Appendix 2 Strategies for Developing Private
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Caucasus Trade Facilitation Conference Tbilisi, June 18-20, 2001 APPENDIX 2 STRATEGIES FOR DEVELOPING PRIVATE INVESTMENTS IN TRANSPORT AND TELECOMMUNICATIONS INFRASTRUCTURE BACKGROUND, STRATEGIES AND CONFERENCE DISCUSSIONS A. Telecommunications: Privatization of State Assets & Internet Infrastructure B. Trade Facilitation through Transport and Telecommunications Development C. Trade Facilitation in the Caucasus D. Transport Issues: Background and Strategies E. Traceca: Success and Difficulties A. Telecommunications: Privatization of State Assets & Internet Infrastructure 1. Privatization of State Assets Privatization Process: According to the Minister of Sate Property Management of Georgia, one of the main pillars of poverty reduction is institutional reform without which sustained growth will not happen. Therefore Georgia embarked in a series of privatizations staring from the small and medium companies, and now moving large state enterprises, to attract both local and foreign private capital. In addition, business environment has been improved to facilitate private capital inflows. The current legislation allows non-Georgian citizens and legal persons to undertake business in Georgia. There are no restrictions on capital inflow or repatriation in Georgia. Corporate tax is also set quite low at 20%. Energy, telecom and transport are sectors where foreign capital investment exceeds local capita participation. The telecom policy adopted by President envisages the to sale of 51% of Telecom Georgia’s (TG) and 75% of Georgia Local Line Company’s (GLLC) assets. The sector has already been liberalized liquidating all monopolies and market control in order to attract private capital and new technologies. A modern law was adopted and an independent regulator established. The tariff rebalancing process has also been launched. He thinks these institutional measures are crucial for attracting private investment into the sector. The Government has also freed the companies to be privatized from any obligations which are state functions such as policy and regulation, and via versa, freed Government agencies from the operation functions. This separation, coupled with strategic investment, will impose financial discipline on the companies, which will increase investments, improve service and extend their networks in underserved areas. A privatization advisor has already been recruited and a first round of expression of interest published. The Information Memorandum is currently being drafted based on thorough market analysis and valuation of the assets. However, so far only one company showed concrete interest by the original April 30 deadline. Therefore a second expression of interest notice will be 1 Caucasus Trade Facilitation Conference Tbilisi, June 18-20, 2001 published and the tender process somewhat extended to assure that several serious investors are attracted. The current investment climate is not very favorable with limited interest in telecom deals in emerging markets. The Government is examining several value enhancement possibilities such as offering a UMTS license. The Government has also hold two investment conferences: one in the USA and another Germany. The Oversees Private Investment Cooperation also expressed interest in financing American companies who may win tender. These meetings were of political nature aiming to demonstrate that the government is serious about holding an open tender, establishing a favorable regulatory framework and protecting private investors. Positive marketing and investment promotion is crucial at this stage. It is important to emphasize the country’s favorable characteristics such as its transit geographical location, linkages to the World by its 4 airports and 2 ports, low taxes on corporation, import of material used for export products is tax free, the regional market is open free repatriation of capital, WTO membership, good education and human resources at low prices, etc. Georgia also needs to be clear about its expectations, and namely that we are looking for a stable and experienced investor who can bring new technologies, efficient management and considerable investment allowing for extension of network to underserved cities and rural areas while running a profitable company so that the country can benefit from sizable fiscal revenues as well. Timing is important. However if the tender shows that there is no sufficient interest, the Government will wait until the telecom market turns more favorable. The market may go up an down, but on our side we need to make everything possible to make this deal attractive and show our readiness and determination to sell these assets. We need to work very hard to be able to clearly define for the investor what we are selling, on what conditions and how he can develop his business. Privatization proceeds are important. However the investor also need to be given opportunity to develop its business and invest. Telecom is essential for development, and as such long term investment and network build out are as important as immediate proceeds. When we first published an expression of interest notice, the law on telecom was not ready, the regulator was not set up and we were still in a learning stage. The companies themselves were not actively involved , and proper promotion campaigns not organized. Now we can demonstrate an up and running regulator. We have also organized a group within the Ministry of Privatization to start organize series of meetings involving the operators themselves to prove our countries and companies are attractive. The two companies will open data rooms in due courses where all information about their technical and financial situation is gathered. A special privatization advisor to the Minister of State Property Management may be recruited to assist him in the process. This new, more aggressive privatization strategy will only be successful if we have exact data, clearly formulate our goals, strategies, and actions. According to the Ministry of Communications of Azerbaijan, the privatization process in this country has experienced some delays as parliament discussed the issue of privatization for long. Azerbaijan has neither determined what will they sell, when and how from the 51% government 2 Caucasus Trade Facilitation Conference Tbilisi, June 18-20, 2001 stakes in companies. They welcome World Bank help similar to the assistance accorded to Georgia in organizing an open tender for privatization of Aztelecom. The Government is also working on determining an investment program according to which the share of the strategic investor would gradually increase from the initial 51% to up to 100% within a certain time period. Azerbaijan recommended to study the opportunity to offer Georgia Telecom, GLLC, Aztelecom and other Azeri assets for sale at the same time, as such time coordination could increase the attractiveness of these deals especially if the same buyer is attracted to more than one deal. According to the Ministry of Trade representative of Armenia, if some countries think they are late with privatization, Armenia may have rushed into privatization a bit prematurely. 90%of Armentel was sold in 1997 to OTE for 0.5 billion dollars. This deal undoubtedly resulted in increased quality with 50% digitalization and quite substantial investment. Armenia hopes that this improved network will attract more private investment in other sectors, and possibly in the telecom sector if the 15 years monopoly up to 2013 is reconsidered, at least on some segments. For instance there are negotiations to reduce it in the mobile sector. For the future, the most important aim should be not ownership change but liberalization. Problem of non-paying customers: Among one of the main issues to be solved prior to privatization, GLLC of Georgia stressed the huge accounts receivables amounting to about 10 million Lari for GLLC and even more in GT due to the high number of non-paying customers, especially the government agencies. Unless this issue is reflected in the next budget it may be hard to sell these entities. The Minister gave its assurance that just as in the case of the privatization of the energy sector, the Government will find a social policy solution to help the poor. In Armenia, there is a non-paying customer problem with about 4 million USD outstanding even after privatization, as Armentel is not allowed to disconnect government agencies as opposed to Georgia where at least in principle this is possible. 2. Private investment in Internet Infrastructure Infrastructure: The only operating fiber optic backbone in the region is the Trans Asia Europe cable along the Baku-Rustavi-Tbilisi-Poti highway and connected to Novorosisk in Russia. The construction of TAE connecting Frankfurt and Sanghai is almost completed (Uzbekistan left the organization and connection may be made via Iran instead). The Caucasus region’s link is of secondary nature in case connection via Turkey is interrupted. The Georgian portion of TAE was built by OTE, the Greek operator, supplier credit and is operated by FOPNET. However, no Georgian ISP leases capacity on it due to prohibitive prices resulting from this quasi monopoly: monthly charge for 2Mbps on 1 kilometer is 300 Belgian francs (6 USD). Most ISPs use satellite connection via Gorizont. Inteslat,etc. Armenia is linked via a branch from Rustavi. There are plans to build Poti-Rize submarine cable further connection to Istanbul. Azerbaijan is also connected to Iran and is planning to build a submarine cable