Turning the Corner

Economic News

22 Jul 2010
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The telecoms sector in Ukraine is one of curious contradictions. While gradual liberalisation has opened the floodgates for major players to enter the market, the stop-and-go privatisation of the fixed-line carrier Ukrtelecom has left the company at the mercy of the country's ever-changing governments.



The introduction of next-generation digital mobile services has attracted over 50m mobile users in a rapidly growing and consolidating market. Last year, total revenue from mobile and internet services climbed to $5.2bn, while forecasts estimate growth to $7.7bn in four years time.



Despite tremendous industry growth, Ukrtelecom, which is 92.86% state-owned, has failed to keep up. Without fresh injections of foreign capital, the telecoms company has been slow to invest in its network, allowing its competitors to snatch a large portion of the country's broadband and mobile technology segments.



In a move to compete with Russia's Vimpelcom and MTS, Ukrtelecom rolled out UMTS (Universal Mobile Telecommunications System) 3G network service on November 1, the first of its kind in Ukraine. This will give a strong position in the growing third-generation (3G) mobile market.



With the help of $152m in investments, Ukrtelecom has re-branded its flagship service Utel and now provides 3G service to Ukraine's six largest cities. Through advanced USB modem technology, the company will offer portable on-demand high-speed internet access through its advanced UMTS network.



The telecoms provider also advanced ahead of its competitors by launching internet protocol television (IPTV) services this month, working in conjunction with the parent company of the Inter television channel. Under the brand U.tv, customers will have access to video on demand (VoD), internet services and other interactive programming options. The carrier also announced its strategy to introduce a voice over internet protocol (VoIP) service.



These developments come at a bullish time for the company, which earned $1bn in the first nine months of this year. In turn, year-on-year profits soared to $53m, a healthy increase of nearly 50%.



This follows the company receiving the two licences for IPTV back in 2005 - from the telecommunications authority and the broadcast regulator. That year, Ukrtelecom also received the only licence to build UMTS infrastructure thanks to its position as a state-owned entity.



However, the company remains troubled, largely due to a lethargic privatisation process that has stopped and started as a result of Ukraine's ongoing political turmoil. In July 2005, President Viktor Yushchenko signed a bill suspending the sale of Ukrtelecom on grounds that a new programme to sell state assets had not been ratified. In January 2007, parliament pushed forward a bill unblocking restrictions and prohibitions on Ukrtelecom's privatisation.



In the wake of last year's parliamentary elections and the rise of the "anti-crisis" coalition, the political will to sell state-run companies has floundered due to infighting between factions. Only one quarter of the 575 companies slated for privatisation were sold.



Valentyna Semenyuk, chief of the state property fund and member of the Socialist Party of Ukraine, described the sale of Ukrtelecom as "inexpedient," suggesting that legislation be passed to prohibit the sale of state-owned assets to foreign companies. Meanwhile, Yushchenko insisted all government shares of the company must be sold to foreign bidders, stating the "sale of 5% or 10% of holdings is not reasonable."



In 2008, the political pendulum is expected to swing once again for Ukrtelecom, perhaps in favour for international investors. Member of the Party of Regions and Minister of Finance Mykola Azarov promised the company would be auctioned off sometime next year. According to Azarov, receipts from the sale could reach $1.3bn.



Yulia Tymoshenko, who might return to her old job as prime minister, has promised foreign investors that any privatisation process or sale of licences will be open, fair and transparent. While the Bloc of Yulia Tymoshenko has openly promised to launch a transparent privatisation programme, party deputies have been silent on any specific plans to sell the telecoms provider.



The sale of the company would add impetus to the need for investments in Ukraine's broadband potential. This is especially timely, considering that internet usage in the country lags behind its neighbours. As of June 2007, 11.5% of Ukrainians are connected to the internet, while in Russia and Romania penetration rates have reached to 19.5% and 23.4%, respectively, according to market analysts.



With plenty of room for growth, Ukrtelecom is clearly stepping up its activities. The company's launch of IPTV and 3G services arrive as broadband internet and third-generation technology represent the last frontiers of telecoms growth.

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