This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BELGRADE 000673 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ECPS PGOV EFIN BTIO KPRV KCOR SR MW
SUBJECT: SERBIAN TELECOMS REGULATOR OFF TO A ROCKY START 
 
 
SUMMARY 
------- 
¶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CONTROLLING AND MONITORING FUNCTIONS HAVE BEEN REVOKED 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