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January 30, 2004 




Talking Up a Storm: Why saying hello to Armentel was not such a good buy



Court hearings resumed today in the static-laced legal conversation between the poorly-served telephone clients of Armenia, the Government of the Republic and the owners of the string-in-tin-can outfit that passes for phone service here.

Unless our Internet connection - also brought to us by the string and can deal - is too slow to get this story to you, here's a look back at how this day was reached . . .

Rewind to 1997, when Greek telecommunications company OTE paid $80 million to the Armenian government, and $62.5 million to a remarkably well-connected American company called Trans World Telecom. For their investment, the Greeks got a 90 percent stake in ArmenTel, the country's monopolist telecommunications provider. As part of the deal, OTE agreed to invest $300 million in Armenian telecoms sector by 2008, two-thirds of which was to be spent by 2003, and to expand mobile phone coverage to all of the territory of Armenia by the end of 2004.

(Trans World Telecom - which is now focused on the Caribbean telecommunications network, according to the company's web site - acquired its stake in ArmenTel in July 1995. The noise that followed hasn't exactly been so clear you could hear a pin drop, but it included allegations by government opposition leaders of big bribes in high places. A presidential commission established in March 1999 dialed into the controversy, but got no clear answer. A few months later, Armenia's Ministry of State Revenue sued TWT and OTE in an effort to collect what it claimed was unpaid profit tax of more than $18 million, including fines and penalties of more than $10 million, stemming from the sale of ArmenTel.)

Routine corruption aside, the real crime of the sale of ArmenTel was the decision to allow the company to remain the monopoly provider of all telecommunications services through 2013. A three-minute analysis of the global history of the privatization of state assets would have found a crucially overlooked matter. Specifically, when monopoly rights are transferred to a new owner, the problems stemming from the lack of competition that plagued the asset in the first place are transferred as well: Little incentive to invest or improve service, and every incentive to asset-strip and maximize short-term profitability. (A mea culpa last summer by Vahram Avanesyan, at the time a cabinet minister involved in the sale, acknowledged as much: "We signed the agreement on our own, without [consulting with] specialists and professionals," he said, according to Radio Free Europe. "We realized very soon that we were very, very wrong.") The predictable result has been terrible service, nosebleed tariff levels, dismal line quality, and Internet connectivity as slow as snowcaps moving off Ararat.

Under heavy public pressure, the Armenian government is trying to move the goalposts of its deal with OTE. In September the government announced its intention to unilaterally revoke ArmenTel's exclusive rights to Internet and cellphone services, in part contending that OTE was abusing its monopoly position. The government further contends that OTE had not met its contractual obligations to develop telephony services in Armenia - a claim that OTE vociferously denies. Seeing the writing on the wall (and certainly not hearing the news via clear electronic communication) and focused on extracting as much cash from ArmenTel as possible, in October OTE decided to double the per-minute fee for local phone calls, and reduce the minute threshold before which users are charged for each minute of telephone usage. The price hike contradicted a government pledge to keep prices stable and has led to these hearings. As another part of its offensive, in December OTE responded to the government's efforts to revoke its monopoly status by filing a countersuit against the Armenian government in the International Court of Economic Arbitration, for breach of contract.

OTE has been trying to extract itself from its Armenian nightmare for nearly two years, but - not surprisingly - has had no takers. Early rumors that the Greek company was in talks with Turkey's Turk Telecom proved to be unfounded, and Russia's hidebound fixed-line telecommunications operator Rostelecom is the most likely buyer of the political pain in the morass that is ArmenTel.

Perhaps worse than lousy phone lines, by fumbling the sale of ArmenTel Armenia squandered the opportunity to develop a competitive advantage in information technology and software development - one of the few businesses in which being blockaded by two of your neighbors needn't matter so much. A recent article in McKinsey Quarterly [http://www.mckinseyquarterly.com/article_abstract.asp?ar=1391&L2=4&L3=42 - abstract only without subscription; registration necessary to view abstract] suggests that the IT and software development sectors in Armenia have benefited from three critical competitive advantages: Armenia's well-educated workforce; low wages; and the Armenian Diaspora, which is in a position to provide funding and management to business efforts. To expand the industry beyond the two percent of GDP that is presently accounted for by IT and software companies, and build upon the country's competitive advantages, the authors suggest that education in the sector should be strengthened and expanded, and that the government and private sectors should cooperate to attract investment into the sector.

But the missing and (strangely) overlooked ingredient - a necessary but not sufficient condition for any sustained, successful investment in information technology - is a telecommunications infrastructure that works. Henry Ford wouldn't have gotten very far, literally and proverbially, if roads hadn't existed when he made the first automobile. And Armenia's IT and software industries will similarly stall as long as they remain engaged in a network search.

Kim Iskyan is a freelance journalist and consultant based in Yerevan. He frequently provides comment and analysis on post-Soviet issues. His work has appeared in the Moscow Times, Wall Street Journal, International Herald Tribune and other publications.


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In Honor

Wednesday was Army Day, marking the 12th anniversary of Republic of Armenia's forces. President Robert Kocharyan and government dignitaries visited a Yerevan military cemetary to pay respects.

 

 





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