January 2000

Israel Update Memo

The following report outlines new developments in the past three months and the state of on-going developments.

1. The regulatory background

The new competitive environment created a very dynamic situation in Israel. Several focuses of conflict developed since the opening of the market and they are described in the background section of the main report. A first license for an alternative infrastructure network was allocated by the Ministry of Communications to the Israel Railways Company (see below).

2. Attitude of the incumbent operator towards alternative network providers

The Bezeq CEO registered a protest with the Minister of Communications over the decision to grant the Israel Railways a license to sell optic fibres capacity to communications market concerns. He ordered taking legal measures including an appeal to the Supreme Court of Justice. He cited clauses from the Rosenne Report establishing the policy for opening the market to competition: elements operating in other infrastructure fields like Israel Railways and Israel Electric Corporation would be able to operate in the inland communications market only when there existed "effective competition" in their field of activity; the report also stated that these concerns should act through a subsidiary company , ensuring structural separation.

3. Inventory of the major "public" utilities with a potential for use in I.S. applications

3.1 Israel Railways Company Licensed as a Communications Carrier

The Ministry of Communications provided the Israel Railways Company with a license for the provision of telecommunications services. The company has established in the last year an advanced network for its internal use. It is based on optic fibres and digital switchers set over 250 kilometers from Beer Sheva in the south to Kyriat Motzkin, near Haifa in the north. In coming years the extension of the network is to be duplicated to 500 kilometers. Only 25% of the capacity of the network is now being used for internal purposes, stated the Railways CEO Amos Ouzani. The remaininig 75% of the capacity will be offered to communications operators: cellular telephony companies; Cable TV; and other competitors to the historical operator in the inland telecommunications market. (30.12.1999)

3.2 Med-1 sets an additional undersea cable to Italy through Turkey and Greece

The Med-1 company that operates the undersea cable LEV from Israel to Italy will set up an additional cable with much higher capacity. The new cable will be operational in June 2001 and will transmit voice and data. The investment in the project is of the order of $ 300 million. Amos Laker the Med-1 CEO announced that the necessary agreements with the Turkey and Greece governments. There are currently ongoing negotiations with the Egypt government regarding its connection to the cable. The tender for setting up the cable is currently under way with the participation of three companies: the itatlian Forli; the french Alcatel and the american Tiko. Med-1 is owned by Telecom Italia (23.2%); Clalcom (23.2%); Globscom (14.4%); Aurec (14.4%); Cama Communications (15.6%); and Cyta (Cyprus, 9.2.%).

3.3 Bezeq International (Beinleumi) and Elbit Simulations join an international fibre optic project. The two companies are investing $ 250 million for the acquisition of 40% of the international consortium led by Oxygen. A letter of intent was signed by the two companies for the acquisition of the control of the consortium that will establish a global fibre optic network. The network will to serve 75 countries. The overall investment in the consortium is of the order of $ 500 million. The remaining capital will be mobilized by the Lehman Brothers and the introduction of strategic partners is also being considered.

In the first phase an undersea and terrestrial cable linking Tel Aviv to New York through Europe and England is being planned through an investment of the order of $ 1.5 billion; it is to be completed in two years. Later phases will enlarge the network towards global coverage. The expected total investments in the projects should reach $ 15 billion. The demand that the first fibre optic cable pass through Israel was made by Bezeq International; Oxygen agreed. Israel is considered one of the strong countries in matters related to international communications; there is an estimate that 6% of the incoming calls to the United States come from Israel. Bezeq International controls 55% of the outgoing international calls from Israel.