Controversy and charges of corruption are overshadowing the privatisation of Deutsche Telekom AG, slated for 1996, and the prospects for a privatised Telekom appear less than rosy, according to a recent report by Deutsche Bank. As part of the privatisation process, since January 1, Deutsche Bundespost has been divided into three joint stock companies: Deutsche Telekom AG, Deutsche Post AG, and Deutsche Postbank AG. However this has been swamped by a furore on the appointment of Gerhard Pfefferman, a senior government official to head Deutsche Telekom’s supervisory board. Pfefferman also happens to be and will remain a key figure in the Postal Ministry, distributing licences and setting fees. Postal Minister Wolfgang Boetsch has denied a conflict of interest as licences are granted according to strict rules and the ultimate decision rests with him. Moreover, as the current owners of Telekom, the Post and Finance ministries believe they must have a representative on the supervisory board. But this assurance and Boetsch’s commitment to deregulation have failed to persuade people that there is nothing wrong with the presence of a government official in a pivotal post in the company’s management.

Large-scale fraud

In December, Telekom’s chairman, Helmut Ricke, resigned unexpectedly and this has been linked to the appointment of five government officials to the 10-man supervisory board. Ricke cited purely personal reasons for his departure, but acknowledged his preference for an independent regulatory body to oversee the whole telecommunications industry, similar to the Federal Communications Commission in the US. Instead, a political supervisory body, aided by the Federal Institution for Post & Telecommunication, in which Pfefferman is also expected to figure, threatens to impinge on the management of Deutsche Telekom. Regulatory issues will be decided by Post Ministry and approved by a Regulatory Council, comprising political representatives from each state government and the Bundestag. However, Ricke believes the pressure for competition and the dismantling of monopolies by 1998 will ultimately force a more transparent regulatory system and help to divorce industry and politics. Deutsche Telekom has also been beset with charges of large-scale fraud, linked to organised crime. As few Telekom customers receive itemised bills, fraud has been difficult to detect, easy to perpetrate and Telekom has been able to demand payment but without having any proof. Telekom suggested to customers that complained of outrageous bills that they had been using phone sex lines and turned a deaf ear to customers with itemised bills that recorded foreign numbers being dialled repeatedly, when the customer was away. After denying any involvement of Telekom employees, it was forced into investigating the claims when two employees were arrested in Braunschweig and confessed to manipulating Telekom’s phone lines for personal gain.

By David Johnson

These investigations have encouraged more customers to come forward and politicians are demanding that itemised phone bills become standard. Although, Telekom admits it is theoretically possible to abuse the network, it still denies any proof that outside interference has boosted individual customers’ phone bills, despite hackers’ claims that illegal use runs into billions of marks. A common phone fraud involves phone sex services based in the Netherlands Antilles or Bahamas. Automated dialling devices attached to the phone lines of individuals or companies dial up the services, wait for a connection, then hang up and redial, generating revenue for the foreign company. And Telekom does admit that complaints of high bills have doubled since long-distance phone sex services were legalised three years ago. To add to Telekom’s list of woes, Deutsche Bank expects that after privatisation Deutsche Telekom will lose market share at around 2.5% a year to competitors such as Viag AG, Veba AG and Mannesmann AG, dropping to around 73% by the year 2001, hampered by some of the hi

ghest operating costs in Europe. As a whole, the report expects the German telecommunications market to expand faster than the rest of Europe, 7% in value to the year 2000. On deregulation, the report expects a defection by business customers to cheaper alternative networks, followed by a grace period as potential defectors evaluate the new networks. In particular, the report highlighted the consortium made up of energy group Veba AG and the Deutsche Bahn AG state railway as well-positioned for the voice telephone market with a national network of fibre-optic cable. And cellular telephone operator Mannesmann AG in a joint venture with utility RWE AG and Deutsche Bank is cited as a major challenger for corporate network services, a market valued at $12,900m a year in Germany. Overall, the largest growth area is expected to be mobile telephony, according to the report. Three providers are currently vying for market share and Thyssen and Veba’s E-Plus are set to join Telekom and Mannesmann in digital networks by the end of 1996. By the year 2000, the report estimated that the number of mobile connections will 9.7m, rising from 2.9m at the moment, equating to 12% penetration, compared with 3% now. This growth will be aided by the liberalisation of leased lines, which represent 40% of mobile operators’ current costs. On Deutsche Telekom’s side is its long-standing relationships with big customers, its proven service reliability, technical superiority, particularly its digital ISDN network and full network integration. But these strengths could be offset by the cost of Telekom’s bloated workforce, of which around 62% are public servants who cannot be made redundant, and the new competitors’ comparative leaness. The report also warned that divesting Telekom of its cable television network would seriously damage the company, and is therefore likely to be opposed by the German government.

Huge sums

This comes in the face of legislation proposed by the European Commission to separate cable television networks from telephone monopolies to encourage competition and calls by German companies, including Mannesmann, to level the playing field. Deutsche Bank opposes the move as it would necessitate the investment of huge sums by Telekom to upgrade its telephone network and run fibre optic cable to each household for its planned multimedia services, which is at the heart of its plans to stem its cable losses, estimated at $1,000m a year. At the end of 1993, Telekom’s cable network accounted for more 63% of all German households and 38% subscribed to its services. However the network suffers from a lack of security, with around 700,000 homes illegally connected, equating to $120m of lost revenue a year. Some see the company’s state as so weak that privatisation may have to be postponed – but things will not look any better two or three later.