TCS Daily

From Telecommunism to Telecosm

By Meelis Kitsing - February 18, 2003 12:00 AM

"At wavelengths running from the millimeters of microwaves down to the nanometers of visible light -- is the new frontier of the millennium, empires of air and fiber that command some 50,000 times more communications potential than all the lower frequencies we now use put together. A purely human invention, they provide the key arena of economic activity for the new century."

No, the above quote is not something out of Star Wars. Some may recall that it comes from the powerful book Telecosm, written by the well-known supply-side economist George Gilder and published in 2000.

Gilder certainly proved that there is a role for poetry in a profession that many call a dismal science. But this telecosm ideal does not seem to apply to Central and Eastern Europe, where it is far from reality in either the future or the present.

Just look at the European Union applicant countries, especially the most developed ones. The number of main telephone lines per hundred inhabitants ranges between 28 in the Slovak Republic to 40 in Slovenia. Internet penetration ranges from 10 percent in Latvia, Lithuania and Poland to almost 40 percent in Estonia and Slovenia.

Though the situation may look significantly better than in Albania, where Internet penetration is below 1 percent and only five main telephone lines per hundred inhabitants are available, the progress report eEurope+2003 indicates that the average for candidate countries is well below the EU norm.

However, even looking at the evidence in both EU members and applicant countries, the diffusion of main telephone lines does not determine how many people use the Internet. And that may be a crucial issue in the less-developed former socialist states, where teledensity is extremely low, but the first wave of EU applicant countries have fairly advanced infrastructure.

One key explanation for the differing levels of Internet diffusion lies in the competition of the telecom sector. Plenty of backbone providers have entered the markets in the applicant countries. The reason why quality bandwidth does not reach everybody or why many people do not connect to the Net is explained by the lack of competition for the so-called "last-mile" of cable between users and main networks.

This last mile is controlled by incumbent telecom companies, which set the final price for users. And average Internet access costs are significantly higher in the applicant countries than in the EU countries.

All the countries had monopoly fixed-line providers in the 1990s. In order to get investments into rural areas and fix the basic infrastructure, telecom companies made deals with governments that granted them a monopoly over fixed lines for a defined period. In order to meet the requirements of EU membership, applicant countries were forced to open their markets in the telecom sector by the end of 2002. However, the formal opening of a market does not necessarily translate to more competition, as is demonstrated by many experiences of the applicant countries.

Telecommunication infrastructure in these countries was built, run and owned by state agencies, the predecessors of monopolistic companies. Dividing up the policy-setting, regulatory and business tasks of the old bureaucratic monsters has been a challenge for all applicant countries in the 1990s. Despite the upgrade of laws that put them in accordance with EU requirements and the sale of companies to strategic investors, a pathological dependence left over from the communist era still afflicts the telecom sector.

Slovakia's former prime minister, the authoritarian Vladimir Meciar, declared the country's national telecom a "strategic company," thereby keeping both investors and competition at bay. After Meciar's fall, the new government sold 51 percent of the telecom shares to Deutsche Telekom and rushed to pass legislation opening up the market by the end of 2002, in order to meet the EU requirements.

Meciar's falling credibility helped Slovakia achieve democratic approval for privatization of its "strategic" assets and, at least formally, challenge the market position of the incumbent. But Slovenia struggles with teledemocracy. On Jan. 19 Slovenians supported the return of some of the profits of its telecom company to 150,000 people - 7.5 percent of the population. Debates over who owns what in the country's telecom infrastructure, inherited from the Yugoslav idea of cooperative ownership, forced a public referendum to be called.

In addition, democratic pressures combined with public dislike of privatization of national assets to foreigners, has required the government to build a national champion in Telekom Slovenije. The company is owned by the state, state-owned investment funds and workers; possible privatization remains undecided.

Slovenia's officials admit that the country's reluctance to privatize the national telecom company and open the market for competition has been subject to heavy criticism and constant pressure from the EU. The market opening has been postponed several times. And despite the officials' claims that the market is now open, in principle, in terms of fixed lines, there are no new entrants to this market. As far as privatization is concerned, country officials had hoped to build a company of increased worth during the years of telecom hype; now is not a good time to privatize either, as the market is down.

It is never a good time.

In addition to formal barriers, many informal market impediments make new entry and sustainable competition difficult. New regulatory agencies have been created, yet cozy relations between companies and government agencies cannot be avoided. Slovakia's telecommunications ministry shares the same building with the telecom company. When Slovenia created the Ministry for Information Society, one of the key objectives was to break the "old boy" network between the telecommunications ministry and the incumbent company. Such cozy relations are reinforced by the conflict of interests between government ownership of telecoms and their concurrent regulatory role.

Even in more competitive markets, such as the case in Estonia (where shares where sold to strategic investors in the early 1990s, and the market was opened for competition two years ago) similar conflicts remain, though to a lesser extent. It is well characterized by the fact that Estonia, one of the poorest candidate countries in terms of per capita income, shares the highest levels of Internet penetration with Slovenia, the wealthiest in terms of per capita income.

The EU's pressure to liberalize telecom markets has served many applicants well; Latvia, for example, had to significantly reduce the original monopoly time period granted to its incumbent telecom company. In general, the EU progress report eEurope+2003 states, "Considerable progress is being made with the implementation of ... coherent and effective policy and regulatory framework, based on EU acquis, notably in the first wave countries and in particular in the telecommunications area."

However, even if the applicants have complied with formal requirements to open their markets, the informal barriers for market opening should be tackled, as well. Otherwise the applicant countries in question have no chance of breaking with the heritage of telecommunism and reaching their telecosm. Certainly, it is a long last mile in the transition from telecommunism to telecosm.

Meelis Kitsing is an International Policy Fellow at the Center for Policy Studies of Central European University in Budapest.

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