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Seeking immediate gratification over Lattelekom

  • 2000-08-31
  • Diana Kudayarova
Along with creating the working group to handle the arbitration case filed by Tilts Communications, a 49 percent shareholder in fixed-line monopoly Lattelekom, against the Republic of Latvia on Aug. 14, Prime Minister Andris Berzins asked the Ministry of Foreign Affairs to consider the possible implications of breaking the agreement with the World Trade Organization.

The agreement stipulates removal of the fixed-line telecommunications monopoly by the end of 2003, and contradicts the operating agreement with Tilts, the Danish subsidiary of Finnish telecom giant Sonera, which preserves the monopoly until the end of 2013.

Breaking the WTO agreement would shake off Tilts' compensation claims, help to avoid a costly court procedure, and allow Latvia to concentrate on developing mobile telecommunications, Transport Minister Anatolijs Gorbu-novs suggested.

And, of course, WTO will not file a court claim.

This may seem appealing. The court case will undoubtedly cost a lot: legal expenses in the order of 400 lats ($667) per hour per lawyer were published in Diena, a Latvian daily, and the Latvian Privatization Agency, which was chosen by the Cabinet of Ministers to foot the bill, hinted that this is the lower, not the upper limit.

Compensating Tilts with Lattelekom shares means that there will be less to privatize. Besides, the Latvian government has repeatedly voiced dissatisfaction with Tilts Communications, and the public bears many grudges for frequent tariff increases.

But, while waiting for the Foreign Ministry's complete assessment, one can kill time by making a much longer list of weightier items of why backing out of a WTO commitment is nonetheless a bad idea.

From an entirely practical perspective, although mobile telecommunications are indeed becoming more widespread, they are far from replacing fixed-line connections. The income level of Latvian residents is simply not yet high enough. A good evidence of this is that even in fixed lines, the number of subscribers has been decreasing. In other countries, such as Finland, this is a sign of mobile telecoms taking over.

In Latvia, it is more likely to be a sign of exorbitant tariffs, considering that, with 30 subscribers per 100 residents, the current subscriber level is only half as high as in Western Europe. And Lattelekom tariffs are still lower than mobile.

Even with other methods of real time voice transmission, such as the previously mentioned mobile and Internet telephony, becoming increasingly available, fixed lines will retain their importance as vital for connection to the Internet. And as Internet rates are based on the rates for domestic phone calls, the liberalization of this market is essential for increasing the availability of Internet connections. It is worth recalling that Latvian officials have shown signs of wanting to earmark IT as a priority development area, and are talking about conducting more government business on-line.

And, one doesn't need to be reminded of Latvia's burning desire to become part of the European Union - whose members are required to liberalize their telecommunications markets by the end of 2000.

The decision to keep the Lattelekom monopoly until 2013 would thus go against the Latvian government's own policy goals, and could seriously question Latvia's commitment not only to free trade, but also to EU membership, electronic government and, by extrapolation, any other long-term policy initiatives.

It is indicative that neither Tilts Communications, nor Sonera, with their team of lawyers and plenty of time to prepare, expected such an outcome. Following the filing of the arbitration request, Tilts' Chairman Christer Nykopp reassured journalists that the company does not demand the restoration of the monopoly. He believed that, after the agreement with WTO, such a move would be all but impossible.

The tricky situation with Lattelekom and Tilts Communications arose in the first place because of the Latvian government's inability to see the forest for the trees and make smaller sacrifices - such as short-term political popularity and control over utility monopolies - for larger gains.

That the promise of 20 years of fixed-line telecommunications monopoly was the price Latvia had to pay for political control over the telecom market, not so much the modernization of its telephone lines, is indicated by the following facts:

First, a 20-year monopoly was not a specific requirement of Tilts Communications or its owner Sonera. The Latvian government was ready to set up a monopoly on basic telecoms, with 51 percent state share holding, months before Tilts was announced the winner of the government contest in December 1993. A monopoly until 2013 was stipulated by the country's telecommunications law, which was adopted by Parliament and came into force May 10, 1993.

Second, in Estonia the same Sonera agreed to carry out the same task of modernizing fixed telecom networks in exchange for just eight years of monopoly on international and long-distance calls, largely because Eesti Telekom, the country's fixed-line monopoly, was not subject to political control, according to Toomas Simera, chairman of Eesti Telekom.

The Communications Ministry there was dissolved and an independent Eesti Telekom operator was set up before the tender was announced.

"No western firm will get involved in a regulated industry," Simera said.

Third, the tariff policy, which is carried out by the tariff authority not Lattelekom itself and created so many negative feelings among Latvian residents, and for which Tilts Communications is requesting compensation, was also implemented with short-term political popularity goals, and little more.

Tariffs were kept artificially low in the first three years, where extra revenues were most needed for investment in rural areas, to win over the public which already had phones.

They jumped up sharply several times, leading to the loss of subscribers, after it was decided that the Tilts' monopoly will be broken 10 years early - to pacify Tilts Communications. Neither worked in the long run, eventually irritating both groups the government sought to sway to its side.

With the choice between WTO membership, fulfilling EU requirements and liberalizing telecommunications for the practical economic benefits it will bring, and avoiding the admittedly costly court case, what will be the decision now?