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A return to the 3G tenders – Ukraine

February 18, 2015

In November 2014, an entry was published that highlighted the tendering for, and licensing of, 3G in Ukraine – the outcome of which is due on 23rd February.  It was identified as one of the litmus tests for foreign corporate investment into the country.

“As such, one of the very first public and international tests Ukraine will face will be the national G3 tender and licensing, due to take place in January 2015.

Quite simply – Ukraine has to get it right!

Whether Ukraine is aware of it or not – there is a lot of corporate and private FDI watching the G3 tender very closely indeed. In fact, it cannot be typed in bold or underlined heavily enough. There can be no cock-ups with the G3 tender and licensing by Ukraine.

If it gets it wrong, or it is thought to be even slightly “smelly”, it is one of the (early) indicators that will have a notable impact on corporate/private inward investment. It will certainly be a significant nail – although not the final nail – in the inward investment coffin for Ukraine.

If it goes as it should, however, from the discussion, there is quite clearly some solid and significant interest in Ukraine – despite the current situation in the east.

Naturally, not only the international/foreign national corporations/private investors are looking closely at the G3 tender – or it would not have been agreed as a significant event amongst those present from the various nations during the discussion with this blog. The western political and diplomatic classes are also looking for clear signs of a perfect execution of this tender and licensing too.

Ergo, dear readers, keep a very watchful eye upon the events surrounding the G3 tender and licensing – for it has far greater implications for Ukraine than any communications (and security) issue.”

In mid January, another entry was published listing those that had submitted tenders – Kyivstar, MTS Ukraine, Life (owned by Astelit) and UkrTower (owned by Turkcell).

All clear and transparent so far – a fairly content international corporate investment audience looking on.

The bids are as follows:

MTS Ukraine: Lot 1. UAH 2,708 billion.  Lot 2.  UAH 2,715 billion.  Lot 3.  UAH 2,705 billion.

Kyivstar:  Lot 1. UAH 2,705 billion.   Lot 2.  UAH 2,710 billion.   Lot 3. UAH 2,7 billion.

Life/Astelit:  Lot 1, 2 and 3 UAH 2,703 billion each.

All bids just over the starting value set by the government of UAH 2,7 billion – unsurprisingly when the license winners are to carry all conversion costs themselves, estimated at another UAH 1,6 billion.  All those successful are contractually obliged to have 3G in all major cities within 18 months, and within all towns with 10,000 or more inhabitants within 6 years of license issue.  Licenses are for 15 years.

So far so good – except there are issues that may now come to the fore with at least two of the bidders.

The first issue may be the existing Ukrainian law relating to sanctions in place against Russia.

The second is a proposed law by MP Anton Gerashchenko (who has some considerable weight,  both physically and metaphorically) to limit Russian ownership within security related spheres to 25% or less.  Communications being considered, rightly, as a security related sphere.  “I ask the NSDC consider setting limits owned by Russian entities and individuals (final beneficiaries) and persons affiliated with them shares that do not exceed 25% in aggregate in the share capital of companies in the field of transmission (storage, processing) of information data, mobile and satellite communications, navigation systems and telecommunications.”

According to him, limiting the share of Russian legal entities in the authorised capital of Ukrainian companies “guarantee information security of the country and close the flow of financial resources, which are displayed in the form of dividends to Russian beneficiaries.

Indeed.  With Russia having clearly, if unofficially, declared war by other means not only against Ukraine, but also the western world, why would it limit it to tanks and artillery, little green men, or energy politics?  Why would any sphere or interaction be off-limits?  Dependency, subterfuge, and/or influence is just that, regardless upon how it is achieved.

But where does this leave the bidders for the Ukrainian 3G tenders?

MTS Ukraine is a 100% owned subsidiary of MTS Russia.  Thus it is clearly ruled out should the goal posts be changed.  Indeed MTS Ukraine had a run in with the Ukrainian regulator in April 2014, when an unannounced inspection displayed cases of illegal data protection leaks, allegedly to the Russian security services amongst others.  Hardly a surprise to many.  The outcome was MTS kept its license, but was ordered not safeguard its data more carefully.

Kyivstar operates under the umbrella of an international holding company called Vimpelcom.  Vimpelcom has a shareholder with 47.9% of votes (indeed the largest shareholder) called Altimo.  Altimo is part of the Russian Alpha Group.  Perhaps a little more tricky and difficult to justify – or not?

This leaves Astelit.  This bidder is owned 55% by Turcell, Turkey’s largest mobile operator, and 45% by SCM, Rinat Akhmetov’s financial/industrial group.

The issues of Russia related security threats has not changed since the first 3G tender related entry here in November 2014.  The setting of parameters that relate to Russian percentage of ownership/control could have been set when tenders were invited – rather than now.  Should Mr Gerashchenko’s proposals fall upon sympathetic ears within the NSDC and/or the RADA, thus changing the tender goal posts now, (and the law), how will this be viewed by the international corporate investors?

Is there a need to change the law or tender parameters anyway?  Winners and losers are not decided upon by the value of bids alone – regardless of their necessary technical abilities to deliver.  If there are legitimate or justifiable reasons to prefer one bidder over another, then if those reasons are transparently communicated, that is the end of the matter.  What of “preferred bidders” or “The management retains the right to refuse”?

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(That said, Monsanto is set to announce $200 million investments in grain storage and lifters very shortly within Ukraine.  A long way behind Chinese investments in similar infrastructure, industrial parks, fertilizer plants etc., which is now approaching $10 billion since 2011.)

The announcements due on 23rd February will send a signal – but what that signal will be, and how it will be received, remains unclear.

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