Dr. Charles Jonscher, founder and president of Central Europe Trust (CET), is involved in the telecommunications and new-technology sectors. In 2001, he led CET's team, which won a mandate from the Czech government to manage the auction for 3G licenses in the Czech Republic. The auction was completed late last year and is widely considered, both in the Czech Republic and worldwide, as having been very successful.

Since its foundation in 1990, CET has become the leading independent firm in its field in Central and Eastern Europe, acting as strategic adviser to over 30 Fortune 500 corporations and as co-manager of the largest bloc of private-equity capital in the region. CET has had an active presence in Russia for over 10 years. CET is particularly active in the telecommunications sector, advising Western and local companies, governments and banks.

Dr. Jonscher talked with Telecoms Special Report about the strategy for investments in telecommunications and the future of 3G in Russia.

Telecoms Russia: There is an opinion among Western analysts that wide usage of 3G in Europe may be expected no earlier than in 2005-06. What are the main obstacles (financing, equipment, government regulation, etc)?

Dr. Charles Jonscher: After an initial period of hugely over-enthusiastic forecasts of the prospects for 3G (which resulted in the absurdly high bids of up to several billion dollars per license in the U.K. and Germany), the move has now swung too far the other way, with observers and analysts being unnecessarily pessimistic. We will certainly not have to wait as long as 2005-06 for widespread deployment and use of 3G in Europe.

TR: What advantages or disadvantages are there in the different ways of providing 3G licenses: auction, contest, other forms?

CJ: At the height of the telecommunications bubble, the issue of auction versus "beauty contest" raised much excitement, debate and controversy because of the sums of money involved. Now that financial markets are putting a more realistic value on telecommunications assets, the issue of auction versus "beauty contest" is becoming rather academic. Realistically, UMTS is only economically attractive to an existing 2G operator, because for the first several years it must be regarded as an extension of an existing 2G network, not as a stand-alone business. This means that there will not be (certainly not in Russia) an excess of demand over supply for UMTS licenses. Therefore, whatever selection method is chosen, the result is likely to be the same: an allocation of licenses to existing operators for a negotiated sum which will either be labeled the "beauty-contest fee" or the "auction-price minimum-bid level."

TR: What are the most positive results of the Czech Republic auction completed in December 2001?

CJ: Contrary to analysts' expectations, the most positive result of the Czech Republic auctions is that serious bids ($100 million per license) were received. This was a vote of confidence for: 1) the telecommunications sector generally; 2) the 3G concept; and 3) the emerging markets of Central and Eastern Europe.

TR: Drawing from the example of WAP and GPRS services, they were promoted and advertised with sufficient funds; however, the demand is still very low. Do you think 3G services will be in demand in Russia?

CJ: 3G services will certainly be in demand in the most important Russian cities. The disappointment experienced with WAP and GPRS is not specific to Russia – it is a worldwide phenomenon resulting from the inadequacies of these two technologies and associated services.

TR: What specifics of Russia's mobile-telephone systems are needed to be taken into consideration while implementing 3G?

CJ: The most important characteristic of 3G from Russia's point of view is that it requires quite a high density of use to be economically viable. This means that it will initially only be deployed in major cities (probably initially just Moscow and St. Petersburg). It will be completely uneconomical for very many years in the bulk of Russia's territory.

TR: What financing will be needed for 3G-network development? What Russian companies, in your opinion, are able to develop successful projects, and what will be the way to attract investments?

CJ: The costs of deploying 3G in a major city are significant but not out of reach for major Russian telecommunications companies. Moscow could be effectively covered with 1,500 base stations at an approximate investment cost of very roughly $150 million. Provided the business case is found, any of the existing major Russian operators could raise such finance through the usual combination of bank facilities, new issue of stock on public markets, or issue of stock to private equity or to financial or strategic investors.