Reform of the Polish telecoms markets was initiated in 1995,
when the government introduced competition in the local loop.
However, no further steps were taken in this process.
Consequently, the incumbent operator, Telekommunikacja Polska
(TPSA), was placed under no pressure to restructure, owing to
the lack of real competition, except in the cellular market. In
November 1998, however, the government launched the
privatization process of TPSA, with an IPO for 15% of TSPA. The
government has also announced plans to sell another 25-35% of
TPSA to a strategic partner in 1999.
The sale is likely to raise significant proceeds, as the
Polish telecoms market is characterized by low levels of
penetration, both in fixed and cellular, and is perceived by
many as one of the last remaining jewels in European telecoms.
There should be no shortage of interest from operators aiming
to increase their European footprint. Istvan Matetoth, a
telecoms analyst at Credit Suisse First Boston, says: "Poland
is one of the last extremely interesting and attractive
telecoms markets owing to its application to join the EU. It is
a very large country. So I think that a number of operators
would find TPSA a very attractive investment."
Matetoth believes that the company is still behind some of its
peers in eastern Europe: "In most of the productivity and
efficiency measures, TPSA is lagging behind most of its eastern
European peers, but this is basically more of a legacy problem.
The other big eastern European telcos started much earlier with
a more aggressive modernization of the network, network
expansion and restructuring. This is something where TPSA is
definitely a latecomer. However, this in turn implies a
significant upside in a way, because at this stage there is no
real reason why TPSA should not be able to reach at least
approximately the productivity, efficiency levels and margins
comparable to its peers."
The company is spending over $1 billion annually to modernize
its network and be in a position to offer more advanced
services and increase teledensity. Currently two million people
are waiting for new lines. Even though TPSA installed one
million new lines in 1998, there is still significant pent-up
One of the more disappointing aspects of TPSA's recent history
has been its performance in cellular. This may be attributable
to its failure to obtain a GSM licence in 1996: According to
Matetoth: "If you look at their mobile performance, they have
not really been able to capitalize on the mobile boom in Poland
unlike other operators. This is due to the fact that they did
not have a digital nation-wide licence. This situation is
likely to change once they receive a GSM licence."
Owing to increasing deregulation, TPSA needs to restructure
rapidly, as Matetoth explains: "There will be new entrants into
the long-distance market. Some local operators will probably
aggressively target the business subscriber base: in many cases
these operators are much more commercial and aggressive. Of
course the big question concerns how TPSA will adapt to this.
Losses in market share and customers, volume growth: these are
the key issues."
In an exclusive interview with Global Telecoms Business,
Telekomunikacja Polska's president, Pawel Rzepka, talks about
the sale of equity to a strategic investor, fixed line and
cellular operations and TPSA's attempts to transform itself
from a state-run utility into a modern day telco.
In November 1998, 15% of Telekomunikacja Polska's
shares were sold for over $900 million. Did you receive any of
Rzepka: As is commonly known, the state treasury
owned the shares that were sold. Therefore all the proceeds
went to the state treasury. The proceeds were not re-invested
or given back to Telekomunikacja Polska. The Polish government
used them for other very important purposes, namely for the
implementation of restructuring programmes in the Polish
In your view, how would TSPA benefit from an
international strategic partner?
Rzepka: You have to take into account that there are
two issues here. The first issue concerns the opening of the
Polish telecoms market through the new telecoms law. The second
issue relates to the opportunity for a Polish
telecommunications company to get involved in the global
telecoms market. We clearly perceive that a strategic partner
would create new possibilities to obtain joint capital for
The Polish telecoms market is characterized by significant
development potential. This is attributable to relatively low
access to telecoms services compared to the very rapid pace of
our economy's development. We require a strategic partner to
provide additional skills in the marketing and sale of our
services as well in the area of financial analysis. On the
other hand, we are very strong in technology areas.
What percentage of shares are likely to be sold?
Rzepka: The government has already made its decision
in this area. In all 25-35% of shares are scheduled for sale in
the second stage of privatization of TPSA.
How much money do you expect to raise from the
privatization? Will the proceeds be re-invested in TPSA?
Rzepka: Nobody can give you a straight answer to such
a question. Everybody can observe every day what the price for
one share of the company is on the London or Warsaw stock
exchange. I think that the government sets a higher price
related to the offering of such a big package of shares. We
expect the government to allocate the money for the
implementation of very ambitious reform programmes in the
Polish economy. Actually four big reform programmes are being
implemented in Poland: reform of the social insurance system,
health care, education and state administration.
What was the importance of the recent NATO contract
award for TPSA? Could you provide some details?
Rzepka: As a company we have already participated in
several international tenders. But our success has special
significance for us. On the one hand, it confirms our
possibilities in terms of advanced technologies. On the other
hand it also confirms the high quality of our services. We are
very glad that we won this contract and that we can implement a
telecoms system that will meet the needs of NATO.
How do you view competition in the Polish telecoms
Rzepka: We can expect Polish telecoms law to be very
similar to laws found in the European Union. I think that this
is good news for investors, as they will be sure about the
rules. So no special solutions should be expected. Another
issue concerns pricing, as well as settlements between
individual participants in the market. I think that a possible
solution here would involve pricing as well as the settlement
relations between the different players on the market based on
Such a solution would lead to a situation that would allow for
the development of services. We currently have the biggest
access network. The number is currently nine million. I am very
glad that we have these cost formulas that mean others have to
pay a fee to gain access to our network. As you know, we are
also active in cellular telephony, which will in future be a
very important part of the telecoms market. We are also very
active in the Internet and in transmission with Internet
Protocol (IP). So our position in this segment of the market is
also very important.
How do you view the regulatory situation in Poland?
Who will be responsible for setting inter-connect fees?
Rzepka: The situation is developing in the right
direction. As I said earlier, most of the activities are aimed
at the harmonization of our solutions with those used in the
European Union. The settlement rates should be based on these
levels. I think this is the correct way to go.
Currently, telephone penetration levels are far lower
in Poland than in other Eastern European countries. What plans
do you have to install more telephone lines in Poland? How much
will you invest in the installation of new lines?
Rzepka: The penetration level is about 23 lines/100
inhabitants. In 1998 for the first time in our history we were
able to surpass the number of one million new customer
connections in one year. We will maintain this high connection
rate of one million new customers annually.
We spend over $1 billion a year on investments - not only
investments related to new lines but also to new services. By
new services I mean a very intense development of services
based on the Internet, data transmission, radio and TV
broadcasting, as well as the services of so-called intelligent
networks. We are also developing services that apply to
individual customer segments.
How many people are currently waiting for new
Rzepka: If we express this number by the total number
of applications that were submitted, the figure exceeded 1.5
million. But we realize that the country's constant economic
development means that potential demand is much bigger, as
demand has remained at the same level, even though we are now
connecting one million customers a year.
There are currently 1.6 million Internet users in
Poland. How are you trying to grow this market? What percentage
of revenues do Internet services account for?
Rzepka: We are the only company in Poland to offer
universal Internet access. We offer a universal Internet
number. Thanks to this number, all the users of the telecoms
network can access the Internet at the same time. So
practically every customer has access to the Internet. In terms
of the growth of Internet-based services, it is four times more
dynamic than voice telecoms services. It is premature to make
forecasts in terms of percentages in the future. But this
segment will show significant growth in our overall structure.
That is why we don't forget this segment: we are investing
increasing amounts of money each year in these services.
In December Internet users in Poland went on strike
due to high prices and low quality of service. Do you plan to
cut prices for users? How are you going to satisfy user
Rzepka: The price that we charge for Internet use is
at the level of local connection rates. The prices for local
calls in Poland are among the lowest in Europe. So we actually
have one of the lowest fees for Internet access in the world.
At the same time we have also received a number of awards from
significant groups in Poland, for example, the Association of
Polish Electricians, the Ministry of Telecommunications. These
are awards for the development of Internet services and the
high quality of these services. In terms of our pricing policy
for Internet services, we are going to use the same solutions
as those applied in the EU.
The fact that Internet services are developing so rapidly at
such a high demand indicates that the price levels are fine and
that they do not impede the development of these services. We
assess the quality of service as very high, but of course the
most reliable assessment will be the one made by our customers.
We offer a full range of access possibilities, starting from
very simple private access using a modem to very specialized
broadband connections for specialized groups, for example
research centres. I think that our ability to offer such a
broad range of services makes it possible for our customers to
select the service that they actually want.
What are your hopes and ambitions for your mobile
operation PTK Centertel? How does your partnership work with
Rzepka: In cellular we co-operate with our partner -
France Telecom. This co-operation works very well. It has been
going on for many years already. At the start we developed an
analogue cellular telephony network based on the NMT 450
system. In that area, France Telecom contributed skills related
to their ability to sell this new service. We are also
operating in the most technologically advanced mobile network,
which is DCS-1800. We started last year: sales have been very
Why do you think that Polkomtel and Polska Telefonia
Cyfrowa have managed to capture such a large market share
compared to Centertel? What steps are you taking to rectify
Rzepka: Polkomtel and Polska Telefonia Cyfrowa have
obtained such a high market share, because they received a
licence for the GSM system in 1996. We have already applied for
a GSM licence and would like to start offering GSM services.
The fact that we have started offering services in DCS-1800
makes it possible for us to retain market share. But once we
obtain our GSM licence, we expect our market share to grow.
It is very unusual for a monopoly operator not to be a
leader in the cellular market. What do you think?
Rzepka: This situation is attributable to the fact
that in 1996 TPSA did not apply for a GSM licence. The previous
management board decided not to apply for that licence. We are
still playing catch-up from that decision. Our aim is to become
the number one cellular provider. There are three main segments
in the telecoms market: data transmission, cellular and regular
fixed telephony. We need to be number one in these three
groups. We should not focus on just one segment.
What suppliers do you work with on the mobile side?
When do you expect to receive a GSM licence?
Rzepka: According to the Ministry of
Telecommunications, the third licence to offer GSM services
could be awarded this year. For the construction of its
network, Centertel uses the most modern technologies and we
select suppliers accordingly. We are prepared to initiate the
investment programme as soon as we obtain the licence. The
licensing process should begin in the third quarter of this
What steps are you taking to improve TPSA's overall
efficiency? How are you modernizing the company?
Rzepka: We are taking control of our operating costs.
We are also introducing a company restructuring programme.
First of all we want to become more customer-focused. At the
same time we want to focus our activities more on financial
results. We separate the organization into one part that would
be solely responsible for revenues, while the second part would
be responsible for costs. The main incentive for the part that
is responsible for costs is to reduce the operating costs to
the minimum possible.
Do you have to reduce employee levels?
Rzepka: Currently we are implementing a very
extensive network development programme. A large share of human
resources have been allocated to implement this investment
programme. We are aware that, once the market becomes saturated
in terms of lines and numbers, this will lead to a significant
reduction in employee levels. Then we will plan for reductions.
As the new management board we have already made a pledge to
halt the increase in staffing numbers. Last year we slightly
reduced employee levels. This will be a constant trend.
How would you compare the performance of TPSA against
its peers in Eastern Europe such as Matav and SPT Telecom? Do
you think that you are behind them?
Rzepka: We are at a completely different stage of
development. You have to consider the size of the market in
which we are operating. We connect over one million new
customers each year. So we build one-third of Hungarian
telecommunications during the year. I think that if we are able
to achieve 30% penetration, our performance indicators will be
at the same level or better than Matav and SPT Telecom.
How much do you spend annually on network
modernization? What new services do you intend to offer the
business sector in 1999? What suppliers will you use to upgrade
Rzepka: We spend over $1 billion for investments in
general. There are three main suppliers: Lucent Technologies,
Siemens and Alcatel. We only introduce the most modern
solutions to our network. So we look at developments in
research laboratories and then plan to implement them into our
network. In our transmission network, we apply the most modern
solutions concerning SDH. We have already started the
implementation of an ATM network. Over 65% of our access
network is digitized. I would say that our long-distance calls
and international network are fully digitized.
Does TPSA have any regional ambitions to become a hub
for international traffic? How will TPSA leverage Poland's
unique geographic position between emerging markets and western
Rzepka: We definitely intend to exploit our
geographical location. We provide transmission services between
the northern and southern parts of Europe. There is a big line
going through our territory. The situation is very similar in
terms of the traffic between eastern and western Europe. We
co-operate with Lithuania and the Ukraine. A large part of
their traffic is transmitted through our territory. But in
terms of direct investment, our home market remains our number
Consequently we do not plan any direct investments abroad for
the time being. We participate in several international
organizations such as Eutelsat. TPSA is also a member of an
organization that is building capacity through the undersea
fibre-optic cable. In terms of our regional ambitions, we want
to be the biggest operator of telecoms services in this part of
How is TPSA rebalancing tariffs? Why did you decide to
increase prices for local calls earlier this year? Do you
intend to raise prices for long-distance and international
Rzepka: The tariffs we apply for local calls are some
of the cheapest that you will find in Europe. We decided to
increase the prices for local connections to move away from
subsidizing local connections, using the funds from
long-distance connections. Right now the ratio between our
local and long-distance tariff is 1:8. So our target is to have
a ratio of 1:5.
Eastern Europe has been beset by economic problems
over the past year. Why do you think that interest in TPSA's
shares has been so high despite this turbulence?
Rzepka: First of all the Polish economy is in a very
good state: it consistently meets set goals. Poland is
experiencing a much higher rate of growth than other parts of
Europe. In previous years it was more than 5% a year. Inflation
was completely curbed. Right now it is less than 10%. The
private sector is accounting for an increasing share of GDP:
over 65% of the total. The current debt and budgetary deficit
are fully controlled. The central bank is implementing a very
consistent and well-decided monetary policy. These are some of
the reasons why big investors float to Poland. We are also
operating in a potentially very big market for telecoms
In addition, our company has a number of strengths, such as a
very experienced and proficient management team and personnel.
We also have a modern telecoms network and operate in major
segments of the telecoms market, such as fixed telephony,
cellular and telecoms services based on Internet Protocol.
These are all reasons why there has been a healthy interest in
Let me add that you should also differentiate between the
economic situation of Poland and other countries in this region
- in particular there is a big difference between the Polish
and Russian economies. Our foreign trade with Russia is very
low right now.
Consequently the economic crisis in Russia has only had a very
slight effect on us. Poland already had the appropriate
economic mechanisms in place, which are more in line with the
highly developed economies in western countries. I think that
the current Polish government is determined to further the
privatization process in Poland and modernize the
infrastructure. Consequently I believe that Poland is one of
the most attractive markets.
How much are you investing in rural
telecommunications? Does TPSA have universal service
obligations? How are you trying to bring the benefits of modern
communications to remote areas of Poland?
Rzepka: We do not differentiate between rural and
city telecoms services. The economic calculus serves as the
basis for our investment decisions. We invest in those places
where the return on investment can be highest. Of course we
also consider associated costs. We do not have any obligations
that would make us invest inefficiently. To improve the
efficiency of investments in less attractive areas, we use the
most modern technologies, for example, radio access systems. In
the case of each investment we make, it has to be positive.
What are your hopes and ambitions for the company as
it heads into a new era of competition in Poland?
Rzepka: We are in an era where the customer will
determine our position on the market. The customer will choose
the services of the operator that they would like. That is why
our company is being restructured, so that our existing
customers will stay with us and so that we can attract new
customers. We are building a new commercial company that is
meeting customers' requirements and is trying to answer them
before they express them. That is what we are trying to
implement. These are the promises I made in announcements last
We were successful in listing our shares on the stock exchange
in Warsaw and London. We changed the way in which our company
is operating. We achieved far cheaper capital for our company's
development. We were able to attract for the first time over a
million new customers in one year. We are seeking our first
strategic partner for our company. This is very important.
As the CEO of TPSA at a time of change, what do you
perceive to be the main challenges over the next two-three
years? Improvements in cellular performance and overall
efficiency, which will probably include widespread staff
reductions, would seem to constitute the main challenges. Would
you agree with this perception?
Rzepka: Of course it is important for us to increase
sales. At the same time we want to achieve this objective
without increasing employees. In actual fact a reduction in
employment will improve our company's efficiency. I would like
to say that company has changed a lot in the period of 15
months in which I have managed the company as president. I am
aware that the changes will continue. I am one of the people
that will help implement this change. I think that the period
of 15 months has confirmed that we are well prepared and that
we are able to introduce change in an effective way.
Right now, the most important challenge for our company is to
meet all our customers' needs and make the customers satisfied.
But first of all we want to make our owners - our shareholders
- satisfied with the constant growth and value of the company.