New telecommunications law cuts monopoly term

  • 2001-11-29
  • Ilze Arklina
RIGA - A new law on telecommunications, which takes effect Nov. 30, sets the legal framework for the liberalization of the telecommunications market in Latvia.

Legal squabble

The law cuts the monopoly rights of the fixed-line telephone company Lattelekom by 10 years to Jan. 1, 2003 - confirming a move agreed to when Latvia joined the World Trade Organization in 1998, and one essential to its European Union membership bid.

The law should clarify arguments currently ongoing in a Swedish court of arbitration, where Lattelekom's largest private shareholder, Finnish controlled Tilts Communications, is suing Latvia for breaking an agreement that Lattelekom's monopoly would stand until 2013.

"This law is positive news for both sides," Aivars Kreilis, director of Lattelekom's regulatory affairs department told The Baltic Times. "The shortening of Lattelekom's monopoly only became final after the parliamentary vote."

But his boss, Lattelekom's Executive Director Leena Suhonen, said the new law would not affect the case in Stockholm. "I don't see any relation between the new telecommunication law and the proceedings," she said.

Suhonen expressed confidence that the company could thrive in a deregulated market. "We have reorganized the company, focusing on different customer sectors. Our priority is small- and medium-size enterprises as the fastest growing segment in the country," she said.

She stressed Lattelekom was developing new products aimed at home users in order to maintain subscriber levels.

But Lattelekom lags behind when it comes to digitalization. Only 55.2 percent of the whole network, compared with 53.8 percent in Lithuania and 72.2 percent in Estonia.

Tilts Communications, which holds a 49 percent stake in Lattelekom, turned to the International Court of Arbitration after the company's majority owner, the Latvian state, decided to reduce the term of Lattelekom's fixed-line monopoly without first agreeing to compensate its other shareholders.

For its part Latvia accuses Tilts Communications of delaying modernization of the company.

Meanwhile the Latvian state's suspension of restructuring plans earlier proposed by the board and accepted by Tilts Communications means. Lattelekom is suffering, Suhonen earlier told the newspaper Dienas Bizness.

Latvian privatization officials have said that Lattelekom's plan to divest itself of a number of subsidiaries may result in the state losing control over them.

The details of the proceedings between Tilts Communications and the Latvian state are confidential, but it has been estimated that Tilts Communications could be claiming up to $1 billion in compensation.

Kreilis described the 20 year monopoly Lattelekom was granted in 1993 as a "logical delusion."

"In 1994, a year after the contract was signed, six of us purchased a mobile phone for 948 lats ($1,500). We weren't able to predict then what would happen in a few years."

Market liberalization

Having the new law on telecommunications in place is a prerequisite for the drafting of licensing rules and other regulatory acts by regulators, said Kreilis.

In predicting what could happen in Latvia following liberalization of the fixed-line market Estonia' experience is instructive, he said. A key battle ground since the Estonian market was liberalized at the start of this year has been over the prices of international calls, which have plunged.

Finland's Uninet and Sweden's Tele2 have taken the lead alongside former monopoly Eesti Telefon. Since Eesti Telefon increased prices of local calls on April 1, competitors have begun offering local calls too, Eesti Telefon spokesman Ain Parmas told The Baltic Times.

"There's little hope the scenario in Latvia could be any different," observed Kreilis.

Lattelekom's practice of subsidizing the cost of local calls with income from international calls may be doomed, as has been the case in Estonia, said Parmas. "In a free market it's no longer possible to have social policies - all prices must have a reasonable profit margin," he said.

Latvia's new telecommunication law allows consumers free access to other public telecommunication networks from the same telephone number as of Jan. 1, 2003, instead of the previously set 2005.

The law foresees establishment of a universal telecommunication fund to pay for development in distant corners of Latvia, to which all operators will contribute.

Coming competition

In Estonia, only Uninet has its own networks, because, said Parmas, "others are not interested in investing in infrastructure." Kreilis does not anticipate anyone building new networks in Latvia because of the high costs involved. Lattelekom has invested more than 370 million lats in modernizing and repairing the network, he said.

One company has already announced its readiness to compete. The Latvian state-owned railway company Latvijas Dzelzcels, which has its own communication network throughout the country, has said it will enter the fray.

"I won't hide my plans to take a share of the pie when foolish arrangements previously made in respect of Lattelekom are terminated," Latvijas Dzelzcels Director General Andris Zorgevics told Dienas Bizness.

"In any case, Lattelekom will have to reckon with Latvijas Dzelzcels as a very serious partner and competitor. We are looking forward to the time when we could begin to work actively in this sector and elbow our rivals aside."

Apart from technological connections with very specific functions, Latvijas Dzelczels' specialized telecommunication network also has other individual and corporate subscribers which it would be unprofitable for Lattelekom to start serving, said the railway company head.

Latvijas Dzelczels' connections to railway networks in neighboring countries are being upgraded extensively, Zorgevics said.

Kreilis said the state energy monopoly Latvenergo and the state information agency VITA, which managed the government's communication network of Soviet Latvia, could also compete with Lattelekom.

In 2000, Lattelekom made one of the highest profits in Latvia of 23.31 million lats, with assets of 276.95 million lats. The company has 731,891 fixed-line subscribers.