EVOLUTION OF TARIFFS IN

HUNGARY.
Dr. Ivan Schmideg
Communication Authority, Hungary
schmideg@hif.hu

Warsaw, June 9-10, 1999

I. Schmideg 1 Warsaw, June 9-10, 1999

 Historical background
Economic difficulties of the centrally planned
economy
 substantial decline in the rate of growth,
 declining investment,
 increasing (albeit moderate) inflation,
 poor productivity in the use of resources,
 deterioration in the standard of living,
 rapid increase in external borrowing during
the first half of the decade,
 neglected infrastructure,
 COCOM export licensing regulation in force.
I. Schmideg 2 Warsaw, June 9-10, 1999
 STARTING POINT 1988
Hungary
 8,1main lines / 100 inhabitants,
 5,0 main lines / 100 inhabitants in province,
 9% of the main lines connected to manual
switches,
 no mobile service,
 13,17 years of calculated waiting time,
 artificially low tariffs, cross-financing
EU
 40,5 main lines / 100 inhabitants
 4,0 mobile subscribers / 1000 inhabitants

I. Schmideg 3 Warsaw, June 9-10, 1999

SHAPING NEW MARKET STRUCTURE
Separation of
 operational
and regulatory functions (1989)
 Postal, telecommunications services and
broadcasting (1990)
Act on Telecommunications (1992)
• concession-bound services :
– public telephone service (PSTN),
– public mobile radiotelephone services,
– nation-wide public paging services,
– national and regional distribution and broadcasting of
public radio and television programs
• not concession-bound public service  license,
• other services  registration
• interconnection contract within 3 months
providing local telephone service, within 6
months for other purposes.
I. Schmideg 4 Warsaw, June 9-10, 1999
 LEGAL BACKGROUND OF A NEW
MARKET STRUCTURE
Structure Plan of the PSTN (1994)
 telephone
traffic (fixed or mobile) between
any of the 54 primary areas should go
through MATÁV back-bone network
Tariffs Regulation of Public Telephone
Services (1994)
 Public voice telephony: Ex ante set by
ministerial decrees based on the proposal
of service providers
• Price-cap = PPI (high inflation: PPI<RPI)
• Revenue sharing instead of interconnection fee.

I. Schmideg 5 Warsaw, June 9-10, 1999

 TELEPHONE CONCESSIONS (1994)
Public telephone concessions for 25 years,
with exclusivity for 8 years to,
 MATÁV in 36 primary areas (including the
capital) for local telephone services,
international and nation-wide long
distance telephone services
exclusivity till 2001. December 31.
 LTOs, in 18 primary areas local telephone
services exclusivity till 2002. November 1.
Concession to two GSM mobile operators for
15 years, with exclusivity for 8 years
I. Schmideg 6 Warsaw, June 9-10, 1999
 LESSONS LEARNED FROM THE
NEW MARKET STRUCTURE
Rapid evolution of the telecommunications
infrastructure and services.
Sensitivity of geographical monopolies to
population of areas.
Updated price and tariff structure necessary.
Tariff re-balancing needed.

I. Schmideg 7 Warsaw, June 9-10, 1999

 LESSONS LEARNED FROM THE
NEW MARKET STRUCTURE
Rapid evolution of the telecommunications
infrastructure and services.
Sensitivity of geographical monopolies to
population of areas.
Updated price and tariff structure necessary.
Tariff re-balancing needed.

I. Schmideg 8 Warsaw, June 9-10, 1999

 HUNGARIAN TELECOMMUNICATIONS
SERVICES 1990 1998
Number of connected main lines (000): 996 3 358
Number of registered requests (000): 657 80,3
Teledensity (%) 9,6 33,1
in Budapest 22,8 48,8
in the Province 6,4 29,6
Distribution of lines (%)
-residential 70,8 85,9
-business 26,6 12,8
-payphone 2,6 1,3
No. of residential lines per 100 households 18,3 71
Automation, local (%) 93,5 100
Digitization (%) 5,3 81,5
Manpower efficiency (main lines / empl.) 46 217
No. of mobile subscribers (000) 2 1059
No. of telex subscribers (000) 14 1,07
No. of internet host computers (000) 0 100
Population (million) 10,4 10,1
GDP/ capita (USD) 3000 4500
I. Schmideg 9 Warsaw, June 9-10, 1999
 Main Line Penetration in Selected
60
European Countries
EU
Greece, Portugal, Spain
52.0
Czech-rep 50.5
Hungary 48.6
50 47.6
Poland 46.4
45.0
43.5
42.0 42.1
40.4
38.6
40 42.2
41.0
40.0
DEL / 100 population

38.6
37.5
36.0 32.0
34.1
33.5
30 32.1 27.3
30.0 30.4
27.6 23.6
25.9 26.2
21.2
19.2
20 17.7
16.6 21.1
15.1 15.8
13.9 14.5 14.6 18.9
12.6 17.3 16.9
10.9 14.8
9.6
8.2 8.8 13.1
10 7.7
11.5
10.3
8.6 9.3
7.8 8.2
7.4

0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
I. Schmideg 10 Warsaw, June 9-10, 1999
 Mobile Penetration in Selected
European Countries
14
EU 13.90

Greece, Portugal, Spain

12 Czech Rep. 11.41

Hungary
10.20
Poland
Mobile subscribers / 1000 population

10

8.91

7.05 6.93

6
5.69
5.36

4.63
4 3.69

2.65
2.27
2.26
1.52 1.26 2.61
2
1.15
0.85
0.64
0.40
0.14 0.24

0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
I. Schmideg 11 Warsaw, June 9-10, 1999
 LESSONS LEARNED FROM THE
NEW MARKET STRUCTURE
Rapid evolution of the telecommunications
infrastructure and services.
Sensitivity of geographical monopolies to
population of areas.
Updated price and tariff structure necessary.
Tariff re-balancing needed.

I. Schmideg 12 Warsaw, June 9-10, 1999

 POPULATION IN THE PRIMARY
AREAS
35 33

30
Number of primary areas

25

20

15
12

10
6
5
2
1
0
50-150 150-250 250-350 350-450 450-
Population in the primary area (1000)
I. Schmideg 13 Warsaw, June 9-10, 1999
 LESSONS LEARNED FROM THE
NEW MARKET STRUCTURE
Rapid evolution of the telecommunications
infrastructure and services.
Sensitivity of geographical monopolies to
population of areas.
Updated price and tariff structure necessary.
Tariff re-balancing needed.

I. Schmideg 14 Warsaw, June 9-10, 1999

 LESSONS LEARNED FROM THE
NEW MARKET STRUCTURE
Interconnection charges
• For the LTOs revenue sharing (the ratio of the
revenue from local services and the revenue
from long distance after revenue sharing was
intended to be 2:1 ).
• For the GSM operators yearly a fixed (traffic
dependent and traffic independent) fee was
established.
Revenue share of the originating provider
in HUF/min (1996)
Fix  fix Fix  mobile
Peak 10.51 5.67
Daytime 7.72 5.67
Reduced 3.86 5.67
Night 1.95 5.67
I. Schmideg 15 Warsaw, June 9-10, 1999
 Revenue-share of Long-distance
Daytime Call
originating daytime
terminating daytime % of long distance
Fee 1/100 US$ interconnection daytime
20 fee 80%
long distance fee
originating %
18.65 terminating %
interconnection %

15 60%
51.4% 59.1%
50.4% 13.81
46.4%

10 40%
9.58 32.2%
29.2% 8.16
24.8% 30.4%
5.44 21.4%
24.8%
5 20%
19.4% 4.20
3.63
10.5%
1.45
0 0%
1996 1997 1998 1999

I. Schmideg 16 Warsaw, June 9-10, 1999

 Revenue-share of Fix to Mobile
Daytime Call
35

30

25
22.05 22.26
charges 1/100 US$

20

originating
15
terminating
interconnection
10 fix -> mobile fee

4.00 3.43
5

1.99 1.78
0
1996 1997 1998 1999

I. Schmideg 17 Warsaw, June 9-10, 1999

 LESSONS LEARNED FROM THE
NEW MARKET STRUCTURE
Rapid evolution of the telecommunications
infrastructure and services.
Sensitivity of geographical monopolies to
population of areas.
Updated price and tariff structure necessary.
Tariff re-balancing needed.

I. Schmideg 18 Warsaw, June 9-10, 1999

TARIFF RE-BALANCING (1995 - 1996)
Tariffs Regulation of Public Telephone
Services (1994 and 1995)
Overall price cap = PPI
 Tariff re-balancing (1995):
• Basket I (subscription fee) = PPI * (1 + 5,1%)
• Basket II (local calls) = PPI * (1 + 7,3%)
• Basket III (long distance) = PPI * (1 - 4,8%)
• Basket IV (international ) = PPI * (1 - 4,8%)
 Tariff re-balancing (1996):
• Basket I (subscription fee) = PPI * (1 + 5,8%)
• Basket II (local calls) = PPI * (1 + 8,3%)
• Basket III (long distance) = PPI * (1 - 6,7%)
• Basket IV (international ) = PPI * (1 - 6,7%)
I. Schmideg 19 Warsaw, June 9-10, 1999
TARIFF RE-BALANCING (1997 - 1998)
Tariffs Regulation of Public Telephone
Services (1996 and 1997)
Overall price cap = PPI
 Tariff re-balancing (1997):
• Basket I (subscription fee) = PPI * (1 + 6,2%)
• Basket II (local calls) = PPI * (1 + 8,6%)
• Basket III (long distance+ international calls)
= PPI * (1 - 4,9%)
Overall price cap = RPI-2% for MATÁV
 Tariff re-balancing (1998):
• Basket I (subscription fee) = +5,0%
• Basket II (local calls) = + 5,7%
• Basket III (long dist. + int’l) = - 9,6%
I. Schmideg 20 Warsaw, June 9-10, 1999
TARIFF RE-BALANCING (1999 - 2000)
Tariffs Regulation of Public Telephone
Services (1998)
Overall price cap = RPI-2% for MATÁV
 Tariff re-balancing (1999-2000):
• Basket I (subscription fee) = +10,0%
• Basket II (local calls) = + 6,4%
• Basket III (long dist. + int’l) = - 8,0%

I. Schmideg 21 Warsaw, June 9-10, 1999

 Telephone Charges in Hungary
94-99 (ITU basket)
200
177 1/5installation_residential
180
1/5installation_business

160 12xsubscription_residential
12xsubscription_business 144
140 1000xlocalcall_3'

120
US$

100 88 88

80 71
81

60 66
59
40

38
20 27

0
1994 1995 1996 1997 1998 1999
I. Schmideg 22 Warsaw, June 9-10, 1999
Residential telephone charges 94-99
(ITU basket US$)
350

1000xLocal call
300
12xSubscription
1/5xConnection 145
250

200
77
146
US$

150 88 81 106 108

105

153
100 116
38 46
48 56
52 66
50
59 54 42 36 30
29 27 24
0
Hungary94

Hungary95

Hungary96

Hungary97

Hungary98

Hungary99

EU97

Greece, Portugal,
I. Schmideg 23 Spain 97 Warsaw, June 9-10, 1999
 MATTTERS TO BE SETTLED

Full liberalization of the market

 The liberalization of public voice telephony
is determined by the concession contracts
 The EU urges and sets the year 2001 as
preferable for the full liberalization.
 The costs of shortening the exclusivity
period of the concession-holders under
negotiations.

I. Schmideg 24 Warsaw, June 9-10, 1999

 MATTTERS TO BE SETTLED
Universal Service
 Lack of the definition
 The funding possibilities are still under
investigation.
Interconnection fee
 From the beginning of the next year cost
based interconnection fees to be
introduced.
Tariff re-balancing
 Further re-balancing needed
I. Schmideg 25 Warsaw, June 9-10, 1999
 MATTTERS TO BE SETTLED
“Affordable prices”
 Too low prices discourage investment and
providing up-to-date infrastructure and
services.
 Too high prices can split the country into
“information rich” and “information poor.”
• On all telecommunications services 25% VAT
imposed

I. Schmideg 26 Warsaw, June 9-10, 1999

 Residential telephone charges
(1997 OECD basket US$)
600

500 Usage charge

Fixed charge

400
428
342

USD 300
327 234

318
250
200
156
168

100 173
147 163
118
93 90
58 68

0
Czech R. Hungary Poland Greece Portugal Spain USA OECD
avg.

I. Schmideg 27 Warsaw, June 9-10, 1999

 Residential telephone charges
(1997 OECD basket PPP)
1000

900
Usage charge
800
Fixed charge

700

600
790
503
PPP 500
416
514
400 443 431
309
300

250
200
248 255
100 169 156 176 189
153
90
0
Czech R. Hungary Poland Greece Portugal Spain USA OECD
avg.

I. Schmideg 28 Warsaw, June 9-10, 1999

 Business telephone charges
(1997 OECD basket US$)
1400
Usage charge

Fixed charge
1200

1000

800
1241
US$
982 821
600
722
890 838

400
580 469

200
216 181
124 100 148 126
55 56
0
Czech R. Hungary Poland Greece Portugal Spain USA OECD
avg.

I. Schmideg 29 Warsaw, June 9-10, 1999

 Business telephone charges
(1997 OECD basket PPP)
2500
Usage charge

Fixed charge

2000

1500

PPP 2214

1000 1250 1444

1533 1492

1105 950
821
500

331
146 139 218 152 216 218
132
0
Czech R. Hungary Poland Greece Portugal Spain USA OECD
avg.

I. Schmideg 30 Warsaw, June 9-10, 1999

 Internet hosts vs. residential
telephone charges
(1997 OECD basket PPP)
Ln(internet hosts)
5.0
SUO

4.5

4.0

3.5

3.0
L
2.5
F H
2.0 -0.9384
CZ y = 766.88x
I R2 = 0.618
1.5
GR
1.0
PL
0.5

0.0
200 300 400 500 600 700 800 900 1000
Residential phone costs PPP

I. Schmideg 31 Warsaw, June 9-10, 1999

I. Schmideg 32 Warsaw, June 9-10, 1999