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The New Europe: ICT

By EBRD  Press Office

Guy on his phone

Over the past 25 years, very few markets have undergone such significant change on a global scale as the information and communication technologies (ICT) sector. Investments in ICT were – and still are – critical for transition, acting as catalysts for economic development.

Improvements here support all other areas of the economy. They extend access to essential services that are key to the spread of knowledge and to improving the business climate.

With this in mind, the EBRD has been an active investor in the ICT sectors of central Europe and the Baltics and, specifically, the EU8, Poland, Latvia, Lithuania, Estonia, the Czech and Slovak Republics, Hungary and Slovenia, since it began operations in 1991. In that time, the Bank has invested a total of €1.14 billion in the ICT sector in the region.

In 1991 the sector – and telecommunications in particular – was dominated by state-owned incumbents. Over time, the proliferation of these monopolistic operators had created severe imbalances between the supply and demand for services, high operating inefficiencies and a lack of commercial focus and basic management skills.

In those early years, the EBRD worked to support the privatisation of incumbent operators and provided technical assistance to create a legal framework that encouraged market liberalisation. These steps were imperative in order to rapidly increase access to services.

The approaches taken by each country varied greatly. In the early 1990s liberalisation of the telecommunications sector was still a recent movement, even in the West. The privatisation of British Telecom – one of the first – had taken place less than a decade earlier, in 1984.

Whichever approach governments adopted, the EBRD was there to support them. Hungary started the privatisation of Matáv with a partial sale to a strategic investor. After the initial privatisation, in 1993 the EBRD provided a DM 65 million loan and US$ 57 million equity investment to support the operator’s modernisation plans.

A few years later, the EBRD was also involved when regional concessions were awarded. In particular, the Bank committed a total of US$ 140 million in loans and equity to two regional telecommunications companies, Déltáv Rt and Digitel Rt, to upgrade their networks to the latest technology and increase subscriber access lines.

In addition, the growth in cellular technology offered an alternative to the slow modernisation of fixed-line telephony. As early as 1991, the EBRD offered a US$ 60 million loan to Polska Telefonia Komorkowa (PTK), a joint venture created to build and operate a national cellular telephone network. PTK was developed in part to offer subscribers an immediate, reliable and flexible telecommunications service until a major land network investment programme in Poland could be implemented.

When the country privatised its incumbent operator, Telekomunikacja Polska, via an IPO in 1998, the EBRD was ready with a US$ 75.5 million investment, which represented 8.1 per cent of the shares sold by the state. Peter Reiniger, then Director of the EBRD Telecommunications team, explained at the time: "As a large financial investor in the company, the EBRD will be an active minority shareholder and supports the management’s objective of transforming the company into a modern, privately-run, customer-oriented and efficient operator."

In 1998, the EU made full liberalisation of the telecommunications sector a legal obligation for all member states. This forced central and eastern European countries to make further strides in liberalising their networks to qualify for EU accession. As a result, these countries have some of the most advanced telecommunications regulatory frameworks within the EBRD region.

After EU enlargement in 2004, EBRD activities in the central European and Baltic ICT sectors focused more on increasing competition between network operators. Experience has shown that markets characterised by healthy competition are more likely to yield new technologies and innovative services. The Bank therefore worked to introduce greater competition.

For instance, in 2009 a €10 million EBRD equity investment in the Lithuanian mobile company Bite allowed the operator to revitalise its activities in Latvia and break into a market dominated by two strong competitors. A leader in technology and innovation, Bite’s market entry forced the competitors to up their game, to the benefit of local mobile users. Today, almost all of the new EU member states have at least three mobile operators.

Currently, the EBRD sees ICT investment as essential for the development of a well-functioning knowledge-based economy, in which innovation and knowledge drive productivity and competitiveness.

“Investment in the knowledge economy will make a significant difference in the countries where we invest,” said Izzet Guney, EBRD Director of ICT. “It will improve the business environment for innovation, further develop access to information through investment in ICT infrastructure – particularly in the regions – and improve competition in the ICT infrastructure sector.

“This investment will also support the ability of traditional industries to innovate through R&D, state-of-the-art technologies, training and skills development and ICT improvements. In addition knowledge-economy investment will help companies to enter global value chains and move to higher value-added production and services.

“Lastly, it will promote access to, and continuity in, the financing chain – from angel support through to later-stage financing. This will allow smaller innovative companies to bring their ideas, designs and products to market.”

In central Europe and the Baltic states this means not only continuing to increase competition within the sector and improving broadband speeds and networks, but also focusing on widening opportunities in technologies beyond basic telephone services.

These include data, media, the internet and other value-added services, as well as investments in research and development and modern technologies in companies across all sectors. These activities currently make up 29 per cent of the EBRD’s ICT portfolio in central Europe and the Baltic states and this figure is likely to increase.

The Bank’s Venture Capital Investment Programme (VCIP) has already delivered results in this area. The VCIP is a dedicated team with a €100 million capital pool investing in early and growth-stage venture capital in innovative, fast-growing technology companies from central Europe to Central Asia.

In future, the Bank’s ICT priorities in central Europe and the Baltics will increasingly focus on providing further resources and expertise to foster the emergence of innovative, advanced services and transformational technology.

The EBRD will also help fund technological advances and research and development within companies, in particular among small and medium-sized enterprises.

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