April 2000

Central and Eastern European Countries Synthesis of Master Reports

Introduction

The rapid growth of the ‘information society’ (IS) has become a major challenge for the economic and social development of Central and Eastern European countries (CEECs). For several years, public and private players have become increasing interested in enabling the development of infrastructure networks, technologies and information society applications, in order to facilitate these countries’ integration with the global economy and society.

Since 1989, a significant part of the CEECs efforts have be concentrated on implementing major social and economic reforms. The telecommunications sector and, more broadly, new information technologies such as multimedia and the Internet, are seen as key components of growth.

However, the CEECs’ policies for growth have been largely held back by, on the one hand, the pace of development at a national level and, on the other, the political will towards integration with the European Union.

National reports from the European Survey of Information Society Projects and Actions (ESIS) phase II (which covers 24 countries of Central and Eastern Europe and the Mediterranean area) show that significant economical and social differences exist between the CEECs, particularly in the areas of telecommunications and IS. (The relevant national reports are available on the ESIS II web site.)These disparities explain important differences in terms of various countries’ priorities for reform and the extent to which markets are being liberalised.

In addition, all the CEECs are candidates to join the European Union. Their integration is likely to be a two-stage process, with the first wave of countries to include Hungary, Poland, the Czech Republic, Estonia and Slovenia, and the second wave to cover the others countries: Latvia, Lithuania, Slovakia, Bulgaria, Romania, Albania, Bosnia and Macedonia. Integration seems to be a long and difficult process, not least because it involves not only incorporating European rules and regulations into national frameworks, but also their practical application. Importantly, a significant number of European directives relate directly to telecoms and the information society.

This document is designed to give a broad perspective of telecoms and IS policies throughout Central and Eastern European countries, with a particular emphasis on the liberalisation process, and public and private sector policies in this area. The first section of the document concentrates on the telecommunications sector and a second section covers IS policies. It is based on the contributions of national contractors involved in the ESIS II project.

I. General telecoms policy

1. The regulatory background: Acquis communautaire (body of EU law) and national policies

For several years, Central and Eastern European countries have been implementing telecommunications development programs. These policies are driven on the one hand by the fact that new communications and information technologies are key components of economic and social development, and on the other hand, by the need to prepared for alignment with European Union policies.

1.1. Acquis communautaire (acceptance of the body of EU law)

Since its foundation the EU has developed a wide-ranging regulatory framework – aimed at enabling the introduction of competition and development of the telecoms sector – through the adoption of a series of directives. The notion of ‘acquis communautaire’ or the wholesale acceptance of the body of EU law, is a major element of EU integration policy. This involves not only embodying European legislation as part of each country’s national law, but also the concrete, practical implementation of these rules.

Key elements if the EU telecoms policy are:

• an end to monopolies by a specific deadline
• the separation of regulatory from operational functions
• the setting up of a framework to enable the development of a competitive market. This includes a set of rules dealing with universal service, licensing, tariffs and consumer protection
• the development of open access to all networks (interconnection principles), the requirement being that every telecommunications operator may access existing infrastructures on a fair and equal basis, at a reasonable price.

1.2 National policies

Central and Eastern European countries are progressively adopting EU legislation. Each country is moving at a different rate, depending on the planned date at which it is due to join the Union and the level of development of the telecoms sector.

1.2.1 End to monopolies by a specific deadline

The dates at which incumbent operators of voice services loose their monopoly vary widely. Countries included in the first wave of EU integration should see the end of their historic operator monopolies in 2001 (Czech Republic, Estonia, Poland and Slovenia) and 2002 (Hungary). For countries in the second wave, this is much further off, affecting Latvia and the Republic of Macedonia in 2003 and Bulgaria, Lithuania and Romania in 2006. These differences are due to the fact that the second wave countries have to overcome major economic problems preventing them from adopting EU legislation more quickly.

1.2.2 Separation of regulation from operational functions

All the CEEC countries envisage setting up an independent regulatory authority: with some countries having already established this function, and others in the process of creating one or having announced this for the future. Broadly speaking, the independent regulator is there to support to the development of competition under the essential conditions to benefit end-users. The true independence of these regulatory authorities may be assessed by looking, in particular, at the real extent of their powers, their human resources ( qualifications, number of employees, independence from operators…), financial resources and the clear definition of the roles of each regulatory body. These regulatory authorities are usually are supported by specialised Councils.

The table below shows how independent regulation has evolved in Central and Eastern European countries.

Table 1: Overview of regulatory evolution

1.2.3 Licensing

Licensing principles are a core element of liberalisation. Depending on the regulatory stance adopted by a particular government, the licensing regime can actively facilitate the growth of competition or, by contrast, put up significant barriers to entry, preventing the development of strong competition. European Union directives are generally aimed at encouraging the development of new telecoms operators. The relevant directives state that:

• licensing provisioning regimes must be simple
• licensing conditions must be published
• processes must be transparent
• licensing timescales must be respected
• cost must not constitute a barrier to entry.
• licensing regimes should also facilitate general authorisations rather than individual licences
• conditions for licences should also cover operators’ commitment to service quality (in terms of coverage and so on).

All Central and Eastern European countries are setting up licensing regimes. In general, individual licences are required for the provision of certain services to the public: voice (if already authorised), mobile, paging, VSAT services and so on. Single general authorisations are usually required for the provision of data services, Internet access, value-added services and so on. In the medium term, liberalisation of services should lead to much greater alignment of national regulations with European directives.

1.2.4 Universal service

An important condition of the European regulatory framework is the provision of universal service. This enables member states to ensure a minimum set of services is guaranteed to the whole of the population, at an acceptable price and quality. Indeed, universal service is one of the cornerstones of the principle of market liberalisation. It consists of two key elements:

• a social dimension targeting socially disadvantaged groups of people who need access to telephone services
• a geographic dimension which enshrines the principle of identical tariffs and charges, irrespective of geographic location, across the whole area served by a basic telephone service.

Free-market laws alone can not make this happen, so it is essential for the national regulators to establish specific regulatory frameworks to guarantee universal service.

Establishing true universal service is a complex task, because it must take into account a large number of parameters including: the country’s socio-economic conditions, the level of development of the network, the use of telecoms services and so on. Broadly speaking, regulatory authorities must answer three major questions which constitute the core of universal service:

• how should universal service be defined for the country in question (should universal service cover the whole population? which services should be included?…)?
• how should the cost of universal service be calculated?
• who should pay and under what conditions?

How should universal service be defined?

The definition of universal service depends on the nation’s actual state of development, so it differs from country to country. It is also clear that the definition of universal service can vary over time. It evolves according to the state of deployment of networks and services, as well as citizens’ purchasing and usage behaviour.

Universal service for the whole population

Usually, universal service translates as one telephone per household. But, less developed countries may prefer the notion of ‘universal access’, which simply means having easy access to a telephone. In this instance, the difficulty lies in defining ‘easy access’. Depending on their level of development, countries may have different definitions. For example, it could be defined as an objective of one telephone per household in urban areas and one telephone per village or settlement in rural areas.

Which services should be included in the definition of universal service?

The notions of ‘telephone service’ and ‘minimum service‘ are defined under telecommunications laws. Usually, basic services such as directory services, phone booths and information services are included under the heading of telephone service.

Definitions usual differ according to the country’s state of economic development. Indeed, most developed countries are extending the definition of universal service to include additional elements over-and-above basic telephone services. In some developed countries, universal service now includes RNIS services, Internet access to schools and many other value-added services.

Quality and affordability are the other main issues for universal service, and several methods can be used to determine what might constitute an affordable price.

Universal service cost

Universal service cost definition is a complex process. In a competitive, multi-operator environment, the cost of universal services must be transparent and clearly evaluated. Different parameters must be taken into account, including: cost elements (direct costs, common costs, etc), allocation methods (total costs or incremental costs) and so on.

Who pays for universal services?

Typically, providing universal services is a loss-making activity for operators (generally the historic monopoly-holders). In new, deregulated environments, all licence-holding operators must play a part in the financing of universal services. This means that the regulatory authorities have to deal with a number of key questions, including which operators pay for which cost components of universal service and which operators might not have to pay. So regulatory decisions have an important impact on the development of competition. Today, many countries in the process of liberalisation (such as Hungary and Poland) are setting up ‘universal service funds’. Generally these funds are not managed by the state, but either by the regulator or an independent body.

In the Central and Eastern European countries, the degree to which the regulatory framework has been developed varies widely. However, universal service appears to be a central concept. The development of a specific regulatory framework is seen as an essential way of accelerating social and economic development and an important factor if the country is not to fall behind in the development of the information society.

1.2.5 Interconnection

The implementation of interconnection is vital to enable the development of market competition. The regulation of interconnection usually deals with two main aspects:

• physical interconnection between networks
• interconnection in terms of tariffs

1.2.6 Physical interconnection

If new market entrants are to be able to operate successfully, interconnection between fixed and/or mobile networks is essential. All licensed operators have to provide interconnection facilities. In addition, there are usually specific interconnection regulations to deal with dominant operators (usually just the historic monopoly-holder) that hold more than a certain share of a national telecoms market. This is necessary to give other players in the market access to the incumbent operator’s network and to ensure that this does not create barriers to entering the market. Historic operators have important advantages which must be taken into account:

1.2.7 Local loops

The cost of building national local loop networks is extremely high and so in the CEECs the historic monopoly-holders are the only organisations with the resources to build and maintain this part of the telecoms infrastructure. The company which controls the local loops is therefore also responsible for physically enabling the capture and termination of communications. This means that all operators need interconnection with historic operators in order to provide their customers with communications services.

1.2.8 Extended long distance networks

Historic monopoly operators have extended networks covering the whole territory, which means they can provide competitors with an extended interconnection service.

Interconnection principles are an important part of historic monopoly operators’ license terms. Historic operators are not only compelled to provide interconnections, but also have to produce and publish an interconnection catalogue detailing their interconnection offerings. Other operators are also obliged to provide interconnections, but do not have to publish a catalogue.

In a competitive environment, the development of the interconnection catalogue must be a transparent process, and the catalogue must be submitted to the national regulatory authority for approval. More broadly, all interconnection conflicts also have to be submitted to the regulator.

Market access can be blocked by conditions imposed by historic operators, including significant delays in the negotiation process, major delays in the provision of certain services or lack of provision of certain services (such as, for instance, intelligent services).

1.2.9 Tariff interconnection

In a competitive market, interconnection costs are a critically important factor. If interconnection costs are high this can create major barriers to development. However, growing competition may lead to a situation where end-user tariffs are constantly falling.

Determining interconnection tariffs is a complex, long-term process. The basic principles are that interconnection tariffs must be very much based on the production costs involved in providing interconnection services.

In countries where there is open competition, like the member states of the European Union, the methodologies used to create the interconnection catalogues are being constantly refined, and every year the range of services involved as well as the tariffs are reviewed and updated.

According to EU directives, national regulatory authorities should have far-reaching powers in this area, with the ability to approve or reject interconnection tariffs, impose changes to tariffs, conduct independent audits of historic operators’ accounts and interconnection tariffs, intervene in cases of conflict, and so on.

The CEECs are currently in the process of developing regulatory frameworks for interconnection, based on existing regulations in sectors where competition already exists (particularly in mobile telephony) and EU regulations.

1.2.10 Privatisation of incumbent operators

The privatisation of historic, state-owned operators is an important element when it comes to integration in the European Union. This fits in with a much broader policy of ensuring that all major companies are privatised, which has been a central pillar of reforms in Central and Eastern European countries during recent years. Privatisation is seen as a vital way of transforming companies’ management methods, injecting capital and know-how, and accelerating the introduction of new technologies.

Nearly all the CEECs have completed the privatisation of their incumbent operators or are in the process of doing so. The state-owned monopoly holder in the Republic of Macedonia – Makedonski Telekomunikacii – should be partially privatised by the end of 2000, leaving only Albania and Bosnia-Herzegovina with no clear date for future privatisation.

In some countries, such as Bulgaria, the Czech Republic, Latvia, Romania and Slovenia, the state has retained a majority shareholding in the historic operator. Whereas in other countries, including Estonia and Lithuania, the government has sold off most of the equity. Across the CEECs, the privatisation process will continue into the future.

The table below shows the evolution of the ownership of historic operators across the CEECs.

Table 2 : OVERVIEW OF STATUS OF HISTORIC OPERATORS AND REGULATORY AUTHORITIES IN CENTRAL AND EASTERN EUROPEAN COUNTRIES

1.3 On-going developments

Telecommunications sector regulation can not stand still. In an environment of rapid technological progress and continuous emergence of new markets and services, the regulatory framework has to be constantly adapted. This constant evolution is essential to facilitate competition and the development of markets for the benefit of consumers.

Towards the end of 1999, the European Commission launched a review of the main telecoms directives. The draft of this review was submitted to member states for comments by 15 February 2000. In particular, the Commission emphasised the following points:

• regulation should be ‘technologically neutral’: which means that the same rules must be applied to all infrastructures (fixed, mobile, cable and so on) regardless of their chosen technology
• as competition increases, so regulation should be gradually simplified and reduced
• the principle of subsidiarity (decision-taking at the lowest appropriate level) should effectively be respected
• there should be no enlargement of the definition of ‘universal service’.

In February 2000, the Information Society Forum replied to the draft. Their main comments were as follows:

• that ‘universal service’ needs to be extended and adapted, initially to include basic Internet access services
• that competition at the local loop level needs to be promoted, to improve affordable access to all communications services
• that representatives of consumer organisations in European and national regulatory authorities need to be involved.

On-going development of the regulatory framework in Central and Eastern European countries will be concentrated around continued moves towards integrating EU directives into national legislation, taking into account the development of new markets, particularly the Internet.

2. Initial feedback from moves towards liberalisation

It has often been shown that the introduction of competition into a particular market plays a very important role in encouraging growth in that industry area. In the mobile sector, as in the area of Internet services, competition has forced all the players to adopt and pursue more aggressive commercial policies, resulting in significant price reductions, product and service innovations and considerable improvements in network quality.

More details and analysis of market developments can be found on the ESIS II web site, under the heading ‘Basic facts and Indicators’.

2.1 Mobiles and Internet

2.1.1 Mobiles

As in the European Union, the mobile sector has been a real test of competition in the Central and Eastern European countries. In most of these countries, the mobile sector has been liberalised for a number of years and several competitors still operate in the market. This early liberalisation is explained by the need to compensate for the lack of fixed-line infrastructures or their poor quality, as well as the requirement to align with the EU policy of ‘acquis communautaire’ (adherence to the body of EU law).

Looking at the growth rates for mobile services between 1998 and 1999, it is clear that almost all the countries saw significant increases. This was particularly noticeable in Slovenia (+237%), Bosnia (+180%), Albania (+154%) (the Albanian and Bosnian mobile sectors still being run by monopoly operators), Bulgaria (+113%), Romania and Poland (+108% each). Overall, mobile services in the region saw an average growth rate of 80%.

Some countries are currently in the process of issuing additional mobile licences. For instance, in Hungary, a fourth mobile operator, the Primatel consortium, has been awarded a GSM 800/1900 licence, whilst in the Czech Republic a third GSM licence (GSM 1800) has been issued to Czeky Mobil.

Nevertheless, the potential for growth remains very high. Across the CEEC region, the average number of subscribers per 100 inhabitants had reached nine by the end of 1999, whereas in the European Union countries this figure stands at between 30 and more than 55 pre 100 inhabitants.

2.1.2 Internet

Data and Internet access services are open to competition in nearly all the Central and Eastern European countries. The booming demand for Internet services has attracted a large number of Internet service providers (ISPs), including both national and international players. As in the Europe Union, in the future it is likely that a number of large ISPs will come to dominate each market.

The explosion of the Internet market should accelerate the process of liberalisation of the related communications infrastructures. Already, in some countries, leased lines and cable TV networks are liberalised for the provision of Internet backbones.

The table below gives an overview of the competitive situation in telecommunications in Central and Eastern European countries

Table 3 : Competitive situation in telecommunications in Central and Eastern European countries

M: Monopoly
PL: Partially liberalised
- (date of expected liberalisation)

2.2 Growth of foreign investment in Central and Eastern European telecoms companies

National reports indicate growing levels of investment by Western operators in Central and Eastern European telecoms companies. This financial involvement is strategic for both sets of companies.

Western operators’ strategies

Companies who operate in markets which are already open to competition, such as Western Europe, the United States and Asia, are facing stronger competition on their own markets. This means that international development and investment in other operators are key elements of their strategies for growth. International expansion is seen as essential to develop new markets.

In the area of fixed telephony:

operators from the Nordic countries, such as Sweden and Finland, are investing widely in Eastern operators, for example:

• Telia (Sweden) and Sonera (Finland) own part of Estonian Telecom Ltd
• Telia and Sonera also own part of Lithuania Telekomas
• Sonera owns part of Lattelekom
• Telia has a stake in the new telecoms operator in Poland, Netia Holding
• OTE Telecom (Greece) has invested in Rom Telecom
• Telsource (owned by Swisscom and KPN – Dutch Telecom) owns part of Czech Telecom

In the mobile area, a number of players already have a very strong, pan-national involvement in other operators:

• DT Mobil (Germany) has a stake in RadioMobil in the Czech Republic and RadioMobil in the Republic of Macedonia, amongst others
• MediaOne (ex-US West) owns part of Westel in Hungary and PTC in Poland, amongst others
• Vodafone/Airtouch owns part of MobilRom in Romania, Polkomtel in Poland and Primatel in Hungary.

These investments reflect both historical and geographic links. However, it is also clear that these new entrants into Central and Eastern European markets are following global positioning strategies. Indeed, thanks to the privatisation process they are able to take equity stakes in operators from various fields including Internet, data, cable and mobile. This enables them to extend the reach of their business across a whole set of related sectors. The advent of this new breed of ‘trans-regional’ operators is heralding a whole new telecommunications landscape across Europe.

The diagram below shows several examples of Western European and American operators’ investment in Central and Eastern European operators.

II - Information society policies

Developing the ‘information society’ is becoming a major challenge for the continued economic and social development of Central and Eastern European countries. Progress towards the information society entails significant changes, mainly linked to increasing globalisation in terms both of companies and national economies. The effective management of these changes involves significant effort for the countries involved. In societies where suitable economic structures are in place, the information society offers excellent opportunities for growth and employment. However, this also brings with it a major risk of growing disparities between regions and countries. The implementation of wide-ranging public policies is essential to assist the distribution of information throughout society and to facilitate countries’ integration into the global economy and society.

In the following developments, we are focused mainly on the public policies which the countries of Eastern Europe have put in place.

Further details and analysis of the information society can be found on the ESIS II database and on the web site under the heading ‘Information Society Promotional Actions’.

1. ‘Acquis communautaire’ (acceptance of the body of EU law)

At a European level, the Commission has an important role to play in establishing a flexible overall regulatory framework.

Key EU developments related to IS include:

• the opening up of the telecommunications market to competition
• the development of a regulatory framework for e-business (focusing particularly on respecting people’s privacy, authentication and security
• supporting content-providers and those engaged in R&D in the industry

These policies are constantly being updated and a large number of questions have yet to be answered.

2. National policies

The development of the national infrastructures, as well as advanced information and communication technology applications, will create new opportunities for enhancing the quality of life and business activities. In all CEE countries, the introduction of modern information and telecommunications technologies is lagging behind the level of the USA and the EU, and it is therefore becoming an essential component of national development strategies across the region.

The main trends of IS policies in the year 2000 are detailed below. More details can also be found on the ESIS II database.

2.1 Umbrella policies

Umbrella programs are key elements of the process of integration with the EU. An important element of these policies is co-operation with the European Union, through involvement in IS programmes such as Phare, INCO-Copernicus and so on.

Mostof Central and Eastern European governments have set up Information Policy Councils, responsible for developing the country’s information society policies. For instance:

• in the Czech Republic, the governmental Council for State Information Policy developed the ‘State Information Policy’ programme in 1998. This targets, in particular, the development of information systems for public administration, and the promotion of e-commerce

• in Bulgaria, the ‘Bulgaria 2001’ programme aims to "build a national, universally-available information and communication infrastructure, promoting new information technologies in education, culture, healthcare, national security and the environment, and promoting new information technologies as a priority industry"

• in Estonia, the Estonian Information Policy plan was developed in 1998. The priorities for 2000 and 2001 are the promotion of IS through government agencies and in schools

• in Lithuania, a programme covering the Information Society, in line with EU directives, was developed in 1999

• in Romania, the main policy strands for promoting IT promotion involve:

  • the development of a national IT infrastructure

  • the development of an IT and communications industry and, in particular, a software industry

  • the use of IT and communications in all economic sectors

• in Macedonia, the Macedonian Information Society Project Office (ISPO) acts as a bridge-builder between the government, EU and organisations interested in the information society. Its activities involve raising awareness about the opportunities offered by the IS, and distributing and collecting information

• in Hungary, a document prepared under the initiative of the Prime Minister’s office, entitled ‘Hungarian response to the challenges of the information society‘, was published in September 1999. This outlines priorities for the government, paying considerable attention to EU’s IS policy, telecommunications convergence and public sector computerisation.

2.2 Areas of application for IS

2.2.1 Government

Computerisation of public administration, governmental agencies, national and regional authorities is an important area where IS policies may be applied. Programmes in the CEECs are aimed at improving the efficiency of public administration, facilitating communication with citizens and

Information gathering. For example:

• in Hungary the government has set up three programmes focusing on ensuring more widespread use of IS in the public sector:

  • ‘Government without paperwork’

  • ‘One-stop shopping’ (focused on the use of special databases and applications in certain fields

  • ‘Community connections’ (focused on how government supports communities in implementing IS tools, developing web sites, and so on)

• in Macedonia, a major programme involves developing a state backbone network interconnecting all governmental organisations

• Romania has also launched a very large programme to extend IT throughout the public sector

• in Latvia, the National Informatics Programme is aimed at a dramatic enhancement of the quality of public information. The main priority is the computerisation of registers, such as the national population and company registers

• Lithuania has also launched an important programme dedicated to the creation of an efficient public sector information system

• in Estonia, one of the priorities for 2000 and 2001 is the promotion of data networks in rural areas. Other priorities outlined by the government include the dissemination of information and communication technologies across the public sector and the creation of the necessary legislation, organisational structures and technological environments to enable the use of digital signatures

• in the Czech Republic, the main aim of the State Information System Office is to co-ordinate the interconnection of all the state authorities different information systems. The Office is also involved in several other activities. For example, it represents the Czech Republic in many co-operations with the EU, co-ordinates the development of e-commerce and so on.

2.2.2 Culture

In Albania, the Ministry of Culture, Youth and Sports is leading projects to develop a network linking public libraries, as well as organising national seminars dealing with the information society.

2.2.3 Research and education

Research and Education are important areas both in terms of the use and development of IS-related programmes. For instance:

• in Hungary, a major programme enabled the provision of Internet access throughout secondary schools

• in Macedonia, two important universities built their own data networks enabling the development of various applications (for files transfer, computer-based education, high-speed Internet access and so on). The Academic and Research Network of Macedonia (MARNET) was established as a public institution to provide information services to education and the research community

• in the Czech Republic, a main target of IS policy is to manage information literacy in schools, with the aim of ensuring that the next generation has the necessary skills. Another important programme involves the wide-ranging development of the Internet. All schools should have an access to the Internet by 2001. The Internet should also be available in all libraries and post offices by the same date

• in Lithuania, amongst the actions announced by the government, it is interesting to note the establishment of an information society infrastructure and the computerisation of Lithuanian schools. Significant investments were planned for the period 1998-2001 to renew the infrastructure and to develop advanced information technologies in universities and state institutes. An important computer-based education project is currently under way

• in Estonia, the Tiger Leap project, launched in 1996, is aimed at promoting the use of information technologies in schools. An important infrastructure development project has been carried out by the Estonian Education and Research Data Communication Network. EENET manages, co-ordinates and develops a data communication network linking research, educational and cultural institutions. 

• In Romania, the National Computer Network for Research (NCN) development was initiated under the auspices of the Phare program in 1993, and its further development has been supported by the government. Currently more than 90 R&D research organisations, covering some 1,300 individual workstations, benefit from the NCN services

• in Slovenia in 1994, the Ministry of Education and Sport launched a six-year computer literacy development programme which ended in 1999. The main aim of the programme was to promote the use of information technologies in primary and secondary schools.

2.2.4 Transport

• in Latvia, the Maritime Administration has developed a vessel traffic information system. Basic IS applications include navigation security and sailing directions

2.2.5 Medicine

• in Poland, the Polish Medical Internet Society promotes the Internet as an efficient tool for medical education and health promotion

• in Macedonia, a programme for the reconstruction and development of the health sector is to be carried out, with financial support from the World Bank. A significant part of the programme focuses on IT implementation

• in Latvia, a major information system has been developed by the Latvian Centre for Health Statistics, Informatics and Medical Technology. This tool deals with medical statistics, registers of patients and diseases, health insurance and so on.