PTK, the Kosovan pubblic telephone company, has seen its proceeds and earnings collapse. Andrea Capussela, ex-director of the economics unit of ICO explains the controversial Dardafon operation to Obc. Eulex is now investigating, but the problem of lack of responsibility remains.
I will try to look at PTK – Kosovo’s state-owned post and telecom company – from the perspective of its owners, the citizens of Kosovo.
The press reported that the chairman and the managing director of PTK and some representatives of its private partner Dardafon are accused by EULEX of several crimes linked to one central fact: the deal by which PTK and Dardafon jointly created Z-Mobile (the so-called Dardafon deal) damages PTK.
I will first explain why it was always obvious that the Dardafon deal damages PTK.
Dardafon, a counterproductive agreement
When IPKO – Kosovo’s second mobile phone operator, now controlled by Slovenia Telecom – was created, it started competing aggressively against Vala (PTK’s mobile phone business) to gain customers. This was right and good for customers. To defend itself, PTK decided to find a private partner with good marketing experience, form a new company with this partner, and give part of Vala’s frequencies and mobile phone lines to the new company. The idea was that the new company, thanks to its marketing skills, would attract those customers who were ready to change their Vala SIM card with an IPKO one: if some or most of these customers could instead be persuaded to take the new company's SIM card , PTK would have continued – through the new company – to benefit from their phone calls. It was right for PTK to defend itself, and this seems a plausible way of doing it.
So, PTK looked for a private partner, chose Dardafon, negotiated for some time and agreed to create a new company which would focus on those customers who might go to IPKO. They decided that PTK would own 75% of the new company, and the private partner 25%. This was right, as such a deal would only make sense under the condition that PTK owned the large majority of the new company.
This is necessary for three very simple reasons.
Firstly, when a new company is founded, the founders become owners of the new company in proportion to how much they contribute to its capital. For example, if Mr. A contributes 7,000 Euros to the newly-founded company and Mr. B contributes 3,000 Euros, then A will receive a 70% ownership of the company (let’s call it A&B) and B a 30% ownership.
In our case, in essence, PTK contributed to the new company some of its mobile phone frequencies and lines, whereas the private partner contributed its marketing skills. Clearly, PTK’s contribution is much more valuable, because its frequencies and lines are worth a lot of money: they are in fact the only ones – aside from those of IPKO – that exist in Kosovo, and without them, the new company cannot issue any SIM cards. On the other hand, the world of business if full of people with marketing skills, so PTK had many possible private partners to choose from. Thus, PTK had the right to request much more than a 50% share of the new company.
Secondly, owners of companies receive profits in proportion to how much they own of the company. In my example, if in 2011 the A&B company will generate 1,000 Euros of profits, 700 Euros will be paid to A and 300 to B.
In our case, PTK wanted this deal in order to catch those customers who were ready to leave Vala and move to IPKO, so that it could continue making profits from their calls. So, the deal would makes sense only if PTK were to receive a large percentage of the profits generated by the calls of those customers. But those profits will be made by the new company, which will catch those customers before they move to IPKO. Then, the new company would have to disburse its profits to its owners – which are PTK and its private partner – in proportion to their ownership. So, to benefit from the deal, PTK had to request much more than 50% of the new company.
Thirdly, owners influence the decisions of their companies in proportion to how much they own of the company. In my example, if the A&B company must decide whether or not to buy a new office, and A and B disagree about this, they will vote. The vote of A will have a weight of 70%, and the vote of B% will have a weight of 30%; so, in fact, A will decide (for this reason, it is usually said that A ‘controls’ the company). In our case, PTK needs to have control over the new company primarily in order to avoid the risk that the new company could start attacking Vala, rather than IPKO, by using Vala’s own frequencies (a risk which is well known in this business and even has a name: ‘cannibalisation’).
This is where things stood in mid 2008, when the management and the board of PTK changed (and probably also some of the owners of its private partner, Dardafon, changed). The new people reviewed the plan and found a new agreement: only 27% of the new company (later called Z-Mobile) would be owned by PTK, and the remaining 73% by Dardafon. The opposite of the original idea.
In this form, the deal was unfair, useless and potentially very damaging for PTK: it risked becoming a powerful pump absorbing every day part of PTK’s profits and delivering them to private hands. This, alas, is what seems to have actually happened. And this risk was as clear then as it is now. PTK should have refused the new deal: better to either find a new partner (there are many) or face IPKO’s competition alone.
It is very strange that the new management accepted this very damaging deal, and that the government publicly defended it.
As it is clear that the Dardafon deal was a macroscopic and very damaging mistake, the main question in the EULEX case is whether the mistake was due to gross negligence or to deliberate intent: the answer to this will determine if the accused go to jail.
This question is very important, but I would leave it to the judges, the prosecutors and the accused, and wish them good luck. While they wait for the judgment, citizens should rather focus on how the damage suffered by PTK can be remedied, because this damage can be counted in millions of Euros.
Before discussing this point I must add some more information.
PTK, disasterous management
In the last three years, PTK has been managed very badly, and not only because of the Dardafon deal. The first full year during which PTK operated under the present management was 2009 (the financial statements of 2010 are not yet publicly available, because PTK is slow in producing them). The results of 2009 were terrible, especially if compared to 2007, which was the last full year under the previous management: revenue (money paid by customers) declined by 21%; costs increased by 23%; and profits (EBITDA) declined by an astonishing 47% (the difference is 54 million Euros). IPKO’s aggressive competition can explain part of the drop in revenue, but not the fact that profits went down twice as much as revenue: this is due to the fact that PTK has become, in only two years, vastly more inefficient. In other words, lots of the money that customers pay to PTK doesn’t come out of it as profits (payable to the budget) because it gets lost inside the company: this has nothing to do with competition from IPKO, and proves that in these last three years PTK has been badly mismanaged (or plundered, if there was deliberate intent). Thus, PTK has lost tens of millions of Euros and a large part of its value.
This, frankly, is not entirely surprising: neither the managing director of PTK (a telecommunication scientist) nor the chairman of its board (an engineer expert in car parts), nor most of the other members of that board, have the skills and the experience that are necessary to manage a large and complex company.
Kosovo’s citizens own PTK through their government. It is the government which chooses, and supervise, the members of the board of PTK; and it is this board, in turn, which chooses and should then supervise the managing director of PTK.
Based on these facts, today Kosovo’s citizens can reach two firm conclusions.
Firstly, the macroscopic mistake made on the Dardafon deal, and the terrible results of PTK, prove beyond any doubt that its management and its board have caused very serious damage (millions) to the company. And there is no need to wait for the EULEX judgment to reach this conclusion, because we already know beyond any doubt that PTK was damaged because they did their job in an extremely negligent way: this, by law, makes them fully responsible for this damage. The EULEX judgment will only tell us if, in addition to negligence, there was deliberate intent to damage PTK.
Secondly, the government (as an institution) is politically responsible for this damage: it chose the wrong people for the board of PTK, didn’t monitor what they did and even defended the Dardafon deal.
From these conclusions, today Kosovo’s citizens can draw three consequences.
Firstly, the government must – because it has a duty to act in the interest of the citizens – without any delay, dismiss the whole board of PTK and appoint a better one, composed of independent and professional persons.
Secondly, the new board must without delay dismiss the managing director of PTK and appoint a more professional one.
Thirdly, the government must take the board members of PTK and its managing director to court to ask them to reimburse the damage they caused to the company. The millions of Euros that have been lost belonged to the citizens. Therefore, as much as possible of this money must be returned to them, by paying it into the budget (it could, for instance, be used to build much-needed schools; plaques could be placed on them stating ‘School built with the money recovered from those who damaged PTK’).
There is no possible excuse for the government not to take these actions. I can already hear the objection that they will damage the privatisation of PTK, but this argument is wrong: every interested investor knows that PTK is badly mismanaged and is losing millions; the sooner this management goes away, the sooner PTK will start to improve, and it will fetch a better price upon its privatisation.
If the government doesn’t take these actions, the citizens will have to draw a fourth conclusion: not only did the government choose the wrong people to manage PTK and defend their worst mistake, but it also prefers to be friendly and forgiving to them rather than to protect citizens' interest in stopping losing millions of Euros and recovering some of them.
I hope that citizens will remember this the next time they have a chance to vote.
Responsibility, responsibility, responsibility...
This, of course, is not the whole story. The Dardafon deal is such an obvious mistake that it may well have been the result of corruption, even though the EULEX prosecutors don’t seem to believe so. And it is very possible that many bad decisions taken by PTK were the result of influence coming from circles close to the government. Still, the chairman, the board and the managing director of PTK remain fully responsible for what they did, and should be punished by being sacked and forced to reimburse the damage they caused to the citizens. This may seem harsh, but is absolutely necessary: their colleagues in other POEs or public offices must start to think that if they do bad things, on their own or because someone tells them, they risk a punishment. The sooner this risk enters into their calculations, the sooner things will improve: in my view, Kosovo needs accountability, accountability, accountability.
So, the future of PTK and the possibility of protecting the interests of Kosovo’s citizens lies largely in their own hands and in those of their representatives in the Assembly: they know enough to hold their government to account and press it to do what it has to.
Thankfully, it is not in the hands of the two EULEX prosecutors who follow this case, who took more than two years to understand the simple facts I just described, or of the judges, who will only tell us whether PTK was managed by criminals or by people who simply had no idea of what they were doing.
Thankfully, it doesn’t depend on ICO, which thinks that everything is fine with POEs (look at item 110 of the ‘Matrix’ published on ICO’s website) because it decided that whatever happens in Kosovo is fine for them as long as it doesn’t make too much noise.
And, to conclude, a similar analysis, and a similar reaction, is probably possible for many other POEs. The time has come to expect those who manage public money to do it in the public interest.