ESIS extension / Israel / Alternative Networks / Master Report

The internal telecommunications market has been opened and liberalised following the implementation of the Rosenne Report beginning June 1,1999. The tariffs of the historical operator have been revised following the Gronau Committee and are down by 21% (since April, 1999) in preparation to the liberalisation; cross subsidy among the services of the historical operator are being abolished.

General licenses for new networks and providers following the guidelines of the Rosenne report will be provided in the coming months. New providers will need to stand up to standards of capability, financial soundness and technical skills.

The competition will be facilities-based; there will be universal service obligations including equal terms service offering and non-discriminatory tariffs; cross-ownership limitations will be enforced.

The new fixed-service operators will be permitted to provide their services throughout the country but will be obliged to do so in at least one "expanded demand area"; such area will include at least twelve "natural regions" form the 41 into which Israel is divided by the Central Bureau of Statistics.

Allocation of additional spectrum for additional providers of wireless cellular and for LDMS will be by made by tender to be published in the coming weeks (April, 2000).

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).

The alternative networks being established will compete among themselves and with the historical operator in the provision of telecommunication services in the new open market created by the liberalisation since June 1, 1999..

Best positioned for such competition are the Cable TV networks which has the local loop in place. The high level of penetration of Cable TV in Israel (more than 1.1 million households) set the Cable TV network as the main contender able to conform to the demands for universal service from the new players.

Other contenders will be best able to compete as transmission backbones. The Israel Electric Company, the Israel Railways and the new Cross Israel road (Number 4).

An additional provider of transmission services will be the company MED-1 owner of the LEV undersea communications cable from Israel to Sicily. This corporation is now laying an undersea cable in parallel to the Israeli coast (from Rosh Hanikra to Ashdod) intending to offer data transmission services for large customers.

1.3 Attitude of the incumbent operator towards alternative network providers

In its offer of shares of March 1998 the historical operator recorded the need for major changes in its operations to be ready to the incoming competitive market. They were aware of the need to eliminate cross-subsidy among different services and to rise the overall efficiency of its operations. A major step in the process of liberalisation was the Gronau report - the historical operator tried to appeal its conclusions and moderate the drop in tariffs.

Another way the historical operator found to cope with the opened market is to speed the introduction of broadband technologies over its copper local loop, both with the expansion of ISDN services and with the upcoming ADSL services now being tested in a large scale.

Some compensation for the expected competition by the Cable TV companies is being provided to the historical operator. It was authorised by the Ministry of Communications to participate in the two DBS (Direct Broadcasting Satellite) companies (an operating one and one for content); it has a 30% share of these companies.

The historical operator avoided a possible confrontation with the Anti-Trust Authority Commissioner and decided to upgrade that part of the Cable TV corporation network, Aruzei Zahav, that it is under her control to a two-way network.

The Cable TV companies after carrying out experiments with IP Telephony and Internet provision are ready to provide these services as soon as they get licenses to extend services in these additional communications areas.

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 is enacting legal measures including an appeal to the Supreme Court of Justice. The grounds for the appeal are clauses from the Rosenne Report: institutions operating in other infrastructure fields like Israel Railways and the Israel Electric Corporation would be able to operate in the inland communications market only when exists "effective competition" in their own field of activity; the report also recommends that these concerns should act through a subsidiary company , ensuring structural separation.

2. On-going regulatory developments concerning alternative network providers

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

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 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 leaded 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.

3.3 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 were completed. There are currently ongoing negotiations with the Egyptian 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.%); Telecom Italia is now obtaining control of MED-1 enlarging its shares to 52% of the ownership.

The Palestinian telecom PalTel is negoting the use of the infrastructure being established by the MED-1 company, the undersea cable being lied out in parallel to the coast of Israel. PalTel is interested in accessing the transmission of calls from the Palestinian Authority to Israel through these alternative infrastructure and to restrict the use of the Bezeq lines. The cable is expected to start its commercial operations in middle 2000. PalTel will continue to use Bezeq's infrastructure for the transmission of calls from the coast to the interior of Israel.

The companies that in the near future will be able to offer alternative network services are the following:

The possible opening of these networks to operators is dated from June 1, 1999 so that no new licenses have been already allocated.

The ownership composition of the candidates for establishing such netwoks follows:

Cable TV: Aruzei Zahav (Aureq -12%; Fishman/Bar-On and Yediot Aharonot - 66%; Tevel - 22%); Matab (Denkner - 43%; Maariv - 16%; Hanania Gibstein - 7%; Shimeon & Ali Hefetz - 6%; the public - 28%); Tevel (I.D.B - 48.5%; UPC - European Cable Company - 46.5%). (Globes, 16.12.1999, p.8).

MED-1: Telecom Italia (23.17%); Telecom Cyprus CYTA (9.22%); Clalcom (owner of Barak) (23.17%) ; Aureq (14.39%) ; Globscom (14.39%) (owned by Golden Lines, private investors, Telrad and Kama); Zohi (15.66%) (Shay Livnat). It was announced ( 30.1.2000) that Telecom Italia is buying control of MED-1 by acquiring 29% of the shares hold by the Israelis for US $ 70 million expressing a value of 240 for the company. Following this agreement Telecom Italia will own 52% of the shares of MED-1. (Yedioth, 30.1.2000).

YES - DBS (Direct Broadcasting Satellite) Companies: Eurocom (40%); Bezeq (30%); Gilat (10%); Lidan (5%); Cardin (5%); Poalim Investments (10%). (7.2.2000).

Israel Electric Company: owned by the Government of Israel, to be privatised in the near future.

Cross Israel Road: The concessionaire is the Derech Eretz group led by Africa-Israel (25%) and includes CHIC of Canada (25%); Hughes from the USA (20%); Societe Generale d'Enterprise of France (20%).

Please note that this report has been prepared under the sole responsibility of the ESIS II contractors.
It does not necessarily reflect the views of the Commission, nor does the Commission accept responsibility for the accuracy or completeness of information contained herein.
The ESIS Team of contractors welcomes any additional information or corrections.