Business
Posted: 1 month ago

Revaz Kopaladze: Suspending Authorization of Caucasus Online May Leave 3 mln Plus Customers without Access to Safe Internet Services from Europe

Interview initially published on Ipress.ge

On June 25, the Georgian National Communication Commission (GNCC) will once again discuss the issue related to Caucasus Online (CO).

Whether or not GNCC suspends authorization to CO for the administrative violation that occurred in October 2019 will most likely be decided at the stated hearing. After October 2019, CO submitted to GNCC complete information on this matter and requested an investigation into the issue, however, it seems these efforts were not sufficient for GNCC.

Caucasus Online is the largest wholesale internet provider in the region, with its infrastructure directly connected to European-based internet (data) exchange centers, located in Frankfurt and Sofia.  In addition to being responsible for two-thirds of the overall internet service distribution in Georgia, CO provides European internet to significant parts of the Armenian and Azerbaijani retail market. The Black Sea fiber-optic cable owned by CO is an asset ensuring the uninterrupted connectivity of the countries in the region to Europe.

What will the future of Georgia's primary wholesale internet provider be, and will Georgia end up losing its only available access to European internet?

We contacted the CEO of Caucasus Online, Revaz Kopaladze, to clarify the issue.

Why did CO fail to notify the regulatory authority about the sale of its shares?

First, I would like to touch upon the issue that the shareholders in CO have not changed for several years. They are the same: Nelgado and ION. Naturally, any changes in ownership of these entities could not have been automatically known to CO. We could not have given the regulator information which we did not have.

Only the ultimate beneficial owner of one of the founder companies was changed. The companies holding shares in CO are based overseas, so the transfer of shares was effectuated in a foreign jurisdiction. 

As an example, we would have been required to submit prior notice to GNCC only in case of a change of the ownership interest of ION or Nelgado in CO. However, GNCC has a different opinion on this, and we are trying to defend our position in the Georgian court.

Even assuming that CO did have an obligation to submit prior notice to the regulator, though we believe the opposite is true, we would still be unable to comply with such obligation simply because the management of the CO does not have access to information concerning the business of its shareholders. CO cannot control how its beneficial owners dispose of their shares. We can only rely on the free will of the beneficial owners to keep us informed and updated about intentions to alienate shares owned by them.

On August 5, 2019, GNCC officially requested from all authorized persons updated information about the ultimate beneficiaries. Upon receipt of the request, we promptly asked for the corresponding data from the founding companies. That is when we learned that the ultimate beneficial owner of the CO was changed and that a businessman of Azerbaijani nationality, Mr. Nasib Hasanov, had become one of the ultimate beneficiaries. We submitted this information with all the requested documents to GNCC. GNCC then commenced administrative proceedings on sanctioning CO based on this information.  

What might the consequences be of GNCC's decision to suspend authorization to Caucasus Online?

Until 2007, Georgia had no access to high-speed and secure European internet. The whole region lacked such an opportunity up until the moment when CO completed the construction of a submarine fiber-optic cable in the Black Sea. The other choice at that time was Russian or Turkish internet, and nowadays these remain the other available alternatives. Keeping that in mind, suspension of authorization to CO translates into ceasing its business activities, which will, in turn, significantly impact the competitive environment on the market, and, most importantly, will limit the country’s direct access to European internet. This will directly affect the quality of internet services in Georgia.

What are the intentions of the new shareholder and the overall business goals Caucasus Online is trying to accomplish?

The progress and sustainability of our business wholly depend on geographic expansion and the capacity to deliver a larger volume of services. The strategic geographical location allows CO to expand its market presence geographically towards both the Middle East and East Asia. Establishing partnership ties with international players is an essential prerequisite for us to increase the sale of wholesale internet services and to explore foreign markets. A new strategic partner, who became the beneficial owner of CO, envisages the provision of internet service to China through the Caspian Sea and Kazakhstan via our infrastructure, which is another step forward for Georgia to be part of the global economic system. Full utilization of the potential of CO will result in an increase in its income and the amount of taxes payable to the state budget, which will, in turn, have a positive impact on the economic development of the country.

The above business plan envisages investment of hundreds of millions of dollars in infrastructure, which requires a substantial amount of resources, and alone, CO, without the assistance of a partner, will not be able to handle it. Taking the above statements into consideration, I, as the Chief Executive, believe that without foreign investment and a reliable partner, not only CO but the country itself will not be able to fully explore the potential of the unique assets at its disposal.

Do you think the decision to be rendered by GNCC will be proportionate?

Let me begin with an overview of the dispute and goals of GNCC: the primary purpose and objective of the activities of the regulator are to prevent monopolies on the telecommunications market in Georgia, promote competition, and safeguard the interests of the end-users by ensuring access to a wide range of services and providers. All actions of the Commission should be in line with and serve the fulfillment of these goals and objectives.

Possible suspension of authorization to CO is against all the principles and goals of GNCC. Even more so, since the regulator has not conducted any investigation or market study to determine the impact of the transaction on the respective segment of the telecoms market in Georgia.

Further, suspension of authorization can only be justified by a failure to eliminate a breach of such an obligation that substantially harms or prevents competition, and the latter cannot be assessed without conducting a market analysis.

Now to get back to the proportionality issue: The use of suspension of authorization as a sanction by GNCC cannot be considered as a proportionate measure. Customers of CO are significant telecommunications operators and internet service providers in Georgia and the regions, too, that provide retail internet services to local end-users. If CO ends up having its authorization suspended, this will cause irreparable damage to CO, and the stated will not satisfy any standard of proportionality since, in such a scenario, more than 3 million mobile and fixed network customers will be left without access to internet services.

You mention GNCC’s disproportionate decision, yet, according to the law, you had an obligation to inform them in advance concerning the transaction. Is GNCC's decision in this particular section then not proportionate?

As I have already mentioned, CO believes that the obligation to obtain preliminary approval as interpreted by the regulator is controversial, and the Georgian court has not yet delivered its final judgment on this issue.

Despite the above, assuming that CO had an obligation to submit prior notice as GNCC requires, the decision of the regulator still does not meet the standard of proportionality. For the failure to fulfill notification obligation, GNCC is requesting reinstatement of the status quo which existed before the change of beneficial ownership. GNCC is considering suspending authorization to CO for failure to fulfill the reversal obligation. Yet, the reality is that CO is unable to enforce the decision since it lacks the legal capacity to do so. Instead of requesting reinstatement of the status quo, GNCC could have and still can require submission of an application to obtain permission for the sale of the beneficial ownership, and commence a study and analysis of the actual impact of the transaction on the telecoms market in Georgia. Not only is GNCC reluctant to start such an investigation on its own, but it has also rejected the respective request from us.

The proportionality of the anticipated decision on the suspension of authorization is questionable because suspending approval to CO will negatively affect the Georgian telecommunications market by losing quality, reliability, and high-profile suppliers of internet services and by forcing a significant competitor to leave the market. While we do not have any mechanism to mitigate such irreversible damages, GNCC does have an opportunity to adopt less detrimental decisions.

It certainly was and still is within our interest to cooperate with the regulator to solve the dispute. For this very reason, CO itself took the initiative and asked GNCC to commence a study and analysis of the actual impact of the change of the beneficial owner on the telecoms market in Georgia. We were and are still ready to submit to GNCC any additional information and documents that they consider necessary. However, as I have mentioned, the Commission has dismissed our request and keeps insisting on the reinstatement of the status quo which existed before the change of the beneficial owner. That is why we question the proportionality of GNCC's decision. Which do you think is more proportional and reasonable: the regulator studying the impact of the change of the beneficial owner of CO on the telecoms market in Georgia and approving the transaction, if there is no negative impact on the competition, or suspending authorization that inevitably negatively affects the telecommunications market?

Additionally, foreign direct investment is not just an option for the development of the country, but rather a chance for survival. If we look at the statistics, it is evident that Azerbaijan is a country responsible for 26% of the foreign direct investment in Georgia, while investments from the member states of the EU equal 41%, and only 5% is Russian.