The government of Ukraine announced its intention to privatize the incumbent fixed-line telecommunication operator Ukrtelecom. Ukraine’s government needs to achieve high revenues from privatization in order to fund the government budget and to increase the political acceptability of privatization. Privatization should provide consumers with more, better, new and less costly telecommunication services through market opening and the stimulation of competition. Such policies have proven to be highly successful and the telecommunication industry has turned into an important accelerator of economic growth. Realization of the telecommunication potential crucially depends on the availability of necessary infrastructure, which allows providers and users to tap new growth markets with innovative new products and services. In this context it is important that telecommunication infrastructure is generally accessible, with high quality service measures (i.e. the reliability, data volumes, and speed).
So far the development of Ukraine’s telecommunication sector has been split. Mobile services are leading the market and are widely available, covering 120% of the population. Fixed-line telecommunication has stagnated at a coverage level of 27% of the population, while the provision of broadband internet has shown remarkable growth rates but has emerged only recently and covers just 3% of the population.
Ukrtelecom maintains its position in fixed line telecommunication. The company is a market leader in the provision of broadband internet with a market share of 38% and is a niche provider in mobile communication with less than a half percent of mobile subscribers.
As the markets change, Ukrtelecoms is under threat from several directions:
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It is losing market shares in the profitable segments of the market such as long-distance, international and fixed to mobile telecommunication. This trend will continue.
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Its main source of revenues is local fixed-line telephony, for which tariffs are set by the regulator below costs, so the firm is accumulating losses in that segment.
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Ukrtelecom faces very high labor costs and was not permitted to shed redundant labor.
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Ukrtelecom has participated strongly in the new growth segment of broadband internet provision and 3G (UMTS)services in mobile communication. But so far both segments remain very small and will require further sizeable capital investments before profits will be generated.
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Ukrtelecom has financed investments in the recent past externally through foreign debt and corporate bonds. During the present economic crisis access to external sources of funding is not very likely, while debt repayments will require significant financial resources.
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The company has reported losses for the year 2008 and the first quarter of 2009.
Hence, the government should privatize Ukrtelecom now, as only private investors will provide the enormous investments necessary for the further development of the telecommunication sector in Ukraine.
Prior to privatization the regulator should modify the present tariff regulation. Tariffs should reflect full and true costs, including capital expenditure costs.
Ukrtelecom urgently needs to adjust its labor costs to the overall performance of the company. Any privatization obligations aimed at keeping the same personnel while market shares are shrinking will inhibit the firm’s competitiveness. So, the government should refrain from obliging investors to keep present staff after privatization. Although this might not be popular, given the present critical situation of Ukrtelecom any clause preventing labor reduction will certainly decrease the interest in the firm.
Furthermore, we conclude that the accumulation of the different assets in Ukrtelecom seems to be worth less than the sum of its parts. Hence we recommend splitting the company according to its different assets and privatization of the mobile services separate from the fixed line operations including broadband and real estate.
