Telekomunikacja Polska SA History

Company Perspectives:

Telekomunikacja Polska Capital Group is no longer satisfied with its role of the market leader in Poland. Aiming much higher, we are interested in being ranked at least sixth in terms of Europe. What this means in practice is that we need to be comparable with other European telecoms in all aspects of our activity, particularly effectiveness, productivity and labour intensity.

Key Dates:

1991:

Telekomunikacja Polska (TPSA) incorporates and takes over the operation of the Polish telephone system; Polska Telefonia Komorkowa (PTK) is formed as a TPSA subsidiary to build and operate a cellular phone system; the subsidiary is a partnership among TPSA, Ameritech, and France Telecom.

1992:

Centertel, PTK's cellular brand, begins operations in Warsaw.

1993:

First contracts for upgrade of Polish telephone systems are awarded to foreign companies.

1996:

Digital cellular licenses are issued to Polska Telefonia Cyfrowa (PTC) and Polkomtel, and TPSA does not participate in the bidding process.

1998:

First 15 percent of TPSA is sold to individual investors.

1999:

Another 15 percent of TPSA is given to a TPSA employee stock ownership plan.

2000:

TPSA loses its monopoly of Poland's long-distance services; and France Telecom and Kulczyk Holding purchase 35 percent of TPSA.

2001:

France Telecom and Kulczyk Holding purchase an additional 12.5 percent of TPSA and an option to bring their ownership to a majority of shares; and TPSA announces restructuring, beginning with a 20 percent reduction of its workforce.

2002:

TPSA is scheduled to lose its monopoly on international services in December.

Company History:

Telekomunikacja Polska SA (TPSA) is Poland's leading telecommunications company. It is also Eastern Europe's largest. The company provides fixed-line and cellular telephone services, Internet and other data transmission services, and radio and television transmission services throughout Poland. TPSA is the successor of the Communist-era state-run telephone company. The state still has a 23 percent interest in the company.

Telecommunications in Immediate Post-Communist Poland: 1989

When Poland's first post-Communist government took office in 1989, the nation's telephone system was one of the least adequate in Eastern Europe. A report by the Polish Electrical Engineers Association labeled telephone availability "catastrophic." Estimates put the number of telephone lines per 100 people at seven, compared with 43 in Western Europe and 23 in East Germany. Only Bulgaria and Albania showed lesser rates of penetration.

This average, however, did not illustrate the full extent of the system's inadequacy. Almost 10,000 villages had no telephones at all; many others had only one telephone, usually in the mayor's home; about one of four homes in urban areas had phones, but only about one in 30 had phones in rural areas. About 2 million businesses and households were on waiting lists for phones, some for many years. Even the possession of a phone was no guarantee that its possessor could use it. The network was antiquated and poorly maintained. Consequently, it was difficult or impossible to complete calls.

A lack of money, the assignment of a low priority to the provision of communications services and an embargo by Western governments on the export of advanced technologies to the Communist bloc all contributed to the poor system the new Polish government inherited. At the beginning of the 1990s, the means to improve the telephone system appeared obvious: privatize it and encourage Western telecommunications companies to invest in it. To comply with this prescription was not, however, as easy as it might seem.

For most of the preceding 42 years, the government had owned, controlled, and administered almost every industry and business in Poland. Only a few small businesses had any experience with private ownership. Virtually nobody had relations of any kind with Western businesses. Moreover, the state enterprises, inefficient though they might be, provided employment for much of the population, and the Post, Telegraph and Telephone Ministry (PTT) was a major employer. Its privatization, therefore, raised both political and social questions.

Even more important, Poland had no system of laws and regulations establishing fair processes for the sale of state enterprises. It had no laws to govern the operations of businesses once they were in private hands. Its guarantees surrounding private ownership of property and assets were vague. It also lacked any of the economic infrastructure that modern capitalist enterprises depended on for their very existences. For example, Poland had no stock exchange; it had no accounting standards and nobody to apply them. The new government had to create all of this while simultaneously opening the nearly 7,000 state enterprises to private ownership.

Privatization: The First Steps during 1990-1995

It is no surprise, then, that the privatization of the telecommunications system was a lengthy process. In January 1990, the PTT called for proposals to operate two analog cellular phone systems in Poland. One license would allow its holder to construct and operate a wholly private system. The other would allow its holder to build a system in alliance with the PTT. By April, the PTT announced that more than 20 consortia, including many of the largest European and U.S. companies, had submitted bids.

In March, the government submitted a telecommunications reform law to Parliament. Reports stated that the Polish government was planning a sweeping de-monopolization and privatization of the system. Some believed that the PTT would be broken into a postal company, a long-distance telecommunications provider, and several regional providers. The reports also suggested that private and foreign companies would be allowed to compete with the state companies in each of these areas.

A hint that the award of the cellular licenses might not go as easily as many Western bidders had expected came in July when the PTT announced that it was postponing the selection of the winning consortia until September and requested extensive new information from the nine finalists.

In January 1991 the entire process began to unravel. The Polish Parliament, after a year's delay, passed the Telecommunications Law. The law as enacted differed from the one introduced by the government. Competition would be allowed only for local networks; the PTT would retain its monopoly over the more-profitable long-distance and international connections. This provision originated from a fear that if allowed to compete in those areas, private and especially foreign companies would neglect the local networks and focus their efforts only on the most remunerative portions of the system.

This law also created Telekomunikacja Polska when it split the PTT into TPSA to handle telecommunications and Pocza Polska to provide postal services. The company incorporated in 1991. Through the Ministry of Communications, the government maintained ownership of 100 percent of the new company's shares--a provision to which Western businesspeople objected. The Ministry was also charged with interpreting the law and with licensing private competitors. The potential for conflicts of interest were evident, and there were calls for a separate and independent regulator.

The new law required that all foreign investment in the system be through joint ventures with majority ownership by Polish partners. This restriction had been absent from the government's initial request for the cellular tenders. At first, the government announced that new conditions for the bids would be issued and that a final decision would be issued at the end of April. By the end of January, however, intensive lobbying by Ameritech, which did not participate in the first competition, and by the U.S. government on its behalf, persuaded the government to invalidate the first competition and open a new one. Many of the original competitors failed to submit new bids, and in June 1991 Ameritech and France Telecom each received 24.5 percent of the venture. This gave them a combined 49 percent of the venture, named "Polska Telefonia Komorkowa" (PTK). TPSA, which officially took responsibility for the system in December, would control 51 percent.

In a transaction that would create problems for PTK in later years, Ameritech and France Telecom made a "donation" to Poland's telecommunications system of $75 million above the license fee. In exchange, they received a letter of intent signed by the Communications Minister guaranteeing them the opportunity to build and operate a system based on the next generation of cellular technology when it became available in Poland. The technology was unavailable in 1991 because Western prohibitions on the import of advanced technology into Poland were still in force.

PTK launched Centertel, the brand assigned to the cellular system, in Warsaw in June 1992. It planned to extend the service to seven additional cities by the end of the year and to enroll 6,500 subscribers by the end of 1993. The consortium surpassed this goal, reaching 10,000 subscribers by October 1993.

The creation of Centertel was, however, a relatively minor event in the overall effort to improve Poland's telecommunications system. The cellular system had a maximum capacity of 125,000 subscribers, and cellular service was far too expensive for most Poles. The massive expansion Poland needed would require the installation of modern fiber-optic landlines. TPSA focused on this task.

Confronting both a lack of money and a dearth of contemporary technology, the government and TPSA reached out to foreign companies again, not to plan and operate the telecommunications system, but to supply and help finance it. As part of its broader privatization program, the government identified the dominant state manufacturers of switching and transmission equipment. It combined these into three enterprises and encouraged foreign telecom companies to submit competitive bids for them. Since these enterprises were not directly part of Poland's telecommunications system, their ownership was not subject to the requirement that they be 51 percent Polish-owned. They were subjected to a requirement that 50 percent of the content of their products be of Polish origin.

By 1993, three foreign companies had purchased the manufacturers. AT&T, with a commitment to spend $86 million modernizing the product line, took ownership of one enterprise. Alcatel of France paid $46 million and made a commitment to increase its investment for another. Siemens of Germany bought the largest of the three for $57 million.

The government guaranteed that these three entities would face no other competition to serve Poland's telecom needs, but it required that they compete among themselves for business. By late 1993, under contracts with TPSA, AT&T was installing networks in five cities and laying 1,500 kilometers of fiber-optic line worth $30 million; Alcatel was installing systems in two cities, and Siemens was installing DM 72 million worth of local and international switches in the region of Silesia.

The highly profitable TPSA provided about one-third of the financing. The rest of the money came from a combination of credits arranged by the three suppliers, the World Bank, the European Investment Bank, and the European Bank for Reconstruction and Development.

While TPSA moved forward with its construction plans, the Ministry of Communications issued about 50 licenses to private companies allowing them to compete in local markets. Most of these ventures floundered from lack of financing and obstructions from TPSA in such matters as arranging for connections to the national network. One effort did see some success. RP Telekom, a newly formed Polish company, joined US Sprint promising to invest up to $2 billion in the modernization of fiber-optic networks in eight cities. They began with a $120 million investment to build 120,000 lines in Pila and Katowice.

The export restrictions applying to advanced technology imposed on Eastern Europe during the Cold War were progressively weakened after 1991 and were eliminated in 1994. In 1995, the Polish Parliament authorized the issuance of two licenses to construct GSM digital cellular networks in the country. Ameritech and France Telecom, part owners with TPSA of Centertel, believed that the letter of intent issued to them in 1991 guaranteed Centertel one of the licenses. But the law authorizing the licenses immediately called that belief into question. The Parliament specified that there would be a public bid process for both licenses, and a government spokesperson stated that Centertel would not be given favored treatment. This seeming change in purpose resulted from four factors. Poland had begun to nurture ambitions to join the European Union and wanted to apply EU standards of transparency and competition to the award process. There had been intense lobbying in opposition to Centertel by the Polish business community, which objected to the high prices and low quality of its services. Reports in Polish newspapers that the U.S. ambassador had intervened to press Ameritech's right to receive a license without competing for it further raised the political temperature. TPSA also expressed its displeasure with what it saw as a lack of influence in the operations of Centertel.

TPSA resolved this question by announcing that Centertel would not bid for the new licenses. Since France Telecom and Ameritech were contractually obligated to undertake any development of a digital system only in cooperation with TPSA, this decision effectively eliminated both companies from the competition.

By the January 3, 1996 deadline, three consortia, all of which met the requirement for more than 50 percent Polish participation, had submitted bids. Polska Telefonia Cyfrowa (PTC) included U.S. West and DeTeMobil, the cellular subsidiary of Germany's Deutsche Telekom which each held a 22.5 percent share; and on the Polish side were Elektrim with a 32.5 percent ownership stake; and a variety of groups, including entrepreneur Jan Kulczyk, with 5 percent or smaller stakes. Polkomtel was formed by AirTouch Communications and Tele Denmark, each with a 19.25 percent ownership; by a Polish oil refinery and a Polish copper-mining company, each of which held 19.25 percent of the consortium as well; and by a group of Polish partners who held the remaining 23 percent. C-Line was formed by STET of Italy and Ciech SA of Poland. In February 1996, PTC and Polkomtel won the licenses, agreeing to pay EUR 520 million over five years. By October, PTC had initiated service in five cities, while Polkomtel had begun service in Warsaw.

Both Ameritech and France Telecom initiated legal proceedings, in Poland and later in international fora, to try to enforce what they believed was a contract guaranteeing them a GSM license. When these initiatives failed, Ameritech withdrew from PTK/Centertel, selling its interest to TPSA and France Telecom. Both minority partners dropped their legal challenges.

Privatization and the Initiation of Competition: 1995-2002

Despite many expectations that TPSA itself, rather than only PTK/Centertel, would undergo significant privatization in the early 1990s, the company remained 100 percent in state hands in 1995, and there had been little movement toward privatization and de-monopolization until then. By 1995, however, discussion of some kind of sale of shares began. Two options for such a sale surfaced. Some argued that a substantial share of the company ought to be sold to a foreign "strategic investor," which could provide the company with increased technical expertise and easier access to capital. Others, including TPSA's managers who did not wish to lose control of the enterprise, advocated a sale of stock through the Warsaw and foreign exchanges, to individual investors.

The government announced a commitment to both approaches early in 1996. It would first sell a portion, perhaps 15 percent, to individual investors to test both the government and individual investors and to help establish free market share prices. Several months later, it would sell a larger share, but not one that would exceed 50 percent, to a strategic investor or to institutions generally. It would, however, maintain TPSA's monopoly on international connections until 2001.

After lengthy discussion and some delay, TPSA sold 15 percent of its shares to Polish and international investors in November of 1998. The government received about US$1 billion in exchange. In 1999, TPSA gave another 15 percent of the company to an employee stock ownership plan. It also announced that it would sell shares to a strategic partner in two stages: 25 to 35 percent would be sold almost immediately; later another portion would be sold, perhaps bringing private ownership above 50 percent. In April 1999, Parliament amended the Telecommunications Act to allow the government to reduce its interest in TPSA below 51 percent.

More difficult was the sale of a 25 to 35 percent interest to a strategic partner. The government expected to receive bids from a number of international telecommunications companies. At the August 30, 1999 deadline, though, only France Telecom and SBC Communications had tendered bids. Reports stated that SBC had bid only about US$1.8 billion while France Telecom bid about US$3 billion. In November, amid reports that it had made only a token effort, SBC withdrew from the competition. As the sole bidder, France Telecom was unwilling to meet the government's price expectations. The government therefore canceled the tender at the end of the year.

The government initiated a new competition in January 2000. By that time an international telecom rally raised TPSA's stock price and generated more interest in the company. The government stated that it received four bids and identified the makers of three of them: France Telecom; Telecom Italia, and Spain's Telefonica. France Telecom and Telecom Italia were short-listed. France Telecom, in partnership with Kulczyk Holding SA, won the competition, paying US$4.33 billion for 35 percent of TPSA.

The final phase came in September 2001, when the France Telecom/Kulczyk Holding partnership bought another 12.5 percent of TPSA for EUR 988.4 million. With this purchase, the partnership also received an option to purchase an additional 2.5 percent plus one share before the end of 2002. If this offer is exercised, France Telecom and Kulczyk Holding will control 50 percent plus one share of the company. The state would then maintain about a 20 percent share of TPSA.

With TPSA's privatization behind it, the company lost little time in initiating a major restructuring to increase its efficiency. In December 2001, the company took a first step announcing a 20 percent reduction of its workforce.

By the end of 2001, TPSA had made major strides in improving Poland's telecommunications infrastructure. There had been about 3 million telephone lines in the nation, or about seven per 100 persons in 1989. In 2001, there were about 10.5 million fixed-lines, or 30 per 100 persons. TPSA, with about 30 percent of the market, also served about 3.2 million cellular customers.

The future was not without challenges, however. In 2000, TPSA lost its monopoly on long-distance services, and at the end of 2002, it would lose its monopoly on international connections. Moreover, the revised Telecommunications Act that took effect on January 1, 2001, established legal barriers to the entrance of new competitors to the market and for the expansion of existing ones. Even though Centertel had purchased a digital concession in 1998, both PTC and Polkomtel still had more customers and were aggressively targeting Centertel's profitable business customers. There were even indications that the Ministry of Communications was encouraging TPSA's stronger competitors to combine in order effectively compete with it for the long-distance market.

The international financial environment was harsh for telecommunications companies that had accumulated massive debts at the dawn of the 21st century. Although TPSA denied that it had such problems in 2002, this environment could only add to the above challenges.

Principal Subsidiaries:Incenti SA (51%); OTO Lublin Sp zoo (100%); Otwarty Rynek Elektroniczny SA (100%); Pracownicze Towarzystwo Emeytaine Telekomunikacji Polsidej SA (100%); PTK Centertel Sp zoo (66%); TP Ditel SA (100%); TP Emitel Sp zoo (100%); TP Internet Sp zoo (100%); TP Invest Sp zoo (99.99%); TP MED Sp zoo (100%); TPSA Finance BV (100%); TP SIRCOM Szkolenia i Rekreacja Sp zoo (100%); TP Teltech Sp zoo (100%); TP Wypoezynek Poludnie Sp zoo (100%); TPSA Finance BV (100%).

Principal Competitors:Polska Telefonia Cyfrowa; Polkomtel; Netia; Telefonia Lokaina; NOM.

Further Reading:

• Adonis, Andrew, et al., "The West Rings the Changes in Eastern Europe," Financial Times (London), October 1, 1993, p. 21.
• "Ameritech Reportedly Has Sold Polish Cellular Interest," Washington Telecom Newswire, December 18, 1996.
• Barnes, Hilary and Reuters, "France Telecom Sues Poland for $500m," Financial Times (London), January 4, 1996, p. 18.
• Bashford, Ray, "Survey of Poland," Financial Times (London), June 17, 1993, p. IX.
• Bobinski, Christopher, "Poland Poised to Re-open Tenders for Telecom Deals," Financial Times (London), September 28, 1993, International Company News, p. 20.
• ------, "Poland Postpones Decision on $150m Telecom Contract," Financial Times (London), January 23, 1991, p. I6.
• ------, "State Operator Mobilises for Phones Battle," Financial Times (London), October 30, 1996, p. 4.
• ------, "Survey of Poland," Financial Times (London), March 18, 1994, p. IV.
• ------, "Western Partners Stranded by Polish Mobile Phone Move," Financial Times (London), October 2,1995, p. 26.
• ------, "World Telecommunications 29; So Much Ground to Make Up-Poland," Financial Times (London), October 1, 1993, p. XXIX.
• Bobinski, Christopher, and Anthony Robinson, "Poland Awards GSM Mobile Phone Licences," Financial Times (London), February 2, 1996, p. 21.
• Dixon, Hugo, "International Telecommunications 5; Liberal Market in the Offing," Financial Times (London), April 19, 1990, p. V.
• ------, "Poland to End Telecom Monopoly," Financial Times (London), April 6, 1990, p. I3.
• "France Telecom, Ameritech Proceeds with Arbitration in Poland," Mobile Phone News, January 8, 1996.
• "France Telecom to Raise Stake in Polish Operator TPSA," Tech Europe, February 2, 2001, p. 303.
• "France Telecom Unit TPSA Plans to Cut 12,500 Jobs in 2002," Tech Europe, December 13, 2001, p. 307.
• "GSM Row: Ameritech Goes to Arbitration," Finance East Europe, October 20, 1995.
• Jeffrey, Peter, "World Watch," Wall Street Journal, November 1, 1999, p. A41.
• "Legal Action Launched," Communications Daily, August 26, 1996, p. 4.
• Leighton, Oonagh, and Guy Norton, "At TPSA's Beck and Call," Central European, September, 1999, pp. 34-36.
• "News: France Telecom/Ameritech Wins in Poland," Mobile Communications, June 20, 1991.
• Pate, Kelly, "Ameritech Fights for Right to New Polish GSM Cellular Network," RCR Radio Communications Report, January 1, 1996, p. 16.
• ------, "Polkomtel Begins Polish GSM Service on Its Competitor's Heels," RCR Radio Communications Report, October 7, 1996, p. 40.
• ------, "Three Groups Compete to Operate Poland's GSM Digital System," RCR Radio Communications Report, January 8, 1996, p. 18.
• Pawlicki, Machiej, "Polish Telephone Industry Opened for Foreigners," January 28, 1991, p. 3.
• "Poland's Ambitious 2000 Programme," Privatisation International, October, 1999.
• "Poland Could Launch More Telecom Sales," Tech Europe, November 18, 1999.
• "Poland Defers Cellular Decision," Mobile Communications, August 2, 1990.
• "Poland Launches Controversial Contest for Two GSM Licences," Mobil Communications, June 15, 1995.
• "Poland Looks Abroad to Remedy Its 'Catastrophic' Telecoms," Telecom Markets, December 14, 1989.
• "Poland Poised to Award Cellular Telephone Licences," Mobile Communications, April 26, 1990.
• "Poland's Cellular Winners to Be Announced," East European Markets, May 31, 1991.
• "Polish Cellular Licence Contest Could Be Re-opened," Mobile Communications, January 31, 1991.
• "Polish Cellular Telephone Network Launches in Warsaw," Mobile Communications, June 18, 1992.
• "Polish Government Prepares for Sale of Polish Telecom," Newsbytes, January 8, 1996.
• "PTT to Be Split," Finance East Europe, December 18, 1991.
• Reed, John, "Companies and Finance Europe: TPSA Prepares for Competition," Financial Times (London), May 14, 2002.
• Robinson, Anthony, "New Company Breaks into Polish Telecoms," Financial Times (London), September 1, 1993, p. 6.
• Schares, Gail E., et al., "The East Bloc's $100 Billion Phone Bill," Business Week, November 20, 1989, p. 139.
• Smosarski, Grog, "Poland Seeks Finance for Ambitious Expansion of Telecommunications," Central European, June 1994, pp. 33+.
• "Sorry, Reformer, the Line is Dead," The Economist (US), July 21, 1990, p. 52.
• "Sprint and RP Telekom to Build and Operate Local Telecommunication Network in Poland," PR Newswire, January 18, 1994.
• "Telekomunikacja Polska Announces That the Polish Parliament Has Adopted Two New Amendments," PR Newswire, April 26, 1999, p. 3,071.
• "TPSA Doesn't Want Strategic Investor," Finance East Europe, November 8, 1996.
• "US Telecoms Company in JV," Finance East Europe, January 21, 1994.
• Williamson, Elizabeth, "French Buy into Polish State Firm," Wall Street Journal, July 25, 2000, p. A14.
• ------, "Poland to Name Bidder for Stake in Telecom Firm," Wall Street Journal, May 22, 2000, p. C11E.

Source: International Directory of Company Histories, Vol. 50. St. James Press, 2003.