Telecommunications Infrastructure in Ukraine

by Barbara Ristau

Ukraine has taken important steps in recent years to improve basic telecommunications infrastructure and introduce modem operating standards -- key fundamentals for the development of modem telecommunications systems. A number of foreign telecommunications companies are active in Ukraine, although the country's restrictive regulatory regime still hinders full development of this market. Despite the obstacles, the low level of market penetration indicates a powerful latent demand for telecommunications equipment and services in the second-largest NIS market.

Developments in Ukraine's wired and wireless communications since 1992 make possible more sophisticated telecommunications services than ever before. Significant advances include the completion of a national wired network with 24 long-distance digital exchanges in 1996. Additional gateways are slated to open in Lviv and Kharkiv in the near future. In the sphere of mobile radio communications, services are currently available on both the 450i NMT and DCS 1800 standards. The forthcoming launching of three GSM 900 national networks in late 1997 will further modernize Ukraine's telecommunications infrastructure. Vigorous plans for satellite communications are also underway.

Low Teledensity

Despite progress, Ukraine's teledensity--the number of telephones per 100 residents, expressed as a percentage--remains at low levels. For example, the percentage of market penetration of the total population in mobile communications is just 0.1 percent, far lower than the current levels in Poland, Hungary, and the Czech Republic (0.8, 4.7, and 2.6 percent, respectively) In "wireline" communications--those using land-based copper or fiber-optic cable--the comparisons are also drastic. The United States possesses roughly 65 lines per 100 persons, a level almost four times higher than in Ukraine, where wireline teledensity hovers at approximately 18 percent.

The Ukrainian Government hopes to raise wireline teledensity from 18 to 40 percent over the next 10 years. This would require installation of 10 million new phone lines at a cost of $5-10billion. The first phase of this ambitious project is envisioned in the Ukrainian Ministry of Communications plan for 1997-2000, which calls for nearly 3.2 million new lines at an average cost of $1,000 per line. Meanwhile, due to high operating costs and frequency fees (especially for mobile networks), mobile telecommunications is affordable only to a small percentage of Ukraine's population.

Major Local Companies

Two companies dominate the domestic and international wireline networks, the Ukrainian State Telecommunications Corporation (Ukrtelecom) and Utel, respectively. Ukrtelecom was created in 1993, when the Ukrainian Ministry of Communications (MOC) reorganized the national telecommunications structure by merging several MOC departments and regional telephone operators. Owning all transmission facilities, Ukrtelecom administers the national wireline infrastructure. Ukraine's hesitation to liberalize its telecommunications industry has given Ukrtelecom a substantial degree of clout in both the political and business communities. Industry experts, however, have been discussing the likelihood that Ukrtelecom will privatize, which would certainly reshuffle the structure of the telecommunications market in Ukraine.

The long distance joint venture and international service provider Utel was established in 1992. Utel has enjoyed considerable success -- in 1996, the company boasted profits exceeding $27 million. The company has thus far reinvested all profits into infrastructure development, primarily concentrating on achieving interregional and international connectivity. At the end of 1996, Utel's cumulative investments into the Ukrainian economy amounted to $13 8 million, which represents 15 percent of all foreign direct investment in Ukraine.

Ukraine's wireline networks, however, remain far from optimal. First of all, fees for new line installation can reach $1,000, and may require long periods of waiting. Secondly, although increasing amounts of digital equipment are in place, many regional telephone operators continue to connect customers on old equipment, for which they can exact charges. Therefore, quality of connection cannot be guaranteed, except with Utel's premium lines (which bypass regional operators).

Regulatory Environment

Although the capital-intensive nature of telecommunications development has meant that foreign firms have been, and will continue to be, significant players in this market, foreign firms are restricted in their degree of participation by stringent government regulations. The Ukrainian Law on Communications stipulates that the foreign share in a Ukrainian telecommunications services provider cannot exceed 49 percent. Consequently, only Ukrainian private or state companies are entitled to apply for operational and frequency licenses. Furthermore, mobile service providers cannot obtain access to wireline networks and public switches without establishing some type of cooperation with Ukrtelecom, which generally only happens in the form of a nine percent ownership share. Lack of transparency in the tendering process, erratic behavior by government entities, and frequent changes in legislation pose additional difficulties.