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 KAZAKHSTAN International Business Magazine №2, 2002
 Kazakhtelecom: National Communications Operator of the Republic of Kazakhstan
Kazakhtelecom: National Communications Operator of the Republic of Kazakhstan
Company’s background
After the state gained independence, the formation and development of the national telecommunications industry became one of the top priorities for Kazakhstan’s economic policy. The Kazakhtelecom National Joint Stock Company (Kazakhtelecom) was set up in 1994 when 36 regional telecommunications agencies of the Ministry of Communications of Kazakhstan merged under this name. As a result of re-registration with the Ministry of Justice, all the regional agencies and local post offices merged into one legal entity, and as of 20 February, 1997, Kazakhtelecom became an open joint stock company, On 29 April, 1999, the National Commission on Securities awarded it the status of a public joint stock company. Table 1.
In compliance with the governmental privatization program, on 18 January, 1997, Kazakhtelecom invited tenders for the purchase of 40% of its voting shares. Under the tender terms, the buyer had to assume obligations to develop the telephone network up to the year 2000 and guarantee the repayment of external debt amounting to US$250m. On 31 May, 1997, the tender winner Daewoo of South Korea redeemed 4,854,611 of Kazakhtelecom’s common shares from the Ministry of Finance, which made 40% of the total chartered capital stock and 44.4% of voting shares.
Affected by the crisis in Southeast Asia, on 26 January, 1998, Daewoo sold 946,649 of common shares to Central Asian Industrial Investments NV, affiliated with Kazkommertsbank of Almaty, Kazakhstan. Later on, Daewoo sold the rest of its shares. The shares were purchased by Central Asian Industrial Investments NV, as well as by portfolio investors who acquired the American Depositary Receipts (ADRs) issued by the Bank of New York.
In November 1999, a depositary institution, the Bank of New York, had Kazakhtelecom’s depositary receipts programmes Reg S (CUSIP No 48666D204 and ISIN No US 48666D2045) and Level-I (CUSIP No 48666D303 and ISIN No US 48666D3035) merged into the Level I single programme, which received new CUSIP No 48666D204 and ISIN No 48666D2045. The new symbol for Kazakhtelecom Level I programme depositary receipts was KZHXY.
On 14 April, 2000, an extraordinary meeting of the Company’s shareholders approved the terms specified in a package of documents (Stock Redemption Agreement, Shares Purchase and Premium Rates Agreement, Put Option Agreement, Cooperation Agreement) to be signed by the government of Kazakhstan and the European Bank for Reconstruction and Development (EBRD) regarding the EBRD sharing Kazakhtelecom’s chartered capital stock. Table 2.
National Operator Status
In 1996, in order to create an environment favourable for the development of the country’s communications, the Ministry of Transport and Communications (Mintranscom) issued an exclusive licence to Kazakhtelecom, entitling the latter to render a wide range of services, including long-distance and international communications services. The license is for 15 years, with the right to prolong the term automatically for the next 15 years. Mintranscom has no authority to change the licence period, issue any other licences infringing upon Kazakhtelecom’s rights, nor initiate amendments to legislation that are in conflict with the national operator’s rights and obligations.
Moreover, Kazakhtelecom has the right of the first rejection, ensuring the Company’s priority against other communications operators in being granted any new Mintranscom licences to render wireless communications services, which bestows an advantage while introducing new communications standards.
Kazakhtelecom is a natural monopolist, with all the Kazakhstani data transfer networks and communications centres being in its possession. The Company has been entered into the State Register of Natural Monopolies of the Republic of Kazakhstan. The national operator holds a dominant position in the telecommunications industry, with its 2001 market share of the long-distance and international communications services amounting to 90%.
One of the key development strategies of Kazakhtelecom is the introduction of a quality management system based on the main principles of ISO9000. By late 2003, the Company plans to have its services certified internationally.
Development of Kazakhtelecom’s Service Lines
In 2001, the Company installed over 191,000 basic telephone sets, with almost 57,400 of them being installed in rural areas. Thus, the net growth in the number of basic telephone sets over the accounting period was 40.7% against early 2001.
In the project for the introduction of universal digital public payphones, the year 2001 saw 1,066 of such payphones installed, thus exceeding 4,750 units.
At present, the total installed capacity of telephone exchanges reaches 2.4 million of telephone numbers, with the digitalization level standing at 34%.
In 2001, the density of telephone installation in the country averaged 13.1 telephone sets per 100 residents, whereas the 2000 figure was 12.3. In cities, the density of telephone installation grew from 18.7 to 19.4, while in rural areas the figure grew from 4.4 to 4.9 telephone sets per 100 residents. The further development of data transfer networks, and an increased demand for this kind of service, resulted in an increased holding time of Internet channels by 1.9 times over 2000. Table 3.
The Company’s Basic Financial Results
The year 2001 was a success both for the entirety of Kazakhstan and the Company on the whole. Though in 1998-1999 Kazakhtelecom’s income growth rate lagged behind GDP growth in real terms, the year 2000 saw the negative trends drastically reversed, and for the first time after 1997, the company received a net income of Te 2.3bn, confirmed by audit examinations.
The 2001 Kazakhtelecom’s net income after auditing amounted to Te 8.6bn (i.e. it grew by 18.9% against the previous year), while sales totaled Te 45.9bn. The profitability of sales, according to the 2001 results, reached 17.4%, which will ensure the Company’s further growth. A general decrease in Kazakhtelecom’s expenses by 14.1% in 2001, as well as reduced servicing cost rates from 60% to 6% (against 2000), contributed to the Company’s profits, which grew nearly three times. The year 2001 saw its assets grow approximately by Te 9bn. The result was due to the effective steps taken by the Company’s administration, including its implemented decentralization management policy while maintaining centralized control. Moreover, Kazakhtelecom has finalized the formation of its accounting policy, which has been fully brought in line with Kazakhstani accounting standards. In 2001, the fiscal accounting module was introduced in the SAP R3 computer-based system. Above all, the Company brought all the procedures of planning, management and control into line with the accounting system.
The Company’s increased profit was attributed both to the enhanced quality of its conventional services, and the expanded range of its new communications services. The new types of services added to profits notably, such as data transmission network services, the Kulan network services, and sales of smart cards. Both the well-thought-out and flexible policy and general economic growth within Kazakhstan impacted positively on the Company’s profitability.
Further measures aimed at achieving a higher assessment rating of Kazakhtelecom’s investment activities on the whole, and in regard to certain investment projects in particular, give grounds for expectations in terms of further improved financial figures of Kazakhtelecom’s performance. Table 4. Chart.
The Company’s Credit Rating
An international rating agency, Standard & Poor’s (S&P), assigned its ’BB’- long-term corporate credit rating in local and foreign currency to Kazakhtelecom. Almost at the same time, another international agency, Fitch, assigned its ’BB’ senior secured debt liabilities in local currency to Kazakhtelecom. Furthermore, this agency assigned its ’BB’- senior unsecured debt liabilities rating in local and foreign currency and its short-term ‘B’ rating to the Company.
These ratings of Kazakhtelecom are in one and the same group, but at a lower rank, with a sovereign rating of the Republic of Kazakhstan.
Both agencies assess the Company’s future rating prospects as stable.
The Company’s Investment Programs
By early 2001, Kazakhtelecom finalized the placement of a bonded loan (US$25m) at annual interest of 10%. By late 2001, the Company also completed the application of an EBRD loan to the amount of US$25m. The 2002 total investment of Kazakhtelecom in the industry development exceeded Te 11bn. In compliance with its general development strategy and upgrading program, in 2001 the Company successfully implemented the major tasks of digitalizing the communications network and constructing fibre-optic communications lines, while replacing analog exchanges with digital ones and carrying out the rehabilitation and development of rural telephone communications. For Kazakhtelecom, the chief event in 2001 was the completed construction and putting into operation of the western branch of the National Information Super Highway (NISH).
Nowadays, as part of further super highway construction, design and survey work is being finalized, and detailed drawings of its eastern branch (2,300 km long) are under development.
The year 2001 saw the continued construction of a transfer telecommunications network in the major cities of the country, based on fibre optic communications lines and up-to-date technologies of the SDH transfer systems. Last year the SDH city rings became operational in six regional centres. Thus, the digital transfer networks already available in 11 regional centres of Kazakhstan both enhanced the quality of interexchange communication and made it possible to transfer all kinds of information, including data transfer, video information and multimedia services.
The launched second International Switching Center (ISC) of 6,572 ports in Astana appeared to be a significant event in the integrated development and upgrade of Kazakhstan’s telecommunications network. Due to this project, it may be now stated that Kazakhstan does have an independent and sovereign national telecommunications network. Some time earlier, a similar international switching centre had become operational in Almaty. The two operating ISCs dramatically enhanced the quality of the long-distance and international communications services and optimized the structure of long-distance lines network of the country. Later on, Kazakhtelecom plans to put into operation the third similar centre in Aktobe.
One more noteworthy project of the national operator is the setting-up of the national satellite communications network, which is primarily aimed at solving the communications problems of the rural areas. Satellite communications will provide adequate quality for long-distance and international communications, while tariff rates for the services will be the same as for the ordinary automatic telephone exchanges.
Moreover, this will avoid the costly and laborious laying of cables between the remote regional centres and rural localities, as well as having to keep the cables in working order under inclement weather conditions. In 2001, 20 DAMA satellite communications sets were installed. Overall, 201 sets were installed during the 4-year project life, of which 188 sets were set up in rural areas.
In compliance with a decree by the government of Kazakhstan and the Communications Development Concept, Kazakhtelecom will be systematically introducing a system of phone call tariffs on a time basis in 12 of the country’s major cities. The estimated amount of investment intended for the upgrade and development of the telecommunications system in 2002 may approximately total Te 14.2bn. Of this, the Company will set aside Te 6.8bn (US$44m) to the implementation of a project on local and intrazone communications development. Table 5.
Kazakhtelecom’s Subsidiaries
Kazakhtelecom plays an active role in Kazakhstan’s cellular market by investing in the stock capital of cellular operators. In particular, it holds 49% in GSM Kazakhstan (?’??ll trademark) and 50% in Altel, an analog network operator and the first cellular company in Kazakhstan.
In 2001, for the first time in its history, GSM Kazakhstan, Kazakhtelecom’s subsidiary, had a positive balance. A leader in the market of cellular services in Kazakhstan, GSM Kazakhstan pursues an extensive development policy and plans to increase the number of its subscribers to 1,000,000 by 2005.
In addition, Kazakhtelecom is a shareholder of Ular-Umit, a thriving non-governmental pension fund, which ranks second among non-governmental pension funds in terms of its size.
The Kazakhtelecom PJSC participates on the Kazakhstani market of cellular communications by investing in the share capital of cellular service providers. Thus, for instance, the national operator’s participating interest in the GSM Kazakhstan Ltd (K’cell’s trade mark) makes 49%; a block of shares of the Altel Limited Joint Stock company (Altel LJSC) a similar provider of cellular services, amounts to 50%. The Altel LJSC is the first cellular services company in Kazakhstan.
Over the entire period of its existence, a subsidiary of the Kazakhtelecom PJSC, the GSM Kazakhstan Ltd, made its first profit in 2001. This company holds a leading position on the market of cellular service providers of the Republic of Kazakhstan; it is pursuing an extensive development policy, and plans to increase the number of network subscribers up to 1,000,000 by 2005.
Moreover, the Kazakhtelecom PJSC is a shareholder of the Ular Umit Private Pension Fund LJSC, which has developed most dynamically and currently ranks second among the private pension funds in the accumulation pension system.
Future Prospects
The geographical location of Kazakhstan is strategically advantageous and thus predestines its role as a natural provider of transit telephone services between Europe and the countries of the Asia-Pacific region. Currently, global cable services links between West Europe and the Far East connect 21 countries. However, routes via the territory of Kazakhstan would reduce the number of countries to only six and ensure the shortest way. Besides, current proceeds per 1 line and the cost per capita of communications services in Kazakhstan turn out to be lower than in other developing markets.
Kazakhstan’s economic growth potential is expected to lead to a dramatic increase in demand for communications services from the private sector and corporate clients.
Due to open pricing for new types of telecommunications services, a relatively favourable legislative framework, an adequately developed market of banking services, as well as the immense available crude oil reserves, foreign investors will continue to consider the Kazakhstani telecommunications market as the right place for investment.

Table of contents
Legal Framework Of Kazakhstan’s Telecommunications Sector  Thomas C. O’Brien, Victoria P. Simonova 
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