Ministry of Communication

Department of International Relations and Information

February 1995

The telecommunications industry has undergone dramatic changes in the last few years. In the past the main aim of the industry was to ensure a high degree of availability for the basic telephone service. In the future, the industry will be judged by its ability to provide integrated audio, video and data service, from anywhere to everywhere, either stationary or mobile, in an efficient and flexible manner, while maintaining high standards of service quality, reliability and availability.

The passage from a traditional telecommunications industry to a modern telecommunications industry was made possible largely due to certain advances in technology. Improvements in transmission, network and memory elements allowed a vast increase in capacity. The use of satellites and of fibre optic cables has greatly reduced the cost of long distance communications. Advances in computer technology have led to improvements in switching systems and network management.

To achieve the traditional goals of the telecommunications industry, a monopoly structure, generally under direct Government control, was considered optimal. Now that the goal of establishing a basic telephone service with a high degree of penetration has been largely achieved, the emphasis has moved to modernization. The development of a modern telecommunications industry necessitates certain structural changes. The Government should not be involved in the everyday management of telecommunications operations. Telecommunications operators should be allowed access to domestic and international markets of the means of production – technology, manpower and capital. There should be competition in those areas that do not constitute a natural monopoly. The creates volume of activity in the industry still functions typically under conditions of imperfect competition, and there should be a Governmental regulatory structure to minimize the damage that this might cause.

The rate of growth in the telecommunications industry is very high. According to recent estimates, by the end of the decade the telecommunications industry will account for some &% of Gross National Product in many western countries. Today the figure is already 4-5%.

In Israel, the rate of growth of internal telecommunications services is 8-10%, that of international services 13-16%, and that of mobile services much higher than that.

Any country that wants to assure itself of growth and of integration into the world economy must create conditions under which its telecommunications industry can flourish.

Israel is physically separated from the main centers of World Trade, and therefore its need for modern high quality and low cost telecommunications services is greater than that of many other countries. The prospects for peace in the Middle East mean we must redouble our efforts, so that we have a chance to become a regional telecommunication center.

This means that Israel must make a concentrated effort to be amongst the leading and most progressive countries in the world in terms of its telecommunications industry.

At the moment we are witnessing changes of historical proportions in the structure of the industry, exemplified by the changes included in the new Operating License for BEZEQ, by the significant increase in the degree of competition. At the same time, steps are being taken to bring about a major increase in the level of investment in infrastructure, to nationalize tariffs and to expand gradually the level of privatization.

The new Operating License for BEZEQ has been issued recently.

The winner of the tender for a second operator for mobile cellular services (Cellcom Israel) was announced on May 11, 1994. This second Cellular Telephone system will be operated parallel to and in competition with Bezeq-Motorola. In December ’94 the new system started to be operated. A similar tender for international services is to be published in the near future.

BEZEQ will remain the national telecommunications infrastructure operator, and because it is a natural monopoly, telecommunications infrastructure will remain in its exclusive responsibility.

All other services,that are not part of the infrastructure, will be opened up to competition, and BEZEQ will be able to compete. We have stipulated however the BEZEQ will have to set up subsidiary companies to compete in the various market sectors, so as to ensure that these activities are managed independently on strictly economic lines, and so as to prevent cross-subsidization between services.

BEZEQ, the parent company, will sell infrastructure services to all the competitors in each sector, including its own subsidiary companies, at the same prices and under the same terms and conditions. It is our opinion that because of the constant growth in demand for telecommunication services, the introduction of competition will not have a detrimental effect on the status of workers in the industry.

There has been some public debate recently on the question of privatizing BEZEQ. A major telecommunications company from the United States expressed an interest in acquiring a controlling interest in BEZEQ, during a period of general dissatisfaction with the slow implementation of the Government’s privatizing program.

The Ministry of Communications supports the principle of privatization, but is not in favor of a "closing down sale" of national assets. The central aim of Government economic policy is to have a competitive structure in each branch of the economy, and this is our strategy to encourage growth and reduce unemployment.

Competitive market structures lead to greater efficiency, lower prices, more investment, greater production and the creation of new jobs. Competitive structure increase Government revenues which create budgetary resources for investment in physical and human infrastructure.

The aim of creating competitive structures in all sectors of the economy is a necessary precondition for putting the Government’s privatization policy into practice, and without such a structure it is often preferable to delay privatization.

The telecommunications industry is today considered by economists all over the world as a "key industry" for the growth of a national economy,, and therefore infrastructure development and increased competition in this sector are considered critical for economic development.

The result of selling a controlling interest in BEZEQ, as it operates today, to an overseas investor, would be to perpetuate the present monopoly for a very long time.

BEZEQ’s own development plans show an awareness of the major economic and social problems facing the Government of Israel, particularly that of increased employment. BEZEQ has recently concluded agreements with major Israeli suppliers for long term purchases from local industry. Changes in the capital structure of BEZEQ will release more financial resources for the company’s development program, which is in tune with the Government’s priorities rather than those of a foreign investor.

The Ministry would like to see the privatization program for BEZEQ continue as it has started, by offering share capital on the local Stock Exchange. This is the way that privatization has been implemented in several Western countries. In any case, we must remember that the process involved is first a separation between Government and regulatory functions and the service operator, followed by liberalization of the market and the introduction of limited competition. Only then is it the time to proceed with privatization, through the existing local capital markets.

In this context it is interesting to look at BEZEQ’s own plans for the coming years.

BEZEQ is planning and preparing for the 21st century, with a continuation and expansion of the technological changes already discussed. In the light of the "Information Revolution" BEZEQ has developed a new overall strategy and five-year strategic plan.

BEZEQ is aware that changes in its Operating License and in the Telecommunications LAW will allow competition in certain sectors that were previously part of its monopoly. The company will also have a new tariff arrangement, a new financial structure, and will be looking ahead to more privatization.

The long-term aims of the company included ensuring BEZEQ’s status as the leading supplier of services to customers and other License Holders, the development and supply of new basic services, the achievement of a satisfactory rate of return on investment for its shareholders, and the maximization of profits of its subsidiary companies, operating in the competitive marketplace, while avoiding the problem of cross-subsidizing.

BEZEQ recognizes the importance of customer satisfaction, and will take steps to improve its standards of service, together with initiatives aimed at influencing customer behavior. BEZEQ plans to introduce new services including some of the most advanced computer communications services in the world.

In terms of its telecommunication infrastructure, BEZEQ plans to make significant advances in the next few years. It will complete its program of digitalization of all its exchanges, continue with the installation of fibre optic cables up to the customers premises and introduce active units and PON type networks. Automatic control systems will distribute network activity and increase efficiency. In addition, it will be possible to allocate transmission circuits, at all speeds, throughout the country.

In international services, BEZEQ will continue to move to digital satellite systems. A third international gateway exchange will be established, there will be more use of under-sea fibre optic cables, and there will be a 140 megabyte-per-second mutual recovery system between the CIOS and EMOS cables. More resources will be allocated to mobile services in accordance with the needs of the local market, and there will be technological upgrades to improve the quality of public broadcasting and reception.

Above all BEZEQ will strive to be dynamic, and to respond quickly to customer demands, and o support all the companies activities.

In its operational plans for 1994-96 BEZEQ emphasizes its preparations for the competitive market-place, particularly in the fields of mobile cellular communication, international services and terminal equipment.

In the field of international projects, the subsidiary "BEZEQ International Ventures" will start to operate within the next months.

BEZEQ plans to continue to develop and implement advanced services, value added services, information services for customers (VIDEOTEX) and leisure services (VOD).

At the same time, BEZEQ will deal with expected regular demand, with the aim of further reducing the supply time for basic services.

In terms of customer service, BEZEQ will continue to improve its relations with its customers by providing personalized quality services, by responding quickly, efficiently and courteously to customer requests and by making special efforts to meet the needs of major commercial customers.

BEZEQ plans to install over 200,000 new regular telephone lines and 10-15,000 new pay phones in each of the coming three years, as well as leased lines and packet switched services.