OXFORD, United Kingdom-Investment in the telecommunications sector is an urgent priority for Central and Eastern European countries. Financial management consultant Price Waterhouse examined in a recent report the challenges of such investments for 12 countries in the region, representing a combined population of some 300 million people. It reports approximately US$120 billion is required in the fixed sector alone to bring average main-line penetration from the current level of 17 percent up to the Western European average of more than 50 percent.
But from an investment perspective, Central and Eastern Europe are very different from Western Europe. Central and Eastern European countries currently are undergoing the difficult transition from command economies to market economies. Not surprisingly, political stability and commitment to reform and privatization vary widely from country to country. Investors, therefore, tend to approach the region from a country-specific rather than a sector-specific viewpoint.
Before the collapse of the Soviet Union, the performance of the economies of Central and Eastern Europe largely were determined by events in Russia. That dependence has now almost completely disappeared. Apart from the Baltic States of Estonia and Latvia ,whose stock markets have been badly affected by the current economic crisis in Russia, other countries in the region appear to be robustly immune to the troubles of their former colonial masters.
The struggle to avoid a massive devaluation of the ruble is seen as a local Russian difficulty, fueled by a collapse in investor confidence following the economic meltdown in Asia. Investors in Russia have every reason to be nervous. Skyrocketing interest rates, a chronic inability to collect taxes, non-payment of wages, and domination of the economy by powerful and often corrupt business barons all have contributed to Russia’s weak economic performance and the resulting confidence crisis.
Russia’s 1,700 banks are most at risk. Heavily exposed to the forward dollar market, the banking sector has substantial foreign borrowings, but its assets are almost entirely in rubles. The threatened 50-percent devaluation of the ruble would almost completely wipe out the entire banking sector in Russia.
Other countries in Central and Eastern Europe have their own economic problems but claim these are decoupled from the crisis in Russia. Their fear is that foreign investors will not see it this way. The ghost of the former Soviet Union still may influence events by denting the confidence of foreign investors in the entire region.
Investor confidence is particularly important in the telecommunications sector. Telecom infrastructure modernization is an essential prerequisite to support the needs of the emerging economies. All countries in the region are seeking foreign investment to establish and strengthen cellular services, finance Wireless Local Loop systems to provide service in underdeveloped areas, and expand fixed networks for residential and business customers. Privatization of the incumbent operator is the generally accepted first step to gain access to external expertise and investment capital.
Ensuring investor confidence in the fixed network privatization and cellular licensing processes is not a trivial task. Past experiences in these areas have not always been positive. Potential investors will be aware of the tribulations surrounding the initial partial privatization of Svyazinvest in Russia and the legal battles resulting from changes in government policies concerning the award of GSM (Global System for Mobile communications) licenses in Poland. But they should gain solace from the successes of foreign investors in Hungary and the Czech Republic. Timing is all important in Central and Eastern Europe. As Price Waterhouse emphasizes, the region is an environment of complex and rapid change.
Price Waterhouse also emphasizes the need for potential investors to take account of the implications of existing tariff structures in the fixed network environment.
In Western Europe, cross subsidies between services have been phased out over the years, and now an international call is approximately 15 times the cost of a local call of the same duration. But in Central and Eastern Europe, tariff rebalancing is less developed; on average, international calls are 93 times more expensive than local calls, and in Russia they are more than 430 times more expensive. Some network operators face a major challenge in restructuring tariffs before the onset of competition in basic services.
Price Waterhouse has identified 118 mobile operators across the region, serving more than 3 million subscribers. But 89 of these operators are in Russia, accounting for only 12 percent of the subscriber base. Analog NMT (Nordic Mobile Telephone) networks always have had a strong presence in Central and Eastern Europe, partly because of spectrum availability, and many still are experiencing healthy growth. However, GSM now is starting to dominate across the region and already accounts for nearly 80 percent of subscribers.
Poland by far has the largest mobile sector in the region. High subscriber growth in the first quarter of 1998 brought subscriber levels close to the 1 million mark. But this represents a penetration level of less than 3 percent, leaving considerable potential for growth. PTK Centertel launched its analog NMT 450 network in 1992 but was not allowed either of the two GSM 900 licenses awarded in 1996. However, Centertel now has the only GSM 1800 license and is scheduled to launch a combined NMT 450/GSM 1800 service later this year.
Centertel originally was a collaboration between state-owned telco Telekomunikacja Polska SA (TPSA), France Telecom and Ameritech Corp. But Ameritech pulled out in 1996 following controversy over the award of GSM 900 licenses, leaving Centertel as a joint venture between TPSA (66 percent) and France Telecom (34 percent).
The first stage of privatization of TPSA now is scheduled for later this year when about 20 percent of the stock will be released. The Polish Treasury values TPSA at around US$15 billion. A new telecommunications bill currently is being drafted in Poland to create an open telecom market, although full liberalization is not expected until 2003.
By 2003 Poland hopes to become a member of the European Union (EU), and its new telecommunications legislation will fully conform with EU law. Four other countries in the region are negotiating to become EU members in the same time frame: the Czech Republic, Estonia, Hungary and Slovenia. Five more countries are waiting their turn: Bulgaria, Latvia, Lithuania, Romania and Slovakia.
Satisfying the conditions for EU membership will not be easy for many of these nations, but it will certainly create a much less uncertain climate for investment.
