The Telecommunications Sector Shows the Way
Directory Discount Low Cost Long Distance International Callback Phone Call Service ProvidersOne of the earliest economic success stories in central and eastern Europe has been the telecommunications sector, driven by the parallel forces of liberalisation and privatisation. Foreign investment, mainly by western telecommunications operators, has brought much-needed capital and technology to the sector. Nearly every former state monopoly carrier has selected a "strategic" western partner while western GSM operators jostle each other to offer services in the liberalised markets for mobile telephony.
The telecommunications sector in central and eastern Europe has changed beyond recognition in the decade since the collapse of communism. A growth sector in any context, telecommunications attracted capital and technology as soon as east European governments began their first timid efforts to liberalise the sector and attract foreign investors. Moreover, by an accident of timing, the reform process began early enough to allow eastern Europe to participate in the development of what we now call the information society from the ground up.
As a result, classic telecoms indicators like lines per 100 population are showing robust increases across the region, although still generally well below west European levels. The penetration of mobile telephones is even more impressive with countries like Hungary and Estonia reporting ownership levels similar to those of some EU member countries. Internet service providers are a common, if struggling, breed throughout the region although few are said to be operating at a profit. The alphabet soup associated with the internet - TCP/IP, ISDN, ASDL, HTML, and all the rest - is just as familiar to buffs in Warsaw and Prague as in London or Los Angeles. Cybercafes can be found everywhere, even in Albania.
However, the situation is not uniform throughout the region. The economically more advanced countries - Hungary and Estonia, but also Slovenia and the Czech Republic - are expected to catch up with western Europe in internet and mobile telephone usage by 2005. Others lag further behind. With incomes well below western levels, affordability is a major drag on expanding existing services and bringing in new ones. But sometimes, even the least advanced can surprise. Romania, one of the poorest countries with a per capita GDP of less than $1,000, had 650,000 mobile subscribers by early 1999 - a penetration rate of three percent.
No gold rush
The existing and future potential of telecoms in all the countries of central and eastern Europe has therefore attracted western investors in their droves. But they have not been willing to buy anything at any price. One reason is that they have learned to differentiate between the situation of the individual countries. Another is that the problem of limited affordability encourages them to invest elsewhere where returns are bigger and come sooner. The premium prices that can be charged for mobile services make them an exception. Investors can make money in more limited markets, and, as we have seen, the strength of mobile markets in some countries has exceeded expectations.
The net result is that investors' cash from privatisation has not exactly fallen into the laps of eager-to-privatise governments. There has been a steady flow, but their price expectations have not always been met.
The tenders issued to potential strategic partners have been attracting fewer bids of late, although mobile licences continue to sell briskly. As well as fewer bids, tenders for strategic partnerships are also attracting lower prices. Deutsche Telekom had to be coaxed into making a bid for the Croatian operator, Hrvatske Telekomunikacije (HT), in October 1999 after the previously sole bidder, an alliance between Telia of Sweden and Telenor of Norway, submitted a price judged too low by the Croatian government. Deutsche Telekom ended up with 35% of HT for $850 million.
Similarly, at the end of 1999, the Polish government cancelled a first tender for a 25-35% stake in the state-owned operator TPSA after France Telecom, the only bidder, offered a price judged to be too low; A new tender was then issued and the process restarted. France Telecom, previously said to be keenly interested, is now taking a prudent approach to the impending privatisation of Slovak Telecom.
The Bulgarian government reluctantly accepted earlier in 1999, a sole offer for 51 percent in the national operator BTK submitted jointly by the Dutch and Greek operators, KPN and OTE. The offer, said to be worth up to $500 million, also included a GSM licence. Although Deutsche Telekom and Spain's Telefonica expressed initial interest in BTK, neither made an offer.
Mixing and matching
The table shows the current state of foreign investment and involvement in the telecoms sector in eastern Europe. One thing, which is immediately clear, is the domination of European operators and the relative rarity of investments from north America, except in mobile services. Given geography and traditional regional links within Europe, this is not surprising.
Among the strongest links evident from the table are those between Scandinavian countries and the Baltic States (Estonia, Latvia and Lithuania) and between Greece and its Balkan neighbours. OTE has acquired stakes in fixed and/or mobile operators in Romania, Bulgaria and Yugoslavia and is said to be interested in acquiring the Albanian mobile operator which is being privatised, possibly in alliance with Telenor.
Deutsche Telekom is mostly involved with Germany's near neighbours - Poland, the Czech Republic and Hungary - while France Telecom's interests are more widely spread. The absence of British investors, particularly British Telecommunications (BT), in central and eastern Europe, is striking. Is it that limited affordability makes them look for better investment opportunities elsewhere? Cable & Wireless is involved in a mobile phone venture in Bulgaria. It was also in partnership with Sonera, when the two took over 49% of Lattelekom in 1993, but Cable & Wireless later sold out to its Finnish associate. In the mobile sector, the biggest UK operator, Vodafone, was also absent from the region although it has now become involved in several countries through its merger with Airtouch of the United States.
The European liberalisation model
In central and eastern Europe the robust growth in the telecommunications sector is driven by the same factors as elsewhere - technology, liberalisation and market demand. A number of countries in the region were among the 69 who signed up to the WTO agreement on liberalising telecoms services which sets the main deadline for liberalisation at 2003.
But the basic model for liberalisation and privatisation in central and eastern European countries is that of the European Union. This is only to be expected since the big majority of them are candidates for EU membership. One of their tasks prior to actually joining is gradually to align their national legislation with that of the Union.
The main features of EU policy in telecoms, which led to the full liberalisation of services and infrastructures in nearly all EU countries at the start of 1998, are:
The liberalisation of markets for telecoms equipment and terminals
The liberalisation of value-added and data services
The separation of the regulatory and operational functions ·
The liberalisation of basic fixed services and networks by set deadlines
The early introduction of competition in the mobile sector
The introduction of cost-based tariffs
The creation of fair and transparent rules for interconnection of networks
The obligation to provide a set of basic (or universal) services at affordable prices
In all, those countries which are EU candidates will need to adopt the 195 or so items of legislation and policy orientations in the telecoms sector which the Union has implemented in the past dozen years. In fact, all governments in the region have accepted the principles, and implementation is in various stages of advancement in individual countries.
Most have already freed their national markets for telecoms equipment and terminals and for value-added services, although a number still do not permit satellite operators from linking into the public switched network. Virtually all have two or more mobile operators competing for business.
All are committed to ending their national operator's monopoly on fixed services and network infrastructures by 2003 and a number have even brought this date forward. Poland has already liberalised local and long-distance services, leaving TPSA with a monopoly on international traffic. The open internal market in Poland has given rise to rivalries among western operators from the EU and America, who have linked up with some of TPSA's competitors in both fixed and mobile telephony. One recent struggle for influence has been between Deutsche Telekom and Vivendi, the principal rival to France Telecom in mobile telephony.
In Latvia, Lattelekom was given a 20-year monopoly upon privatisation in 1993 but this was subsequently negotiated down to ten years. Those countries that have yet to privatise their monopolies or sell part of them to a strategic partner have at least transformed them into joint stock companies in readiness, while some have offered limited shareholding to local interests, individual investors or the carrier's own employees.
The Privatisation Status Chart lists 15 countries in Central and Eastern Europe.
Still to come
The other elements of the EU's liberalisation programme are still far from completed in central and eastern Europe. The majority have created independent regulatory authorities, although most of these are still in their infancy. The EU is providing institution-building support for a number of them, particularly as the authorities in the region are increasingly faced with privatised, cash-rich ex-monopolies with access to western expertise when pushing their corporate interests against those of the regulator.
Interconnection, whereby dominant operators (the ex-monopolies) have to give competitors fair and transparent access to their networks, has been a problem. It has also been one of the biggest post-liberalisation headaches in western Europe as well. In east, as in west, patience, perseverance and - from time to time - the big stick will be needed to restore orderliness.
It is on tariff-rebalancing that central and east European governments have made the least progress. Again it comes down to a question of affordability. In some countries of the region local calls were traditionally free, or charged at a very low flat rate. EU de-regulation requires the elimination of cross-subsidies in tariffs: tariffs should reflect the real costs of providing the service. This means that (as has happened in the EU) long-distance and international tariffs need to be lowered and local tariffs raised considerably.
Given the low level of wages and salaries in most of central and eastern Europe, governments are reluctant to impose what is seen as a major burden on their population. Lack of progress on tariff rebalancing also slows the implementation of a valid structure for defining the scope and cost of providing all subscribers with access to a basket of basic services.
But markets will continue to grow and services to improve despite these difficulties. As the market economy takes firm foot across the region, operators will be able to respond to the needs of business users for improvements in existing services and the introduction of premium services. The internet is becoming a major source of communication, commerce and education as it is in the west. Imaginative formulae will no doubt be found to sort out the problems associated with tariff re-balancing and the universal service. The next ten years will probably be as dramatic for telecoms in central and eastern Europe as the previous ten have been.
