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Eastern Europe: Phones Won't Improve Without Private Financing

Prague, 14 November 1996 (RFE/RL) -- The European Bank for Reconstruction and Development (EBRD) says outdated telephone networks in eastern Europe and the former Soviet republics will not improve without private financing.

Further, the EBRD says private investment from abroad won't come to eastern telecoms unless the companies develop a more commercial approach, along with "credible reform" of the way they charge customers.

In its annual "Transition Report," issued this month, the EBRD emphasized that dependable phones are crucial in the transition to a market economy. The report says reliable phones increase private sector productivity dramatically by enhancing markets and helping businesses forge new relationships with trading partners.

In fact, the EBRD says there is a strong association between the availability of reliable telephone services and per capita Gross Domestic Product (GDP) in eastern countries.

A recent survey by the Economist Group goes a step further. It says telecom sectors are an accurate barometer of policy evolution, investment generation and national economic development in former communist countries.

Countries with pro-investment policies have developed their telecommunication systems more quickly and are now on a faster track to overall prosperity.

And a clear division is now apparent between countries that are developing their telecom networks and those that are delaying reform.

The Czech Republic, Hungary and Estonia have jumped ahead of all the others with major strategic privatizations that have brought in thousands of millions of dollars from abroad.

But progress has been slow in places like Romania, Albania, Belarus, Moldova, the Caucasus and the former Soviet republics of central Asia.

In the middle are countries like Poland, Slovakia, Latvia and Lithuania. The Economist Group says Croatia and Bosnia also are moving into the middle ground, largely due to a benevolent attitude toward them by the international lending community.

In Russia, the momentum for telecom privatization was set back last December by the collapse of a deal in which Italy's STET would have bought part of Sviazinvest -- a holding company with stakes in 82 of Russia's 86 STET had agreed to invest $1.4 billion for 25 percent of Sviazinvest. But only weeks after reaching the agreement, the deal fell apart in a dispute over payment terms and conditions.

The result has been crippling for Russia. Half of the proceeds from the sell-off had already been earmarked for improving the telephone network in 1996 and 1997.

Russia's State Property Committee Chairman Alfred Kokh told Interfax last week that the government is now seeking several portfolio investors rather than one strategic investor for Sviazinvest. But analysts say foreign investors have become wary because of the STET fiasco and the lack of clear regulations in the sector.

Meanwhile, Russia's Communications Minister Vladimir Bulgak last month announced plans for a new round of share offerings for the country's regional telecoms. The ministry says it expects foreign investments in the sector to total $750 million this year.

Elsewhere in Russia, the Economist Group says the centerpiece of the country's telecom modernization strategy remains a mere pipedream.

That $40 billion plan, known as the "50x50 project," would join together an international consortium with Russia's long distance carrier, Rostelecom. The aim is to install digital exchanges in 50 cities that would be linked by 50,000 kilometers of fiber-optic cable.

Governments that have delayed privatizing their telecoms for fear of losing control of the sector's development would do well to look at the Czech example.

In selling a minority stake of SPT Telecom to a Dutch-led consortium, Czech authorities required that the company nearly double the number of telephone lines in the country to four million by the end of the year 2000.

To reach that goal, SPT will have to invest about $4 billion for new lines during the next four years. It would be difficult for the firm to raise the needed money without the help of its new foreign partners, PTT Telecom Netherlands and Swiss Telecom.

Hungary has sold 67 percent of its telecom company, Matav, to Deutsche Telekom and Ameritech. These foreign partners have helped Matav obtain more favorable loan conditions from Western banks. That has, in turn, established a benchmark that means better loan conditions for other Hungarian businesses.

The EBRD says other countries also must commercialize their telecoms and create more responsible regulations if they expect to attract the enormous levels of private financing needed to rebuild their inefficient phone systems.

Commercialized firms can remain publicly owned, but they are similar in structure and operation to private businesses.

The World Bank says telecoms should be removed from the control of ministries and converted into joint-stock companies which must report to a board of directors.

Prices for household customers also should be increased to efficient levels so that profits are the underlying goal, rather than social considerations.

This would ease the burden of phone payments for new businesses, which currently pay higher rates in many countries so that household phone charges can be kept lower.

In a nutshell, the World Bank says social programs should be created to meet social needs. But telecoms and other businesses must be operated with the goal of generating profits.

Initially, such moves have been politically unpopular in former communist states. However, the World Bank stresses that the entire economy will benefit in the long run from the creation of a healthy market infrastructure.