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Jeff
Howley
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Ukrainian telecoms takes a huge step back
The telecoms environment
in Ukraine recently took a huge step back in time and it almost
seems that those responsible believe no one will notice. The recent
appointment of the new Chairman of the State Communications Committee
and the fanfare surrounding that appointment conceal some disturbing
trends in the political arena in general and in the telecommunications
market specifically. Almost immediately after the appointment of
the former head of Ukrtelekom to the position of head of the State
Communications Committee, the State Property Fund transferred its
shares in Ukrtelekom to the Committee. That means that now the state
telecoms regulator and the state telecoms monopoly are one in the
same. The change is as far away from a transparent, market-oriented,
sector reform as you can get. Imagine if the United States in 1984,
instead of breaking up the AT&T telephone monopoly, transferred
AT&T ownership to the FCC. As long as the regulator and the monopoly
are one, there can be no transparency. There appears to be an insecure
belief among key decision makers that competition threatens Ukrtelekom
and, therefore, national interests. The new head of the State Communications
Committee says the planned Ukrtelekom privatization will proceed
according to the European model. Well, so far, there doesn't seem
to be a clear understanding of what the European model is, because
steps taken to date are not at all consistent with that model. A
main argument for dismissing the former chairman of the State Communications
Committee, Oleh Shevchuk, was that he allowed independent, competing
operators to freely access state infrastructure. However, it's common
practice in market-driven economies for the state regulator to force
the monopoly to provide competitors with access to its state-subsidized
infrastructure. That is because market-oriented governments realize
that private competitors must be given assistance to compete with
the monopoly. That further leads to increased tax revenue for the
state, as well as growing employment for its citizens. Shevchuk
seemed to understand that. It's not clear whether the new regulator
does. Shevchuk made significant contributions to driving telecommunications
in Ukraine toward a market-driven model common to developed countries.
In the short time he was in office he did more for the Ukrainian
market in terms of revenue growth and investment opportunity than
all the others before him. He clearly recognized the importance
of a market-oriented telecoms industry to the country's economic
development. So why was a man with such a glowing record dismissed?
Government officials have offered several reasons. One is that his
policies were a threat to national security. Another is that he
failed to pull off the Ukrtelekom privatization this year. Evoking
matters of national security, common in less developed countries,
always raises the same question: security from what? Does the government
fear infiltration by foreign intelligence services? Does it fear
that its inability to adopt 21st-century ways of doing business
will be exposed? Does it fear that 49 million people armed with
more-advanced means of communication will threaten the old ways?
The government would only say, weakly, that competitors are a threat
to Ukrtelekom and, therefore, to national security. It's also questionable
that Shevchuk was fired for failing to privatize Ukrtelekom. A closer
look at the plan to privatize Ukrtelekom shows that it was not Shevchuk,
but Ukrtelekom that is responsible for the failure to privatize
the monopoly. The plan includes a provision to sell 13 percent of
the company to employees and management and to find a strategic
investor to buy the other 37 percent. The idea, I suppose, was that
the investor would quickly buy up the 13 percent as well, making
the sellers of those shares fabulously wealthy. After all, the state
was hoping for an overly optimistic $600 million for a 50 percent
share; 13 percent of that is $156 million - a nice bonus. Essentially,
the plan was a get-rich-quick scam. But strategic investors have
seen right through that and have shown no interest in the Ukrtelekom
tender, which looks set to come to a full stop as a result. Ukrtelekom
has further isolated strategic investors by abusing its monopoly
position in the market under the illusion that competition is bad
for privatization value. On the contrary, real strategic investors
crave free markets. Was Oleh Shevchuk bad for Ukrainian telecommunications?
I don't think you will hear many operators or telecommunications-equipment
suppliers working in Ukraine answer "yes" to that question. It seems
only one operator was firmly opposed to his leadership. Fundamental
business and industry experience still seem secondary in the selection
process for leadership positions that are crucial for the advancement
of Ukraine and its 49 million people. That is unfortunate because
Ukraine is a business and its 49 million citizens are, in a manner
of speaking, its employees. One fundamental rule of business is
to take care of and pay your employees first and foremost. In this
case, though, the pay is not money. It's much more than money. It's
creating an environment for enabling growth and prosperity for everyone,
not just the few. Will the recent changes and developments within
the State Communications Committee and competitive environment go
unnoticed? Absolutely not. Will there be a reaction to the change?
It all depends on which direction the regulator decides to proceed.
Either policy will be aimed at suppressing competition in the interest
of protecting the state (Ukrtelekom), or it will be structured to
promote an open, European-style competitive market. For the time
being, the main focus appears to be internal, with reformers and
supporters of broad development in the telecommunications sector
being systematically removed from office. Jeff Howley is the chief
operating officer and representative of the U.S. investor at Golden
Telecom, which is currently locked in a bitter court and antimonopoly
suit with Ukrtelekom. 