Telecommunications and Communication: Problems and Solutions

KAZAKHSTAN International Business Magazine №2, 2004
Telecommunications and Communication: Problems and Solutions

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Telecommunications and Communication: Problems and Solutions

Editorial Overview

Telecom Reforms

Foreign business generally holds the opinion that Kazakhstan is a leader among the CIS countries in terms of economic reform. This is especially clear in the banking and energy sectors. However, foreign experts say that it is essential to reform the telecommunications sector as well. Annually, Kazakhstan loses up to 0.15% of its GDP in this sector. To improve the situation, the government has adopted the Programme for Demonopolization and Liberalization of the Telecommunications Market, and has set up the Agency for Information Technology and Communications. These measures can be regarded as an important step towards forming an independent regulator of the telecom field in compliance with Kazakhstan’s preparations for WTO membership.

Rebalancing telecom tariffs is a serious problem which needs to be solved before anything else. This imbalance resulted from Kazakhtelecom’s monopoly in the general-use telecom network inherited from the Soviet era. Using a hidden cross-subsidy mechanism, the national operator funds unprofitable rural telephone services at the expense of high tariffs for international and long-distance communications. There is also discrimination between users: tariffs for legal entities are considerably higher than those for individuals.

It is planned to begin rebalancing long-distance rates by eliminating Kazakhtelecom’s exclusive right to provide this service in 2004.

As for the telephone licence fee in cities, its actual level will depend on the situation in the market. Given that the expected increase in the license fee may have a negative social impact, funds will be provided from the national budget to reduce the fees and pay compensation to very low-income users (there are about 500,000 in Kazakhstan). In 2005 alone, it is planned to spend some 2.2 billion tenge to this end.

The rates will be changed for all types of services except those considered as ‘universal telecommunications services’ by the state. The draft act On Communications lists telegraph (including telegrams and the Internet) and rural telephone communications as universal services. In villages numbering 500-1,000 residents, services will be provided through payphones. In villages of 1,000-3,000 it is planned to organize mixed access (individual and collective), and in larger ones individual subscriber access will be set up.

To ensure universal access in every region and locality of the country, operators will be appointed by appropriate tenders. To make sure that new operators enter the market in rural communications, attractive conditions must be created for them, compensating them for the costs of rural services and ensuring a reasonable level of profit. At the same time, it is planned to maintain the license fee for individuals in rural areas at the existing level of 250 tenge, which does not cover the prime cost. As for the losses inevitably incurred by operators of universal services, these will be funded from a portion of the national budget contributed by operators of long-distance communications, who will pay corresponding fees. The necessary amendments will be made to the Tax Code for this purpose.

Streamlining the entry procedure for new long-distance operators is an important condition for boosting competition in the telecoms sphere. They will gain the right to provide a full range of services provided that they have the necessary licences, received under the procedures defined in law. In turn, these operators will have obligations to develop the telecoms network and ensure national security.

Introducing fair, transparent regulation of the telecoms network is yet another necessary condition. Foreign experience indicates that a monopolist or a dominant communications operator with an extensive network can dictate discriminatory connection conditions to smaller operators in order to strengthen its own position in the market. Rules for Joining the General-Use Telecoms Networks and Regulating Telephone Traffic have been developed in Kazakhstan to prevent this from happening. These are based on the principles of obligatory connection and validity of tariffs for connection and traffic flow. In addition, the principles of interconnection between operators will be defined, and dominant operators will have special connection conditions imposed.

It is expected that the liberalization of the telecommunications sector will be completed by 2006.

Basic Indicators of the Sector

As previously stated, 2003 was a year of vigorous reform in telecommunications. The favourable economic indices recorded in the industry last year provided a firm base for this development. For instance, communications services were worth 146.1 billion tenge in 2003 in total, or 127% of the previous year’s level. Within that figure, the highest income growth among the companies in the sector occurred in cellular services (52.7%), radio communication, radio and TV broadcasting (25%), data transmission networks (20.1%), sale of smart cards for payphones (21.4%) and long-distance communications (19.5%). It is notable that the share of postal services in the total income of the sector fell to 3.3%.

In 2003, outgoing paid long-distance traffic (PLT) increased by 20.4% against 2002. Outgoing PLT consists of long-distance communications within the country (74.2%), cellular communications traffic (17.6%) and international traffic (8.2%).

By the beginning of 2004 the number of telephones in Kazakhstan had reached 2.2 million, including 408,900 in rural areas. At the same point, the density of coverage reached 15 numbers per 100 residents, having increased by 7.2% against 2002.

There are four mobile operators in the country and more than 100 telecommunications companies, of which Kazakhtelecom is the largest. It is developing a common, general-use telecoms network, mastering advanced technology and introducing up-to-date equipment.

Investment Activities of Kazakhtelecom

Today Kazakhtelecom accounts for the largest amount of investment in the telecoms sector of Kazakhstan. With total foreign direct investment in the sector in 2003 at $2.4 million, capital investment in the company reached $93 million over the same period, according to preliminary estimates.

Last year, under its investment programme, Kazakhtelecom mainly invested in upgrading and developing telecom networks, replacing analogue exchanges by digital, installing telephones in rural areas and introducing new types of telecom services.

In 2003, the 2,400-km Eastern Fibre-Optic Line (FOL) was brought into test operation. After this eastern branch of the National Information Super Highway (NISH) is fully commissioned in June, the Eastern FOL, together with the already operating Southern and Western segments of NISH, will connect 14 of the 18 long-distance exchanges of the country with digital trunks. This will provide the residents of Astana, Petropavlovsk, Kokshetau, Pavlodar, Ust-Kamenogorsk, Taldykorgan and another 29 localities within the region’s boundaries with access to all types of high quality telecom services. In addition, the Eastern FOL will help to establish trans-national transit and link the International Switching Centres (ISC) in Almaty and Astana with digital trunks. Today Kazakhtelecom is working on constructing the 1,600 km Northern FOL (Petropavlovsk-Kostanai-Aktobe).

It is planned that when the Eastern FOL is fully commissioned it will become possible to create a fibre-optic ring using the Trans-Siberian line of Rostelecom and the Western FOL. This will solve the problem of reliability with the SDH bus network. Since municipal SDH-rings were commissioned in 2003 in Semipalatinsk and Aktau, the number of cities in Kazakhstan with digital communications networks has reached 15. These have helped to improve the quality of connections between exchanges and allowed the transmission of any type of information: data, video and other multimedia services. Currently SDH equipment is being installed in the only regional centre that still lacks this facility-Kyzylorda.

Throughout the past year Kazakhtelecom was constructing new digital radio relay links (DRRL) which will help to connect the major industrial regions and localities along them. In 2003 the Atyrau-Uralsk-Aksai DRRL project (a 600-km line that will comprise 14 exchanges) and Zhezkazgan-Zharyk (a 449-km line with 11 exchanges) were launched. New zonal DRRLs were built along the Kokshetau-Ruzaevka, Kellerovka-Kishkenekol and Emba-Shubarkuduk sections. The 400-km Almaty-Zharkent DRRL was also completed.

By the end of 2003, 174,000 digital numbers were installed in the municipal network and 30,000 in the rural network within a large-scale programme for digitization of telecom networks. As a result, the level of digitization reached 53% in Kazakhstan. In cities it stands at 61%, but is a mere 20% in rural areas.

To provide access to communications in remote localities, Kazakhtelecom is continuing to install DAMA satellite communication systems. 28 were assembled last year alone. Today the network comprises 258 stations, 222 of which are installed in rural areas.

Cellular Communications

Although cellular communications have existed in Kazakhstan for a decade at the most, it is one of the most actively growing segments in the telecoms market. The first licence to provide mobile communication services was issued to Altel in 1994. Altel worked to the AMPS standard. However, when another two operators entered the market with the GSM standard in 1999, Altel had only 50,000 subscribers. Four years later, at the beginning of 2004, the number of cellular communication users was some 1.5 million. It is noteworthy that this indicator was only 900,000 in 2002.

The lion’s share of Kazakh users of cellular communications is accounted for by GSM operators: GSM Kazakhstan with the
K-cell brand holds 70% and Kar-Tel with the K-mobile brand about 28.9%. Altel accounts for a mere 1%, and subscribers to Telecom Services, a company working with the AMPS standard, number only 2,000.

With just above 10% of the population using this type of service, Kazakhstan lags behind Russia (25% of the population) and Ukraine (13%). This is due to the fact that cellular communications became available in this country later than in its CIS counterparts, and that about half of the republic’s residents live in rural areas (Russia’s and Ukraine’s indicators are 25% and 32% respectively). These factors and the low population density (about six persons per sq km) result in high capital costs for Kazakhstan’s cellular operators.

However, the GSM operators are continuing to increase their capacity. After GSM Kazakhstan installed 600 base stations
(226 in 2003), its technical capabilities allowed it provide services to over 1.5 million potential subscribers. In order to expand the existing network, the operator signed a $24 million agreement with Ericsson at the end of last year for supplies of equipment. In summer 2003 the second major player in the cellular market- Kar-Tel- also invested more than $30 million in the development of its network, thus doubling switchboard capacity and the number of base stations throughout the country. As for Altel, it should be noted that in December 2003 the local cellular pioneer assembled $30 million worth of Ericsson equipment and launched the Dalacom CDMA-standard project. As a result, over five months the company has attracted 5,000 new subscribers.

K-mobile has signed 178 international roaming agreements in 124 countries, whereas K-cell has signed 186 in 86 countries.

Internet Service

According to the Statistics Agency (which calculates the number of internet users under the principle ‘one computer, one user’) Kazakhstan had up to 184,200 users in 2003 against 133,700 in 2002. Despite the increase of more than a third in clientele, traffic has grown insignificantly from 684.9 million minutes in 2002 to 694.42 in 2003, which means that a Kazakh user spends an average of one hour 12 minutes per week surfing the Net.

If we look at the regional breakdown of the Internet market, we will see that the user numbers depend on the economic development of a region or a city. Almaty is the undisputed leader (34.2%). It is followed by the industrially developed cities of Pavlodar (17.4%), Atyrau (6.5%), and East Kazakhstan (6%) and Karaganda (5.4%) regions. The capital Astana accounts for 6%.

High prices remain a key barrier to the development of this market segment: $1-1.4 per hour for Internet access. For instance, in Eastern Europe the figure is $0.2-0.35 per hour in peak day time, although the income level of Eastern Europeans is higher than in Kazakhstan. As a result, only 2% of Kazakhstanis use the Internet, which means we are far removed from international standards. Some developed countries enjoy an indicator of 90%.

Experts believe that high Internet rates are due to the fact the majority of Kazakh providers use information highways owned by Kazakhtelecom. Even the large players such as Nursat and Astel which have their own communication channels have to use Kazakhtelecom lines as a ‘last mile’: these lines connect exchanges with users. The situation is aggravated by the fact that the national operator, i.e. Kazakhtelecom, holds a vast share of the Internet market (it provides dial-up access via telephone lines): 69% or 477.1 million minutes of traffic in 2003. Hence the market is dependent on the pricing policy of the national operator.

Nevertheless, the balance of power could be changed by new providers: TransTelecom (a daughter company of Kazakhstan
Temir Zholy) and KazTransCom (a daughter of KazMunaiGaz), which have their own information highways. For instance, TransTelecom claims that 86% of its present facilities are located in regional centres and rural areas, which is a good omen for future domination in the regional market.

We should also take account of the fact that alternative Internet access technology is rapidly being mastered in Kazakhstan and this may also determine the price climate. For instance, GSM Kazakhstan offers the cheapest Internet access; it has been providing GPRS data transfer services since autumn 2003. Experts point out that the CDMA standard is even more suitable for this purpose, but Dalacom has not yet introduced its rates for Internet services, as they are currently being tested.

Cable networks can serve as another medium for transmitting information. In developed countries up to 10-15% of the cable TV audience uses this type of access. In the autumn last year Alma TV offered a similar service to its clientele. The advantage of cable networks is high quality of service, high speed and elimination of problems related to the ‘delivery’ of Internet directly to a user.

Early this year Kazakhtelecom entered the international market in telecommunications, which is a true breakthrough for Kazakh providers. An agreement on the provision of a comprehensive ‘communication channel plus Internet access port’ service was signed with Uzbekistan’s UZPAK in February 2004. The motivations of the Uzbek firm in making this choice were both the price/quality ratio and the redundancy option provided by Kazakhtelecom. With its two independent routes (through the so-called northern and western junctions between Kazakhstan and Russia’s digital networks), Kazakhtelecom can use a backup route whenever signal is lost over the other route.

Information Technology

Although there are 51 domestic IT companies and 11 branches of foreign IT companies in the Kazakh market, the information space of Kazakhstan is made up of poorly connected segments (agency intranets, regional and commercial networks). To boost the local information infrastructure, a state programme has been developed. It envisages the introduction of information technology in the public sector, i.e. the creation of e-government and e-commerce networks. The blueprint contains strictly defined priorities for state IT policy: developing a legal network, creating a system for monitoring public information resources, curtailing the turnover of paper documents, establishing state databases and integrating and developing information systems in each state agency.

As previously noted, the Agency for Information Technology and Communication?a central executive body outside the Government?is in charge of pursuing state policy in this field. The Agency is currently working on developing a Public Registrar of IT and Telecom Resources, creating a Public Depository of Software Codes and Documentation of Information Resources, forming a System of Software Examination and Certification and Maintenance of the Guide to and Site of Official Electronic Addresses.

So far, laws On Information Technology and On E-document and Electronic Digital Signature have been passed in the country, as well as a number of government decrees regulating relations in the IT domain. In addition, the Agency is developing standard acts regulating electronic document turnover and electronic digital signatures, and is also developing the .kz domain of the World Wide Web.

Work is currently under way to introduce IT in 19 public agencies in Kazakhstan to reduce the turnover of paper documents. At the same time, software applications are being created for the electronic archives of state agencies; the software is being tested by the Committee for Managing Archives and Documentation. Based on the Edifact international standard, work has begun on developing and approval of a national standard for electronic data exchange formats.

Since 2002, the state database Individuals has been introduced in a pilot zone (Astana, Karaganda and Almaty) and a Legal Entities database has been formed. The latter will comprise information on mineral resources, and fixed and movable property. In addition, work has begun on collecting data for Kazakhstan’s Resources database. This will comprise the Address Registrar and Public Land Register automated systems. Alongside introduction of a common identification code for individuals and a common business identifier, this system will help to orchestrate the operations of different agencies, including information systems at loan offices. The model created will help to normalize the registration and upgrading of data on individuals, which is essential for the operation of public agencies, and will foster the integration of otherwise disconnected intra-agency information systems.

Today the Integrated Tax Information System and Automated Customs Information System (IS) are operating successfully, as well as the registrar of Taxpayers and Taxable Entities.

To ensure information security and the compatibility of the existing and new public IS, the 100% state owned National Information technology company was set up in January 2004; it was assigned the role of national operator in the field. One of its key tasks is to form and maintain the information infrastructure of e-government and integrate the national information infrastructure of Kazakhstan into the global information space.

Mail Service

Kazpost is the national operator of postal services in Kazakhstan. A 100% package of shares is held by the Ministry of Transport and Communications. As a transit organization for information, money and goods flows, the company provides a broad range of postal, financial, agency and other services.

Today Kazpost is the leading player in the postal market, accounting for an 80% share. In 2003 it processed 16.1 million units of written correspondence and delivered 90.9 million periodicals.

Kazpost co-operates with Rospechat, a Russian press agency, in the area of news distribution. The two accept subscriptions to Russian and foreign publications. This year, the company has begun the Cyberpress electronic subscription project in Astana.

Thanks to its corporate clients, the EMS Kazpost mail service is developing rapidly and competing with FedEx, UPS, Pony Express and TNT. DHL International Kazakhstan is the leader in this sphere: it provides express delivery of packages and documents to any city in the country.

It should be noted that since Kazpost partially resumed its pension and welfare-payment functions, it has taken 45.7% of this market. While the share of the company is 17% of total payments in cities, in rural areas it is 100%. Financial transactions also went up. The total amount of pensions and welfare payments handled came to 88.4 billion tenge last year (an increment of 32.2% against 2002). For salaries this index came to 24.6 billion tenge (up by 31%). The amount of utilities payments grew by 3.6 times (10.9 billion tenge) and taxes and other payments to the budget 2.2 times (7 billion tenge). As of the beginning of 2004, Kazpost had opened 1.3 million accounts for individuals, which is 400,700 higher than the 2002 level, and the deposit base was 1.4 billion tenge.

In 2001 the company began providing agency services to pension savings funds and insurance companies, also organization mail-in ads and hybrid and electronic mail. Since 2003 Kazpost has been acting as an agent in lending to the public and supporting small and medium-sized businesses.

Kazpost provides a large number of socially important services, that is why its losses came to 238.7 million tenge in 2003, and will reach 469.9 million tenge this year on its own forecasts. The reason is that the existing commission on the payment of pensions and welfare does not cover the prime cost of these services. In addition, Kazpost has a single tariff for delivering a copy of a newspaper (3.91 tenge), but in rural areas this rate does not cover the actual cost of delivery. If the tariff is raised to the zero profit level, the price of periodicals may have to go up by 40%, which will make subscription too expensive for most rural residents.

This and other problems could be solved by transferring all functions for payment of pensions in regional centers and rural localities to the company, and increasing the income of Kazpost by raising commissions on pensions and welfare. Also, to ensure that it can operate effectively in the deposit market, an expanded banking license is needed to provide the entire sector of banking services and lift the limitations of the existing license to carry out brokerage and dealer activities.

The decline in traditional services, also wear-and-tear to the fixed assets of the company, requires heavy investment in the creation of an up-to-date information, telecoms and transport infrastructure.

For this purpose, a project has been developed for upgrading the mail service of Kazakhstan and forming a postal savings system. To launch this, Kazpost placed 1.413 billion tenge ($9 million) worth of 5-year corporate bonds in the KASE in May 2003. Their annual coupon rate is 8%. In addition, on 2 September 2003, an agreement was signed with the Islamic Development Bank on a government guaranteed loan. The 15-year loan of $9 million is granted for 15 years with an annual interest rate of 6%.Under the same project, it is planned to receive 153.8 million tenge in loans from resident banks in Kazakhstan in 2005. As part of the State Programme for Development of Rural Areas in 2004-2010, 400 million tenge will be provided from the national budget to increase the authorized capital of Kazpost, thus improving the quality of postal services provided in rural areas.

As a result, the total investment in the purchase of fixed assets will come to 4.367 billion tenge in 2003-2005.

Table of contents

Telecommunications and Communication: Problems and Solutions

The Logic of Corporate Solutions Ilya Lapaev

Telecommunications in Kazakhstan: Liberalisation is At Hand Paul Moffatt

Competitive Transit Capacity for Eurasia Kazhmurat Nagmanov

Navigators of Our Skies Sergei Kulnazarov

The Fifth Majilis Session: Deputies Summarize the Results Ivan Chirkalin

Traceca, a Route to the Future Thomas Lamnidis

Ispat Karmet: The Reincarnation of A Giant Nawal Kishore Choudhary

We are United - and Not Only by Oil! Morteza Saffari Natamzi

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