Liberalization of the Latvian Telecommunications Market

Liberalization of the Latvian Telecommunications Market Dr. Jānis Lelis, Latvian Telecommunications Association, Batic IT Review 1 '99 Over the last several years, the Latvian government has sought to improve the overall telecommunications climate in Latvia. On August 18, 1998, the Cabinet of Ministers adopted a new sector policy [1] in the field of telecommunications. Two cornerstones for further development of the telecommunications sector are the demand for general competition in the telecommunications service sphere, as well as the intention to privatize the telecommunications provider Lattelekom in the near term. Recent events in the sector -- the decision of the Telecommunications Tariffs Council to change telephone tariffs, as well as the decision of the Latvian Privatization Agency to complete the privatization of large state-owned companies in 1999 and 2000 -- have led to much dispute, and there have even been protest meetings. [4] The Latvian Telecommunications Association believes that if there is to be development of the telecommunications sector, following important conditions must be in place. I. Ongoing and efficient development of the telecommunications sector, and the integration of the country into the European Union This goal is included in the current operational declaration of the Cabinet of Ministers, and the Latvian government is well aware of the increasing role of telecommunications in business, culture and education. II. A national telecommunications sector policy that is harmonized with the requirements, policies and development trends of the European Union and the World Trade Organization. The EU's goal of ensuring telecommunications services for virtually every resident of a country must be adapted gradually to Latvia's specific circumstances. In our country, as in the EU, the use of information services must be seen as a basic human right. If this is not the case, Latvia will not deserve to be seen as an intellectual society. Basic services must be available to all strata of residents in all of Latvia's regions. III. Stimulation of effective competition in all market segments while controlling the move toward general competition in the public services sector. A completely unacceptable situation would be one in which during the course of market liberalization, telecommunications companies suspend the provision of services that are important to the public but that are for various reasons economically disadvantageous for service providers. In elaborating new normatives, all basic services must be defined specifically – transmission of speech and other signals between the public telecommunications network in the Republic of Latvia and telecommunications networks in other countries and in Latvia; transmission of speech and other signals among telecommunications equipment that is connected to telecommunications network; transmission of radio and television programs in the public telecommunications network; line leasing; provision of free calls to emergency services (fire fighting, the police, medical services, etc.); introduction and use of pay telephones in the public telecommunications sector; and use of a common infrastructure that has been developed by more than one market participant. Transitional rules must be put in place that ensure the availability of basic services to the public while simultaneously allowing for the provision of services to other market participants. This would stimulate the creation of new companies in the sector – something that at this time is hampered because overall uncertainty about the future of the sector limits the ability of new and existing participants in the sector to develop long-term business plans. IV. A stable environment for investments in the telecommunications sector Latvia's internal resources are currently insufficient to find the necessary money for development of the entire telecommunications sector, and this means that there is a need for foreign investment. This is made difficult by several circumstances, however. First of all, the existing normative base in Latvia is such that a single market participant – Lattelekom – is given privileged conditions. Latvian law does not ensure that money invested in the telecommunications sector is not only recouped, but also leads to a profit. Lattelekom's annual income from each client line is currently such that a normal period of investment recovery (5-7 years) cannot be forecast. [3] One of the conditions to improve the investment climate in this country will be allowing investors to control the management of Latvian companies. V. Specific attention to the development of telecommunications networks and services in rural regions, utilizing the entire existing telecommunications network infrastructure Depending on financial abilities and technical considerations, responsibility for expanding the telecommunications networks and service spectrums of Latvia's regions must be undertaken by all companies that have telecommunications infrastructures in place. It must be ascertained that telecommunications network managers reach agreements among themselves to use the network resources, so that at least the universal range of services is made available in rural areas. Sometimes this is not particularly financially advantageous, and here there should be a universal service fund to help out where necessary. [2] VI. A prohibition against any bans against entering into the marketplace and against competition, given the limited access to resources, the need for large volumes of investment, and the interests of consumers There need to be transitional regulations and unified standardization rules that ensure that once the market is liberalized, there is no confusion in the telecommunications sector. The state must set out technical parameters that are mandatory for all market participants. Among the limited resources are the use of radio frequencies and numbering plans. VII. The creation of new jobs in the telecommunications sector and support for local manufacturers The new investments and new services that enter Latvia along with foreign partners and new companies also often lead to new jobs, but not sufficiently to recreate the number of jobs that once existed in Latvia. In 1990, the number of people per 100 residents to be employed in the radioelectronics and telecommunications sector was the largest in Europe. Latvia was home to such giant firms as VEF, ALFA, Radiotehnika and DAMBIS. There were many academic research institutes, most of which have all but suspended operations. There are still highly qualified specialists in Latvia, an care must be given to ensuring that the government does not forget about opportunities to promote the work of local producers. Once again we come back to investments here, and now we are talking about numbers that are in the billions of local production is to be restored. VIII. Protection of poorer clients who cannot pay for basic services A special series of packets of telecommunications services must be established and partly financed through a specialized fund. This would allow less well-off people to call other clients at a minimal cost, as well as to obtain necessary information. Of course, no service can be completely free, because that would create absolute demand and reduce the flow of money within Latvia. The resources for the universal fund must come from payments contributed by the state and by telecommunications companies. Additional opportunities would be created by a universal service fund, from which some resources could be diverted to the protection of less well-off clients, compensating operators for losses that are caused through the provision of discounts. Any kind of client protection must necessarily involve scrupulous analysis of the share of clients who are facing a situation that deserves discounts. There must also be careful analysis of the volume of money that must come from the universal service fund to ensure these discounts. This work must be done in tandem with operators, and the indicators must be adjusted from year to year. According to Lattelekom, at the beginning of 1999 various kinds of social discounts were being received by 196,000 Lattelekom clients. Any kind of discount system forces operators to increase tariffs at the expense of those who do not receive discounts. Also to be calculated are the costs of document preparation and data base maintenance that are associated with each discount system. Every client who does not receive discounts is actually paying for services that are received by others. [5] IX. Availability of those public services that are in highest demand for all clients There must be a unified system for licensing of companies that allows for monitoring of the operations of these companies and for a prohibition against the failure to observe the interests of specific market participants or groups thereof by refusing to provide services or by failing to ensure the necessary quality. X. The public availability of licenses for all telecommunications operators and service providers Licenses must be issued to all companies that are active in the telecommunications sector, including Lattelekom. The public availability of licenses would allow us to have a more complete view of the telecommunications sector as a whole, and it would also serve to increase competition.

By the year 2000, the following things will be done with respect to Latvia's telecommunications companies and with the participation of the Telecommunications Association of Latvia: A) The legal base of telecommunications will be improved, including the existing law on telecommunications, which is to be replaced with a new law to govern the operations of the telecommunications sector under conditions of free competition. The new telecommunications law will have decisive influence on future development of the sector, and this was evidenced by a draft law that was prepared in 1998 but was rejected for various reasons by all of the interested parties, each saying that the legislation could be improved cardinally. The new law must certainly conform to European Union requirements, and it must promote the liberalization of telecommunications in Latvia. [2] The working group that will elaborate the new draft law will have to understand the enormous responsibility that will rest with it in terms of the fact that the work will either hamper or develop the telecommunications sector, depending on the quality of the document. B) More extensive representation in international telecommunications organizations will be ensured, and there will be more active work in studying internationally coordinated telecommunications programs, as well as the experience of developed countries. Latvia must truly participate in all of the international telecommunications organizations in which it is a member. Latvia must not allow others to judge on issues that affect Latvian interests. An important factor here is the consistency which Latvia demonstrates in fulfilling its obligations vis-a-vis international institutions. C) A new telecommunications modernization program will be elaborated and approved. In 1998 we saw the significance of this issue, because if the situation in the market is not known, market participants have difficulties in planning their future work. The previous state telecommunications program was approved in 1994, when the basic operator in Latvia was only Lattelekom. Since then, the situation in the telecommunications market in terms of market shares held by various operators has changed fundamentally (Figure 1 and 2). We must deal with the rapid development of mobile networks, for example. At the beginning of 1998 the total number of mobile network clients in Latvia was 168,000, and the volume of Internet services is also increasing very rapidly. It will not be easy to elaborate a new state telecommunications program, because the rapid development of the entire sector will have to be taken into account, as will the new and super-new technologies that are appearing in the marketplace. D) A special fund will be set up to ensure universal services. The establishment of a universal service fund is intended to stimulate operators to bring services to regions where work is currently not profitable. Bids for tenders will be launched, and service providers will be able to receive subsidies from the universal service fund to cover losses that are caused in providing the various services. This is extremely important, but first there must be a highly concrete law about the sources from which money for the fund will come. The sooner the service fund is set up, the greater will be the hope that our rural residents will be able to receive telecommunications services in all areas and without exception. When receiving a license, of course, operators will have to understand that universal telecommunications service obligations will be involved. [2] E) New telecommunications standardization regulations will be worked out in concert with international requirements. The first step will be to collect information about normative acts that are already in place, comparing them to the requirements of the European Union and other international organizations. F) A training program will be set up in the telecommunications sector. Employees in the telecommunications sector require ongoing training if the sector is to continue to develop successfully. The existing situation signifies that demand for such training considerably exceeds the supply of opportunities. Because of limited resources, smaller telecommunications companies have limited abilities to train their employees.

The following things will be done in 1999: 1) The Umbrella Agreement between Lattelekom and its foreign partners will be reviewed in concert with present-day economic requirements in Latvia. The most important issue here is a reduction in the term during which Lattelekom enjoys monopoly rights in Latvia. The interests of Lattelekom's investors will have to be observed in this process, as will the trends of Latvia's economic development. Analysis will have to be given to the issue of whether the investors will be able to recoup their investment prior to the expiration of the monopoly period, or whether justified compensation will have to be paid. The Lattelekom foreign investor Sonera, according to press reports, has spoken of compensation of around USD 100 million. 2) Lattelekom will be issued an individual license. The licensing of the company will ensure full protection of consumer interests, something that is not happening at this time. The license will serve as a basis for analysis of Lattelekom's operations, allowing us to see whether the company has fulfilled its obligations vis-a-vis clients and whether the quality of services that are provided is commensurate to the fees that are charged for those services. 3) The state share in Lattelekom (and other telecommunications companies) will be privatized. The most difficult issue in the privatization process is to specify the price of shares in Lattelekom properly and to define whether the shares will be available to anyone. Also at issue – how large a segment of the shares will be reserved for foreign investors, and how large a share will be sold to existing Lattelekom investors with a right to first refusal. Decisions have to be made about how large a segment of shares will remain the property of the Latvian state, and how large a segment will be floated for public purchase. Estonia hopes to earn several billion Estonian crowns through the privatization of Eesti Telekom, while 27.28% of the company will remain in the hands of the state. There will be much discussion and debate over the privatization of Lattelekom [4], but this process must not be hampered because it will stimulate the involvement of additional resources in telecommunications development. 4) The mobile telecommunications service market will be liberalized as much as possible, offering licenses to new mobile telecommunications network operators in new technological standards. GSM (Global System for Mobile Communications) and DCS (Digital Cellular System) systems are developing very rapidly in Europe, and the number of clients of GSM networks, and especially DCS-1800 networks, is skyrocketing. In 1998 DC-1800 operators went on line in Austria, Denmark, Finland, Germany, Luxembourg, Portugal and Sweden. The forecast of user distribution by system is seen in Figure 4. The appearance of new operators stimulates the work of existing operators in each country. Quality increases, tariffs are reduced. Estonia's largest mobile service provider, Estonian Mobile Telefon, feels that the advertising campaign that was conducted by the new third operator, Q-GSM, served to promote EMT's operations even more than its own advertising activities. In Latvia the market share of the mobile network must be analyzed in the very near future, and a bid for tenders must be launched in 1999 for the entry of new operators into the market. The longer the period during which new licenses are not issued to mobile network operators, the less effective will be the work of those operators. The new operators should be allowed to work only with new and super-modern technologies such as UMTS (Universal Mobile Telecommunications System). 5) An independent and professional national telecommunications regulator will be established to stimulate competition and to supervise the extent to which regulations in the telecommunications sector are observed. The national telecommunications network regulator will have to oversee the following areas: • The setting of tariffs • The fulfillment of licensing regulations • The review of client complaints about operators and service providers • The elaboration and supervision of regulations governing technical aspects of client equipment as well as the connection of equipment to networks • The elaboration and control over interconnection principles • The distribution of numeric regions in the overall numbering area and regulation of the use thereof • Review and resolution of disputes among operators • Supervision of service quality • Protection of consumer rights and operator interests • Supervision of the financial mechanism to underpin the universal telecommunications network fund The national telecommunications regulator must be set up absolutely as quickly as possible, and its main goal will be to promote competition in all segments of the telecommunications networks. The national telecommunications regulator must be absolutely independent from telecommunications networks, equipment suppliers and service providers. 6) Liberalization of the leased line service market will be launched, permitting private, specialized and public telecommunications service providers, as well as other businesses, to offer leased line services, ensuring the necessary licensing of such companies. Currently Latvian law permits the liberalization of this market segment only if agreement can be reached with Lattelekom and its foreign investor, Tilts communications. In writing a new law on leased line services, there must be a section that precisely defines the relations among potential service providers, as well as other "rules of the game". 7) Control will be placed over service quality, and service fees will be revised or compensated when services do not meet quality requirements The Telecommunications Tariffs council in 1996 set up the Telecommunications Metrological Center, which later was reformed into the Telecommunications Quality Control Center. Also in 1996 work was begun on developing quality indicators that could be understood by all consumers. The current situation requires that in each agreement between the service provider and the service recipient there be a strict definition of the respective quality indicators, and the service provider must bear full responsibility for ensuring that these indicators are met. 8) A general licensing regime will be implemented with the minimal necessary regulatory conditions over the provision of pay phone services, as well as the provision of data and multi- media supplementary services. It is necessary to define those services that telecommunications companies can offer their clients and which services they may not provide. At this time there is a lack of clarity over the provision of voice services in the Internet network, over the organizing of video conferences, and over two-directional cable television communications. The new telecommunications law must have a precise definition of those services that remain fully the brief of Lattelekom as long as its monopoly rights persist.

References 1. The telecommunications sector policy of the Republic of Latvia for the period between 1998 and 2003. A protocol of the meeting of the Cabinet of Ministers of the Republic of Latvia, 18 August 1998, No. 45, Paragraph 45. 2. Bērziņš, G. and G. Lauks. "Toward Europe - A New Telecommunications Sector Policy for Latvia", Baltic IT Review, No. 2, 1998, pp. 54-58. 3. The annual reports of SIA Lattelekom, 1994-1997. 4. Kaža, J. "Tumsoņsociālisma rēgs un Latvijas telekomunikācijas" (The ghost of dark socialism and Latvian telecommunications), Dienas Bizness, 21 January 1999, p. 3. 5. "Lattelekom lielākā vērtība ir klienti" (Lattelekom's greatest value is its clients), advertisement in Dienas Bizness.