.1, Q1.2, Q3.4, derivadas de auditoría laboral. Q3.17, PA1, PA2, •Increase in number of products and •Definition and Approval of Internal Regulations PA3,PA4, PA5, services accessible to disabled people for minimum Requirements for Accessibility (Group) PA6, PA7 •Increased number of services aimed at •GeSI Supply Chain Work Group: extension people with low income of activities to suppliers. •Human Rights training in companies •Definition and Approval of Purchasing providing security services Policy with regard to Suppliers who work •New social responsibility requirem ents towards social integration. for suppliers: corrective measures •Definition of a Global Plan of Digital derived from labour audit Inclusion (Latin America) Labour HR5, HR6,HR7, HR8 •An average of 49.32% of Telefónica •Definition and Approval of Internal standars HR9, HR10, HR11, Group's employees are women Regulations of Minimum Requirements Principles 3-6 LA3, LA4, LA5, •21.83% of women are in management and regarding Health and Safety at Work LA6, LA7, LA8, LA10, middle management in the Company. •Definition and Approval of Internal LA11, LA14, LA15, •Schooling of over 11,000 children, victims of Regulations of Minimum Requirements IO3, IO4, IO5,I child labour, through the Proniño Programme Life Environment O6, IO7, IO8 •Decrease in rate of accidents per million hours worked (4.99 vs. 7.01) •10% increase in number of people with disabilities employed by the Telefónica Group in 2005, with over 1,000 disabled employees •Over 45,000 employees of the Telefónica Group are Trade Union members Environment EN1, EN2, EN3, EN4, •IImplementation and Internal Audit of •Common Environmental Policy (Group) Principles 7-9 EN5, EN6, EN7, Minimum Environmental Requirements •Country Environmental Committees EN8,EN9, EN10, •Efficiency Programme in paper •Definition and Approval of Management and EN11, EN12, and energy consumption Control Regulations regarding the Environment EN13, EN14, EN15, EN16,EN17, PA8 Q1.1, Q3.13 Anti-corruption SO2, SO3, SO5, •Implementation of Telefónica Móviles Code of Ethics •Implementation across the Group Principles 10 SO6, SO7 Approval of Telefónica Group's Code of Ethics •Alignment with O2's Business Principles •Definition and Approval of Policy •Implementation of Responsible regarding responsible use of Internet Use of Internet Policy Responsable de Internet •Implementation of Adult Content •Definition and Approval of Regulations Management Regulations on Adult Content Management

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Departments that collaborated in the preparation of the report

Capitulo Areas implicadas 01 Corporate Governance Secretariat General / Internal Auditing Department

02 Identity Communication (Brand, Reputation and CSR) / Human Resources Office / Sponsorship / Internal Auditing Department

03 Driving Force for Progress Finance (Consolidation, Management Control), Tax, Regulatory Affairs, Innovation, Telefónica I+D, Institutional Relations, Information Systems, Investor Relations

05 Shareholders Shareholders’ Office / Investor Relations / Secretariat General

09 Suppliers Purchasing / Internal Auditing / Reputation and Corporate Responsibility

10 Media Communication

Annex 1: About the Report Reputation and Corporate Responsibility Annex 2: Verification Report Ernst&Young. Report

Coordination Reputation, Brand and Corporate Social Responsibility (G.D. of Communication)

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