Politics vs. privatization

Telecom sector perpetually on hold

by Sami Halabi

Lebanon is now one of the most expensive places in the world to make a phone call (AFP)

Lebanon knows very little of the advances the telecommunications industry has experienced over the past decade in other Middle Eastern and North African countries. The sector is still wholly owned and controlled by the Lebanese government, meaning there is little industry to speak of.

Throughout 2009, the structure of the industry has hardly changed. Ogero, the government-owned fixed-line operator, remained under the management of the director general of Operations and Maintenance at the telecom ministry, the same body that oversees and issues contracts to Ogero — a setup in gross violation of corporate governance principles.

Profits from telecommunications operations remain a lucrative source of income for the government and the telecom ministry. According to the finance ministry’s 2009 budget proposal, revenues from telecommunications were expected to reach  $1.6 billion by the end of the year.

Another front that has seen little if any progress in 2009 is the implementation of Telecommunications Law 431, which calls for the creation of a joint stock company named Liban Telecom (LT). The company would inherit the different areas of Lebanon’s telecom infrastructure from the telecom ministry and merge them into a corporatized entity, paving the way for privatization of up to 40 percent of Lebanon’s telecom landscape within two years.

Kamal Shehadi, chairman of Lebanon’s Telecom Regulatory Authority (TRA), blames former Minister of Telecom Gebran Bassil (who is now Minister of Energy and Water) and the council of ministers (COM) for delaying the appointment of the board of LT that would, effectively, start the process of reform in the sector.

“This is the single most important reform that they…should have done in 2009,” says Shehadi. Without a corporatized body to regulate, the TRA must wrest control of the industry away from the telecom ministry and assert its authority as granted by stipulations in the telecom law. The trouble is, the telecom law itself is written in generalities, such as one, cited by many who support the minister’s authority over the TRA, stating that the minister has the power to establish the “general rules of Telecommunications Services in Lebanon, supervision of such application through reports submitted to him by the Authority [TRA].”

This caused quarrels over prerogatives in 2009, such as the licensing of data service providers and funding to allow the TRA to “create and manage” a national numbering plan, as stated by Law 431.

The law also states, however, that the TRA’s role is to “prepare the draft decrees and regulations” related to the implementation of the law, “and submit them to the minister and give an opinion on draft laws and decrees relevant to the telecommunications sector” — which would require the minister’s pre-approval before any action.
With these issues in the way, the TRA and the ministry have had to refer to the Shura council — Lebanon’s highest court — for a final verdict on who would be granted what authority. The council has yet to make a decision on many of the outstanding issues.

It has, however, passed a verdict on one related to prefixes of mobile telephone numbers, which relates to the quantity of mobile numbers allocated to each of the country’s two contracted operators, Alfa, owned by Orascom Telecom, and MTC, owned by Zain. The decision granted the TRA the legal mandate to dictate to the mobile operators that “71” prefixes would be granted to MTC and “72” prefixes to Alfa in tranches of 1 million numbers at a time, which would allow the TRA greater control over numbering, as opposed to the previous practice of giving out 100,000 at a time. The problem is that before the decision was taken, Alfa had already issued 200,000 numbers with the prefixes of “717” and “716” in accordance with the previous numbering rules set by the ministry.

The decision was made by the Shura council in July, but as Executive went to press, no action had yet been taken to roll back these numbers and Alfa is still “awaiting instructions,” according to its Chairman and Chief Executive Officer Samer Salameh. (No one from MTC was available to comment for this article.)

The numbering issue is just one of many that have made life difficult for Lebanon’s telecom players, who are eager to expand and grow the industry. Both Alfa and MTC need more numbers to distribute now that they have completed an “aggressive plan done on short notice” to increase their capacity, according to Wassim Mansour, country director at Nokia Siemens Networks. By the end of 2009, both operators had expanded their networks from 600,000 subscribers to more than one million each. Salameh says that his company is looking to reach 1.5 million by next year, as the new infrastructure allows them to increase capacity “almost like a software upload.”

The expansion is one part of new management contracts that were signed in February 2009 with Lebanon’s two mobile operators, after the previous government shelved plans to privatize the sector in 2008 on fears that the international financial crisis would sink the offering price of the sector if it were put up for tender.

“There was no decision so there was no alternative,” said Shehadi in April. “The management contacts and their renewal were the only option left. ” The management contracts, which do not allow the operators to set their own prices, are yearly one-time renewable contracts that accord Alfa $6.75 per subscriber and MTC $6.66 per subscriber. Hence, expanding the networks, whose capital expenditures were footed by the government at around “$100 million,” according to Salameh, became a key profit-making opportunity for the two mobile operators.

The problem is that a profitable model does not necessarily entail profits in the real world, at least not in this case.
“Based on that price [$6.75 per subscriber] our speculation was that we were going to lose a significant amount of money in the first year,” said Salameh. “The good news is we lost a bit of money, but far less than expected because we were able to acquire customers faster than we had hoped.”

Salameh stressed that Orascom does not usually pursue management contracts, but did so in Lebanon’s case in order to position itself for eventual privatization of the mobile telecom sector.

Along with the decision to expand the network, the government also enacted a new pricing structure that lowered prices for prepaid monthly subscriptions ($45 to $25), prepaid minute rates ($0.50 to $0.36), monthly subscription fees ($25 to $15) and postpaid minute rates ($0.13 to $0.11), facilitating higher market penetration.
The average expenditure per user dropped from $75 in August of 2008 to the current rate of $50, according to statements Bassil made as he handed over the telecom ministry in November to the new minister, Charbel Nahas. Bassil also stated that throughout his tenure, mobile penetration rates increased from 32 percent to 50 percent, though still significantly below the regional average.

MTC introduced Blackberry to the Lebanese market in February 2009, and Alfa is slated to do the same this December, according to Salameh. In order to encourage adoption, the government lowered prices on service fees (from $45 to $40 per month) and increased usage capacity per user from 20 megabytes to 100 megabytes for both mobile operators.

Fixed line follow-up
Now that the expansion of
mobile networks has been completed, the country’s fixed telecom operations seem ripe for expansion as well.
One project that has been approved by the COM is the $14 million pilot project to lay fiber optic cables in the Hamra and Ashrafieh districts of Beirut. The project will enable the residents of both areas to have faster Internet speeds and will be a litmus test for the implementation of broadband nationwide.

For this project to proceed, however, a long overdue tender would have to be issued by the Department of Operations and Maintenance at the telecom ministry and contracted to the incumbent operator, Ogero. Abdulmineim Youssef, who has close ties to the parliamentary majority, heads both of these entities and many in the parliamentary opposition have accused him of stalling progress at the level of the telecom ministry. Youssef did not respond to Executive’s requests for an interview.

“For the time being, there has been no tender or anything issued,” says Roger Ghorayeb, country
senior officer for Lebanon and Syria at Alcatel-Lucent, the global technology  firm responsible for the construction of much of Lebanon’s telecommunications infrastructure.

Privatize or politicize
Authentic competition in Lebanon’s telecommunications market is widely recognized as a necessary condition for the sector to advance, and both mobile operators, Alfa and MTC, have expressed interest in acquiring a stake in any eventual privatization of the industry. Political leaders in Lebanon, however, also own stakes in the same regional and global telecom companies to which the country’s telecommunications sector may be sold, which has prompted criticism as there may be a conflict of interest afoot.

For instance, Prime Minister Saad Hariri is the director and general manager of Saudi Oger, which he owns along with other members of his family. Saudi Oger holds a 41.9 percent stake in Oger Telecom, where it partners with the majority Saudi government-owned Saudi Telecom Company (STC) that owns a 35 percent stake in the company. Oger Telecom is already active in the Lebanese telecom market, where it is majority owner of the Lebanese Internet service provider Cyberia, along with Saudi Oger. Oger Telecom’s chairman is Mohamad Hariri, who is also the chairman and general manager of GroupMed, which owns Lebanon’s BankMed.

Another political figure, former prime minister Najib Mikati and his family, through their M1 Group, are the second largest corporate shareholders in the multinational Mobile Telephone Networks (MTN), which runs operations in Cyprus, Syria, Dubai, Yemen, Iran and several African countries.

In mid-November, Charbel Nahas, a former economist and consultant to the World Bank allied with the parliamentary opposition’s Free Patriotic Movement (FPM), took over the post of telecom minister from Gebran Bassil (FPM leader Michel Aoun’s son-in-law). As Executive went to print, Nahas was involved in drafting Lebanon’s ministerial policy statement and was not available for comment.

Nonetheless, the stage looks set for a bitter battle between those who advocate the speedy privatization of the industry against those who believe that the assets of the telecom industry should be increased before privatization in order to bolster the selling price of the industry.

Paris III advocates the privatization of the telecom sector, as do many within the parliamentary majority. Hezbollah — the lead opposition party which also happens to run its own telecommunications network separate from that of the state’s — has come out against privatization, stressing “the preservation of this national wealth through the sector’s development and improving its services” in its electoral platform prior to the June 2009 elections.

While the new minister had not explicitly stated his position on the matter of privatization as Executive went to print, he has hinted at adopting the latter position, stating that he will not allow the state’s monopoly to turn into a private monopoly, and said he will focus on increasing the assets of the industry.

Even if privatization is not adopted, liberalization and the creation of LT are all viable options for the COM to take. The Shura council will also need to make decisions regarding the dispute over prerogatives concerning licensing regulations. With a new government and a new minister in place, there is some optimism, if not momentum, for telecom sector reforms to finally begin.

“It’s obvious that change is coming and the government is serious,” says Sami al-Basheer al-Morshid, director of the Telecommunications Development Bureau at the International Telecommunications Union, which works with governments and the private sector to promote best practices in the market. However he cautions that expectations “should be realistic.”

“By the end of 2010 we will be asking different types of questions, that is for sure,” he says. It seems 2010 will be another year where the Lebanese will have to wait and see whether their new government takes the call from the telecom sector, or keeps it on hold.

First published in Executive Magazine’s December 2009 Lebanon issue