Belarus takes big step with Velcom privatization

By bne IntelliNews July 17, 2008

Graham Stack in Minsk -

Velcom's new Austrian CEO Helmut Duhs does not hesitate to call the privatization of Belarus' second-largest mobile operator by Telecom Austria, "the biggest step in privatisation for Belarus." The 37-year-old Duhs hardly anticipated Minsk as a future posting, but since he took over in November, Velcom has become a flagship for Belarus' new economic policy of openness.

The privatization has been a feather in the cap for President Alexander Lukashenko's privatization programme, but the deal was mired in scandal to start with. Only a year ago, the Belarusian government suddenly announced that its second-largest mobile telecom asset, then called Mobile Digital Communications (MDC), had been clandestinely privatized for an undisclosed sum to a shadowy Syrian investor called Ead Samawi, bringing with it accusations of insider dealing.

Samawi's business interests in Belarus allegedly originated with arms trading, and he was one of the few foreigners in the country said to be close to the president. Ead Samawi also surfaced in public shortly after the Syrian foreign minister visited Minsk on a state visit about two years ago. Analysts point out that the state arms exporter Beltekhexport held 20% of the government's total 51% in MDC. Relationships between the Belarus administration and Samawi have had their ups and downs since MDC was founded in 1998: Samawi even spent a night in a KGB detention cell in 2003. But 2008 saw a number of televised love-ins between Samawi and Lukashenko, which seemed to pave the way for the behind-the-scenes privatization. With a decade's delay, Belarus seemed to be making the same transition from state-ownership to crony capitalism that Russia and Ukraine had done in the 1990s.

This initial apprehension made the cheer greeting the Telekom Austria deal weeks later all the louder: the Austria firm bought 70% of Samawi's holding company SB Telecom for €730m, with a call option agreement for the remaining 30% exercisable in the fourth quarter 2010, valued at approximately €320m. Suddenly a new optimism was in the air: Belarus seemed to be skipping over the crony capitalism stage and looking instead to attract foreign investors - from the West.

The shift was a big surprise apparently for Telekom Austria itself, which first made contact with the Belarusian government in 2007. The sum Telekom Austria paid SB Telecom, Duhs told bne, was only a slightly higher valuation than the €550m the government belatedly this year said it had received from SB Telekom for its 51% stake.

And now the government has said it intends to privatize the other two mobile phone companies as soon as possible. The Belarusian market leader, MTS, a joint venture between Russian mobile giant MTS (49%) and Belarus fixed-line monopolist Beltelecom (51%), looks set to see the Russian company acquire an extra 2% for around $27m, according to the telecommunications ministry. The third-placed BeST is likely to be acquired by Turkey's Turkcell when a price has been agreed upon.

So what only a year ago would have seemed fantasy, is now nearing reality: the complete privatization of a key sector to foreign investors.

Duhs himself disputes that there has been any u-turn in government policy, arguing the development is entirely logical. "Velcom was the first GSM operator in Belarus and Samawi was always the driving force behind the company. The digital mobile industry was from day one, competitive and liberalized. It simply made sense for the state to sell its stake when the market had matured and the entrepreneurial stage completed. It made sense that the existing partner make a deal, and then negotiate with an international investor."

President Lukashenko himself boasted to students at Belarus State University in February about how profitable this strategy had been for the state: "We invested nothing at all [in Velcom] and got around $600m for our stake," he said, adding that "billions" were being offered the state for MTS, and for BeST even "with all its debts."

Growth potential

From the point of view of Telekom Austria, the attraction of the Belarus market lies in its great potential for growth. "It is the only market we have with less than 100% penetration, in fact around 70%, and currently our tariffs are 70% lower than in the next lowest market," explains Duhs.

Velcom's monthly ARPU in the first quarter was €6.5, compared with Telekom Austria's ARPU of €28.7 in Austria for the same period. In the Belarusian context, however, Velcom boasts the country's highest ARPU due to its traditional focus on better-off users: market leader MTS reported only €6.25 of ARPU in 2007.

Part of the reason for such low tariffs, besides competition, has been government involvement in the branch, admits Duhs, and the ideology of a "socially-oriented economy."

"This is a country-specific approach," shrugs Duhs, "which requires a commitment from large companies. You have to know and accept it before you enter the market."

One such commitment is for mobile operators to provide equal quality to all inhabitants, ie. to ensure coverage of unprofitable rural areas. The rural population is an important government constituency, and because Belarus is sparsely populated, operators have to invest a lot in their networks relative to subscribers. In addition, the fixed-line operator Beltelekom is a state monopoly offering the lowest call tariffs in Europe. "Mobile phone operators subsidise the fixed-line operators," says Duhs.

So Velcom has no worries about a price war breaking out between the newly privatized operators as happened in Ukraine 2006: "Prices are simply as low as they can get." Instead, Duhs welcomes increased competition as stimulating market growth.

He also notes that Belarus is committed to WTO entry, which requires the liberalization of fixed-line communications. "Positive signs by the government on such issues were a condition for us entering the market."

But for all the low ARPU and social strings attached, the 3.2m Velcom subscribers now comprise 20% of Telekom Austria's mobile subscribers in a country with GDP growth averaging 8% per year, with the first tenders for 3G licenses likely to take place this year. And Duhs is aiming higher: for Velcom to be market leaders within five years, by providing more value-added services while diversifying its subscriber base away from business users.

Improving investment climate

Regarding the investment climate as a whole, Duhs points to the Belarusian tax system as the biggest obstacle. "It is by far the most complicated I have ever seen, with 42 taxes meaning that huge administrative efforts are needed for compliance." And it's not just the number of taxes: taken together, Belarus has the highest tax rates in region, says Duhs.

Duhs points out that Velcom enjoys a privileged position when it comes to dealing with government, "because the privatization is perceived by all parties as a pioneer action and supported as such." In general, he says, since foreign investors are still a novelty, government works with them on a case-to-case basis, not yet having developed routinised procedures.

Duhs sees Velcom acting both as an "ambassador" for Belarus abroad, promoting the country as an investment location, as well as for Austrian business investing into Eastern Europe. "The Austrian approach regarding [foreign direct investment] is more flexible than in larger countries, and Austria has always been a pioneer in entering East European markets. So it's not a coincidence that the biggest sectors in Belarus are privatized first with the help of Austrian companies."

Duhs points to Austria's historical links to Central and Eastern Europe. Metternich once quipped that the Balkans start on the outskirts of Vienna, and it's no coincidence that the Austrian pioneers in Belarus, Telekom Austria and Raiffeisen International, are both headed by men with roots in the former Yugloslavia - Boris Nemsic and Herbert Stepic, respectively. Looking east comes easy to them.

That is not all the two pioneering investors share: Belarusians might well imagine that yellow and black are the Austrian national colours. Following rebranding, Velcom's new black on yellow logo now perfectly matches the Raiffeisen emblem displayed by Priorbank. The new Velcom brand aesthetics are also pioneering: The eye candy previously smiling from billboards has now been replaced by sombre, even harsh, images of "real people," about which even Velcom's own sales staff openly express their puzzlement.

But this, argues Duhs, is what foreign investment can bring - new approaches, new ideas, new technologies. And thus, to explain the rebranding to staff, Duhs and his team did what few Belarusian managers do - they launched a roadshow through Belarus to convince workforce on the rebranding, explaining the concepts and answering questions openly. "There were a lot of questions," smiles Duhs.

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