The Hungarian Government is reviewing its telecommunications regulations and plans to amend them during 2003. Hungary began to privatise and liberalise its telecommunications sector in 1988. Initially, the question was how to privatise without disrupting the market and, later, to liberalise the market and introduce competition. Now, the Hungarian regulatory regime is being re-examined to determine how to modify current rules to comply with EU requirements, taking into account the specific needs of its telecommunications market - particularly to strengthen competition.
In 1988 Hungary perceived the need to develop its telecommunications infrastructure and bring it up to Western European standards. To do this it needed to get funds both from private investors - this through the partial privatisation of the state-owned incumbent operator, and international institutions such as the World Bank. The key elements of Hungary's telecommunications policy in 1988, then, were the privatisation of the state owned infrastructure and the separation of the operational and regulatory functions by the creation of the Telecommunications and Postal Inspectorates. In 1991 the first steps towards privatisation were taken and MATÁV was transformed into a "joint stock" company. During the next few years international telecommunications groups obtained a controlling share of the company and the company was listed on both local and New York stock exchanges. The Hungarian Government kept a "golden share" in the company, which allows it to veto decisions which they feel are not, strategically, in the country's best interests; the government also has one-for-one membership on the executive and supervisory boards. The liberalisation of the Hungarian telecommunications market had its roots in the Telecommunications Act of 1992. This act established a framework for the granting of concessions by the Government for public telephony, wireless telephony, paging and broadcasting. In addition, the Act established licenses for certain public services, such as ISDN, data, leased lines, Internet, and permitted companies to render other services by simply registering with the Government. Concessions were granted, including to the incumbent, for 25 years and the initial concession holder's were granted 8 years of exclusivity in the long distance and international markets. Telephone service was divided into 54 areas and Matáv was granted exclusivity in 29 of these. The other areas were tendered. The last of the exclusive market rights expired in 2002. Beginning in 1999, the government's policy was aimed at fostering the liberalisation of the telecommunications market. Essentially, the government sought to comply with the provisions of the agreements with the World Trade Organisation that called for the freeing of Hungary's telecommunications markets by 2002. The policy also was designed to comply by 2003 with the European Union's aquis communautaire provisions for the telecommunications market, to align the country's policy with the Europe initiative and otherwise update, as needed, Hungary's legislative framework for telecommunications. Throughout this process of modernization, privatisation, liberalisation, introduction of competition and harmonization with the WTO and the EU the policy has been structured to avoid market shock; Hungary's telecommunications legislation, public policy and regulations all reflect this concern to greater or lesser degree. Hungary's new Communications Act (Act XL of 2001) came into force on December 23, 2001. The act introduced a new regulatory structure with the aim of liberalizing the Hungarian telecommunications market, and established various new institutions. However, less than a year after it took effect, industry players have already begun complaining that there are problems with the new regulatory scheme and institutions, and that competition has been slow to develop. The Ministry of Informatics and Communications, thus, recently announced that the Communications Act would be reviewed and amended in 2003. The review will focus on the institutional rules, the Internet, universal services, cost accounting and price regulations, carrier selection and local loop unbundling, and the harmonization with EU rules. The EU harmonization process is rather complex and raises a series of issues that need to be considered. The new EU regulatory framework In March 2002, the European Parliament and the Council adopted four directives that set out the new framework for electronic communications networks and services: · Directive 2002/19/EC of the European Parliament and of the Council of 7 March 2002 on access to, and interconnection of, electronic communications networks and associated facilities; · Directive 2002/20/EC of the European Parliament and of the Council of 7 March 2002 on the authorisation of electronic communications networks and services; · Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services; · Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users' rights relating to electronic communications networks and services. These directives were subsequently followed by two more directives adopted in July and September: · Directive 2002/58/EC of the European Parliament and of the Council of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic communications sector; · Commission Directive 2002/77/EC of 16 September 2002 on competition in the markets for electronic networks and services. The new regulatory regime must be adopted by the member states by July 2003 or, in the case of the directive on privacy and electronic communications, by October 2003. The directives take into account convergence of technologies in the field of communications services and now cover all electronic communications networks and services, excluding content provision and audiovisual services. The new regulatory package aims to simplify the authorization rules and conditions for the provision of electronic communications services. The new regulatory framework builds on the achievements of the liberalization of the telecommunications market in 1998. The concept of significant market power (SMP) now follows the general competition law concept of dominance. Operators having significant market power are still identified by the national regulatory authorities, but now they have to follow the EU Commission's guidelines. The Hungarian telecommunications market and regulation The Hungarian telecommunications market is different from that of most EU member states. In Hungary, as a consequence of the old concession regime and unlike in most EU member states, there is not only one incumbent monopoly telecommunications operator but also rather one large one (Matáv) and a few smaller ones (e.g. Vivendi, Hungarotel). However, the current Communications Act follows the old EU rules on significant market power and market definition, which were introduced to liberalize markets with one monopoly operator. This adoption of the EU rules resulted in almost all operators having significant market power and thus advantages intended to be provided to the smaller operators are not realized. The Communication Act entrusts the Communication Authority with tasks such as identification of SMP operators, approval of reference interconnection and unbundling offers. However, the authority's powers are not clearly defined in the Communications Act, and it lacks the necessary staff and financial support to fulfil its functions effectively. For example, the authority has difficulty verifying the accuracy of the financial data supplied by the SMP operators, on which their cost models are based. In addition, even though SMP operators must provide separate financial reports for their wholesale and retail business lines, they often fall short of providing the required information because the applicable requirements are not defined adequately in the Communications Act. As a result, the current Communications Act failed to introduce real and effective competition in the Hungarian telecommunications market. Harmonization of the new EU regulatory framework The preparatory work for the Communications Act took place from 2000 to mid-2001. Therefore, the act cannot and does not take account the new EU regulatory package adopted in 2002. Under the Europe Agreement concluded between Hungary, on the one hand, and the EC and its member states, on the other hand, Hungary must harmonize its laws with those of the EU. This, in practice, means that by the date of Hungary's accession, which is now set for May 1, 2004, Hungarian law must fully be compatible with EU law, including the new regulatory framework for electronic communications networks and services. The new EU regulatory framework builds on the achievements of more than five years of a liberalized telecommunications market, while the liberalization of Hungary's telecommunications market has just begun and no significant achievements seem yet to have been realized. As the Hungarian telecommunications market is not yet fully competitive, the preferential and asymmetric regulatory treatment of smaller or new market players may still be justifiable. Conclusion Therefore, when adopting the new EU rules, the Hungarian legislator must try to avoid simply copying the EU rules and adopt only those rules which, taking into account the difference between the level of competition in the EU and in Hungary, enhance competition. Finding the balance between complying with the harmonization requirements and taking into account the peculiarities of the Hungarian market may not be easy. However, it appears that the Commission may not pursue the complete adoption of the new rules by new EU entrants by the date of their accession. In our view, such delay in the adoption of the new regulatory regime would allow Hungary to introduce transitional measures that could increase competition in the Hungarian electronic communications market.