SERBIAN TELECOMS REGULATOR OFF TO A ROCKY START

1. Two years after the passage of the Serbian Law on
Telecommunications, the Republic Telecommunications Agency
was established and finally became operational on December
19, 2005. Shortly after its inception, however, the
Government of Serbia (GOS) suspended the Agency's license-
monitoring function during the GOS revocation of cellular-
provider Mobtel's license, justifying this action on grounds
of national interest. The Agency should soon resume these
functions and become legally and financially independent,
although other ministries still do not support the role of
the Agency. END SUMMARY.

REGULATORY AGENCY BECOMES OPERATIONAL AFTER TWO YEARS


--------------------------



--------------------------




2. The Republic Telecommunications Agency was formed only
recently pursuant to the Serbian Law on Telecommunications
adopted in April 2003. After two years of delays, the Serbian
Parliament finally elected the President and the members of
the Agency's Management Board in May, 2005, and the Agency
finally became operational on December 19, 2005. Its mission
is to raise the efficiency of existing providers, introduce
new and improve old services to modernize the telecom
infrastructure, and create conditions for the sector's
further development.



3. The regulatory function of the Agency includes
establishing the rules for participants in a liberalized
market and issuing the licenses that permit access to the
telecommunications market. The Agency also sets prices for
monopoly services, sets policy for network interconnections
and line leasing, monitors overall network service quality,
and monitors compliance with license requirements.

CONTROLLING AND MONITORING FUNCTIONS HAVE BEEN REVOKED


--------------------------



--------------------------




4. On March 29, econoff met with Jovan Radunovic, President
of the Agency's Management Board, to discuss the Agency's
role in the privatization of newly formed company Mobi 63,
the former Mobtel. The Serbian government has approved an
agreement with a consortium of Austrian businessmen, led by
Martin Schlaff, on establishing a joint telecommunications
company called Mobi 63 as successor to Mobtel. This new
company gives Serbia 70 percent and Austrian investors 30
percent of the company. According to Finance Minister
Dinkic, the initial price for the company and license will be
EUR 800 million, with EUR 320 million for the license alone.



5. Radunovic explained that 10 days after the Agency became
operational, its monitoring and controlling functions were
revoked for 120 days by the Government of Serbia (GoS) to
facilitate revocation of the Mobtel's license on December 29,


2005. The GOS justified its action as necessary to protect
state interests. The Ministry of Capital Investments cited
provisions in the Law of State Administration to withdraw
some functions of the budget-based Agency. However,
Radunovic believes the Ministry should not have intervened
since the Law on Telecommunications established the Agency as
independent, and the Agency was established by the
Parliament, not by the government. (Other sources tell us
Radunovic voted against the Mobtel action within the agency,
although we are not aware of the specifics.)



6. After talks with Dinkic and Minister of Capital
Investments Velimir Ilic, Radunovic believes that this
problem will soon be overcome. Moreover, the GoS on April 4
adopted a detailed procedure for privatization of Mobi 63
that designates the Agency as responsible for issuing the
license for the new operator of Mobi 63. The Privatization
Agency will handle the sale of the assets of Mobi 63 -
network, customer base, etc. Radunovic does not expect other
problems concerning the privatization of Mobtel.

MINISTRY JEALOUS OF AGENCY'S ROLE


--------------------------




7. Radunovic expressed frustration over the Agency's
relationship with the Ministry of Capital Investments, which
previously had the authority to monitor and control telecoms.
Radunovic said that the Ministry is trying to amend the law
to completely remove the Agency from the picture.



8. According to the law, the Government should adopt a
Strategy for Telecommunication Development proposed by the
Ministry. The Agency as an independent regulator would then
be responsible for implementing that strategy. Last year,
the Ministry formed a working group of employees from Mobtel
and Telecom Serbia to write the strategy, but the stategy was
never adopted, according to Radunovic, because the draft
favored Mobtel and Telecom and was not seen as in the best
interest of the Serbian telecommunications sector. Radunovic
said that the agency has responded by forming its own council
of experts that will prepare such a strategy for presentation
to the Ministry. The council also will provide advice on
amendments to the telecom law that are necessary to harmonize
it with EU directives.



9. After a long process, the GOS recently chose Goldman
Sachs to develop a strategy for privatization of the entire
sector, but this contract appears to have been superceded by
the Mobtel developments. (The GOS, in late December, revoked
Mobtel's license and seized its assets in a dispute with
Milosevic-crony Bogoljub Karic. Karic owned a majority in
Mobtel, with the state holding the rest, but the two sides
were locked in a dispute over ownership of Mobtel. Many
believe that the increasing role of Karic's political party
also figured in the GOS action.) The development of the
cellular sector would have been a key focus of the strategy,
but a Goldman adviser told econ chief that the strategy is
effectively moot because of the GOS plan to sell Mobi 63 and
then refrain from issuing a new license for a prescribed
period (except under certain restrictive conditions). A
separate investment bank was chosen by the GOS to handle the
sale of Mobi 63, leaving Goldman on the sidelines.


UNBUNDLING OF TELEKOM SERBIA


--------------------------




10. Concerning the future of Telekom Serbia and its monopoly
position, Radunovic believes that the unbundling of Telecom
will not end its monopoly position automatically. Although
Telekom's fixed line monopoly expired in June, 2005, as a
practical matter, the rules necessary to permit other
operators to access its network have not been adopted.
Telekom Serbia, of which 20 percent is owned by Greek
telephone company OTE, also controls the second cellular
telephone provider. According to current law, Telekom Serbia
should be divided into three separate parts - fixed line,
mobile telephony and Internet.



11. However, Radunovic sees the unbundling of Telekom Serbia
as out of step with the current global trend toward
unification of services in one company. He supports keeping
the services within one company but operating each as a
separate business unit, with its own financial statements.
He also favors introducing new services and new technology as
a means to overcome the monopoly position of Telekom, in part
to avoid problems in using the current Telekom
infrastructure. However, liberalization of the market and
usage of the current infrastructure owned by Telekom will be
the topic of the telecom development strategy - whenever it
is approved by the government.

CONFLICTS LOOM


--------------------------





12. The GOS, on March 29, approved a document that is to
form the basis for the government's telecom strategy. This
non-binding statement of intent proposes that Serbia Telekom
be awarded spectrum at 3.5-3.6 gigahertz, spectrum that
already is used by three small companies for broadband
wireless internet. One U.S. company is considering a
proposal to create a WiFi zone in the small city of Indjija,
perhaps in cooperation with USAID, but such a proposal would
require use of this frequency. The Jefferson Institute,
which is working on this proposal, told ECON FSN that Serbia
Telekom's proposal to use this spectrum to provide wireless
fixed telephony to villages would prevent the growth of a
WiFi/WiMax service industry in Serbia, a type of service that
already is popular in Croatia. However, the control of this
frequency is in the hands of the Regulatory Agency for
Telecommunications.

POLT