In January 2003 the president directed the Cabinet of Ministers to transfer some state shareholdings, including UkrTelekom shares, to the management of the State Property Fund of Ukraine. The transfer was intended to address the conflict of interest arising from the Ukrainian government's ownership in UkrTelekom and its regulation of the telecommunications industry through the State Committee for Communications and Information (SCCI).

Back in August 2001, the Cabinet of Ministers transferred the state's UkrTelekom shares (previously managed by the State Property Fund) to the SCCI. This resulted in a situation where the state telecommunications regulator and the state telecommunications monopolist were effectively one and the same. The step was a far remove from transparent, market-oriented sector reform. At the time, the government believed that competition threatened UkrTelekom and therefore national interests.

Since August 2001 the government's position has changed dramatically: the separation of the regulatory and operational functions previously combined in one governmental agency is now considered an essential aspect of the liberalization of Ukraine's telecommunications industry. The performance of regulatory functions by an agency vested with the management of the incumbent operator is considered detrimental to the establishment of a competitive environment in the Ukrainian telecommunications market.

Experience in the European Union proves that the creation of a regulatory authority which is completely independent from the incumbent and responsible solely for matters such as licensing, allocation of frequencies and approval of terminal equipment is the best solution to this problem.

Notwithstanding that UkrTelekom may well be privatized in the near future, the Law on Specifics of Privatization of OJSC UkrTelekom (July 13 2000) provides that the state will retain a 50%-plus shareholding in UkrTelecom, thus maintaining de facto control over the company. This makes the structural separation of the SCCI's regulatory functions and the functions associated with UkrTelekom's controlling stake ownership and management even more important.

Ukrainian operators have repeatedly raised the issue of independence and separation of the regulatory and incumbent management functions of the SCCI, including measures to ensure that officials associated with the regulatory functions are not involved in the management of UkrTelekom. This would help to combat UkrTelekom's consistent abuse of its market power (eg, delaying access by engaging in lengthy negotiations and failing to provide relevant information to other market players), and prevent the SCCI from intervening in the market in order to safeguard UkrTelekom's interests.

The State Property Fund, together with the Cabinet of Ministers, is currently working out a mechanism for transferring the state's shares in UkrTelekom to the State Property Fund. The State Property Fund will create a State Department for Management of Corporate Rights within its purview, thus helping to accelerate the process of UkrTelekom's privatization, which was previously resisted by the SCCI.

However, independent analysts are pessimistic about the effectiveness of this measure, and remain convinced that UkrTelekom will be favoured and protected by the state for as long as the state owns a shareholding which generates revenues for the budget.

For further information on this topic please contact Igor Svechkar or Olena Repkina at Shevchenko, Didkovskiy & Partners by telephone (+380 44 230 6000) or by fax (+380 44 230 6001) or by email ([email protected]).