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GETTING AWAY FROM THE RED PHONE
THE ROLE OF THE STATE

IN THE TELECOMMUNICATION SECTOR
IN HUNGARY AND POLAND

By

Manuel Auguste Metz

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF ART

Departement of Communication Art and Sciences

1994

ABSTRACT
GETTING AWAY FROM THE RED PHONE
THE ROLE OF THE STATE
IN THE TELECOMMUNICATION SECTOR
IN HUNGARY AND POLAND
by

Manuel Auguste Metz

This document is a case sutdy trying to compare the role of
the state in the development of telecommunication in Hungary
and Poland. It deals with the indirect and the direct actions
of the state on the telecommunication sector for the 1989-1994
period. It shows that Hungary has a very strict regulative
attitude toward telecommunication whereas Poland is more
inclined to a "laissez-faire" policy. Some advises, based on
the findings, are then given for the other countries in
Central and Eastern Europe for them to have better chances to
develop quickly and efficiently their telecommunication

sector.

AC KNOWL EDGMEN TS

I am grateful to the European Union for its help during the
research. I am also grateful to the Writing Center at Michigan
State University for its help in the editing of the thesis. I
would like to thank doctor Mody and doctor Steinfield for
their willingness to go with a very constraining time frame.
I would especially like to thank doctor Bauer for his precious
advises and his patience toward my very complex scheduling.
Finally, I would like to thank my mother who always stand by

me and give me courage.

iii

TABLE OF CONTENTS

List of tables

Chapter 1: Outline

Chapter 2: Theoritical Framework
Chapter 3: Telecommunication Development

Chapter 4: State's action affecting
telecommunication indirectly

Chapter 5: State's action in the
telecommunication field

Chapter 6: Lessons

Chapter 7: Conclusion

iv

19

36

58
88
93

LIST OF TABLES

Table 3.1.: Principal economic indicators
for Hungary for the period 1990-1994

Table 3.2.: Principal economic indicators
for Poland for the period 1990-1994

Table 3.3.: The Hungarian and Polish
telecommunicaition in 1989

Table 3.4.: The Hungarian and Polish
telecommunication in 1994

Table 5.1.: International loans for
Polish telecommunication in 1993

Table 5.2.: International loans for
Hungarian telecommunication in 1993

22

23

28

29

61

61

CHAPTER 1: SYNOPSIS

Before any tentative study of the role of Polish and
Hungarian States in telecommunication, a historical background
will be provided to help the reader understand the problems
faced by both countries after the fall of the Communist block.
The first section of this chapter is devoted to a brief
history of telecommunication and general economy in Hungary
and Poland under Communist power. It will show the
considerable role of the State in the societies of these
countries. Such a big influence is unlikely to disappear
quickly even after a radical change in the political
structure. The second section is then devoted to the role of
the State in the post-Communist economy, particularly
telecommunication. It will show why the State is one of the
most important actors in telecommunication. Finally, the third
section will outline the different steps that the study will
follow to ascertain the role that the State had during the

five years that followed the fall of the Communist power.

1.1. HISTORICAL BACKGROUND

At the end of World War II, Europe was divided into two
blocks depending on who freed the countries from. Nazi
occupation and the results of "democratic" elections. While

Western Europe remained capitalist with the help of the United

1

States of America (USA), Central and Eastern Europe (CEE)1 was
forced to adopt a Communist system, with the exception of
Greece. In Greece, a strong capitalist feeling combined with
financial aid from the USA provided enough protection against
revolutionary partisans to keep the country inside the
“Western World".

Under Communist power, with the exception of some
atypical examples in. the agricultural field (very small
private land, independent farming community), the whole
economy has been put under State control. The State was then
the only significant actor of the economy, being seller and
buyer of every single product of the production chain down to
the end consumer. It decided what to produce, how much to
produce and where to invest profits. The sectors of the
economy' were developed. depending on their symbolic
significance for the Communist propaganda. On the one hand,
the coal and steel industries, which represented the power of
the Communist production, were, along ‘with the defense
industry, the first priority during the allocation of the
national budget. On the other hand, the production of consumer
goods was under-developed and very unlikely to benefit from
investment or research and development.

The situation. was similar' in. the telecommunications
field. With its high propaganda value, broadcasting was
"pushed into" the household through a broad choice of programs

(though always tainted by Communist propaganda) and subsidies

on television sets and radios. In contrast, inter-personal
communications, difficult to monitor for politically incorrect
content, were always considered as not worthy of development
or even dangerous for the system. When inter-personal
communication technology was developed, it was primarily meant

for commercial use or for the members of the intelligentsiaz.

Thus, telecommunication3 in the CEE countries was far
behind the "Western World" level. Cut from the rapid
technological changes in western telecommunication by the
CoComfs restrictions (Coordinating Committee on Export
Controls), obliged through protectionism to buy expensive
domestic equipments with very limited funds‘, forced to keep
the phone service scarce and primitive to facilitate
eavesdroppings, the civil telecommunication operator did not
have much possibility to develop telecommunication. As a
result, telephone penetration in the area was averaging around
10% in 1988 with very few differences between the countries‘.
The waiting lists for a basic phone line were dramatic and the
waiting was hopeless except for the members of the Communist
party's elite. As far as quality of service was concerned,
even the use of the word "quality" was an exaggeration to
stress the lack of it. Finally, besides phone services,
telecommunication was reduced to telex service, mostly
developed for strategic Communist firms. Data transmission,

satellite communication or mobile networks were exclusively

reserved for military use if they were at all developed.

1.2. THE IMPORTANCE OF THE STATE ACTION

However, since 1989, four countries have managed to reach
a level of development high enough to be considered for full
European Union (EU) membership after the turn of the century7.
The Czech Republic, Hungary, Poland and the Slovak Republic
made considerable effort in order to keep up with EU's
expectation. They developed links with western countries to
acquire capitalist's ”know-how" and raise investment for their
development, privatized part of their economy and defined
politics to improve the general economic situation.

In countries where the State was all powerful for 45
years and owned the entire economic infrastructure, such
changes could not be done without an important role for the
State. Owning the entire economy, the State has at least the
important role of initiating privatization. Thus, in the
consumer goods retail sector, the role of the State is limited
to the definition of a broad framework which allows private
ownership and operation. For other sectors where technical
knowledge or an important amount of investment are needed,
opening the sector to damestic private ownership is not enough
because of a dramatic lack of domestic capital and domestic
expertise.

The telecommunication sector was one of the latter. For

the development of telecommunication infrastructure as well as

for its improvement, high amounts of investment are needed.
Moreover, telecommunication has been defined, since the
beginning of the transition, as a strategic sector. As such,
the emphasis is on a quick development of the network,
allowing other economic sectors to benefit from
telecommunication services. It could be possible to open the
sector to private interests and allow them to charge
monopolistic prices. The funds could be raised through the
sector. However, considering the very small existing network,
even monopolistic prices would not be enough to raise funds
for a quick development.

Investment has to be provided first and reimbursed by the
profit it allows. Since capital is very scarce on the private
domestic market, it can only come from private foreign sources
or from governmental sources (either tax money or money
collected from international aid). In a situation as such, the
State has a very heavy responsibility. It has to determine the
minimum amount of foreign help needed to develop the sector
and the maximum.ampunt of foreign help acceptable so that the
country is not “sold“ to foreign powers. Too little help could
lead to a failure of developing the sector according to
original plans. Too much help could lead to a loss of trust
from.the people toward the State and could bring about serious
political crises in countries that are already politically
shaken by a radical transition from Communism to Capitalism.

In Hungary for instance, many people already accuse the State

of having sold the country to foreign investorse.

In any case, economic possible returns are not the only
factors influencing the investors' decision. North9 argues
that institutions determine the payoffs. He defines
institutions as consisting of “ formal rules, informal
constraints (norms of behavior, conventions, and self—imposed
code of conduct), and the enforcement characteristics of
both."10 Thereby, regulations, that constitute a big part of
the formal rules, play an important role in determining the
payoffs of an investment and luring the investors.

Moreover, while defining a policy for the
telecommunication sector, the State is still the owner and the
operator of the telecommunication system. It is then
responsible for finding capital (either through taxes or
through foreign aid) and "know how", and then using them for
the development and the improvement of telecommunication
infrastructure.

Thus, the role of the State is very important in the
telecommunication sector as compared to some less capital and
technical intensive sectors which can be developed quickly by
the domestic private sector in cooperation with foreign aid.
The state is then a mediator between social interest and new
private owners and between the country need in
telecommunication and foreign investors. It is certainly not
the only actor to be considered when studying

telecommunication in the CEE, but it plays a major role.

1. 3 . OUTLINE

The thesis will then concentrate on the comparative role
of the State in the telecommunication sector in two countries:
Hungary and Poland. A theoretical framework of study based on
a review of the literature about the role of the State in
telecommunication will be defined in chapter 2. In chapter 3,
the situation of the two countries will then be compared in
particular for the telecommunication sector, just after the
fall of the Communist power at first and then five years
afterward, to assess the differences in development. Chapter
4 will then deal with the indirect influence the State has had
on the telecommunication sector, and chapter 5 will deal with
the direct influence. Chapter 6 will outline same lessons that
could be learnt through the experience of the two countries
and chapter 7 will conclude the study by outlining weaknesses

in the study and proposing possible research.

1. Central and Eastern Europe comprises the former Warsaw
Pact countries excluding the former Soviet republics, the
former Yugoslavia, and Albania.

2. Jurgen Muller and Nyevrikel, “Closing the Capacity and

Technology Gaps in Central and Eastern European
Telecommuni cat ions " in Bj Orn Wellenius and Peter Stern
(eds. ). ' ° '

, The World Bank, Washington D.C.,
1994, pp. 353-373.

3. Telecommunication is used here in a narrow sense excluding
television and broadcasting since the development of the two
sectors are totally different.

4. Jurgen Muller and Emilia Nyevrikel, 1994.

5. Anthony Ramirez, “Cellular Phones fill Gap in Hungary",
Wines, Jul. 6 1992, 9- D2-

6. Clare Lees, “Telecommunications in Central and Eastern
Europe“. WW5.
1994, pp. 121-131.

7. "Europe Membership Talks Start Today“, W,
Oct. 31 1994, p. A5.

8. Jane Perlez, “Hungarians Cooling to Foreign Investment“,

Wines, May 3 1994, p. A12.

9. North D. "Institutional Change: A Framework of Analysis",
in Sjostand S.
Bindings, Armok, M. E. Sharpe, New York N. Y. 1993.

10. North, 1993.

CHAPTER 2: THEORETICAL

FRAflUflMURKZ

This chapter will outline the theoretical framework used
for the study. The first section is devoted to a literature
review on the role of the State in the telecommunication
sector. The second section presents the method that has been

used for this study.

2 . 1 . LITERATURE REVIEW

Since the fall of Communism, there has been a lot of
literature about the CEE countries and the problems they face
in their difficult path toward capitalism. However, this
literature is not oriented to specifically ascertain the
impact of the State actions on telecommunication. It is either
very general and deals with the impact of the State actions on
the macro-economic scale, generally only for one country but
sometimes comparing several (e.g. "A Comparative Review of
Privatisation Strategies in Four Former Socialist Countries'I
by Marko Simpnetil), or very narrow and deals with one aspect
of the telecommunication sector in one country (e.g. "The
evolution of the Hungarian telecommunications policy" by Erik
Whitlock and Emilia Nyevrikelz).

The existing literature about telecommunication provides

good insight on the role of the State in the development of

9

telecommunication. Even though several ways of looking at
telecommunication are presented in the literature, each method
includes the state as a factor influencing telecommunication.

For instance, while using a contextual analysis to study
the telecommunication sector as a whole in a country, Bella
Mody3 includes the State in the political contextual factors.
It is then acknowledged that the state has an influence on the
telecommunication sector. The role of the State is not only
acknowledged in the study of the telecommunication sector as
a whole. Authors stressing a particular aspect of the sector
do also recognize the State as an influence. William Duttonf,
for instance, studies telecommunication policy through I'the
ecology of games“. In each game considered, the State is a
player. The State then has a significant influence on the
ecology of the telecommunication games. Some authors even
consider that the State has a very important role if not the
most important role in the development of telecommunication,
especially in the developing countries. Katz, for instance,
maintains that the growth of “telecommunications technology is

”5 Jonscher states

strongly determined by government policy.
that development in the telecommunication sector is only
possible with an active intervention of the State.6

MOst of the literature on the impact of the State actions
on the telecommunication sector follows four main directions.7

Even though the situation is different for each country, the

role of the State can generally be divided in four categories:

10

commercializing operation, increasing private sector

participation, developing competition and developing
regulation.
During the last forty years, the general wisdom about

the privatization of telecommunication has changed from a pro-
State owned telecommunication infrastructure position to a:
strong belief in privatization. After the decolonization, as
domestic capital was a scarce resource, most of the scholars
and the international organizations, such as the World Bank,
favored a State owned and operated telecommunication structure
for the developing countries8.'The situation now in the CEE
countries is similar to what the situation was like in the
decolonized countries. The State is responsible for most of
the economy and does benefit from important revenues. Domestic
capital is almost non-existent. However, even if some authors
advocate that State owned and operated firms allow a better
control on the economyfi, the trend is to advise privatization
of telecommunication especially using domestic capital. Most
of the literature about the role of the State in
telecommunication deals with the role of the State in the
privatization of telecommunication. It is recognized that the
State, along with foreign and domestic capital, plays an
important role in the ownership of telecommunication”.
However, some opposition to privatization inside the State is
also recorded. Fearing staff reduction, new work conditions

and 'creamskinming", part of the State tries as much as

11

possible to avoid privatization or to slow it down“. Teske
advocates against this reasoning as there are opportunities
for laid off staff through their experience in the sector and
as there is still a lot of monitoring to do in the sector for
the State.12 However, this fear of loosing one's job is a
reaction that has become typical in CEE countries where hopes
in capitalism fade slowly under the attack of unemployment.
The regulatory issue is sometimes given less attention in
the countries but is an important part of the literature about
the role of the State in the telecommunication sector. In a
country where the telecommunication sector is not private, the
State has a tendency to stress operation compared to
regulation”. The first step taken toward letting private
interests in the sector is to separate the regulatory body
from the operation. However, in many cases, when the State
looses the operation of telecommunication, it tends to
“forget“ the sector.
I'The State is offering what could be its most profitable
sector to private capital often with little attention to
regulatory mechanisms or requirements to service the total
population.““
However, the regulatory function of the State is a very
important role. According to Nulty and Schneidewind, a
“telecommunications system that relies solely on private,
competitive firms will tend to be both inadequate overall and
too unevenly distributed to meet the needs of society as a
whole".15

Finally, the structure of the State is likely to

influence the process of telecommunication reforms and

12

6 For instance, a strong executive

determine their success.1
body might be effective in initiating the reforms, but might
also vitiate the objectives of reform by diluting the power
and effectiveness of the regulatory process.17 The structure
of the State departments influencing directly the
telecommunication sector should then be given some attention.

The literature dealing with the state's action in the
telecommunication sector stresses the privatization issues and
the regulatory issues, either in general or for particular

countries. This document is trying to compare the role of the

State in telecommunication for two typical examples in CEE.

2 . 2 . METHOD

Since 1989, the telecommunication situation in the CEE
evolved gradually. Some countries were able to quickly develop
their telecommunication whereas others were stuck, unable to
efficiently move forward. Among the four most developed
countries, there are also differences. These differences are
differences in approach. Hungary chose a quick but rigid
approach to telecommunication. improvement defining every
single step and enforcing social goals through regulation. The
Czech republic and the Slovak republic were less quick in
defining regulation and they have been less rigid trying to
lure investments through less restriction. Poland, on the
other hand, chose a “laissez-faire' approach for almost the

whole telecommunication sector. Thus, the four countries are

13

now scattered on the telecommunication reforms and policy
spectrum. In order to see the difference between the
approaches chosen, the study will focus on the two ends of the
spectrum, Hungary and Poland.

As noted earlier, after the fall of Communism, the State
stayed in charge of many sectors including the
telecommunication sector, at least to help the transition. For
instance, during the period 1989-1994, the Hungarian and
Polish States kept the responsibility of running most of the
telecommunication operations. Moreover, any movement toward
privatization or any regulations were initiated by the State.
The study concentrates then on the role of the State in the
development of telecommunication in Hungary and Poland.

According to the literature, the State plays an important
direct role in the development of telecommunication through
its policies on privatization of the telecommunication sector
and its telecommunication regulations. However, the State's
actions do not stop there. Diplomacy toward international
organizations and toward sovereign countries in order to raise
aid (either in currency or in "know-how") is a very important
direct influence on the telecommunication sector.

Moreover, through its different actions on the economy of
the country, the State might indirectly influence the
development of the telecommunication sector. For instance,
actions aimed at reassuring investors touch telecommunication

investors as well as others and are likely to help the

14

development of the sector to some extent.

The study will then take the form of a case study using
press articles and books on both countries. The State's
actions (direct or indirect) on telecommunication will be
noted in each article and then interpreted for its
significance in telecommunication development.

The documents used for that study can be divided into two
categories. Some documents are directly related to
telecommunication and can be used for determining the direct
influence of the State's actions on telecommunication. It is
anything done by the government or by any State agency in the
field of telecommunication. It can be related to legislative
power, to executive power, to juridic power, to diplomatic
actions, or to decisions taken in the management of State—
owned firms.

On the other hand, indirect influences are more difficult
to determine. Any actions undertaken by the State could have
an indirect influence on the telecommunication sector. An
action with an indirect influence on the telecommunication
sector is an action that is not specifically aimed at the
telecommunication sector but still affects it. It is rather
difficult to recognize an indirect influence, but in general,
any action taken by the State to affect the whole economy of
the country is an indirect influence whether its effects are
important or not. For the purpose of the study, only the main

indirect influences such as macro economic policy or general

15

diplomacy aimed at investors will be used.

16

1. Marko Simoneti, "A Comparative Review of Privatization
Strategies in Four Former Socialist Countries", Europe;Asia

Studies. Jan. 1993, pp. 79- 102.

2. Erik Whitlock and Emilia Nyevrikel, "The evolution of
Hungarian telecommunications policy", Igleggmmun1gatigns

£91122. Apr. 1992, pp. 249-258.

3. Bella Mody, "First World Technologies in Third World
Contexts“, in E. M. Rogers and F. Balle (ed. ).Ihe_CQmmnni£aLion

WW Ablex. New
Jersey, 1985.

4. Williami Dutton, “The Ecology of Games Shaping

Telecommunications Policy, Commun1gation_lheory, Nov. 1992,
pp. 303- 328.

5. R. Katz,
£gzsngg§1ye,Praeger, New York, 1988.

6. C. Jonscher, "Information Resources and Economic

Productivity“, W 1983. pp.
13-35.

7. BjOrn Wellenius and Peter Stern, “Implementing Reforms in
the Telecommunciations Sector: Background, Overview, and
Lessons", in BjOrn Wellenius and Peter Stern (eds. ),

"I. ‘ll‘. .0 :‘ O." .0 0‘ “ ‘ 0W" O. o .0 ‘ ‘ 0"
fzgm_Expezien:e, The World Bank, washington D.C., 1994, pp. 1-
64.

8. Bella MOdy and Lai Tsui, "The changing role of the State.',

in Bella Mody, Johannes Bauer, and Joseph Straubhaar,
o o o o . I 0

.gelfSDmmun1oat1onsIJaztuzua11Iwho_IuJJ__an_J3n1_Informat1on

, Lawrence Erlbawm, Hilldale
N.J., 1995.

9. R. Noll, " The Political and Institutional Context of
Communications Policy“, in M. Snow (ed.), W

‘ ‘ 0qu O. . .00 ° :‘ol . o. .00 I‘ -o . o. a I- - oo oo
.anntries, Longmans, White Plains N.Y., 1986.

P. Evans, ”After Dependence: Recent Study of Class, State
and Industrialization". WW.

1985, PP. 149-160 .
17

10. Bella Mody and Lai Si Tsui, 1995.

11. Bella Mody and Lai Si Tsui, 1995.
Paul Teske,

AWN
W, State University of New

York Press, New York N. Y. 1990.

12. Paul Teske, 1990.

13. Bella Mody and Lai Si Tsui, 1995.
14. Bella Mody and Lai Si Tsui, 1995.

15. T. Nulty and E. Schneidewind, "Regulatory Policy for
Telecommunications", in B. Wellenius, P. Stern, T. Nulty and
R. Stern (eds. ).

Wad—MW
W The World Bank Washington D C .

1989.
16. B. Petrazzini, " The Politics of Telecommunications
Refonm in Developing Countries", Bag1f1g_121egommun1eat1ons
Eexieu 1993
A" Galal, '

' , The World Bank, Washington
D.C., 1993.

17. B. Petrazzini,‘1993.

18

CHAPTER 3: TELECOMMUNICATION DEVELOPMENT

This chapter consists of a comparative description of the
situation of Hungary and Poland right after the fall of the
iron curtain in 1989 and five years afterward. The first
section is devoted to general economy while sections two and
three are dealing with telecommunication. To facilitate the
comparison between the two countries, four tables are
provided. Tables 3.1 and 3.2 include general economic data.
Tables 3.3 and 3.4 summarize the Hungarian and Polish
telecommunication situations in 1989 and 1994. The following
chapters will then concentrate on the direct and indirect

actions of the States on the telecommunication sector.

3.1. THE GENERAL ECONOMIC SITUATION

Poland and Hungary do. not share the exact same
characteristics. Demographically, the two countries are
really different. With a population of 38 millionl, Poland is
the biggest CEE country beside Russia. Hungary, on the other
hand, is one of the smallest with 10 million inhabitantsz. The
difference of size is of course also geographical: Hungary
represents 93,032 square ikilometersa, whereas Poland
represents XXXXX square kilometers. Although they have similar
proportion of urban population (60% in 1989 for Poland‘ and

62% in 1990 for Hungarys), the population of Poland is more

19

concentrated. In 1989, the Polish urban population lives only
on 6% of the Polish territory and there were 24 cities of more
than 100,000 inhabitants". In Hungary, on the other hand,
there are only eight cities of more than 100,000 inhabitants7.
Poland having bigger urban market than Hungary but they are
further apart. Operation of rural communications is then less
profitable in Poland as villages are more likely to be far
away from cities. Similarly, long distance operation is mpre
costly in Poland than in Hungary as the urban centers are
relatively evenly distributed on the Polish territory.8

Historically, they dealt with Communism differently.
Poland had a tradition of dissidence that made people aware of
political debate and made them capable of political actionsg.
Hungary' had. a tradition. of private ownership for small
businesses, and in 1989 the private sector already accounted
for 2% of the economy.10

After the fall of Communism, the two countries followed
sensibly different ways of development. Hungary became a
parliamentary democracy and chose a slow transition from
Communism to Capitalism. It protected the people as much as
possible until the economy could not support it any more:
”The ruling coalition in Hungary protected the population from
welfare costs of transition to a much greater extent than
those ruling in other countries."11
Nowadays, the average wage in Hungary is still the highest in
CEE at $300/month.12 Poland became a republic and opted for a

”shock therapy“. Consequently, the economic indicators have

20

been lower than in Hungary. For instance, the buying power of
wages has fallen 28% since 1989 in Poland and only 16% in
Hungary. However, Poland achieved positive growth before
Hungary. Tables 3.1 and 3.2 summarize the principal economic

indicators for the period 1990-1994 for the two countries.

21

 

Growth

 

Inflation

 

 

 

 

 

 

 

sources:
1. Craig Whitney, 'East Europe's Hard Path to New Day', Ihe_Neu_ngk_I1mea,
Sep. 30 1994, pp. Al and A4-A5.

2. Michael Marrese, 'Hungary Emphasizes Foreign Partners', BEELBL_BeseaLQh
BBDQIL. , Apr. 24 1992, pp. 25-33.
3. Jan Winiecki, 'East-Central Europe: A Regional Survey. The Czech Republic,

Hungary, Poland and Slovakia in 1993', Enzgpg;A§1a_§;nd1es, 1994. pp. 709-
734.

4. Karoly Okolicsanyi, 'Macroeconomic Changes in Hungary, 1990-1994',,B£ELBL
, Jun. 17 1994, pp.21-26.

5. Anthony Ramirez, 'Cellular Phones Fill Gap in Hungary', Ihe.Nemnlgzk
Times, Jul. 6 1992, p. D2.

6. Jane Perlez, 'Hungarians Cooling to foreign Investment', Iha_flfifl_Xsz
Times. May 3 1994, p. A12.
7. N/A means 'not available'.

8. Attila Becskehézi and Jason McDonald, Bna1ne§s_1njgzmag1gn_finngazx,CERA,
Budapest, 1992.

22

 

 

Inflation

 

 

 

 

 

 

 

source:

1. Craig Whitney, 'East Europe's Hard Path to New Day', Ihe_fleu_19;k_11mes,
Sep. 30 1994, pp. A1 and A4-AS.

2. Ben Slay, 'Poland: an overview', BEELBL_Reseazgh_BengzL, Apr.24 1992. pp.
15-21.

3- 'Country Profile: Poland'. US_DenarfmenL_DI_SLeLe_Disnateh. Jan. 3 1994.
p. 10.

4. Jan Winiecki, 'East-Central Europe: A Regional Survey. The Czech Republic,

Hungary, Poland and Slovakia in 1993', Bu;gne;A§1a_£Lnd1gs, 1994, pp. 709—
734.

5. N/A means I'not available'.

6. 'Fact Sheet: Poland'. uS_DeDeerenL_ef_SLaLe_Disnefeh. May 3 1993. pp-
317—318.

7. Jane Perlez, 'Fast and Slow lanes on the Capitalist road', The Nemuxgzk
I1mes, Oct. 7 1994, pp. A1 and A6.

23

3.2. THE COMMUNIST HERITAGE IN TELECOMMUNICATION

As explained in chapter 1, telephony did not enjoy a high
priority under Communist regime. Thus, in 1989, the
telecommunication infrastructure in CEE was totally
underdeveloped compared to its Western counterpart. For
instance, the phone penetration was on average four times
lower in Eastern Europe than in Western Europe. Even in
underdevelopment, there were some differences between the
countries. Bulgaria for instance enjoyed a fairly high
telephone penetration compared to the rest of the area with an
average of 17 main telephone lines per 100 population”.
Hungary and Poland, on the other hand, were considered the
least developed of the CEE with respectively 8.7% and 7.9%
penetration (representing 0.9 and 3.0 million main lines),
while the rest of the area had at least 10% penetration“. Even
though the number of public phones was far better than
anywhere else in CEE (24400 for Hungary and 25600 for Poland,
to be compared with less than 10000 in the other countries“),
it was difficult to find a phone, especially for businesses
deprived from a main line. Budapest was the European capital
city with the lowest number of phones and in Hungary as well
as in Poland, many villages did not even have a telephone line
at all”. The following example shows very well how difficult
the situation was for former Communist non-strategic

businesses:

24

“The orchard [a large fruit orchard located about 40 km.south
of Warsaw] serves both national and export markets. In order
to do business it must have access via telecommunications to
its suppliers and customers at home and abroad. Yet it cannot
get a telephone line. Therefore it has made an 'arrangement'
with a pensioner in Warsaw who happens to have a telephone
line in his apartment. Every day a car and driver make two
round trips to the pensioner's apartment to send and receive
messages."1

The waiting lists were the highest in the CEE with 5.2%
of the population on waiting list for both countries18 and are
likely to be largely underestimated as many were discouraged
by the waiting and didn't even submit an application. The
waiting time was so bad (12 years in average for Hungary19 and
Poland”, although some applications are 25 years old) that a
joke advises people to file an application for a phone line at
the birth of their children in order for them to get it as a
wedding present.

Quality in phone connection was not better. In Hungary,
there was only a 40% chance for a call to be completed“. In
Poland, call completion was 35% for local calls and 40% for
long-distance. Beside very low call completion rates, random
malfunctioning was not unusual. For instance, during the
winter 1990, the subscribers in Warsaw whose telephone number
started with 3 could not call the subscribers whose telephone
number started with 4”. This is due to outdated technologies
still used under Communism. Many switches are still antique
mechanical switches when they are not manual. In Hungary,
14.4% of the switches were manual and only in operation from

8 a.m. to 2 p.m.. In Poland, the situation was a little better

25

on that. point. with. only’ 8.5% .manual switches. Even the
receiving devices were the cause of some quality problems. In
Hungary, for instance, many phones are still hand-crank models
from.the 20's”. The only phone system with acceptable quality
was reserved to members of the ruling party and benefitted
only a small population of elites. In Hungary for instance,
the "K“ line (line for the communist elites) was only open to
2% of the population“.

Other means of personal communication were almost
unavailable with the exception of telex. Being the only legal
proof beside written agreement in Communist commercial law,
the telex has benefitted from a good development. There was
approximately one telex connection for 1,000 inhabitants in
Poland and one for 800 inhabitants in Hungary”. But telex was
very rarely used for personal communication, and only linked
Communist means of production together. The only mobile
communication system was reserved for the army and no civil
usage was allowed. Finally, although data communication was
not available in Poland, Hungary introduced data communication
in 1968 and developed it throughout the twenty following
years. In 1989, there were 7,653 data stations in Hungary able
to transmit data at a speed of 2,400 bits per second.

Finally, the manufacturing sub-sector of the
telecommunication sector was old and inefficient as was most
of the consumer goods manufacturing sector in the former

Communist countries. Even though the work force could be

26

considered well trained and disciplined, it lacked efficiency
and "know-how“ in new telecommunication techniques such as
fiber optics. In both countries, the only work force almost up
to date for telecommunication technologies was from military
contractors and did not serve the civil market.

Except for data communication, the telecommunication in
Hungary and in Poland could be considered as fairly similar.
Telephone penetration was in the same range, quality was
dramatically missing and the equipment was equally antique.
However, since the fall of the Communist system, Hungary and
Poland have fought their way through the chaos of transition
to improve their telecommunication. Both countries obtained
results worth mentioning, and from a very similar situation

arrived to somewhat different positions.

3.3. EVOLUTION OF TELECOMMUNICATION SINCE 1989

From. 1989 to 1994, Hungary and Poland have given
development of telecommunication a very high priority. For the
sake of clearness, the main telecommunication indicators are
shown in the tables 3.3 and 3.4. The results Show improvements
that surprisingly enough sometimes exceed the national
estimate. Hungary for instance went from.a 8.7% average phone
penetration in 1989 to 10.92% in 1991 and 14.57% in 1994

exceeding the 1993 installation estimate by 30,000 lines“.

27

POLAND

 

Telephonegpenetration

7.9%

 

Main lines (in million)

3.0

 

Public phones

25,600

 

Waiting_list (in % of population)

5.2%

 

 

Call completion

35%-40%

 

   

Manuel switchino eo ioment

28

 

14.4%
source:.DeLaDre_BeDDrLS_en_InLernaLienalrleleeemmunisefiens

 

8.5%

I O C I
v. ‘ " 0‘ 9 .00 o. .0. 0‘ .0 O ‘ ‘ CHIN I . 0.

HUNGARY POLAND

 

Telephone penetration 14.5% 11.5%

 

Main lines (in million) 1.5 4.4
Public phones 27,300 28,600
Waitinglist (in % of population) 6.5% 5.8%
Call completion >50% >50%

 

 

 

 

 

Manual switching equipment 6% 8%

Cellular teleohone subscribers 75 000 6 200
source=DaLaDre_BeDerLs_eD_lnLerDaLiene1_IeleeemmunieeLiens

 

 

 

29

Poland increased its main lines by 46% (compare to 67% for
Hungary) going from 7.9% penetration in 1989 to 8.6% in 1991
and 11.5% in 1994”. In the same time, the number of public
phones increased by 2,900 in Hungary for a total of 27,300 and
by 3,000 in Poland for a total of 28,600”. Hungary has also
introduced card phones in 1991 with a total number of 300
phones that has grown to 8,500 in 1993.

The quality and the speed of service have also improved.
The connection is automatic in 92% of the cases in Poland and
in 94% of the cases in Hungary. 10% of all switches are
digital in Hungary and 20% in Poland”. The waiting time is
down to 5 years and the call completion rate is now over 50%
for both countries”. In 1990 for instance, only 20% of
international calls made from Warsaw were completed and the
waiting for a connection could take hours if not days. Now,
there is instant and reliable international connection from
the capital city”. And with 22,000 digital lines, Budapest has
by far the most digital lines of any Eastern European city”.
However, the development is not homogenous especially in
Poland. The urban areas have benefitted far more than the
rural areas from the effort to develop telecommunication. In
Poland for instance, telephone penetration in urban areas is
16% whereas it is 4% in rural areas”. And there are still more
than a thousand villages in each country that have no phone.

Mobile phone service was introduced in both countries

after 1989, but the development of the mobile phone system has

30

been quite different in the two countries. Hungary was the
first country in the area to develop a mobile phone
infrastructure in 1991“. It used frequencies of 450 MHz not
compatible with Western European or American systems because
the military occupied the 900 MHz range. By the end of 1992,
the system run by Westel had a coverage of 70% of the country
and in May 93 Westel had 30,000 subscribers”. Now that the
military has freed the 900 MHz range, Hungary has three
systems of mobile telephone: An analog system with more than
50,000 subscribers and two GSM systems with an aggregate
number of subscribers between 25,000 and 30,000“. Poland, on
the other hand, did not start its mobile network until March
1993 and now, its analog system run by Centrel only has 6,200
subscribers. Moreover, the military in Poland has not freed
the 900 MHz band yet and there is no possibility for a GSM
system compatible with the Western European and the American
system.

Data communication has also improved since 1989, but very
little information is available on the subject. In Hungary,
where data communication was introduced 20 years ago, the
development has been rather quick and there were already
123,223 data stations in 1990 up from 7,653 in 1989.
Unfortunately, the figures for later years are not available.
But the comparison with Poland can be done through two
factors. The speed of transmission supported by the network is

the same in both countries, varying from 2,400 bps to 9.6 Kbps

31

depending on the lines. However, the quality of the lines
sometime forces the speed down to 300 bps or 1,200 bps in
Poland. The second factor is the number of white collar
workers per computer. This figure is a small 4 in Hungary
compared to Poland's 14".

Finally, both countries have invested in satellite
communication in order to communicate with NOrth and South
Americas, Far and. Near East and..Australia. Hungary' has
developed two satellite earth stations in the mid 1993. Those
two station use Intelsat and provide the overseas links
Hungary uses to communicate with the world. Poland on the
other hand has only one earth station, but it uses Inmarsat,
Intelsat, Intersputnik and should soon be able to use

Eutelsat.

32

1. “Country Profile: Poland", HS_DBDaInmenL_Q£_SLaLe_DifindLQh.
Jan. 3 1994, p.10.

2. “Country Profile: Hungary“, US Department__of__SLaLe
Dispatch, Jan. 3 1994, p. 9.

3. Patricia. Stripling, “Hungary" ,
W, 1994, pp. 361- 371.

4. Glenn Curtis, ”The Society and its Environment“, in Glenn

Curtis (ed.), W. Federal Research

Division, Library of Congress, Washington D.C., 1994.

5. ' - , Hungarian Central
Statistical Office, Budapest, 1993.

6. Glenn Curtis, 1994.
7. "Country Profile: Hungary", 1994.
8. Glenn Curtis, 1994.

9 Frances Millard Wad University
Press, Cambridge, 1994.

10. Richard Lonworth, "Hungary seems Western Already", Europe,
Jun. 1990, pp. 25-26.

11. Jan Winiecki, "East-Central Europe: A Regional Survey.
The Czech Republic, Hungary, Poland, and Slovakia in 1993',

Wdies 1994 pp 709- 734

12. Jane Perlez, “Hungarians Face Slump In Economy", The_Nem
Xork_Times, Oct. 27 1994, p. A4.

13. Jurgen Muller and Emilia Nyevrikel, “Closing the Capacity
and technology Gaps in Central and Eastern European
Telecommunication“, in BjOrn Wellenius and Peter Stern (eds.),
W. The World Bank. Washington D.C.,

33

1994, pp.353-373.
14. Jfirgen Mfiller and Emilia Nyevrikel, 1994.
15.Jurgen MOller and Emilia Nyevrikel, 1994.

16. Brian Toohey, "Hungary: An Update for U.S. Companies",
We. Jun. 28 1993 pp. 7-9

17. WW 1987.

18. Jargen Muller and Emilia Nyevrikel, 1994.

19. Patricia Stripling, 1994.

20. Patricia Dewar. “Poland“, WW1
Ieleeomuaiaafioas,1994,pp 451 463

21. Anthony Ramirez, 1992.

22. "Don't hang up”, The_Eggngm1st, Mar. 24 1990, p.73.
23. Anthony Ramirez, 1992.

24. Anthony Ramirez, 1992.

25. Jfirgen Muller and Emilia Nyevrikel, 1994.

26. Patricia Stripling, 1994.

27. Patricia Dewar, 1994.

:28. Clare Lees, “Telecommunications in Central and Eastern
Europe " , WW.
1993, pp. 121-131.

34

29. Clare Lees, 1994.

30. Jfirgen M01ler and Emilia Nyevrikel, 1994.

31. "Poland's New investment challenge", W,
Feb. 1994, pp. 23—24.

32. Steven Titch, "The liberalization express roars through
Hungary", Telephony, Jun. 3 1991, pp. 36—44.

33. Patricia Dewar, 1994.

34. Stefan Zehle, "Telecoms in Eastern Europe: Investing for

Growth“ IeleeomnuaiaafioasJIE Nov 1993 pp 85 96

35. Stefan Zehle, "Mobile Network in Eastern Europe",

W1 Dec 1993. pp. 39-42-

36. Patricia Stripling, 1994.

37. Patricia Stripling, 1994.
Patricia Dewar, 1994.

35

CHAPTER 4: STATE'S ACTION AFFECTING

TELECOMMUNICATION INDIRECTLY

Both countries lack dramatically domestic capital and
technological "know-how". Direct foreign investment is then
very interesting "both because it is equity and also because

1 As for any

it may' bring foreign. management expertise."
investment, several economic variables (not specific to
telecommunication) are to be considered before any investment
in the telecommunication field is planned.

Several authors consider telecommunication development
linked with general economic situation. For instance, Karoly
Okolicsanyi believes that:

"Such a development is only possible if East Central European
governments create an atmosphere friendly to business, where
the involvement of foreign capital would make it possible to
skip several generations of communications technology..."2
The States are then. to play an important role in the
development of telecommunication even if the policies used are
not directly directed toward the sector but affect the general
economic situation of the countries. Francois Grossas is even
more specific in his evaluation of the general economic
situation needed for luring investors in telecommunication:
"However viable and. promising the investment may look,
successful privatization of telecommunications enterprise will
also depend on features of the country as a whole. Local
cap1ta1 markets are expected to play important roles.

Investors, especially market investors, are sensitive to how
their money will be treated, especially regarding taxation of

36

profits and dividends, and repatriation of capital. General
political conditions also have an impact on investors'
decisions."3
Even though this is intended for the privatization of
telecommunication enterprises, it can be applied for any kind
of investment in telecommunication. Investors are very likely
to consider all those factors before engaging in any capital
move. Possibilities to further raise capital on the domestic
money market are really important as it is always easier than
moving capital cross-border. Prospects for return are always
affected by taxation and the general goal of any investment in
a foreign country is to ultimately repatriate the profits
where the investors are. Finally, general political conditions
are influencing investing decisions as there are one of the
main component of the risk to invest in a foreign country.
As for the specific telecommunication influences, those
factors are linked to State's actions. In a country where the
State is the only big actor, even if it transfers its dominant
position very slowly to the market mechanisms it creates, its
policies and laws are molding the economy and are likely to
keep a major influence for a long time. In order to study the
effect of State's action on foreign investment in general
(which will encompass telecommunication investment), this
chapter will focus on the different points stressed by
Francois Grossas. The first section will deal with general
privatization laws and how easy (or hard) it is for a foreign

investor to participate in the privatization of State-owned

37

enterprises. The second section examines then how capital is
treated in Hungary and Poland. Finally, the third section
looks into the general political and diplomatic situation of

the countries to determine how national risk is perceived.

4 . 1 . PRIVATIZATION POLICIES

Privatization of State-owned enterprises has been one of
the first objectives of the States in Hungary and Poland since
Communism has been replaced by capitalism. In order to
emphasized the difference of approach of the two countries
toward privatization of national assets, this section is
divided in two parts each dealing with the privatization

policy of a country.

4.1.1. Privatization in Hungary

Privatization is an integral part of the four year
economic program (1991-1994) that is suppose to help Hungary
with the transition from centrally planned economy to market
economy. The goal set for 1994 is a state ownership reduced to

‘ But this process is not to be

less than 50% of the economy.
rushed without paying attention to the quality of
privatization. In Hungary, more than the figures, the emphasis
is put on the fact that privatized companies should come into
the hands of highly motivated and responsible investors, able

to manage the assets they bought. This is why the Hungarian

state does not intend to speed up the privatization process

38

through mass free distribution of State assets, as it is
believed this would not contribute to finding responsible
owners. Furthermore, restitution (giving the enterprise back
to the former owner or its legal heir) is quite limited and
will be carried out through issue of special compensation
vouchers that the owners can trade for shares in privatized
State companies or sell on the Budapest stock market. Thus,
the restitutees that are not highly motivated by managing a
firmican get the capital they are entitle to without hindering
the economic development of the companies.5

Initially privatization was spontaneous, a company
feeling ready to be privatized could look for investors and
jprivatize itself. However, this led to losses to State
property. In many cases, the management staff of a company,
willing to be privatized as soon as possible, divided that
company in several parts and privatized the profitable parts,
leaving unprofitable activities to the State. Those abuses led
to a moratorium on any company transformation and the
establishment of the State Property Agency (SPA) in the
beginning of 1991. Nevertheless, even though spontaneous
privatization was a failure, the State did not want to deprive
companies from initiative in privatization believing that
insiders know better than anyone else when privatization seems
like a good option.

There are then two kinds of privatization in Hungary. The

first is a self-privatization initiated by the company and

39

approved by the SPA. This is generally done through the
raising of new equity rather than the sale of existing assets.
Thus, the company can keep the capital invested to purchase
new equipment or to repay its debt.6 Most of the time, this
process is used by small or medium enterprises that are easier
to evaluate as they have less activities and cannot camouflage
a loss making department in their balance sheet.

For large enterprises, the process is longer. It
generally has five basic steps leading a company from entirely
State owned and operated to privately operated and at least
partly privately owned. Privatization begins with the transfer
of property from the State to the SPA. This stage is initiated
under different conditions. It can be requested by the State,
by the enterprise or by investor interested in the company.
However, the SPA always has the last word. The second step
consists in the corporatization of the enterprise. This not
only changes the legal status of the firm, but also allows it
to begin reorienting its production and employment structures.
When the corporation looks viable enough to attract investors'
interest, the SPA initiates a search for strategically placed
partners. Most of the time, such partners are found outside
the domestic capital market, but domestic investors are not
automatically rejected if they show any interest in the
corporation. If several possible partners have been found, the
Twinning proposal is generally selected through a competitive

loidding. Participation in the assets of the corporation is

40

then sold to the partner. Generally, the State retains part
ownership of the newly privatized corporation. The fourth step
consists in the transition between State operation and partner
operation. The investor takes charge of the corporation's day-
to-day operation and carries on with restructuring. Finally,
after the corporation's position has been solidified, the
State may decide to sell its remaining ownership share via
public sale of stock.7

The Hungarian State has a very important role on
privatization through the SPA. It keeps an eye on all the
firms that are privatized and is very careful to select
investors motivated and competent. In fact, the State would
rather delay its privatization program than give away the
domestic assets. Although the objective of the four year plan
was to reach 50% of private ownership of the economy, barely
20% of the whole economy was in private hand in 1993.‘3
However, the State did not speed up in any way the pace of
privatization to keep up with the objectives. Such concern is
likely to inspire confidence to investor in the private
sector. Private clients and suppliers are likely to be
motivated and efficient, insuring good business prospects.
This is particularly true for the telecommunication sector
which is a supplier for the whole economy and therefore
benefits from such privatization efforts in every sector of

the economy.

41

4.1.2. Privatization in Poland

As in Hungary, the main objective for privatization in
Poland at the beginning of the new capitalist era was a quick
system transformation. It was aimed at transferring the
ownership of the economy from the State to private hands. To
achieve so huge a goal, the Polish State granted from.the very
start unlimited freedom of entry into almost any economic
activity. Consequently, the growth of the generic private
sector (the one starting from scratch) was very quick, but
privatization lagged behind.9 Moreover, the rush toward
private capital and especially foreign capital did encourage
a large amount of abuses and fraud in the same way as in
Hungary. The Polish State was than obliged to react and, after
several months of parliamentary discussion, the LaW' on
Privatization was passed. According to the law, there are two
main ways of privatization:
"1. Transformation of enterprises into corporation through
sale) of shares, using' different techniques, like jpublic
offering, direct sale to strategic investors (private
placement), management buy-outs and the like;
2. Liquidation of companies and sale of their assets to
private natural or legal entities."10
Moreover, various methods of mass puivatization, including
free distribution of shares, are mentioned as possibilities in
the law even though they are not described in details.

To implement the law, a State agency was intended to be
created as it was the case in Hungary. However, for political
reasons a special ministry was created establishing a close

relationship between privatisation and the executive part of

42

the State.11 This close relationship, beside giving the State
an even more important role in privatization, leaves the
privatization process to be heavily influenced by any change
in political landscape. Indeed, the objectives of an agency
are set at its creation and are rarely totally remodeled with
a change in the State. In contrast, a ministry is more likely.
to change hands every time the political landscape changes and
with a new minister comes a new view about the way
privatization should be achieved. Such sensitivity to
political environment actually' hinders the privatization
process, even if the Law on Privatization outlines what is to
be done. As a consequence, confusion is one of the
characteristic of Polish privatization. As Marek Krawczyk and
Jose Lopez-Lopez state:
"The three most recent administration have been unable to
formulate general policies or to set goals on the
privatization front. NO answer has been provided to the
question of what assets should be privatized, in what way, to
whom and how."12

Several ways of privatization have then been used in
Poland. After privatization through public offering of shares,
direct sale of enterprises to strategic investors, and
sectoral approach to privatization, the results in 1992 were
not as high as expected especially for large enterprises. The
ministry then launched a program of mass privatization13 which
was to be achieved through free distribution of shares to the

population. The main purpose of this scheme was to ensure

speedy and fair privatization process.

43

In Poland, the transition from State economy to market
economy is considered very important and privatization is
therefore a priority. Privatization is then emphasized, and if
no serious investors are found for large enterprises, free
distribution of shares will be used. If this process is quick
and seems to be fair, it does not insure motivated investors
at all. Moreover, most of the Poles who benefit from.the free
distribution of shares are unlikely to have a strong interest
or experience in managing an enterprise. Thus, restructuring
the privatized enterprise might not be a given in this
situation and it might still operate inefficiently after the
privatization, burdening part of the economy of the country.
Such inefficient private enterprises do not represent
efficient clients for telecommunication. Returns of investment
in telecommunication for the business' sector may be hurt if
the amount of inefficient private enterprises is important

enough.

When the methods of privatization are considered, Hungary
is providing investors with more security than Poland when the
quality of the private economic actors is considered. Thus,
the market is more promising for enterprises that are likely
to serve all the economic actors in their geographic area as
are telecommunication firms. In Poland, on the other hand, the
“economic fitness" of the other firms is not "secure" through

tkle privatization process. However, the Polish privatization

44

process is designed to be quicker and should soon create an
important private sector more interested in economic

efficiency than the state-owned firms.

4 . 2 . FINANCE ENVIRONMENT

Beside the prospect for clients and consequently for
profit, another important point that investors consider before
taking any decision to engage capital in a country is the
general finance environment offered by that country. In order
to develop a business, and this is all the more true in
hardware intensive business such as telecommunication, capital
is needed at different stage of the development. Most of the
time, the capital initially invested in the operation is not
enough (especially if the initial investment was to buy
participation in a privatized company in which case the
investment does not benefit the company) and. operation
requires more investment. Moreover, the objective of any
investment is to eventually turn the risk taken into profit.
In the eventuality of profits, foreign investors are
interested in repatriating them in hard currency. An important
point to consider then before investing is the capital market.
Is the currency convertible? Is it easy to import capital? Is
it possible to raise capital in the country? Can profit be
repatriated without any problem?

Furthermore, the amount of net profit is not only a

function of the clientele, the State influences the level of

45

profit a great deal through fiscal policy. Depending on taxes
and other fiscal tools, a finm can be better off in a country
where the prospective market is less promising but where the
State provides investors with tax breaks.

This section will quickly ascertain the initiatives of
the State in matters of finance and the financial appeal of
the two countries. Firstly the State's actions for the
development of a capital market will be described. Then, the
fiscal system of the two countries will be examined to find
out which country is the more likely to attract investment

according to its tax system.

4.2.1. Capital Market

The approach, taken toward. capital has been totally
different since 1989 in Hungary and in Poland. For that
matter, Hungary has been far more daring than Poland and took
the risk to loose capital to foreign countries at the
beginning.

Indeed, early privatization laws in 1989 and 1990 allowed

total repatriation of profits from Hungary.“

Moreover, any
kind of control on flow of capital had been totally lifted by
1992.15 The "de facto" convertibility of the Forint for foreign
and domestic business and for foreign investors allows imports
to be freely purchased and the profits to be freely

transferred abroad in hard currency.16

On the other hand since 1989 Poland has been really

46

concerned about its balance of currency. In 1991, foreign
companies were only allowed. to repatriate 15% of their
profits.17 Full repatriation of profits has only been granted
in 1993 and as the flow of capital is still monitored because
the Zloty is not totally convertible yet, the Polish State can
still fix a maximum amount allowed for repatriation.18
Domestic capital in both country is still rather
difficult to obtain. The stock exchanges in Budapest and
Warsaw have been open since 1990, but they are only beginning
to take off and beside State securities it is rather difficult
to trade any title or to raise capital through emdssion of new
stocks or bonds. In spring 1994 for instance, there were only
28 stocks traded in the Budapest stock exchange.19 Those titles
were basic pieces of ownership and the viability of any more
elaborate financial instrument was very unlikely. But beside
having established the exchange and trading securities, the
States do not have a strong influence on that capital market.
The best way to obtain domestic capital is still to ask
for a loan at a domestic bank. For that point, the situation
is the same in both countries where the State retains part
ownership in important banks and uses its influence to starve
capital markets. In Poland for instance, the interest rates
are outrageous between 30% and 50% per month (to be compared
with an inflation rate below 5% per month) with a maximum pay

20

back period of 6 months. The situation in Hungary is very

Similar, and Terry Buss and Roger Vaughan summarize very well

47

the situation:

"The national government retains a 40% stake in the 'big four'
banks whose portfolio are choked with bad loans to failing
state owned firms, leaving little credit for smaller
businesses. [...] National government is starving capital

markets by accumulating hard currency to reduce inflation;
stabilize the forint, and pay off its enormous foreign debt."1

4.2.2. Fiscal System

At first, the fiscal system in Hungary and Poland appears
to be the same and is fairly reasonable for investors. The
corporate tax at 40% in both countries is a little high, but
they are planning to reduce their tax rate significantly.”
Moreover, the accounting system has change in 1992 to conform
with western accounting standards in order for the evaluation
of a firm to be easier for foreign investors.23 A trusting
investor could be led to believe that the fiscal system in
both countries is totally similar and should not influence its
choice.

However, a careful investor would notice differences in
fiscal setting and should consider the implications of such
differences before any decision. Hungary has a very low

“ Investments are then amortized on a longer

amortization rate.
period and provide less interesting current tax shield than in
Poland. Due to this stiff hidden tax on current profits, the
actual corporate tax is higher in Hungary than in Poland.
Moreover, even though it reduced relative and absolute debt
indicators and in general purged the economy from.inefficient

firms, the tough bankruptcy law introduced in Hungary in 1992
48

is enforcing taxes and contribution payment.25 In Poland on the

other hand:

"There was little pressure in the form of enforced
bankruptcies resulting from non-payment of taxes and soc1al
security contributions."26

Although it is not an official tax credit, investors are
likely to take advantage of this lack of State pressure and
consider it as a good point for Poland when making an
investment decision. Unfortunately, this "de facto" tax break

is also likely to leave some inefficient firms on the market.

Since 1989, Hungary has been traditionalby more
attractive than Poland for foreign investors because of a free
flow of capital and the "de facto" convertibility of the
Forint. However, with the repatriation of full profits in 1993
and a soon to come "de facto" convertibility of the Zloty,
Poland becomes more and more interesting. In the near future,
foreign investors are likely to consider Poland as a better

bet than Hungary because of its more lenient fiscal system.

4.3. COUNTRY RISK

The last factor likely to influence investor decision and
on which the State has some influence is the perceived
political risk of investment. If the prospect of economic
returns are really good but the political situation can cast
doubt on the security of the assets, very few investors will

be ready to engage a large amount. The shadow of the French

49

Russian railroad bonds is still hanging over any kind of
investment into a potentially nationalizing country and the
threat is real or at least really felt by westerners. In March
1993, in a special survey about Eastern Europe, Ihe_EppnpmisL
stated that:
"Risk in Eastern Europe for Communism to come back surveys in
nearly all countries show a swing back towards socialist
values, with 70% of the population saying the state should
provide a place of work, as well as a national health service,
housing, education, and other services."27

The State has then the difficult task to reassure
investors about political risk. The definition of political
risk is very vague and varies from one individual to another.
It is therefore difficult to define the influence the State
has on effective political risk. However, some State actions
give clues about the safety of investment in the countries.

The willingness to integrate the global capitalist
community and the visible diplomatic efforts done in that way
are surely a good indication that the State is not considering
going back to Communism immediately. The diligence of the
State to pass and implement reforms in the country and the
domestic political situation is an other indication of the
commitment of the State to favor investment. This section

examines the State initiatives taken along those lines by

Hungary and Poland.

50

4.3.1. Diplomatic Initiative

Since 1989, Hungary and Poland have multiplied the
initiatives to be part of the international community. They
quickly applied to several international organizations such as
NATO or the EU, and in order to help each other out before
being accepted for full membership, they formed the Visegrad
Group in February 1991.28 Consequently, both countries are now
considered very seriously for European integration before the
end of the century. They have also been offered a part
membership in the NATO institution that should later lead to
a full membership.

However, while the two countries have followed the same
path, Hungary has adopted an easier position on compromise and
present an apparent stable political situation reassuring the
international community. It was the first to accept the U.S.
compromise on NATO as a transition status whereas Poland
rejected it as an agreement to lock the Eastern European
countries in a half-membership position.29 Hungary also strives
to reimburse its debt on time and in contrast with Poland
never asked for a rescheduling of its interest payments:
"This enormous sum for a country such as Hungary might
otherwise have been invested in the economy and used for
urgently needed structural changes. Debt repayment, though,
was considered more important than any other economic factor
and Hungary takes some pride in comparing itself with other
countries in this respect. Poland, for example, was granted
sizable reduction in its Paris Club debt in 1991 and for all
practical purposes did not service its London Club debt at all
between 1990 and 1993. [...] Private foreign investors have
been impressed with Hungary's regular debt payment record in
contrast to those of some other countries such as Poland and

Bulgaria."30

51

Such goodwill in trying to integrate the international
economic community has been noticed by all, and in 1992,
Hungary was the first country to be dropped from.the CoCom's
list of countries subject to strict export control.31 It also
helps investors to believe into the Hungarian capitalist credo
even if reforms are slow. In comparison, Poland seems more
conservative in its diplomatic relations and along with some
political instability this factor’ may deter some extra

conservative investors from investing in the country.

4.3.2. Political Situation

Although the domestic political situation of a country is
not totally determine by the State, some State's actions are
affecting the perception of investors. As for the diplomatic
situation, actions showing a strong involvement in reforms and
democracy are particularly well perceived by investors.

Here Poland's uncertainties play against it for a good
place in the investors' hearts. While the State is active, the
matters it examines may not always be relevant for investors
who consider most of parliamentary time as wasted:
"Parliament discusses superficial matters, such as color of
the talons of the eagle on the Polish emblem, while important
legislation is postponed for months."32
Moreover, although former Communist parties have regained an
important influence in all the CEE countries, Poland was the
first country in October 1993 where former Communists were

33

elected to rule the country. Even though they are claiming

52

to be pro-capitalism, pro-democracy and pro-reform, their
renewed political power along with the slow pace of
parliamentary reforms is enough to worry the more pessimdstic.

The political and diplomatic situation for a country is
not the first thing considered by investors (in
telecommunication or in any other sector) when selecting
countries to invest in. However, lack of protection for
investments and risk of nationalization are likely to deter
investors. In the case of Hungary and Poland where the two
countries present rather similar situations, the risks are
reduced, but the strong commitment to reforms and market
development of the Hungarian State inspires more confidence

than the Polish attitude.

As telecommunication development plans in Hungary and
Poland are relying heavily on investment and especially on
foreign investment, the State's influence on general
investment conditions plays an important indirect role in
telecommunication development. As for the direct influence of
the State's on telecommunication, when actions on investment
conditions are considered, Hungary presents a slightly better
general situation than Poland. The clear Hungarian legislation
and the quick reforms implemented by the State define an
environment better suited for inspiring confidence to
investors than the uncertain situation in Poland. where

legislation are very slow to be passed and generally unclear

53

in their application. However, the differences are not as much
structural than arising from.a delay in the Polish case or an
early lead in the Hungarian case. Once the Polish
privatization process will have shown some results and the
Polish State will have improve the financial situation through
full convertibility of the money and the development of a
strong capital market, the two countries will present the same
kind of general situation for investment. Poland may even be

more interesting for foreign investors because of its size.

54

1. Timothy Nulty, "Challenges and Issues in Central and
Eastern European Telecommunications", in BjOrn Wellenius and

Peter Stern (eds. ) . Implementing—Reforms__ia__tbe
I 15::mmnnicatians Sector° lessons erm Expgrjence, The
World Bank, Washington D.C., pp. 339-352.

2. Karoly Okolicsanyi, "Telecommunications in East Central

Europe". W, Sep. 18 1992. pp. 55-60-

3. Francois Grossas, "Privatization of Telecommunications
Enterprises: The Viewpoints of Investors", in BjOrn Wellenius

and Peter Stern (eds . ) . WWW—1n
. l' S i:r° lessons from Experjenge, The

World Bank, Washington D.C., 1994, pp. 411-418.

4. Brian Toohey, "Hungary: an update for US companies",
BasiaeSLAmerica. Apr. 1992, pp. 29-32.

5. Marko Simoneti, "A Comparative Review of Privatisation
Strategies in Four Former Socialist Countries", Europe_As1a
Studies, 1993, pp. 79-102.

6. Marko Simoneti, 1993.

7. Michael Marrese, "Hungary Emphasizes Foreign Partners",

Wotan. Apr. 24 1992. pp. 25-33-

8. Brian Toohey, 1992.

9. Jan Winiecki, "East-Central Europe: A regional Survey.The
Czech. Republic, Hungary, Poland, and. Slovakia in 1993",

Europe;Asia_Studies, 1994, pp. 21- 23.

10. Marko Simoneti, 1993.
11. Marko Simoneti, 1993.

12. Marek Krawczyk and Jose Lopez- Lopez, "Ideas and Experience
from the Recent Past",The_Calumbia_.IDuma1_of_Hor1d_Business,
Spring 1993, pp. 180- 186.

55

13. Marko Simoneti, 1993.

14. John Ettlie, "The Emergence of Manufacturing in Hungary",
Production, Aug. 1993, p.34.

15. Karoly Okolicsanyi, "Macro-economic changes in Hungary,

1990-1994", BEELBL_Research_Beaort. Jun. 17 1994. pp. 21-26.

16. Attila Becskehézi and Jason McDonald, Eps1ness_1hfprmah1gn
Hungary, CERA, Budapest, 1992.

17. "Don't hang up", Ihe_Eppnpm1sL, Mar. 24 1990, p. 73.

18. Patricia Dewar. "Poland", WW
.Ielecommuaicatioas 1994 pp 451- 463

19. Karoly Okolicsanyi, 1994.

20. Marsha Johnson, "Eastern Europe Opens for Business",
Dahamah1pn, Nov. 1 1991, pp. 80-13/80-15.

21. Terry Buss and Roger Vaughan, "Local Economic Development

in Hungary: From Communism to Democracy" ,Eppnpm1p_Deyelppment
.Bexiem, Spring 1993, pp. 51— 56.

22. "Lower tax plea", Enhl1p_uehmprks, Jun. 1993, p. 56.

23. Terry Buss and Roger Vaughan, 1993.

24. Karoly Okolicsanyi, "Hungary's set limits on state

ownership". Wm. Nov. 6 1992. pp. 40-45.

25. Jan Winiecki, 1994.
26. Jan Winiecki, 1994.
27. "Order disguised as Chaos", Eastern European Survey, The

Eppnpm1sf, Mar. 13 1993, pp. S4— 56.
56

28. Frances Millard, W, University
Press, Cambridge, 1994.

29. Paul Lewis, "Hungary officially informs U.S. It Accepts
Compromise on NATO", The_Nem_Xork_I1mes, Jan. 9 1994, p. 6.

30. Karoly Okolicsanyi, 1994.
31. Karoly Okolicsanyi, 1992.

32. Jacek. Kochanowicz, "The (disappearing state: Poland's

three years transition", Spp1a1_Researgh, Winter 1993, pp.
821-834.

33. Patricia Dewar, 1994.

57

CHAPTER 5: STATE'S ACTIONS IN THE

TELECOMMUNICATION FIELD

After the fall of Communism and the advent of capitalism,
the CEE countries realized very quickly that they would be
unable to develop all the economic sectors at the same pace.
Some had to be given a very high priority, other had to be
sacrificed. Based on a UN study, stating that "a 1% increase
in the number of telephone, for instance, results in the
economic growth of 3%"1, and on the fact that direct foreign
investment is unlikely' to take place unless the
telecommunication infrastructure is satisfactoryz, the
telecommunication sector has been given a very high priority.

The telecommunication goals set by the State in Hungary
and Poland are very ambitious. Poland targets a 30% telephone
main lines penetration by the year 2000, while Hungary has set
its target at 28.5%9.1Moreover, quality telephone service is
the basic minimum.service a firm.needs to operate. MOst firme
require more advanced technologies such as satellite
communication or fiber optic to satisfy their need in data
communication. So both countries strive to improve quality and
performance by modernizing the existing network and opening
new services and to increase the number of connections.
However, neither' the capital nor' the technical know-how

required to achieve the targeted development were present in

58

the countries in 1989. They then had to make a decision to
raise capital and improve technology. This chapter examines
how the State (the only important economic actor then) dealt
with those problems. The first section describes the efforts
done outside the countries on the international stage, the
second section the efforts to develop the existing network
through the national operator and the third section, the
efforts to get direct foreign investment in the country's

telecommunication.

5.1. ROLE OF THE STATE IN THE INTERNATIONAL WMIW
STAGE

In 1989, the State was the only big economic actor in the
former Communist countries. Five years later, it is still a
very important actor and the biggest domestic actor by far.
So, beside its international diplomatic role as a State, it is
the only one to be able to defend its country's economic
interest with some result on the international stage. This
section examines how successful the Hungarian and the Polish
States were in defending their country's interest by
attracting international aid, integrating the countries in the
international telecommunication community and positioning them

strategically in this community.

59

5.1.1. International Aid

.When a country tries to develop its telecommunication
sector, there are several international institutions to which
it can apply for help. The World Bank and the International
Monetary Fund (IMF) are two worldewide organizations whose
purpose is to examine development projects and to grant
financial aid for worthwhile projects. The European Investment
Bank (EIB), the European Bank for Reconstruction and
Development (EBRD) and the EU's PHARE program have exactly the
same role but are only run by Europeans.

For the European institutions, the process is quite
simple and could be followed by any private interest. One only
has to defend the project and if project proves its worth, a
loan will be approved and/or technical aid will be provided.
However, only important projects are likely to be accepted,
and in Poland and Hungary, only the State is able to sustain
important projects. Moreover, during the period 1989—1994 (the
EBRD is currently looking for new possibilities for the
future), every project had to involve the State as the EBRD
(and probably other institution) was requiring a State-backed
guarantee on its loan‘.

Hungarian and Polish States were really good diplomats on
that point and took advantage of the readiness shown by the
institutions to invest in CEE. They were "the first two former
Communist nations to be provided with monetary and technical

assistance by the Commission of the European Community as

60

early as December 1989”. They were also the first two
countries to be integrated in the PHARE project in January
19906. Finally, out of $340 million available for global
telecommunications projects in 1991, $270 million were devoted
to improve the Hungarian and the Polish telephone systems.
Tables 4.1 and 4.2 give the amount allocated to Poland and
Hungary for telecommunication projects for the period 1989-

1993.

Amount Loaner Project
($ million)

63.4 EBRD develop cellular
phone.

 

 

120 World Bank promote institutional
reforms.

 

90 EIB promote institutional
reforms.

 

100-150 EBRD establish 6 regional
joint ventures

 

l4 PHARE develop rural areas

 

EBRD modernize and expand
network in Warsaw

 

 

 

spurge; Datapro Reports on International Telecommunications, 1994

   

    
   

   

    

Amount Loaner Project

($ million)

   

 

    

    
    

 

90 EBRD develop rural areas

220 World Bank develo- the count
spureerDatapro Reports on International Telecommunications, 1994

 

 

 

     

      

 

  

61

As it can be observed by comparing the tables, Poland
seems to have been more successful in obtaining funding for
its projects. Compared to the $310 million lent to Hungary to
develop its telecommunication, the loans granted to Poland is
almost double ($557.4 million — $607.4 million).

This could be axplained by the size of the countries.
Poland being far bigger than Hungary needs more kilometers of
telephone lines to inter—connect the cities and to connect the -
villages. Moreover, the help given to the countries is
proportional to the basic needs in telecommunication. For
instance, Poland has been given $170 million to modernize the
Warsaw's network. Those funds have been given to Poland
because Warsaw is one of the less equiped capital in CEE.
Budapest, on the other, hand has been quickly developed and is
now the capital city with the most fiber optics lines in CEE.
Surely, the needs are less dramatic in Budapest than in

Warsaw .

5.1.2. International Telecommunication community

Being member of the international telecommunication
community does not "per se" help a country to develop its
telecommunication system. However, it is part of a general
diplomatic effort to get help from other countries. Once a
country has representatives in an international
telecommunication organization, it is easier for it to be

recognized as a "player " in the " international

62

telecommunication game". The country can then use some
resource of the organization for its own communication needs
such as Intersputnik satellites. It is also involved in
definition of standards which could lead to some transfer of
know—how if the standard is unknown in the country. Finally,
it can position itself strategically in the international
telecommunication "Monopoly"7 to be one of the required stops
on the board.

Here again, the State plays a very important role. As
stated earlier, there is no private telecommunication company
important enough to be significant on the international level.
The only actor able to be accepted in international
organizations such as the International Telecommunications
Union (ITU) would be the State as a representative of the
country or through the telecommunication operator that it
controls". The State has then the responsibility to defend
.alone its country's interest in telecommunication.

Both Hungary and Poland were obliged to be members of
Intersputnik before 1989 and they remained members after the
fall of Communism as it provided them with a resource to
communicate efficiently’ with. the other former Communist
countries. The use of only one kind of satellite however is
barely enough and both countries have become members of
Intelsat and Eutelsat. Poland is also member of Inmarsat to
help the communication with its fleet. Such memberships allows

them to keep communication links with the whole world and is

63

certainly a useful development of the telecommunication of the
two countries that have on that point provided the same
efforts toward satellite telecommunication.

For other telecommunication organizations, Hungary is a
little more active than Poland. The two countries are members
of the ITU, of the COMECON'S Postal and Telecommunications
committee (CEPT), that retained a minimal activity even after
the COMECON' dissolution, and. of the European
Telecommunications Standards Institute (ETSI). However,
Hungary is getting more involved in the international
telecommunication community. It is member of the European
Telecommunications Network Operators' Union (ETNO) and the
European Institute for Research and Strategic Studies
(EURESCOM). Finally, it is a founding member of the European
Telecommunications Informatics Services (ETIS)9.

Hungary's strong involvement 1J1 international
telecommunication is not only opportunistic, it allows the
country to position itself strategically. In the 10 year plan
outlined by the Hungarian State in 1990, a very high priority
was allocated to transform Hungary into the telecommunication
hub of the area. Consequently, following the influence of the
State, MATAV (the Hungarian operator) "is developing an
aggressive international telecommunications supplier strategy
as a network services hub for the region"m. Hungary already
hosts Trans European Line (TEL), a fiber optic line connecting

Warsaw to Zagreb, Trans-European Telecommunications Network

64

(TET), a fiber optic network whose major hub is in Budapest,
and is member of METRAN, an association whose aim is to
establish Ei pan-European fiber-optic telecommunication
network“.

Only history will tell if Hungary managed to get the role
of telecommunications hub it wants. But the country is already
on the way to become one of the mandatory stops on the
international telecommunication "Monopoly" board, and stop in
"Monopoly" means income for the owner of the land... Such
strategic position is very likely to boost Hungary's
telecommunication. On the other hand, Poland had taken less
advantage of its geographical situation. It could have pushed
its position as the meeting point of Germany (an important
EU's member), the Scandinavian countries (that are not fully
integrated to the EU yet), Russia and CEE.

Hungary seemsto be in a better strategic position than
Poland in the international telecommunication "game" thanks to
the actions of its State. However, if the role of
telecommunication hub came to be very rewarding in the future,
it might not be as great to attract investment now. Karoly
Okolicsanyi12 estimates that the perspective of being a hub
does not totally match the interesting rate of return that the
big population of Poland is likely to bring. Thus, although
credits should be given to the Hungarian State for its actions
to promote Hungary as a telecommunication hub, this argument

is weak when used to explain the differences in foreign

65

involvement between. Hungary' and. Poland” Nevertheless, it
compensates for the small size of Hungary's telecommunication

market compared to Poland's.

Having raised some funds for telecommunication
development, the State had to use them for developing and
enhancing telecommunication in the country. But giving funds
to a national operators that is still run like a Communist
firme is not the more efficient way to use foreign aid at all,
and the international loaners are more than likely to be
deterred from loaning more money if it is not used
efficiently. Moreover, according to Timothy Nulty, the aids
will not be enough to finance the development of the whole
sector:

"[...] however, it is unlikely that they can contribute more
than 40 to 50 percent of the total foreign exchange financing
required. More likely they will contribute less."13

Thus, the State had to restructure the sector so that it was
more efficient in its spending and in its revenue generations.
It was done in two ways: restructuring the national operator
and open some part of the sector to private interest. The two

following sections will examine the two solutions.

5.2. RESTRUCTURING THE NATIONAL OPERATOR
Under Communist rules, in Hungary as well as in Poland,

the national telecommunication operator was an inefficient

66

monopoly. The firm was in charge of telecommunication
operation, postal operation and in the case of Hungary
broadcast signal operation. Moreover, it was part of the
ministry in charge of telecommunication so regulatory
functions and operation functions were performed by the same
staff. The State had then to rationalize the operator and give
it the means to develop the sector. It was done through a
change of structure of the operator and a strict definition of
the role of the operator both following a general strategy

outlined by the State.

5.2.1. General telecommunication strategy

Hungary and Poland have followed the first "traditional"
step to rationalizing the telecommunication sector: they
separated the operation from the regulation by corporatizing
the national operator and they divided it into independent
part such as postal operation and telecommunication operation.

The Hungarian State parted operations from.regulation in
1989. The regulatory body stayed under the supervision of the
Ministry of Transport, Communication and Construction and
Magyar Posta (the national operator) was corporatized. In
1990, the postal, broadcasting and telecommunication branches
of the operator were divided to make three independent
companies. Hungarian Telecommunications Company (HTC) became
the official telecommunication operator“.

The Polish State was slower to achieve this first step of

67

the restructuration and the separation between regulation and
operation only took place in 1991, leaving the regulatory body
under the supervision of the Ministry of Post and
Telecommunication. In January 1992, the postal activities were
separated from the telecommunication activities giving birth
to Telekomunikacja Polska Spolka Akcyjna (TPSA), the
telecommunication operator”.

Those two "traditional" steps are however the only common
approach to telecommunication restructuration between the two
countries. The Hungarian State developed its restructuration
slowly but surely always in the same direction even though the
changing political and legislative environment made it quite
a lengthy process”. The Polish State, on the other hand,
considered a lot of options and got caught into a never ending
process of structuring and restructuring.

In Hungary, during the definition of the ten year plan in
1989-1990 (the ten year plan is a plan for 1990-2000), the
State was hesitating between two strategies. Developing an
overlay network that develops a new modern network on the old
one for business use, thereby freeing access in the old
network for residential use, was chosen over the island
strategy that targets a specific area for a large scale
expansion, thereby reducing the investment per lines but
generating an uneven regional development. Since then, the
Hungarian telecommunication policies are based on this

strategy. In order to overcome the associated infrastructure

68

expansion problem, especially in the rural areas, the program.
was complemented by regional liberalization”. Moreover, to
leave the national operator free to develop the network,
activities not directly related to telecommunications such as
building, installation and others, were assigned to subsidiary
companies”. Finally, to keep some control on the sector, the
State required. until 1992, that HTC be present in all
telecommunication activities”. By 1992, the Hungarian State
had finished restructuring the national telecommunication
operator that was the basis of its ten year plan and was ready
to extend the restructuration to other parts of the sector and
to begin to privatize HTC.

On the contrary, the Polish State explored several ideas,
going back and forth. Even before 1989, the Polish State was
considering restructuring the telecommunication sector.
Between 1987 and 1989, the activities of the Polish Post,
Telegraph and Telephone (PPTT) that was originally part of the
Ministry of Post and Telecommunications, were managed by the
Ministry of Transport and.Maritime Economy. After having been
reintegrated in the Ministry of Post and Telecommunications,
the PPTT was the subject of several daring projects aimed at
a quick capitalist development of telecommunication. One of
them was based on a complete privatization of the sector:
"Poland is considering privatization of all its
telecommunications services, including selling off the
telecommunications ministry as a private company. Proposals
currently in draft form.include allowing private companies to

compete in voice telephony on long distance and international

69

routes."20

However, in this case, the State would have lost its entire
power on the sector and the regional development of the sector
would have been uneven, widening even more the gap between
urban and rural areas and forming island of well developed
telecommunication that might be able to communicate with each
other. The project was abandoned, but some ideas were kept.
For instance, the regulatory body that has been created in
1991 as a part of the Ministry has the potential to evolve
into independent bodies. Another project was to mimic the
American model with local and long distance operators. This
project would have left the ministry with the setting of
technical standards of Poland's public network and the setting
of ceiling on consumer prices“. Here again, the project was
not implemented all the way, but some ideas were kept. For
instance, the State has passed legislation splitting its
national telephone operator into six regional companies that
might be privatized over the long run. The plans have changed
so much, that it was hard for the Polish parliament in 1990 to
take any proposition as a serious one. An official of the
ministry's department of political economy of
telecommunication confessed: "We have reorganized this
ministry so many times no one will believe that we really mean

"” Consequently, Poland is going from one proposition

it now.
to another without having a very well defined strategy to
guide its legislators and its regulatory body. Their only

70

point of reference is the "Program of Modernization and
Development of Telecommunications 1991-1993" originally drawn

up by the PPTT under the guidance of the ministry”.

5.2.2. Role of the telecommunication operator

The differences in basic strategy between the two
countries had a very strong influence on the definition of the
role of the operator in the telecommunication sector. The
Hungarian State was very narrow in its definition of the
activities allowed. to .HTC and. is forcing the network's
development through specific goals and drastic sanctions if
they are not achieved. In Poland, the situation is less clear,
some minor points in the role of the operator have been
addressed, but in general, the operator“ has had little
guidance from the legislators.

When the Hungarian telecommunication strategy was clearly
defined, the State began to consider privatizing HTC. A new
bill passed by the parliament in 1992, divided basic telephony
services in two classes. International and long distance calls
were to be entirely handled by HTC whereas local calls were
subject to future licensing even though they would stay in a
monopoly structure. Right afterward, the State invited foreign
bidders to tender for part of HTC soon to be called MATAV. In
December 1993, the State selected the MagyarCom Consortium
(Deutsche Telekom and Ameritech) offer of $875 million for

30.29% of the operator.

71

The Consortium has the right to manage MATAV'S day-to-day
operation and should enjoy a menopoly on international and
long distance calls until 2002. In exchange, the Hungarian
State nominates the Chief Executive Officer“ and still keeps
some monitoring action through the Chairman of the
telecommunications subcommittee in the Hungarian Parliament
who sits on the board of directors of MATAV”. Moreover,
MagyarCom is committed to specific goals in international and
long distance communication.

It has to insure each village of a tie into an international
telecommunication network by 1996”, it must develop the local
concession that have been given to it as if it had won the
tender (the local concessions are discussed in the following
section) and it has to develop the telecommunication
infrastructure so that Hungary is the telecommunications hub
of the area:

"[Making of Hungary a telecommunications hub for Central and
Eastern Europe] is actually a commitment entered into
MagyarCom's contract with the Hungarian government. Quite how
the government will be able to measure its success in making
Hungary a hub in five years time is less clear."27

To be sure of the development, the Hungarian State implemented
a system of penalties if MATAV fails to meet its contractual
development targets. The penalties go from. payment of
financial penalties into the future Telecommunications Fund28

to a reduction in the duration of the MATAV's monopoly

concession.

72

On the other hand, in Poland, there are less guidelines
and no penalties for the operator if goals are not reached.
TPSA has been since 1994 a joint stock company which is 100%
owned by the State treasury, and even though there is no
official position on the subject, sources inside Poland do not
envisage privatization for three to five years. Even though it
has not been privatized, TPSA has been corporatized. It is
then free to set long distance and international tariffs with
the exception that the Ministry of Communications has the
right to impose maximum tariffs for voice and telex services
as long as they are agreed by the Ministry of Finance.
Moreover, it has very little State-set goals and no sanctions
in case the goals are not reached. The only requirement the
Ministry of Communications has really set was that only
digital central office switches were installed after 1991 so
that it would prevent the dumping of used technology. Finally,
the monopoly of TPSA has been reduced as in 1993, "controlled
competition" was introduced at the intercity infrastructure
level. Foreign participation is limited to 80% and foreign
investors may not operate international links or connections
of any kind which reduce greatly the threat to TPSA”.

As for telecommunication strategy, the situation of the
national operator and its goals are cut clearer in Hungary
than in Poland. The Hungarian State has paid a great deal of
attention in order for the operator to develop the network as

it should be, whereas the Polish State was less active on that

73

matter and let the operator set its own objectives. Yet,
whether the operator has been well guided or let free, there
is not enough capital in neither country to make up for the 50
to 60% financing of the network that is not given by
international organizations. Here again, the State had to jump

in and decide how to raise more funds.

5 . 3 . FOREIGN PARTICIPATION

Both countries had the same reaction and looked for
foreign partners that could not only bring fresh capital, but
also new technologies for which there was no expertise inside
the country. Both countries allowed foreign and domestic
investment in telecommunication and actually tried to attract
them with tax breaks or monopoly concession. For instance, Dr
Gosztony, the Hungarian telecommunication official,
explains:"Are we looking for partners? The door is always
open."30 The situation is such that:

"The country's Government has seen to it that there are now
more foreign carriers active in Hungary than in. any1 other
country in Europe, east or west of the iron curtain."

Opening the country to foreign investment is however not
enough to insure an even and adequate development of
telecommunication. Let by themselves, investors are "selective
cherry pickers". They only invest in markets with an
interesting return on investment perspective and they select

the best way to maximize their profits in those markets even

74

if it means loosing some customers because of too high a
price. In order to develop telecommunication as they expect,
the States have to be really careful and balance incentives
and regulations. This section will examine the
telecommunication sub-sectors where the Hungarian and the
Polish States requested foreign capital. It begins with a.

presentation of the situation for local communication. Then it

deals with added value services such as cellular phone and ‘

satellite communication. Finally, it examines the case of the

telecommunication manufacturing sub-sector.

5.3.1. Local communications

Here again, Hungary adopted a very rigid position whereas
Poland followed a "laissez faire" policy. Though Poland was
the first country to approve of foreign investment in local
communication, its regulatory framework was so unclear that
relatively few candidates were ready to invest. On the other
hand, Hungary waited until February 1994 before taking part of
local communication away from MATAV. Yet, the results were
impressive and foreign investors did respond to the call
probably because everything was set before the investment and
the risks were therefore reduced.

Poland was probably the first CEE country to accept
foreign investment in local communication. Since November
1990, any one can invest in local communication and operate a

local network provided that the Ministry of Communication gave

75

 

a license for such operation. Some of the contracts that have
been signed are impressive. For instance, Cable and Wireless
agreed to build a $356 million digital network in Gdansk in
exchange for a license to operate it for 25 years”. However,
a lot of points are left unexplored. There are no deadlines,
no:minimum.development and no penalties if the contract is not
met. Until 1994, there was not even a formal procedure or any
tariff in place for the interconnection between local networks
and the TPSA's network. This point is one of the problems
holding the development of local network back. According to
Henryk Lasota, Managing Director of Gdansk Telekom:

"The construction of local network is severely hindered by the
reluctance of the state TPSA to negotiate on access charges
and general rules of networking."33

In February 1994 the Polish State finally announced it had
found a formula for revenue sharing between independent
operators and TPSA. However, this formula is only a temporary
settlement to be changed again in three years. This is not
very likely to reassure shy investors about risks. As for the
ones who have already invested, it might already be too late:
"In the interim, two pioneer operators have built out two new
networks serving a few thousand customers in two districts of
South Eastern Poland. But under the terms of the agreement
which they signed with TPSA, these two companies are not
receiving a single Zloty of the revenue from the long distance
or international calls which their customers are generating.
NOt surprisingly, the two companies are understood to be close
to financial collapse.""

Moreover, the State is still struggling to define the

76

geographical boundaries dividing the localities where TPSA
‘will provide local services and. those ‘where independent
companies will exercise their own franchise. This is also a
cause of delay in the development of local networks”. Finally,
as the licenses are given without official tender and on the
investor initiative, it is really difficult for an investor to
know if his/her offer is in competition with some one else's.
The complications of the Polish State make it even more
difficult to obtain an exclusive license:
"'It's incredibly easy to believe because you are speaking to
a minister with a relevant sounding title that you are
actually being given something. Three rooms away, another
minister who thinks he had the appropriate authority is
negotiating the same exclusivity with another company.‘ says
C. Jonsher, founder of Central EurOpe Trust, a London-based
consultant that advises western firms investing in Eastern
Europe."36

On the contrary, the situation in Hungary is meant to
inspire confidence. Hungary has been divided in 54 regions
representing 54 local networks. Out of the 54, 29 regions were
automatically given to MATAV for operation, the licenses for
the other were awarded after an international bidding in
February 1994. Before the bidding, everything was defined: the
future relation between MATAV and the local operators, the
price to be paid to MATAV for the infrastructure already in
the concession and the goals and penalties imposed by the
State. MataV' was to pay 100% of the revenue from. the
international calls and 60% from the revenues for domestic

long distance calls which they originate. Of course, for

77

 

terminating calls, the local operator's share was to be
smaller, but it ‘was not defined”. This actually' helped
financial analysts to evaluate the concession proposed and
reassure investors about future revenues. When an investor had
won a concession, it had to buy the existing network together
with the local MATAV employees that go with it. According to
an observer, the price of purchase was much lower than what
MagyarCom had proportionally paid for the portion of network
in question”. Finally, to promote network development, each
license (including MATAV's licenses) is tied to improvement in
service level including installation waiting quotas. Each
franchise must attain a 15.5% annual growth for a 6 year
period through 1999 or endure the same kind of penalties as
MATAV if the objectives are not met and the State has always
the right to put a ceiling on communication prices. Normally,
franchises are valid for 15 years and may be renewed once for
an additional 12.5 year period, but penalties can shorten that
period”.

The results of the auction are very satisfactory and it
raised $8.5 billion. Out of the 25 franchises, only 2 did not
attract any investors and were automatically given to MATAV,
8 were won by MATAV which totalizes now 39 licenses, and 15
were awarded to other foreign investors“.

Hungary was able to attract more interest for its local
communication operation than Poland because of a clearly

defined framework that has been announced prior to the opening

78

 

to investment. This kind of situation was more likely to
reassure the investors about the risks and the return than the

unknown that investors had to face in Poland.

5.3.2. value added services

The situation in the value added services is a little
similar to the situation for local communication. The Polish
State was slow to give the licenses and did not regulate the
licensees in order to be sure of satisfactory results. In
Hungary, the State chose almost the same approach, but it took
one step further and liberalized almost all the value-added
services.

Due to a long legislative mechanism, the Ministry of
Communications in Poland was unable to give licenses to
companies before the end of 1990“. However, by the end of
1992, 45 licenses had been granted for operation of paging,
data transmission, value-added services and cellular telephony
services. This process was quick thanks to an absence of
regulation. Once the operator has its license, it can manage
its resources, serve the areas it thinks are profitable and
charge the price it considers "fair". Only the nationwide
cellular mobile radio network was not totally liberalized as
Centrel is the only company to provide such service in Poland.
Poland is also waiting for the military to free the 900 MHz
frequency in 1995 to be able to license two digital cellular

phone operators.

79

The situation in Hungary is similar. In 1990, wireless
communication such as paging, VSAT and mobile telephones were
not State monopolies anymore, but the State only gave licenses
to companies in which it had a majority holding. In April
1994, all telecommunication services has been liberalized with
the exception of public-switched telephone, mobile phone and
nationwide paging. Mobile phone and nationwide paging still
require licenses. However mobile phone and nationwide paging
are not as regulated as public-switched telephone, the State
does not set objectives for them nor does it implement any
penalties. There are only three cellular phone operators, one
for analogue cellular communication and two for digital
cellular communication. The nationwide paging operation will
only begin in 1995.

There is no real differences in the actions of the
Hungarian and Polish States toward value-added services. If
the Polish State has to give licenses, they are really easy to
get and it can not be considered as a major difference. The
only notable difference between the two countries is not due
to part of the State in charge of telecommunication but to the
military who were slower to evacuate the 900 MHz frequency

that is required for digital cellular communication.

80

 

5.3.3. Telecommunication manufacturing

Telecommunication manufacturing is an atypical example in
the telecommunication sector. Since the CoCom. was only
completely dissolved in 1994, importations of
telecommunication hardware were still restricted for the CEE
countries for the period studied. The sector has then the task
to produce goods it never produced before to satisfy the
foreign operator who had invest in the countries. Moreover,
instead of being of profitable sector like telecommunication
operation, manufacturing had to be restructured to be
efficient. Foreign. help *was badly' needed in that area.
Surprisingly, the Polish State that adopted a "laissez faire"
policy for any other telecommunication sub-sector was the one
to stress regulation compare to the Hungarian State.

Indeed, after a period of search for partners in
telecommunication manufacturing, the Polish Ministry of
Communication passed regulation to control more closely the
sub-sector. 50% of all telecommunication equipment for the
network infrastructure was to be produced locally, the number
of telecommunication suppliers was to be limited to three and
the suppliers had to purchase stocks in selected State-owned
telecommunication manufacturing plants. However, the three
suppliers were guaranteed of State's digital switch business
for 6 years (they would only bid for future State business
against each other). Any other suppliers would have to leave

or to survive without any State contract. In the late 1993,

81

 

Alcatel, AT&T and Siemens were selected to be the suppliers of

Polish State”.

Hungary was less protectionist in that field. Since 1990

joint ventures have multiplied between Hungarian interests and
foreign interests in the telecommunication manufacturing sub-
sector”. The Hungarian State did not interfere with the
process and encouraged a policy of open procurement for
telecommunication.
"Open procurement policy was unheard of in the past and even
today is not often favored because of the lack of foreign
exchange and the need to use large public investments in
telecommunications to stimulate the restructuring of an
important manufacturing sector."“

The only special help given to the manufacturing sector is a

10 to 15% price advantage on tenders in international bids.‘s

As it has been seen in this chapter, the two countries
have two different approach in telecommunication development.
While Hungary has laid down slowly but very accurately a basis
for operation with private interest taking little by little
operation from the State's hand, Poland was more adept of a
"laissez faire" policy that let the investors and the national
operator take the initiative. The two approaches have their
advantages and their trade-offs. However, it has to be noted
that the Polish approach did not foster an even development.
If the big Polish cities benefited from a lot of investment,

the rural areas were left behind. In Hungary, on the other

82

hand, the regulation forced the investors to developed their
concession at a minimum rate, and each concession include

rural areas subject to special Objectives.

83

1. Karoly Okolicsanyi, "Telecommunications in East Central

Europe". W. Sep. 18 1992. pp.55-60.

2. Clare Lees, "Telecommunications in Central and Eastern

EurOpe". Datapra_Beparts_aa_Iateraatioaa1_Te1ecommuaicatioas.
1993. pp. 121-131.

3. Stefan Zehle, "Telecoms in Eastern Europe: Investing for

Growth". Telecammuaicatioas_IIE. Nov 1993. pp 85- 96

4. "Eastern Europe: making real progress?", 2uh11e_merugrke,
Dec. 1993/Jan 1994. pp. 21—23.

5. Marsha. Johnson, "Eastern. Europe) opens for' business",
Datamation. Nov. 1 1994, pp. 80-13/80-15.

6. Whar_1s_2hare2, European Commission, Brussels, 1994.

7. The word "Monopoly" is used here to designate the popular
board game and not the economic concept.

8. By the time Hungary became member of all the organization
cited, MATAV was still owned by the state.

9. Patricia. Striplin, "Hungary",
1ateraatieaa1_Ie1ecommuaicaitdas. 1994. pp 361- 371

10. Patricia Striplin, 1994.
11. Patricia Striplin, 1994.
12. Karoly Okolicsanyi, 1992.

13. Timothy Nulty, "Challenges and Issues in Central and
Eastern European Telecommunications", in BjOrn Wellenius and

Pater Stern (eds. ). Ima1emeatiaa_Befanms_ia_Te1ecammun1catiaas
Sectar1_Lessaas_frdm_Experieace, The World Bank, Washington
D.C., 1994, pp. 339-352.

84

14. Krisztina Heller, "Restructuring in Hungary", in BjOrn

Wellenius and Peter Stern (eds.). Imolemeat1ng_Be.forms_1a
Telecommua1catioas__Sector1__Lessoas__from__Experieace. The

World Bank, Washington D.C., 1994, pp. 375-382.

15. Patricia Dewar. "Poland". WW
Telecommunications.1994, pp. 451-463.

16. Krisztina Heller, 1994.

17. Jfirgen Muller and Emilia Nyevrikel, "Closing the Capacity
and Technology Gaps in Central and Eastern European
Telecommunications", in BjOrn Wellenius and Peter Stern

(eds.). ImplementiaLReforms_1n_Telecrmmun1cat1oas_Sector_-.

W. The World Bank, Washington D.C.,
1994, pp. 353-373.

18. Krisztina Heller, 1994.

19. Patricia Striplin, 1994.

20. Monica Houten, "Dial M for Moscow", ManagementJoday,
Oct. 1990, pp. 105-109.

21. "Don't hang up", The_Ecpnpm1et, Mar. 24 1990, p. 73.

22. "Sorry, reformer, the line is dead", The_Econom1st, Jul.
21 1990, p.24.

23. Patricia Dewar, 1994.

24. Patricia Striplin, 1994.

25. Karoly Okolicsanyi, 1992.

26. "Ameritech Group Wins Stake in Hungary", The_Neu_York

Times, Dec. 20 1993, p. D4.

85

27. "Hungary: getting down to work", Puh11e_Neruprks, Mar.
1994, pp. 43—50.

28. The Telecommunications Fund is a fund that should help
the development of telecommunication in non—profitable rural
areas. It would be administrated by a commercial bank and
would be bolstered by annual contribution of $5 million from
the operator. Yet, the government has had problems since
1992 to get the fund's draft pass the parliament. ("Hungary:

getting down to work", Buh11e_metuprks, Mar. 1994, pp. 43-
50.).

29.Patricia Dewar, 1994.

30. Anthony Ramirez, "Cellular phone fill Gap in Hungary",
W. Jul 6 1992. p. D2-

31. "Hungary: getting down to work", 1994.

32. "Finding their voice", The_Econom1st, Feb. 8 1992, p.
74.

33. "POST delayed by PTT”. Eub11c_Netuorks. Jul./Aug. 1992,
p. 44.

34. "Independents for the East", Puhl1c_Netuorks, Apr. 1994,
p. 10.

35. "New telephone lines: is there no alternative?", Puhl1c
Neruprks, Mar. 1993. pp. 71-79.

36. "Finding their voice", 1992.
37. "Hungary: getting down to work", 1994.
38. "Hungary: getting down to work", 1994.

39. Patricia Striplin, 1994.

86

40.

41.

42.

43.

44.

45.

Patricia Striplin, 1994.
"Sorry, reformer, the line is dead", 1990.
Patricia Dewar, 1994.

Patricia Striplin, 1994.

Jurgen Muller and Emilia Nyevrikel, 1994.

Jurgen Mdller and Emilia Nyevrikel, 1994.

87

 

CHAPTER 6: LESSONS

Hungary and Poland offer two examples of totally
different approaches toward the role of the state in
telecommunication development. On one hand, the Polish State
has a policy of "laissez faire". It only defined broad
objectives without implementing control structure to insure
that they are reached and it waited for the investors to take
the initiative before considering a "personalized" framework
for investment. On the other hand, the Hungarian State has
defined very detailed objectives and the procedure necessary
in order to reach them. As of yet, this difference in
approaches has only made a difference in the telecommunication
sector structure. However, it might eventually make a
difference in the development of the telecommunication sector.

The literature on the role of the State in
telecommunication for other countries may help to determine
some lessons that Poland and Hungary could follow to help
their telecommunication development. For instance, according

1 the lack of interest from the foreign investors

to Spiller,
for the Argentinean privatization is, at least in part, due to
the fact that the Argentinean regulation was not clear enough.
The terms of the licenses were not clearly set and nothing was

said about how, and by whom, the terms of the licenses would

be enforced. The absence of regulation in Poland could then

88

deter foreign interest from investing in the country. If they

do however, they are likely to:

"Seek only most profitable markets and prefer not to serve the
others, while at the same time undermining the profits of the
PTT which it needs to extend service to underserved areas."
And it is already happening as foreign investors compete with
PTSA for highly populated and industrialized areas but leave
the unprofitable rural areas to the national operator. In
Hungary, on the other hand, the auction forced the investors
to accept the rural parts of the sector they won and to
develop telecommunication in those parts.

Moreover, if regulation does not require foreign
investors to develop the telecommunication network, they might
only invest enough to create a profitable network. After a
while investors might stop investing and only collect profit
even if their concession is far longer than the period over
which they invested. It was the case in Chile where the law
fails to provide sufficient obligations for the firms. The
companies were obliged to follow an investment schedule over
a period less than 15 years whereas the concessions were to

3 In the case of Poland, the obligation is

last for 50 years.
generally stated in currency instead of years, but it could
lead to the same kind of problem. Hungary has protected itself
from such problems by linking the length of the concession
with the annual telecommunication infrastructure growth in the

concession zone.

The Hungarian State seems to have thought of every single

89

problem that might appear and to have protected the country's
telecommunication against it. That may be attributed to the
very restrictive regulation it has chosen. One may also say
that Poland, because of its "laissez faire" approach, did not
bother with the possible problems and could be really
surprised in the future. According to Nulty, "the
telecommunication sector is not like restaurants or textile
factories; it cannot be completely unregulated."‘

However, while Poland will probably need to straighten its
position, at least a little, it does not have to be as rigid
as Hungary. In fact a more malleable position than Hungary
will probably be more favored by investors as long as the
conditions of investment are known in advance. For instance,
instead of letting the investors have the concession they want
in the profitable areas, the State could define the concession
zone so as to include profitable and unprofitable areas. Then,
it could reward the firms that have invested in the
unprofitable area by granting them.exclusivity in a profitable
area. As the service zones are not defined yet, this could be
easily done and could help to connect the numerous villages
that don't have any phones yet. It would still be less
restricting than the Hungarian regulation.

Whatever approach to the telecommunication development is
chosen, the clearness of the situation is probably the most
important characteristic a State has to create. Therefore, it
has to define clearly and in detail the objectives that are to

be reached and when they are to be reached.5'Ehen, it has to

90

 

choose clearly what model is to be adopted, deciding whether
the state-owned firms should be privatized and/or to what
degree the different sub-sectors should be regulated. Finally
it has to define regulations that follow the model and that

make sure developments are taking place according to the

objectives.

91

1. P- Spiller. Institutions_aasLBeoulatory__Commitmeat_in
Utilities—Primatization Institute for Policy Reform.
Washington D.C., 1992.

2. Timothy Nulty, "Challenges and issues in Central and
Eastern European Telecommunications", in BjOrn Wellenius and

Peter Stern (eds.),
' ' , World

Bank, Washington D.C., 1994, pp. 339-352. ~

3. A. Galal, RegulationWW
Telecommunications—thile The World Bank. Washington
D.C., 1993.

4. Timothy Nulty, 1994.

5. John Collings, "Managing the Process of Sector Reform",

in BjOrn Wellenius and Peter Stern, Implement1no_Reforms_1n
' ' ' , The

World Bank, Washington D.C., 1994, pp. 567-580.

92

 

CHAPTER 7: CONCLUSION

In this document, the role of the State on the
development of telecommunication infrastructure in Hungary and
Poland has been qualitatively defined using literature about
the two countries and CEE in general. It has been found that
the State has two ways of affecting the development of
telecommunication; either directly through laws and
regulations on telecommunication or indirectly mainly through
the general investment situation in the country.

Both countries have managed to get important financial
aid from international organizations for the development of
their telecommunication. However, a complaint from the World
Bank about the Polish State shows some tension that might
reduce the rate of approval funds to be lent to Poland:

"In the summer 1990, World Bank officials complained that
Polish Telecommunications Ministry officials were not
technically competent to judge various proposals submitted to

them for modernizing the telephone system and were terrified
of making the wrong decision."1

Hungary' and. Poland. Ihave restructured. their
telecommunication sectors after 1989 to define the goals to be
reached, the role of the national operator, and the role
foreign interests have to play. Hungary has produced well
defined goals and very clear strategies to reach them. The

Hungarian State was very careful to define meticulously the

93

rights and obligations of each actor. On the other hand,
Poland seems to have let the actors take the initiative
through a "laissez faire" policy. The State only outlined
vague objectives that are to be reached eventually. Even if
the situation in Poland might provide actors with more freedom
about their business and the way to make a profit, it is not
a sure investment. If there are less obligations, there are
also less explicit rights and this may disturb the investors.
It is hard to explain those differences. They may come from.an
incertitude of the Polish legislators, who are afraid to make
mistakes, as the World Bank official claimed. However, they
may also come from the general political system and the
traditions of the countries. Poland is a republic, so every
politician is subjected to public approval and is likely to
follow the shift in popular trends. Moreover, because of its
tradition of political debate, it may be harder to pass
detailed strategic legislation quickly.

The same kind of differences are found in the indirect
influences. While Hungary prepares its privatization very
slowly and carefully, Poland has a broad framework for a quick
privatization of the economy and let the market forces develop
the economy. Here again, even though it gives more freedom.to
investors, it increases uncertainty about the other actors in
the country and might hinder privatization. The financial
environment follows the same pattern. In Hungary, the free

flow of capital is already achieved for foreign investors.

94

 

Moreover, fiscal rules are clear-cut and they are enforced
very seriously. In Poland, it may still be difficult to
repatriate profits in hard currency. However, the fiscal
system in Poland is easier to dodge than in Hungary. In the
long run, when capital movement will not be a problem.anymore,
it might lure investors in Poland. These differences might be
explained by the different approach taken by the two
countries. The Hungarian State has decided to follow the
transition from Communism to Capitalism very carefully. It
wants to make sure the transition is done properly, even if
that means slowing it down. On the contrary, with its "shock
therapy" policy, the Polish State wants the transition to be
quick. It believes that a "shock" at the beginning will put
the country on the right track. Thus everything is done
quickly when it is possible and with as little intervention of
the State as possible. However, when a decision is blocked by
the political process, the situation can lead to a full stop

since there is no progressive actions planned.

This study shows the differences in approaches taken by
the Polish and the Hungarian State. It tries to show how the
differences in approaches may influence the development of the
telecommunication sector. However, it is limited and should be
taken only as an tentative try to see the role of the State in
telecommunication development in two countries with the same

past but a different approach to reforms.

95

 

When considering the results of the study, one should
keep in mind several inherent limitations.

First, the study is only qualitative and does not provide
any proof other than a conceptual view. It is based on facts
but does not have any means of scientifically linking State's
actions and telecommunication development to provide empirical
evidence. However, the rationale on which it is based is
largely approved in the literature and has been observed
several times.

This limitation is really difficult to lift through
further research. Not only the relation between friendly
environment and development is impossible to prove through
simple scientific method, but also the statistic data
available on the countries are more than likely to be at best
inaccurate.2

Second, the study is not complete. Even though the State
plays an important role in the definition of the objectives
for telecommunication and in the creation of an investment
friendly environment which is needed for luring capital in the
sector, no development would be taking place without other
actors. The results of this study are only considering the
creation of proper environment while holding the participation
of any other actor equal. No attention is given to particular
situation like the important Polish community in the United
States that is likely to push for investment in the mother

country. Contrasting with the first, this limitation may be

96

lifted through some further studies.

This limitation is a little easier to lift, as it only
requires the same kind of study for other factors of
telecommunication development. However, the problem of
scientific validity and empirical proof is always the same

even without considering the inaccuracy of statistical data.

97

Karoly Okolicsanyi, "Telecommunications in East Central

1.
Europe". W. Sep. 18 1992. pp. 55-60-

2 "The false trails of Eastern Europe's hidden economies",

Euromoaexjuoplement. Apr. 1994. pp. 124-126.

98