Private enterprise boosting growth in Ukraine’s telecom sector

Ukraine’s mobile telecommunications market has grown dynamically in recent years, with subscriber bases surging on top of mounting domestic demand. Private enterprise, which has pumped hundreds of millions of dollars into developing the sector, has also played a large role in driving the growth.

In contrast, growth in Ukraine’s fixed-line telecommunications sector, which is largely controlled by the bureaucratic fixed-line telephone monopoly, state-owned Ukrtelecom, has been less impressive.

Private capital has brought sharp growth rates and improving quality to Ukraine’s mobile telecommunications industry in recent years.

Citing the grand success in the mobile telecom market, industry experts are once again calling upon the government to privatize Ukrtelecom, which remains under ineffective state management following repeated failed attempts to auction it off in a tender in past years.

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Ukraine’s mobile phone business has grown in double digit figures in recent years, with subscriber penetration exceeding the 80 percent mark this year.

Figures released last month indicate that 39.59 million of Ukraine’s nearly 47 million population use mobile phones.

The sale of mobile phones during the first nine months of this year surged by 80 percent with 6 million sales completed, according to a study produced by Aventures Group, a Kyiv-based IT investment group.

Vitaliy Mukhin, a spokesperson at Ukrainian Mobile Communications, one of the country’s two largest mobile communications providers, said the mobile communications market has grown with lightening speed compared to Western mobile markets.

Experts say that it is the fastest growth in Eastern Europe region,??? Mukhin said.

Large investments from private owners of UMC and other mobile telecommunications companies has helped pave the way for the double-digit growth. Moscow-based MTS has invested hundreds of millions of dollars into UMC since acquiring the company from Ukrtelecom years ago.

The investments have paid off.

Mukhin said UMC’s proceeds in 2005 swelled by 44.4 percent year-on-year, reaching $1.2 billion.

He conceded that growth rates will flatten out as penetration peaks in the near future, but expects income levels to continue rising through the sale of new services and increased usage.

The same can be said of private owners backing UMC’s main competitor, Kyivstar, and smaller operators which are growing fast such as Astelit, which provides mobile service under the Life brand. Then there is Beeline, a Russian brand recently launched by Russian operator Vimpelcom, following the acquisition of the tiny Ukrainian operator Ukrainian Radiosystems.

Kyivstar leads the race in subscriber base with 17.7 million customers. UMC trails not far behind with 16.4 million subscribers. Together, the two companies used to control more than 90 percent of the market, but new competitors providing services under the Life and Beeline brands are slowly inching up.

Aggressive marketing campaigns in the past two years have increased Astelit’s subscriber base from below 100,000 to more than 4.5 million. The newly introduced Beeline brand has, meanwhile, close to 1 million subscribers, several-fold more than in previous years.

Nationwide coverage is the main advantage for UMC and Kyivstar, the veterans on the block. The Life and Beeline brands are still building up nationwide networks, offering clients network access in major cities for now.

The fast pace of growth, the race to attract subscribers, and efforts to provide nationwide coverage have, at times, put quality on the backburner.

Dave Young, director at Integrated Network Solutions (INS), a contractor providing turnkey services for setting up mobile networks, said the fast growth rates have affected quality of services on Ukraine’s mobile networks. Operators often stretch out the capabilities of their networks’ increasing capacity only after subscriber levels exceed network potential, he said.

Time to sell Ukrtelecom

Despite the presence of smaller yet dynamic operators backed by private capital, state-owned Ukrtelecom holds a monopoly position on Ukraine’s fixed-line telecommunications market.

Oleksandr Parashchiy, an analyst at Kyiv-based investment bank Concorde Capital, said the services provided by the state operator are far from appropriate, leaving room for smaller, privately-owned operators such as Golden Telecom to gradually snatch up market share.

The arrival of a private owner through the privatization of the company is the only hope Ukrtelecom has to keep its hold on the market.

Ukrtelecom will also become more flexible and independent in terms of price policy. At present its tariffs are being set [at subsidized rates] by the National Commission for Telecommunications Regulation,??? he said.

Ukrtelecom’s outlook for 2007 is not shiny, according to a report published this fall by Moscow-based investment bank Troika Dialog. The report blamed a policy of subsidized tariffs and poor management for an expected fall in annual profits this year to below $10 million, nearly five fold less than in 2005.

According to the report, turnover is expected to tally in at below $2 billion with profits staying below $100 million next year.

The state has repeatedly announced its intention to privatize Ukrtelecom, one of Ukraine’s largest companies in revenues, since 2000. But the sale has been repeatedly put off due to political bickering.

Now efforts to privatize the company seem to be back on the agenda as the government seeks out state sell-offs for raising funds to fill budget coffers, but the value of Ukrtelecom has fallen in recent years due to poor management and a shift towards usage of mobile communications.

Ukraine recently tried to increase the value of Ukrtelecom ahead of a privatization sale by issuing it the sole license for so-called Third Generation communications, also known as 3G.

Young expects the government to find other ways to increase the attractiveness of Ukrtelecom ahead of a sale. But he doesn’t expect Western telecoms to bid for the aging, troubled Ukrtelecom.

The only company seriously providing fixed line services is Ukrtelecom, which has been presented with the first 3G license by the government in a move to fatten up its value like a Christmas turkey before it is sold to foreign investors. However the change in government recently has led to Western investors backing off Ukrtelecom, and it is currently thought that it is money from Russia that will bid for it??? Young said.

Source- http://www.kyivpost.com