Struggling industry looks to state aid - News Analysis

CommunicationsWeek International, April 22, 2002 by Michelle Donegan

Industry sectors are due to get more direct--and indirect--help from governments, but might this distort the telecoms market?

The European commission this month approved separate subsidies from the German and Italian governments to two semiconductor companies in those countries, raising the specter of state aid in the European high-technology sector.

Observers say the fine line between government funding for economic development and protectionist aid is increasingly blurred.

But it won't blur enough for some in telecoms hoping for intervention, particularly on third-generation (3G) technologies. "State aid is not there to help companies that have made bad business decisions," said Ian Rose, a competition law partner at international law firm Watson, Parley and Williams, of London. "To lend money to help [3G operators] pay for licenses would be unfair for operators who have paid less for licenses."

Critics say there is a risk that creeping public investment could distort the market for information and communications technology.

Last month, the European commission authorized the German government to provide [euro]219 million to help Infineon Technologies AG build a new semiconductor factory. The Commission also approved the Italian government's [euro]542.3 million in aid to ST Microelectronics Srl for building a new semiconductor plant in Catania, Sicily.

And the European Union's Galileo satellite navigation and positioning system received [euro]550 million from the European council of transport ministers. The European Space Agency, which co-developed the system with the European commission, will match this investment with another [euro]550 million. The commission says the Galileo initiative will spur a "technological revolution" of the magnitude that GSM did for mobile phones.

And while the funding given to the semiconductor companies will not directly impact the European telecoms industry, the wider issue of the reliance on government help does have resonance for the sector, which is currently straddling an old-world, state-owned, vertically-integrated monopoly structure and a newly privatized, liberalized and competitive market structure.

"There is tacit state aid in terms of regulatory policies that protect the incumbent," said Larry Spiwak, president of the Phoenix center for Advanced Legal and Economic Public Policy Studies, based in Washington, D.C. "If you view the telecoms policy [in Europe] and the dearth of competition, along with the slowness of the NRAs, that's a pretty good version of state aid."

The Commission's own regulations on state aid would rule out direct help for telecoms.

"Telecoms would be one of the last industries that state aid would be applied to," said Rose at Watson, Farley. "The European commission would expect the market to weed out the weaker players."

But many of Europe's incumbents still have significant government shareholdings (see chart). And it is difficult to draw the line between government help and competitive market forces.

For example, in the German UMTS market, a standoff is mounting between the six licensed operators, who claim the market cannot support so many competitors, and the German government, which will not provide more favorable terms for the operators to merge (see news in brief, p. 4).

But in the United States, the Federal communications Commission has done what European governments appear to deem unthinkable. Last month, the FCC said it would refund $2.8 billion of the downpayments collected from the winning bidders of the much-disputed NextWave spectrum licenses. The ownership of the licenses are the subject of a Supreme Court case, which won't be completed until early next year. The FCC is refunding the downpayments after one of the winners, Verizon Wireless, threatened to sue the FCC becaue it would lose millions in interest while the actual ownership of the licenses is decided.

And some operators have already received direct public funds after going out of business. In most cases, these funds help to keep the network running and customers connected until they can find an alternative service provider.

Last year, the Scottish development agency gave Atlantic Telecom a [pounds sterling]550,000 rescue package to keep the fixed wireless network going and ensure Atlantic's 2,000 business customers did not have their service disrupted.

Privatization status of incumbents in Europe

Operators                      Share holding
                 State     National        Stock
                           Investors       exchange

Belgacom         50%  
                 1 share

BT               0%                        100%

Deutsche         around    around 12%      around 29%
Telekom          31%       held by KfW
                           bank

Eircom           <1%                       around 49% (3)


France           55.7%     1.3% FT         31.3% (incl.
Telecom (FT)               itself          employees)

KPN              34.7%                     65.3%

OTE              51%                       49%

P&T Luxembourg   100%

Portugal         Golden                    95.2% (4)
Telecom          share

Sonera           53.3%                     46.7%

Swisscom         65.5%                     34.5%

Telekom Austria  47.8%                     22.4%

Telecom Italia   3.6%      Olivetti 54.2%  42.2%

TDC              0%                        58.4%

Telefonica       Golden                    100%
                 share

Telenor          77.7%                     22.3%

Telia            70%                       30%

Operators           Share holding
                 Foreign
                 ownership

Belgacom         50% - 1 share (1)


BT

Deutsche         28% (2)
Telekom


Eircom           KPN 21%;
                 Telia 14%

France           DT 1.8%;
Telecom (FT)     Vodafone 9.9%

KPN

OTE

P&T Luxembourg

Portugal         Telefonica
Telecom          4.8%

Sonera

Swisscom

Telekom Austria  29.8% (5)

Telecom Italia

TDC              41.6% SBC

Telefonica


Telenor

Telia

(1)SBC, Singapore Telecom, TDC plus Belgian Banks;

(2)Voicestream/Powertel;

(3)(employees hold 14.9%);

(4)(25.9% financial institutions);

(5)Telecom Italia