Rzepka spearheads TPSA's modernization drive

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The Polish telecoms was fairly closed until 1998. Telekomunikacja Polska (TPSA) had all the negative attributes of a state-owned monopoly: it was inefficient and was held back by cash constraints. However, after the sale of 15% of the operator, TPSA is modernizing rapidly. TPSA's president Pawel Rzepka talks to Basil Ballhatchet about the challenges ahead.

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 demand.

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 the proceeds?

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 economy.

In your view, how would TSPA benefit from an international strategic partner?

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 development.

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?

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?

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?

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 market?

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 costs.

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?

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?

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 lines?

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?

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 demands?

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 France Telecom?

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 dynamic.

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 this situation?

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?

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?

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 year.

What steps are you taking to improve TPSA's overall efficiency? How are you modernizing the company?

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?

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?

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 the network?

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 Europe?

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 one priority.

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 Europe.

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 calls?

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?

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 services.

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 our shares.

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?

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?

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 year.

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?

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.