|Issue:||Europe I 2002|
|Topic:||A Growth Strategy for Romanian Telecommunications|
Romania’s telecommunications system has suffered as a result of its long delayed liberalization and privatisation. The downturn in world telecommunications has had an impact upon the modernization of Central and Eastern European telecommunications systems. Many of these have not been able to attract significant financing or strategic, foreign operating company, partners. Romania is no exception. Nevertheless, there is hope that the upcoming liberalization of its telecom sector will allow it to build a modern system and provide service throughout its rural regions.
World Context The deep recession in the telecommunications sector was triggered by optimistic forecasts of the demand for fixed and mobile telephony. Exaggerated forecasts regarding the demand for transport capacity triggered the formation of new carriers, many of which installed alternative optical backbones. Today, a number of them, such as Global Crossing, have serious problems. A few years ago, overly optimistic forecasts of ARPUs (average revenues per user) for UMTS advanced mobile services triggered a ferocious fight to acquire UMTS licences in the UK, Germany, and others. Today, as a consequence, Deutsche Telecom and France Telecom have some US$60 billion in debts. Company ratings have fallen, and raising funds for investment, even at higher cost, has become very difficult. Central and Eastern Europe The downturn in Western European telecommunications has propagated eastward to Central and Eastern European (C&EE) countries as well. As a result, telecom companies there have failed to attract strategic partners and to sell stakes in their operations. Bulgaria, Greece, Turkey and others have all been unable to attract strategic partners to participate as shareholders in the structures of their national operators. The only success story in the region during the last two years was the privatisation of MakTel; Hungary’s Matav, majority owned by Deutsche Telecom, acquired a majority stake. Despite a collapse in share prices, the offer of telecommunications shares is still high; Bulgaria, Romania, Moldova, Turkey, Czech Republic all hope to sell significant stakes in their national operators. Even new entrants, such as Poland’s Elektrim, face problems. During the last few years fixed telephony penetration in C&EE has stagnated. Penetration rates in Hungary and the Czech Republic have stabilized at 38%. Could it be that 37% or 40% is the maximum penetration C&EE countries can afford? If yes, what sort of penetration can Romania, a country with a lower GDP, afford? During the same period mobile telephony increased rapidly, mobile penetration is now much higher than fixed; mobile penetration has reached 74% in the Czech Republic. National Context Romania is an important market in C&EE Its 22.4 million inhabitants face problems common to all ex-communist countries in transition: low GDP, low average wages, high inflation, high unemployment, and the like, all mostly due to much delayed reforms. Nevertheless, there have been radical improvements during the last two years, making Romania a very attractive place for foreign direct investment (FDI). Romania’s GDP has increased, the yearly inflation rate has gone down and the country’s ratings are improving. Romanian Telecommunications Romanian telecommunications have developed at a slower pace than elsewhere, due mainly to its state-owned telecommunications monopoly, which has been unable to manage and to finance high growth rates. In other countries where competition was permitted the results were outstanding, as the presence of domestic and foreign investment funds or operators, and their battles for a stake in domestic operators, prove. Fixed Telephony The Romanian telecommunications infrastructure has developed at a slower pace than that of the EU. This is largely due to the fact that in the past Rom Telecom, the national telecommunications operator, earned revenues insufficient to maintain the system properly. This was due to an incoherent tariff structure, set at rates far lower than those necessary to recover the cost of an efficient system. On December 30, 1998 after a long privatisation process which started early in 1997, OTE of Greece paid US$675 million for a 35% stake and 16% of the voting rights, becoming Rom Telecom strategic partner. The deal valued Rom Telecom at some US$1.93billion or US$540/line. The remaining 65% is still owned by the Romanian state, but there are plans to sell a major stake. Schroeder Salomon Smith Barney, an investment bank, was appointed to help the Romanian State turn itself into a minority shareholder. Rom Telecom’s partial privatisation triggered a policy of heavy investment in network modernization. That is why, in last few years, the automation and digitalisation rate increased rapidly. More than 65% of the company’s subscribers were connected to digital exchanges by year-end 2001. In the last 12 years, though, fixed – line penetration increased slowly due mainly to the lack of financial resources and, in last three years, to strong competition from mobile telephony. Mobile Telephony Mobile telephony provides a clear example of what competition could mean to Romanian telecommunications. The launch of GSM mobile operators (Mobi Fon and Mobil Rom) in 1997 created a strongly competitive environment that resulted in 3.9 million mobile subscribers signing on by year end 2001 – for a 17.3% penetration rate. The growth rates for mobile subscribers during the last few years – 900% in 1997, 220% in 1998, 110% in 1999, 70% in 2000, and some 60% in 2001 – are among the highest in Europe. Last year GSM900 operators launched GPRS services, and early in December 2001 a new mobile service, Zapp Mobile, based on CDMA2000 technology in the 450MHz band, was launched. Zapp Mobile provides voice and data at 153Kb/s and challenges both existing GPRS services and planned UMTS services. Could this new service be an alternative for UMTS, at least for Eastern and Central European countries, and could Romania be the foothold for CDMA penetration in Europe? It is difficult to answer this question considering the many pieces in the puzzle: – the world telecommunications turmoil, the big problems with UMTS, problems with Qulacomm Zapp Mobile’s main shareholder, the strong presence of GSM in Europe, and so forth. Cable TV The Romanian cable TV industry has evolved outstandingly since its liberalization. With over 3.3 million subscribers (45% household penetration), Romania is ranked sixth in Europe. The market liberalization planned for January 1, 2003, has triggered a race. Important players have already started restructuring, replacing coaxial cable with optical fibre in trunk networks and targeting smaller players. Consequently, raising funds seems to be the most important problem, and foreign strategic partners, investment funds and investment banks are important players in this landscape. Alternative Infrastructures There already are three alternative infrastructures in place: fixed telephony, mobile telephony and cable TV, but for the time being only fixed and mobile telephony’s are competing. Fixed and mobile telephony are, essentially, the same service, they just use different technologies. RomTelecom provides fixed telephony services and mobile telephony is via Cosmorom, its affiliate. Mobile operators – Mobi Fon (Connex), Mobil Rom (Orange Romania) and Telemobil (Zapp Mobile) – could enter the market upon liberalization and provide a full package of services (mobile voice, data and Internet plus fixed voice, data and Internet) by focusing mainly on the most lucrative segment – business clients. CATV operators are preparing to enter the liberalized market, on January 1, 2003, by installing optical fibre in trunk networks and using equipment that permits it to bundle TV channels, data transmissions, Internet and voice. CATV operators will have a valuable asset when the market is effectively liberalized – connection to 50% of Romanian households. As such, they will be well positioned to enter a variety of markets immediately. Fixed telephony is no longer an attractive business. Investment requirements for fixed telephony using classic copper wire and switching technology are very high and the return is slow and low. The estimated growth and potential market for fixed telephony are both lower than for mobile telephony. That is why a rational investor will not put money in fixed telephony using classical technology, unless incentives fill the gap. Preparing for liberalization The all-important stakeholders are preparing for liberalization. Very soon the Romanian ministry of communications and IT (MCIT) will issue licences for fixed telephony and establish a national regulatory body – ANRC. UMTS licences will also be issued, perhaps later this year. Alternative infrastructures are already being built. The current low penetration rates and long waiting lists for services are promising for the emerging market and could provide incentives for other operators to enter the market. The economy is now undergoing a restructuring process and there are high hopes for positive changes in the macroeconomic environment. Also, negotiations to adhere to the EU are being held. All these circumstances seem to guarantee that demand for telecommunications services will rise steadily. Conclusion Low penetration rates and a long waiting list for service are a problem for any government keen to have a telecommunications infrastructure able to support an e-society. That is why improving fixed telecommunications infrastructure in Romanian has become a national priority. To build the system, financial incentives (exemption from VAT on imported equipment, accelerating assets depreciation at European level, exemption from tax on profit for a limited period of time, etc.) are being offered. The use of money raised by telecommunications (sale of UMTS and fixed telephony licences, sale of important stakes in state-owned entities: RomTelecom, Radiocomunicatii, etc.) for the development of tele-communications infrastructure could be a real chance for Romania. At the same time, this could well be the price Romania has to pay for having delayed its telecommunications reform for so long. The income from selling UMTS licences – about US$150 million, for instance, could pay for the installation of some 100,000 fixed lines in rural areas. Also, by selling a major stake in Rom Telecom the government could raise close to US$300 million, sufficient to install more than 200,000 new lines in rural areas. The total of 300,000 new fixed lines would be enough to cover all of Romania’s rural villages! A partnership between the owner of infrastructure, the Romanian state, and a telecommunications operator could be arranged to operate this rural network. This could be a chance for Romanian telecommunications to grow and a real growth strategy for Romania’s post liberalization telecommunications sector.