Project: Privatization: The Global Scale-Back of Government Involvement in National Economies || TELECOMMUNICATIONS IN FORMERLY COMMUNIST COUNTRIES

TELECOMMUNICATIONS IN FORMERLY COMMUNIST COUNTRIESAuthor(s): Laura ConnerSource: Administrative Law Review, Vol. 48, No. 4, Project: Privatization: The Global Scale-Back of Government Involvement in National Economies (FALL 1996), pp. 463-478Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/40709839 .

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463

TELECOMMUNICATIONS IN FORMERLY COMMUNIST

COUNTRIES Laura Conner

to achieve economic remodeling have accompanied the political reforms that have swept throughout the formerly communist countries of

Eastern Europe since the latter part of the 1980s. A vast portion ofthat economic transformation has centered around movements to privatize, or at least partially privatize, the centrally-planned, command-and-control economic structures of those countries. The telecommunications industry is one such area that is moving toward privatization in most of the formerly communist Eastern European nations. Privatization in the telecommunications field should have far-reaching impacts on the success of the emerging competition-driven economies of those countries as a whole in terms of the expanded business opportunities and capabilities it will afford those nations.

I. Before Democratization and Moves Toward Privatization

Prior to the trends leading in the direction of democratization and privatization in Eastern Europe, control over the telecommunications industries in those formerly communist countries was best described as a complete monopoly in all aspects.1 The state exercised total control over what is generically referred to as a PTT system (state-operated postal, telegraph, and telephone administrations).2

Eastern European countries did not enjoy a very high quality of telecommunications services. Technology, quality, and availability of service lagged far behind that of the West.3 Outdated equipment and a massive lack of infrastructure were key problems and remain so today. Some current equipment dates back to World War II and earlier.4 A World Bank study showed that Eastern European telecommunications networks experienced growth rates of only three percent over the preceding 30 years.5 The formerly communist countries of Eastern

1. Eli Noam, Telecommunications in Europe 274 (1992). 2. Id. 3. Id. 4. Id. 5. Id.



464 48 ADMINISTRATIVE LAW REVIEW 463

Europe generally made meager investments in telecommunications, and the little investment in telecommunications that did occur went to creating new lines; maintenance and infrastructure were almost completely neglected.6

The quality of telecommunications service likewise suffered before the economic and political reforms of the late 1980s. Slow responses to applications for new telephone service were typical.7 In Eastern Europe as a whole, the average wait for telephone service installation was ten years or more.8 In Poland, waits sometimes lasted for more than 30 years.9 The people who were lucky enough to get service installed still experienced poor quality because of the lack of infrastructure and maintenance.10 In general, extreme neglect of telecommunications was prevalent.11

For the most part, political and economic reasons were behind government control and neglect of telecommunications. The communist governments of these countries wanted to keep capitalist ideas outside their borders. "Too many telephones were seen as a way for people to organize or spread rumors."12 At the same time, the governments wanted to control telecommunications and broadcasts to support and strengthen communist ideals as part of their "ideologi- cal struggle" with the West.13 The Communist Party directed programming content through state ministries of communications.14 "[Programming empha- sized political propaganda, educational material for children, sports, classical and folk music and politically correct imports."15

An example highlighting the former Soviet Union's attempt to prevent future international television broadcasts by satellite demonstrates such concerns on the part of the then-communist nations. In 1972, then Soviet Foreign Minister Andrei Gromyko submitted a proposal to the United Nations General Assembly urging that "the relaying of television programmes by means of artificial earth satellites to other sovereign states without the clearly expressed agreement of these states" be "regarded as illegal."16 The proposal also provided that any nation planning a satellite television system be required to consult with other countries if there was a chance that the future transmissions would "be a source of potential damage to, or lead to the unintentional radiation of," those countries.17 Any nation thus "threatened" would be able "to take . . . steps [to prevent the illegal broadcasts from entering its borders] not only within its own

6. Id. 7. See id. at 275. 8. Id. at 274. 9. Id.

10. Id. 11. Id. 12. Jane Perlez, Western Ventures Helping East's Phones to Ring, N.Y. Times, Dec. 21, 1993, at

D5. 13. Gerhard Wettig, Broadcasting and Detente: Eastern Policies and Their Implication

for East-West Relations 1-5 (1977). 14. Eli Noam, Television in Europe 274 (1991). 15. Id. 16. Wettig, supra note 13, at 57. 17. Id.



FALL 1996 Telecommunications: Formerly Communist Countries 465

territories but also in space and in other domains situated outside the national jurisdiction of any state."18 The language of the proposal and the severe and far-reaching remedies it suggested be made available for nations exposed to unauthorized broadcasts indicate exactly how serious the communist governments were about maintaining total and exclusive control over telecommunications and broadcasts within their borders.19

Economic views also induced government neglect of telecommunications. Communist economies favored activities involving production of goods, such as agriculture and manufacturing, and disfavored consumption and service types of activities.20 The formerly communist countries of Eastern Europe viewed telecommunications as primarily a "nonproductive consumption sector of the economy."21 As a result, profits from telecommunications rarely were reinvested in the industry that produced them.22 Telecommunications profits regularly were funnelled into other government programs.23

Although civilian telecommunications were neglected, Eastern European nations valued telecommunications for military and political reasons.24 As early as the beginning of the century, Lenin followed the development of radio technology before radio broadcasting even began and then used radio to create support in Western Europe for the Russian Revolution.25 Also, the Moscow radio station began operation in August 1922 using a 12,000-watt signal, while at the same time the most powerful U.S. stations used only 500 watts.26 The Soviet Union also pioneered the use of domestic satellites as a means to broadcast to all 11 time zones in its vast territory.27 Despite the emphasis on using telecommunications to advance military and political positions, the vast geographic proportions of the Soviet Union still caused that country to lag behind in terms of telecommunications infrastructure because of the enormity of the task of providing telecommunications services to the entire area.28

II. Moves Toward Democratization and Privatization

The economic and political reforms taking place in the formerly communist countries of Eastern Europe have sparked changes in those countries' views of, and approaches to, the telecommunications industry. As political reforms have increased, most Eastern European nations have placed increasing emphasis on

18. Id. 19. Id. at 58. 20. Noam, supra note 1, at 274. 21. Id. 22. Id. 23. Id. 24. Sydney W. Head, World Broadcasting Systems: A Comparative Analysis 23 (1985). 25. Id. 26. Id. 27. Id. In fact, the Soviet Union in 1965 deployed the world's first satellite used to relay

television signals. Id. 28. Id.




upgrading their telecommunications infrastructure.29 Economic development has been the driving force behind that shift in emphasis.30 Eastern European countries aim for substantial growth in their telecommunications industries: they hope to increase growth in telecommunications by 10 to 11 percent each year.31 If attained, that growth rate that would almost quadruple the former rate of growth in the telecommunications industries in those countries.32

Telecommunications has received a higher priority because it is considered essential to economic development in today's "global marketplace."33 Without improvements in telecommunications services, such as fax machines, data communications, and toll-free telephone service, the nations of Eastern Europe will not be able to bring about a successful transition from communism to free market economies.34 Those particular telecommunications services are vital to the free market transition because of their significance to business applications. The countries of Eastern Europe "will be unable to build modern financial services or efficient manufacturing enterprise without the telecommunications infrastructure needed to do business."35 The business community, especially the financial services industry, is in desperate need of improved telecommunications capabilities.36 "Improving telecommunications service to this sector will have an immediate impact on these countries' economies since all businesses in market economies depend on rapid and reliable movement of capital. Investment in the data services area will make a larger contribution to the economies of these countries than any other telecommunications improvement and possibly greater than equal investments in other business sectors."37

The formerly communist countries of Eastern Europe themselves recognize the significance of telecommunications to economic success. Then-Soviet leader Mikhail Gorbachev recognized that significance when he said in April 1989, "Those who march with the times and make the necessary accommodation to the introduction of high technologies into the world will meet with success."38 The telecommunications statutes that the new Eastern European governments have produced also recognize the importance of viable communications systems

29. Noam, supra note 1, at 274. 30. Id. 31. Id. 32. Id. 33. Telecommunications Opportunities in Eastern Europe: Hearing Before the Subcomm. on Telecommunica-

tions and Finance of the House Comm. on Energy and Commerce, 101st Cong., 2d Sess. 1 (1990) [hereinafter Telecommunications Opportunities] (statement of Rep. Edward Markey, Chairman, Subcomm. on Tele- communications and Finance).

34. Id. 35. Id. 36. Staff of House Comm. on Foreign Affairs, 101st Cong., 2d Sess., Eastern European

Telecommunications, Broadcasting, and Environment: Report of a Staff Study Mission to Hungary, Czechoslovakia, and Poland, Nov. 4-17, 1990 1 (Comm. Print 1991) [hereinafter Eastern European Telecommunications].

37. Id. 38. Parker W. Borg & Fredric A. Emmert, Telecommunications: A Bridge to Better East- West Relations,

14 N.C. J. Int'l L. & Com. Reg. 279 (1989) (quoting Jim Hoagland, Gorbachev Fails to Bite Bullet on Cuban, East-West Questions, Wash. Post, Apr. 8, 1989, at A14).




to economic development. The Interim Statute of Russian Federation (RF) Communications lays out the purpose of communications as follows:

Communications shall be a component part of the economic infrastructure of the Russia Federation and shall function on its territory as an integrated economic and production complex designed for the satisfaction of the requirements in postal and telecommunications on the part of the public, the legislative and executive authorities, of defence, security, and law and order, and also of business persons and other legal persons.39

Despite the recent emphasis on telecommunications in the formerly communist countries of Eastern Europe, numerous problems continue to plague their telecommunications industries. Money is a prime concern. Eastern Europe currently suffers from a critical shortage of funds to invest in a meaningful upgrade of its telecommunications infrastructure.40 Lack of the technical and managerial expertise needed to run a sophisticated telecommunications system in a market economy also persists.41 Laws in these Eastern European countries restrict foreign investment and represent yet another barrier to achieving a successful upgrade of the telecommunications infrastructure.42

One factor that hindered the Eastern European countries in their struggles to improve their telecommunications systems no longer exists. Western export controls on high technology previously created problems for Eastern Europe's efforts to upgrade its telecommunications capabilities. The Coordinating Com- mittee for Multi-National Export Control (COCOM), an association of Western countries that voluntarily enforced group- generated restrictions designed to keep certain advanced technologies from the countries of Eastern Europe for security reasons, disbanded in 1994. 43 Although the former COCOM participants are negotiating to create a similar successor organization, the focus of any such group will be much narrower than that of COCOM.44 Also, the former COCOM

39. Interim Statute of RF Communications, RF President's Edict No. 810, July 31, 1992, available in LEXIS, WORLD Library, SOVLEG File. The Interim Statute was designed to remain in effect until the passage of the RF Communications Act, which occurred in January 1995. The purposes outlined in the Interim Statute appear in nearly identical language in the 1995 Act. RF Communications Act, RF Federal Act No. 15-FZ, ch. I, art. 1, January 20, 1995, available in LEXIS, WORLD Library, SOVLEG File.

40. Telecommunications Opportunities, supra note 33, at 2. See also Noam, supra note 1, at 275. As much as $140 billion will be required in telecommunications investment in the next decade. Id. at 274.

41 . Telecommunications Opportunities, supra note 33, at 2. See also Eastern European Telecommuni- cations, supra note 36, at 3. The companies working on Russia's trans-country fiber optic line {see infra part III) recognize the need for people with appropriate skills to manage the resulting business; US West, one of the companies involved in the project, is working with the Agency for International Development to open three business training centers to meet that need. Russians Wait 32 Years for Phones, Can't Get Dial Tone (NPR radio broadcast, Sept. 23, 1994) [hereinafter Russians Wait].

42. Telecommunications Opportunities, supra note 33, at 2. 43. Peter Behr & Thomas W. Lippman, U.S. Lifts Cold War Sales Curbs, Wash. Post, Mar.

31, 1994, at Al. 44. Any successor agency will focus on controlling exports of weapons-related technologies to

"countries of concern," which are defined as North Korea, Libya, Iran, and Iraq. Behr & Lippman, supra note 43, at Al. The new organization also will continue COCOM' s control of exports to all countries of technologies dealing with nuclear and chemical weapons and missiles. Id. In the mean time, the former COCOM nations have agreed "to keep in place current restrictions on exports of products with military purposes." Id.




members will continue to cooperate on policies dealing with "weapons prolifera- tion,

" but each country now will make its own independent choices about exactly which technologies to export.45

The day before COCOM officially disbanded, the Clinton administration announced a new U.S. policy concerning high technology exports and cancelled restrictions on exports of most telecommunications equipment to Eastern Eu-

rope, including the former Soviet Union.46 Under the new policy, the Commerce

Department will issue general licenses to exporters for shipping "most conven- tional computer and telecommunications products" as long as the buyers are civilian, rather than military, customers.47 While the old system required item-

by-item export licenses, the new system does not mandate advance permission for individual sales.48

Most of the formerly communist Eastern European countries have moved toward privatization as a way to alleviate or eliminate at least some of the above

problems facing their telecommunications industries.49 Political reasons and ne-

cessity have driven the decisions of Eastern European nations to privatize indus-

try in general. With the fall of communism, privatization is a way "to change the existing system of government by reducing its direct involvement in the

day-to-day lives of its citizens, to create competition and to improve the nation's

economy."50 State-owned enterprises (SOEs), which were pervasive elements of Eastern Europe's command and control economies before political and economic reforms, generally are overstaffed, exhibit poor financial and export perfor- mances, depend on subsidies, and exclude competition from both foreign and domestic sources.51 Privatization goals, on the other hand, include increasing competition, promoting domestic investment, attracting foreign investment and new technologies, and boosting efficiency.52

For largely nationalistic reasons, many of the formerly communist countries would like to maintain ownership of their telecommunications systems. Where the systems cannot be totally government owned, those countries would prefer ownership at least by citizens who would purchase stock in private ventures.53 That desire, however, is unrealistic because there is not enough investment capital in these countries to finance the massive projects needed to update their

45. Id. 46. Id. 47. Id. 48. Id. U.S. exporters still must obtain an individual license, however, if the item "could be

used for advanced weapons production." Id. The Commerce Department estimates that it will issue half as many permits under the new system as it did under the old system (approximately 25,000 permits were issued in 1993). Id.

49. See infra part III. 50. Rodney Burton & Diane Juzaitis, Amid Current Deluge of Privatizations, Remember the Golden

Rule: Beware/, Int'l Herald Trib., Mar. 25, 1995. 51. Ira W. Lieberman, Privatization: The Theme of the 1990s, Colum. J. of World Bus., Mar.

23, 1993, at 8. 52. Id. 53. Eastern European Telecommunications, supra note 36, at 1-2.




telecommunications systems and equipment.54 As a result, most of the formerly communist governments in Eastern Europe are opening up investment in their telecommunications industries not only to private domestic investors but also to foreign investors, although to varying degrees.55

III. Events in Individual Countries

A. Russia Russia is encouraging joint ventures with foreign firms as one means of

securing additional investment capital for telecommunications improvements. In 1990, a Belgian company (BTM Alcatel) won a contract to supply approximately $1 billion worth of digital switches to Russia.56 Siemens and GPT also entered into joint ventures to provide switching systems.57 General Electric agreed to produce integrated circuits for the Russian enterprise Svetlana.58 The Ministry of Communications (Minsviaz) entered into a " memorandum of un- derstanding'

' in 1990 with AT&T to look into cooperation on telecommunications services, equipment manufacturing, and research and development.59 Sprint International came to an agreement in July 1990 to establish the first commercial international videoconferencing service in Russia.60

Tentative plans exist for U.S. Sprint Communications Company to construct a commercial data communications network in Russia: U.S. Sprint will own half of the resulting corporation, and the other half ownership will be divided between the Latvian Academy of Sciences and Central Telegraph, which is the Russian government agency in charge of running the telegraph network.61 US West has entered into a definite agreement to build Russia's first cellular telephone system in St. Petersburg.62 US West will hold a 40 percent share in the enterprise and will have two Russian government agencies as partners: The St. Petersburg City Telephone Network Production Association will own a 55 percent share, and the St. Petersburg Station of Technical Radio Control will hold a 5 percent share.63

The dismantling of COCOM64 has allowed what will be the largest telecommunications project in the world to proceed.65 The project, called the " Fifty Times

54. Id. at 2. 55. See infra part III. 56. Noam, supra note 1, at 288. Most existing switches were analog and electromechanical. Id.

at 287. 57. Id. at 288. 58. Telecommunications Opportunities, supra note 33, at 71. 59. Noam, supra note 1, at 288. 60. Telecommunications Opportunities, supra note 33, at 71. 61. Id. 62. Adriel Bettelheim, US West Cracks Soviet Market, Denv. Post, Oct. 23, 1990, at Cl. US

West also is building similar cellular networks in Hungary and Czechoslovakia. Id. 63. Id. 64. See supra notes 43-44 and accompanying text. 65. Russians Wait, supra note 41.




Fifty" because of its goal to connect 50 Russian cities with 50,000 kilometers of fiber optic cable, will make monumental strides toward improving Russia's telecommunications infrastructure by creating a "telecommunications backbone across the country."66 Minsviaz and three Western companies - US West, France Telecom, and Deutsche Telekom AG67 - are working on the massive venture.68 Although US West has been involved in the project since 1988, mean-

ingful efforts to get it underway were impossible until the 1994 end of COCOM, which had prohibited sales to the former Soviet Union of the high-speed fiber

optic cable necessary for the project.69 Although the project once was valued at $500 million,70 its estimated eventual

worth has climbed to $40 billion.71 US West has received a pledge from the U.S. government's Overseas Private Investment Corporation to provide more than $100 million in bank loans to help finance the undertaking.72 Vic Pavlanko, president of US West in Russia, calculates that the "Fifty Times Fifty" project will nearly double "the number of local phone lines for businesses and residences across the country."73

U.S. companies are not the only ones taking advantage of the expanded business opportunities in Eastern Europe. Samsung, a South Korean company, has completed an agreement with Russian authorities to cooperate in a variety of telecommunications projects: Samsung will provide a public telephone exchange developed in Korea to Minsviaz, Samsung will export or jointly manufacture the Time Division Exchange (TDX) to be installed in the telephone system, and the two groups will jointly work on technology for satellite communications, fiber optic cables, and other telecommunications items.74

A few key points of interest may be noted about these joint ventures by contrasting them to the Eastern European approach to telecommunications before the debut of privatization schemes. The above joint ventures emphasize telecommunications for commercial as opposed to military uses.75 Also, at least in some instances, the joint ventures reflect partial foreign ownership of the telecommunications enterprise instead of a mere contractual relationship whereby Russia would simply purchase telecommunications equipment from

foreign sources. Although joint ventures were allowed near the start of the Russian political

66. Id. 67. Douglas Lavin & Steve Liesman, Russia Phone Offer May Get No Answer, Wall St. J., Oct.

11, 1995, at A10. 68. Russians Wait, supra note 41. 69. Id. 70. Noam, supra note 1, at 288. 71. Russians Wait, supra note 41. 72. Id. 73. Id. 74. Telecommunications Opportunities, supra note 33, at 70. Despite that agreement, South Korea

continues to screen items that Samsung proposes to export, especially the fiber optic cables, to determine if they are ' 'restricted strategic items." Id.

75. In 1990, three military factories in the former Soviet Union started producing equipment for civil telecommunications purposes. Id. at 69. This illustrates the shift from a military to a business focus.




and economic reforms, the government more recently has stepped up efforts to attract foreign investors. In 1994, the RF government issued a decree announcing a policy of making greater efforts to draw foreign investment into the country.76 The government announced, "The work of Federal organs of executive power involving the attraction of foreign investments in the RF economy and the creation of a favorable legal, fiscal and customs regime for foreign investors shall be regarded as a task of fundamental importance."77 As a step in furthering that policy, the decree creates a Consultative Council for Foreign Investments in Russia that is comprised of "working groups" responsible for different tasks in making Russia attractive for foreign investors.78 The Ministry of Economics is in charge of coordinating the Consultative Council's working groups.79 The decree also charges the Ministries of Economics, Foreign Eco- nomic Relations, Finance, and Justice and the State Customs Committee with drafting proposed legislation aimed at attracting foreign investors. Issues to be considered in the legislative proposals include "measures in taxation, export and import tariffs, and foreign-currency regulation."80 The decree also targets the ensuring of a competitive economic environment as a means to lure greater amounts of foreign investment.81 The 1995 RF Communications Act also makes it clear that foreign investors share equal legal footing with domestic investors and that foreign investors will not be discriminated against because of their foreign status.82

Despite Russia's strong desire and need to attract substantial foreign investment, the country recently hit a stumbling block in one step that would have gone a long way to help achieve that goal. What would have been the largest foreign investment in Russia outside its oil sector was abruptly terminated last December when Russia and Italy's state telephone holding company, Societa Finanziaria Telefonica per Azioni (Stet), reached an impasse concerning the method of payment for Stet's purchase of a 25 percent share in Russia's regional telephone holding company Svyazinvest.83 Svyazinvest, which was formed during the summer of 1995, holds a 51 percent interest in 85 out of Russia's 87 total local telephone companies.84 The Russian government controls a 51 percent share of Svyazinvest.85

76. Greater Efforts in Attracting Foreign Investments in the RF Economy, RF Government Decree No. 1108, Sept. 29, 1994, available in LEXIS, WORLD Library, SOVLEG File.

77. Id. 78. Id. 79. Id. 80. Id. 81. "The RF State Committee for Antimonopoly Policy and Support of New Economic Struc-

tures shall work out and put before the RF Government proposals for taking due account of antimonopoly requirements in the process of attraction of foreign investments in the RF economy." Id.

82. RF Communications Act, RF Federal Act No. 15-FZ, ch. X, art. 42, Jan. 20, 1995, available in LEXIS, WORLD Library, SOVLEG File.

83. Neela Banerjee, Major Investment in Russia Is Stymied As Pact with Stet Runs Into Trouble, Wall St. T., Dec. 26, 1995, at A4 [hereinafter Banerjee, Major Investment].

84. Id. 85. Id.




After announcing the tender in October 1995, Russia announced on Decem- ber 1 of the same year that Stet had prevailed over a consortium of US West, France Telecom, and Deutsche Telekom in the bidding with its pledge of approximately $1.4 billion.86 The deal came to a halt over payment terms. When Stet insisted that its initial payment of $640 million would go into an escrow account until specific terms87 were met, Russia objected to the escrow arrangement and called the deal off.88

Experts had envisioned potential problems with the Svyazinvest sale soon after the tender was announced. Attracting investors to the relatively low-profit local telephone market was a concern, especially considering that Svyazinvest' s "goal is to develop a network for more lucrative long-distance and international calls.''89 In response to that anxiety, the Russian government hastened to grant Svyazinvest licenses to operate long distance and international networks,90 but the relationship between Svyazinvest and Rostelekom, the partially state-owned company that dominates Russia's long distance and international services, remains uncertain.91 Whether Svyazinvest' s investors will gain access to the planned national fiber optic network, the "Fifty Times Fifty," also remains unclear.92 Also, information about the local telephone companies that constitute Svyazinvest is nebulous. The condition of the local lines is largely unknown, and there is some question surrounding the local subsidiaries' recognition of Svyazinvest' s control.93 Those concerns were what led Stet to demand that its initial payment be placed in escrow until certain conditions were met.94

Despite the above problems highlighted by the failed Svyazinvest deal with Stet, the potential for growth in Russia's telecommunications industry seems vast. Currently there are only 16 telephone lines for every 100 people in Russia.95 Comparatively, the United States has 60 lines per 100 people.96 When a person in Russia initiates a telephone call, there is only a 30 percent chance that it will be completed.97 A study by Barings Securities projects that Russia's current number of 25.5 million telephone lines probably will climb to 40 million by 2004. 98 Also, total revenue from Russia's telecommunications industry is expected to increase at a rate of 25 percent per year, taking total revenue from

86. Neela Banerjee, Stet Bests US West, Buys 25% Stake in Russian Firm, Wall St. J., Dec. 4, 1995, at A8 [hereinafter Banerjee, Stet Bests]: Banerjee, Major Investment, supra note 83.

87. Stet wanted commitments from the Russian government that the local telephone companies comprising Svyazinvest would recognize Stet' s authority and that Stet "would have greater access to long-distance business" through the deal. Banerjee, Major Investment, supra note 83.

88. Id. 89. Telecom Deal Fraught with Problems, Fin. E. Eur., Oct. 20, 1995, at 13 [hereinafter Telecom

Deal]. See also Lavin & Liesman, supra note 67. 90. Banerjee, Stet Bests, supra note 86. 91. Telecom Deal, supra note 89. 92. Lavin & Liesman, supra note 67. 93. Lavin & Liesman, supra note 67; Banerjee, Major Investment, supra note 83. 94. See supra note 87. 95. Baneriee. Stet Bests, suara note 86.

»I ' ' M

96. Id. 97. Id. 98. Telecom Deal, supra note 89.




$2.5 billion in 1994 to $23 billion by 2004." Russia is expected to commence a new series of bidding for the Svyazinvest interest.100

In addition to advocating joint ventures, Russia has been relaxing government control as a method of realizing telecommunications reform. Then-President Gorbachev announced plans to remove control over broadcasting from the Com- munist Party and to advance the "democratization of the airwaves" by giving all political parties air access.101 Additionally, legislation now makes the Ministry of Communications function more like a regulator and less like an operator.

102 The 1995 RF Communications Act functions as the enabling statute giving "[f]ederal organs of executive power in the field of communications united in a single system . . . responsibility for the state and development of all types of communications."103 The administrative agency is responsible for the licensing of communications activities and for the certification of communications facili- ties.104 The agency also is charged with using its administrative and regulatory powers to promote competition in the communications industry.105

Russia also has been relaxing control over research and development in the telecommunications field. Research and development institutes are undergoing reorganization; they are continuing on a self-financing basis and are receiving greater freedom in developing their projects.106

B. Hungary

Joint ventures and foreign ownership are playing a major role in the efforts to upgrade the telecommunications system in Hungary. Even as early as 1984, Siemens had arranged a joint venture with the Hungarian company Videoton to manufacture telecommunications equipment in Hungary.107 An abundance of foreign investment and partial ownership activities has continued more recently. In just one of such deals, US West and the Hungarian Telecommunica- tions Company (HTC) are working together to construct a mobile cellular telephone system.108 US West will own 49 percent of the resulting cellular network.109 So far, the US West project has met with success.110

99. Id. 100. Russians Trv to Save Deal. N.Y. Times. Dec 27. 1QQ5 at Dfi 101. Telecommunications Opportunities, supra note 33, at 69. 102. See RF Ministry of Communications Activity in International Telecommunications and

Postal Communications, RF Government Decree No. 165, Mar. 17, 1992, available in LEXIS, WORLD Library, SOVLEG File (authorizing the Ministry "to perform the functions and obliga- tions of administration of RF communications in international relations on communications mat- ters").

103. RF Communications Act, RF Federal Act No. 15-FZ, ch. Ill, art. 11, Jan. 20, 1995, available in LEXIS, WORLD Library, SOVLEG File. Such administrative agencies are responsible for the "drafting of proposals for state policy in the field of communications and implementation thereof, [and] general regulation in the field of communications." Id.

104. Id. at 15-16. 105. Id. at 20. 106. Noam, supra note 1, at 289. 107. Noam, supra note 1, at 276. 108. Id. 109. Telecommunications Opportunities, supra note 33, at 52. 1 10. Richard L. Hudson, US West's Cellular Venture Defies Odds in Hungary with Savvy, Local Contacts,

Wall St. J., Oct. 19, 1992.




In other projects, Northern Telecom has an arrangement to construct digital switches for HTC as well as for private businesses.111 In 1990, United Interna- tional Holdings, Inc., of Denver joined forces with Time-Warner, Inc., to agree to formulate and operate cable systems in Hungary.112

Foreign companies also are leaping at the telecommunications opportunities available in Hungary. The French Compagnie Generale des Eaux has made public its intention to invest 700 million francs, or approximately $120.9 million, in operating telephone systems in Hungary's Szeged and Szentes regions.113 A subsidiary of LM Ericsson AB, Ericsson Radio Access AB, has earned a contract to provide radio equipment that will be installed in Hungary.114 A Nordic consortium known as Pannon GSM has won a bid for the right to construct a digital mobile telephone network in Hungary.115

As the degree of foreign investment discussed above indicates, government control over telecommunications has been relaxing and the government has been leaning toward privatization. In 1989, the Hungarian government amended its Telecommunications Act to permit limited private investment in Hungarian telecommunications service providers.116 The government first offered HTC shares to domestic firms in 1990, and in the following year offered HTC shares to foreign investors.117 Although Hungary initially placed a 25 percent cap on total foreign ownership,118 that ceiling did not long remain operative because in 1993 Hungary announced plans for an auction to sell at least 30 percent of HTC shares to Western telecommunications companies.119 By the end of that year, Ameritech Corporation and Deutsche Bundespost Telekom had acquired a 30 percent interest in the Hungarian state telephone company now known as Matav.120 Another 40 percent of Matav was offered for sale in 1995. 121 The international investment bank CS First Boston won the right to coordinate the sale over rival bids from Salomon Brothers and NM Rothschild.122 By the end of 1995, Hungary announced that the Ameritech and Deutsche Telekom joint venture, now called Magyarcom, had prevailed in the bidding for the additional shares; the consortium will pay $852 million for an additional 37 percent interest

111. Noam, sutora note 1, at 276. 112. Adriel Bettelheim, Local Firm Joins Time in Hungary Cable Deal, Denv. Post, Sept. 25, 1990,

at Cl. 113. Generale des Eaux Phone System, Wall St. J., Mar. 3, 1994, at B8. 114. LM Ericsson Unit Gets Contract, Wall St. T., Mar. 28, 1994, at A6. 115. Scandinavian Group Is Surprise Winner in Bidding for Hungarian Phone System, Wall St. J., Aug.

27, 1993, at A4. The consortium includes PTT Nederlands and the state telecommunications companies of Denmark, Sweden, Finland, and Norway. Id.

116. Noam, supra note 1, at 275. 117. Id. 118. Id. 119. Richard L. Hudson, Greece, Hungary Move to Sell Stock in Telephone Firms, Wall St. J., Apr.

7, 1993, at A10. 120. Perlez, supra note 12. 121. Nicholas Denton & Virginia Marsh, Banks line up for Matav sale, Fin. Times, Apr. 7, 1995,

at 21. 122. CS First Boston Wins Matav Mandate, Fin. E. Eur., May 26, 1995, at 2.




in Matav, raising its total holding to 67 percent.123 Matav is the first national telecommunications operator in Eastern and Central Europe to have a majority foreign ownership.124

Other legislation provides for the creation of private local telephone companies,125 but the PTT will maintain its monopoly over long distance service.126 In the face of this increasing privatization, the government is assuming a regulatory type of function. The State Price Control Office acts as a regulator by approving telephone rates.127 The Minister of Transportation, Communications, and Water Resource Management is charged with various administrative functions. For instance, the minister is responsible for setting consumer protection and service quality guidelines for subscriber contracts.128 The minister also over- sees the Telecommunications Chief Superintendency and its regional telecommunications superintendencies.129 The central and regional superintendencies are responsible for licensing the establishment and operation of telecommunications links and networks as well as licensing the sale, use, and operation of telecommunications equipment.130

C. Poland

Poland's government has undertaken gradual steps toward privatizing its telecommunications industry. In 1991, the postal, broadcast, and telecommunications services of the Polish Post Office, Telegraph and Telephones (PPTT) system were divided into individual units as a step toward privatization.131 Tele- communications services now are provided by Telekomunikacja Polska SA (TPSA).132 Poland's 1991 Telecommunications act provides for additional elements of privatization. The Act allows competition with TPSA in a variety of services, including local, cellular, and domestic long distance services.133 Regula- tion will occur under the Ministry for Posts, Broadcasting and Telecommunica- tions.134 Under the act, TPSA is to be privatized in the future, but foreign investors will not be permitted to own a majority of the shares, except in the

123. Ameritech, Deutsche Telekom Venture Boosts Matav Stake, Dow Jones News Serv., Dec. 20, 1995, available in Westlaw, Allnewsplus Database; Matav Raises a Further $852m, Fin. E. Eur., Jan. 5, 1996. at 10.

124. Id. 125. France's Compagnie Generale des Eaux's plan to operate telephone companies in two

regions of Hungary is an example of the types of projects that legislation will allow. See infra part III.

126. Noam, supra note 1, at 275. 127. Id. 128. Hungarian Law on Communications of 12/92, Central & Eastern Europe Legal Texts, 1

9(1), Dec. 1992. 129. Id. 1 19(1). 130. Id. 11 19(4)(a)-(b). 131. Noam, supra note 1, at 277. 132. Id. 133. Id. 134. Id. at 277-78 (1992). The Ministry for Posts, Broadcasting, and Telecommunications was

created in 1990 to oversee the PPTT. Id. at 277.




case of local service companies.135 TPSA also might be separated into a national

long distance division and several regional companies.136 In 1989, in another privatization measure, United Telecom (UT), the state

monopoly in charge of telecommunications manufacturing, was divided into three separate units that compete with each other: ZWUT, Teletra, and the Polish Transmission Works (PZT).137 Siemens bought a 49 percent share of ZWUT in 1990 for DM 50 million.138

Although Poland's privatization scheme started slowly, the government has announced its intention to "accelerate its privatisation programme in 1995 with the issue of shares in a mass sell-off scheme."139 Poland declined to start extensive

privatization earlier because of fear that such a move would have harmed the nation's new capital markets.140 Poland now is pursuing privatization aggres- sively largely in response to a fall in Western investment from $1.6 billion in 1993 to $1.3 billion in 1994. 141 Western investment dropped after the Polish stock market fell 40 percent during political arguments over the pace of economic reform.142 Poland's mass privatization plan (MPP) entails the selling of coupons that will entitle the buyer to stock in 15 national investment funds (NIFs), which in turn own shares in 414 state-owned businesses, with shares in an additional 100 state businesses to be distributed throughout the NIFs in January 1996.

143

Privatization of Poland's telecommunications system is expected to begin in 1996,144 but it is currently unclear whether Poland's telecommunications com-

pany is one of the state companies that already has been placed in an NIF. Poland also encourages participation in joint ventures as a course to moderniz-

ing its telecommunications system. In 1990, Ameritech was negotiating for a deal with the PPTT to install and operate a cellular telephone system in Po- land.145 AT&T already had a $7 million order from the PPTT to provide digital switching equipment.146 The specific goal of that project is to modernize the telecommunications network and improve international capacity.147 The PPTT has purchased eight transit exchanges from Alcatel-Spain in an effort to improve the domestic telecommunications network.148 ZWUT and Siemens are working together to produce certain switching mechanisms, and Alcatel produces other switches with Teletra and PZT.149

135. Id. at 278. 136. Id. 137. Id. 138. Id. 139. David Chance, Poland Committed to Economic Reform, Minister Says, Reuters, Apr. 11, 1995. 140. Id. 141. Id. 142. Id. 143. OTC Market for Coupons, Fin. E. Eur., Dec. 15, 1995, at 6; Chorus of Criticism as MPP Gets

Underway, Fin. E. Eur., Dec. 1, 1995, at 3. 144. Polish Minister Sees Utilities Selloff in 1996, Reuters, Apr. 9, 1995. 145. Michael Arndt, Ameritech Eyes Phone Venture in Poland, Chi. Trib., Feb. 2, 1990, at Cl. 146. Telecommunications Opportunities, supra note 33, at 59. 147. Noam, supra note 1, at 278. 148. Id. 149. Id.




IV. Effects of Privatization of the Telecommunications Industry Concrete effects of the move toward privatization of the telecommunications

industries of the formerly communist countries of Eastern Europe remain diffi- cult to discern because most of the plans discussed above are still being put into place. Certain projected effects, however, are expected to occur in time. It is hoped that economic development will result because of the increased amount of business opportunities that the bolstering of the telecommunications industry will allow.150 Such economic development would help these counties to make a successful transition from controlled to free-market economies.151

Such a transition, however, is likely to take a long time. Positive effects probably will not appear immediately. In fact, outright negative effects may appear as the first results of Eastern European telecommunications reform. Ma- tav, the Hungarian state telecommunications company that has been substan- tially privatized,152 sustained a loss of more than $20.8 million in the first two months of 1995. 153 Considering that Hungary is one of the Eastern European front-runners in terms of privatization and liberalized economic reform, the news of Matav' s massive loss could have devastating effects on the pace of continued privatization in the region, in terms of both prompting other countries to slow privatization efforts and possibly making foreign sources afraid of in- vesting. At least some foreign investors, however, seem to understand the long- term nature of gains in the region, as evidenced by Hungary's subsequent ability to sell an additional 37 percent stake in Matav.154

The underlying message seems to be that things have to get worse before they can get better. Privatization is not going to be the quick fix for these countries' economies that many Eastern and Western observers envisioned at the fall of the Iron Curtain.155 The reality is that the Eastern European telecommunications infrastructure is in worse shape than anyone could have anticipated.156

" Investments are going to have to be a lot larger and the returns will probably be a good deal smaller than originally anticipated. There is more realism and greater pragmatism around now, a realisation that the road will be a lot longer than anyone at first thought."157 The journey may be longer and more arduous than expected, but the destination remains the same. Eco-

150. See Telecommunications Opportunities, supra note 33, at 1; Borg & Emmert, supra note 38, at 279.

151. See Telecommunications Opportunities, supra note 33, at 1. 152. See infra part III. 153. Hungary's Telecom Company Posts 20.8-Million-Dollar Loss in First Two Months, AGENCE

FRANCE PRESSE, Apr. 12, 1995. Matav officials attributed the shortfall to losses on international telephone calls and to customer fraud from the use of rigged phone cards at public telephone booths. Id.

154. See infra part III. 155. See Malcolm Brown, Pursuing Eastern Promise; Telecommunications Systems in Eastern Europe,

Mgmt. Today, Jan. 1994, at 70. 156. Id. 157. Id. (quoting Ross Parsons, Eastern European telecommunications analyst for communica-

tions consultant CIT Publications).




nomic reform and stable market economies are achievable, but it is important for the Eastern European governments and their foreign investors to keep in mind that long-term change is the main goal.

In addition to long-term strides in economic development, advances in per- sonal freedom are expected to result from the increase in the free flow of information associated with private consumer uses of telecommunications technologies.158 Also improvements in East-West relations may grow out of the increased cooperation inherent in the large numbers of joint ventures that are underway.159

158. Borg & Emmert, supra note 38, at 286. 159. Id. at 279.



Documents

Project: Privatization: The Global Scale-Back of Government Involvement in National Economies || TELECOMMUNICATIONS IN FORMERLY COMMUNIST COUNTRIES