Playing to your strengths

Lebanon’s ICT industry could compete on a global scale … if only the pace of reform picked up

61.25 percent of Lebanon's population now possesses an internet connection

When you’re barreling back down towards Beirut on the Nahr al-Mot highway, staying in the right hand lane means a workout for your car’s shocks as you hit sewer cover after sewer cover. Smoothing out the ride means either driving in the left hand lane as faster motorists drive on your back bumper or zoom past you on the right, or making a ‘middle lane’: half left lane, half right lane or half right lane, half shoulder (where it exists). Once you’ve found a way to avoid the sewers, there are only the potholes and globs of dried cement that fell from leaking trucks to maneuver around. This, of course, is to say nothing of the hairpin turns. The highway suffers from both design problems and a lack of maintenance.

All complaints about dropped calls, slow speeds and high prices aside, the country’s ICT infrastructure is still its most advanced

Then again, the construction and maintenance of pristine roads is arguably not Lebanon’s strong suit. The same goes for the electricity and water networks and pretty much every other piece of physical infrastructure save for the air and sea ports. For information and communications technology (ICT), however, this was not always the case. With both mobile phone and internet infrastructure, Lebanon in the early to mid 1990s was a regional leader. And all the complaints about dropped calls, slow connection speeds and high prices aside, the country’s ICT infrastructure is still its most advanced — aside, as mentioned, from the two international transportation gateways, Beirut Port and Rafik Hariri International Airport.

Benchmarking

While there may have been doubters 30 years ago, it has become gospel truth to those who measure such things that investment in ICT infrastructure, as well as increasing mobile phone penetration and broadband internet access, are absolute necessities for a country keen on global competitiveness. In 2009, the World Bank took an econometric model it had developed based on “the experience of 120 countries between 1980 and 2006” and applied it to Lebanon. It found that “a 10 percentage point increase in broadband penetration in [the country] would result in a recurring point estimate of 1.38 percentage point increase in the growth rate of GDP per capita, equivalent to $400 million per year.” Additionally, the study says the “fiscal contribution resulting from this additional growth is estimated at a recurring $90 million per year.” According to the International Telecommunication Union’s most recent data for Lebanon (which comes from 2012), despite 61.25 percent of the population having an internet connection, there are only 451,000 broadband connections. There is clearly plenty of room for growth.

On the Networked Readiness Index, produced as part of the World Economic Forum’s Global Technology Report, Lebanon ranked 97 out of 148 in 2014, a three spot drop compared to 2013. In addition to ranks, the index assigns countries a value between 1 and 7, with Lebanon clocking in at 3.6, slightly better than its score of 3.5 in 2013. The index comprises 10 pillars, each subdivided into between three and nine indicators. On pillar three, infrastructure and digital content, Lebanon’s rank jumps to 77 of 148 with a value of 3.9, just shy of the upper middle income group average of 4. 

Of the five indicators used as part of pillar three, however, the country’s rank is dragged down by “accessibility of digital content,” for which it ranks 115 out of 148. The value for this particular indicator comes from the WEF’s Executive Opinion Survey as a result of the answer to the question: “In your country, how available is digital content via multiple platforms (e.g., fixed-line internet, wireless internet, mobile network, satellite)?”

On the other indicators for pillar three, Lebanon was much higher: electricity production measured by kilowatt hours per capita (59), mobile network coverage as a percentage of the population (56), international internet bandwidth based on kilobytes per second per user (71) and the number of secure internet servers in the country per million people (61). Perception bias of the executives surveyed could be dragging the country down on the infrastructure pillar as the other numbers, which point to actual physical equipment, suggest Lebanon should be above the upper middle income group average.

The Glory Days

Before the Civil War erupted in 1975, three subsea cables designed to carry telephone traffic connected Lebanon to France, Egypt and Cyprus,  and the country also hosted three earth links, beaming communications to satellites operated by Intelsat. The country had more than 400,000 fixed line telephone subscribers. Years of conflict severely damaged the cables and the earth links, as well as most of the country’s telephone infrastructure. That said, development of the sector did not come to a complete halt during the war. In 1982, Taha Mikati, whose brother Najib served as prime minister briefly in 2005 and then again from 2011 until 2014, began offering radio and satellite communications in Lebanon through Inteltec, which two years later became part of Investcom. Given the infrastructure damage and continuing hostilities, business was booming, and Investcom went on to set up Lebanon’s first mobile phone network. It was a 1G (first generation) analogue system that began operating in 1991. Three years later, the government was in full rebuilding mode and signed two build–operate–transfer (BOT) contracts to develop new, 2G mobile networks using the Global System for Mobile Communications (GSM) standard. Around the same time (some sources say 1991, but pinning down an exact date has proven difficult) Sodetel, a company held in equal partnership between the Lebanese government and Orange (then known as France Telecom), introduced the internet to Lebanon. The American University of Beirut was using this network, called Libanpac, by 1993. According to a research paper from 1994 written by Nabil Bukhalid, then AUB’s director of network services, the institution was paying $58,000 per year for a monthly quota of 20 megabytes delivered at a speed of 1.2 kilobites per second. Commercial users began logging on in 1996 when the government started licensing private sector ISPs.

While privatization is still the law of the land, there have been no serious efforts to implement it since 2007

Must be the money

The Mikatis’ Investcom, in partnership with Orange, won one of the BOT contracts through a joint venture commonly known as Cellis, and a company called LibanCell, majority owned by the Dalloul family along with Telecom Finland (today Sonera), won the other. The government cancelled the contracts, set to expire in 2004, two years early.

In 2002, LibanCell and Cellis signed management agreements with the government as plans first floated in 1999 for privatization of the networks began looking like they might come to fruition. Despite a new telecom law (431) in 2002 laying the groundwork for privatization and a failed bid round for the networks in 2004, selling these assets has still not happened. The government signed management contracts in 2004 with Kuwait’s MTC (today known as Zain) and Fal-Detecon, a Saudi–German partnership. Zain still manages one network under the brand Touch, while former Telecommunications Minister Gebran Bassil cancelled the management contract with Fal-Detecon for the network branded as Alfa in December 2008. In early 2009, Egypt’s Orascom Telecom won a management contract for the Alfa network, although in 2012, the company’s name changed to Orascom Telecom Media and Technology after a merger between Orascom Telecom’s parent company, Wind Telecom and Russia’s VimpelCom.

While privatization is still the law of the land, there have been no serious efforts to implement it since 2007 and the current Minister of Telecommunications, Boutros Harb, wants to rework the management contracts but still not fully privatize the networks (see box). Beginning in 2008, however, the government, which has control over the mobile managers’ CAPEX, invested in both 3G and long term evolution (LTE or 4G) technologies.

Failed reform: It’s almost a tradition

On July 23, Telecommunications Law 431 will turn 13, by virtue of its publication in The Official Gazette on that day in 2002. The law has three major components: privatize the two existing state owned mobile phone networks; establish an independent regulator/supervisor for the telecommunications sector; and create a private company called Liban Telecom to operate the fixed line telephone network and develop a third mobile phone network, as well as offer internet services, among other things.

While provisions of Law 431 regarding the establishment of the regulator were implemented and privatization of the existing mobile networks was attempted, the project of Liban Telecom never even came close to implementation. Consequently, the law, hailed at the time as a modern one which promised to be a foundation for astounding economic growth, has yet to be implemented.

After the law’s passage, the government invited bids for privatizing the two mobile phone networks whose ownership had been reclaimed by the state a while earlier. However, the privatization attempt was aborted as all received bids were judged too low. The government instead opted to sign management contracts with the very same operators which had developed the two mobile networks under build-operate-transfer contracts. Another attempt at telecommunications reform and privatization was made in the context of the 2007 Paris III donor conference for Lebanon but it also failed due to a lack of political will to sell state assets.

That said, in 2007 the government did appoint board members to the Telecommunications Regulatory Authority, which the regulator Law 431 called for, but a 2011 decision by the Shura Council, a consultative body that rules on the constitutionality of laws, stripped the TRA of its powers, handing them back to the Ministry of Telecommunications (although the TRA still has an office and paid staff, even though its board’s “non-renewable and non-extendable” term ended in 2012).

Throughout the past 13 years, no serious effort has been made to create Liban Telecom, which would replace Ogero, the state owned fixed line operator which also controls most of the country’s internet infrastructure.

Potentials for implementing Law 431 in the foreseeable future sound vague at best. Gilbert Najjar, head of the owner supervisory board which liaises with the two mobile operators on behalf of the government, tells EXECUTIVE that new Telecommunications Minister Boutros Harb is not pushing for privatization, but does want to revise the contracts with the network managers. Najjar cautions, however, that the networks are actually the property of the government, not the ministry, so the minister can make recommendations, but ultimately the full cabinet must make a decision.

As Najjar describes it, Harb aims at a revision and gradual expansion of the two mobile networks’ management contracts, which are up for renewal in April. In a first revision, the contracts would return responsibility for the networks’ operating expenses (OPEX) from the government to the managers, reversing a change initiated by then Telecommunications Minister Nicolas Sehnaoui in 2012. The contracts had previously only called for the government to pay capital expenditure (CAPEX) for the networks.

For the longer term, Najjar says the current idea is to renew management contracts in April for a two year period. After these two years, a tender for new, longer-term management contracts would invite bids and the terms of these contracts would “liberalize” but not privatize the sector, he adds. Pressed on what the difference is, he offers that instead of a full sale of telecommunications assets Harb’s plan involves signing contracts valid for “15 years, 20 years, 25 years,” where the winners would “rent” the frequencies and equipment, which would still be owned by the state.

At the same time, Najjar says, Harb wants to tackle the other two stipulations of Law 431 by appointing a new TRA board and by bringing in a new consultant to corporatize Ogero, essentially turning it into Liban Telecom. He estimates all of this should happen within two years. That said, if a new president is elected, the constitution mandates that a new government must be formed. How Harb’s plan will sit with the next minister is an open question.

The Internet and Ogero

While the mobile network saga has produced plenty of mudslinging, it pales in comparison to the accusations of intransigence and law breaking you hear when asking those supposedly in the know about the development of the internet in Lebanon. While the half government owned Sodetel first brought the internet to Lebanon in the early 1990s, it wound up in the hands of Ogero in 1994. That year, the government gave rights to manage all of the Ministry of Telecommunications’ infrastructure to Ogero — also a state owned firm, first founded in the 1970s to manage telegraph lines owned by a now defunct French company called Société Radio Orient. The 1994 decision was meant to last five years and help a struggling ministry rebuild the fixed line telephone network. Since then, Ogero has operated the country’s fixed line phone network as well as most of its internet infrastructure.

Unlike the mobile phone market, however, the internet market is liberalized. Private sector internet and data service providers have been operating since the mid 1990s, however they rely on Ogero both for access to bandwidth they resell to customers and for access to ‘centrales’ spread across the country that link individual users to the actual internet. Several private sector ISPs have been complaining for years that Ogero is purposefully holding back bandwidth to keep its market share, as Ogero is also an ISP.

The president and CEO of Ogero, Abdel Moneim Youssef, is also the director general of operation and maintenance at the Ministry of Telecommunications, which Youssef’s critics argue is illegal. In his role at the ministry, Youssef also signs for any telecom equipment imported into Lebanon, which private sector ISPs argue he takes his time doing. Youssef is notoriously difficult to interview, even though some who know him described him as able to charm people. When Executive was admitted to Youssef’s office in June for an interview appointment, he said he knew nothing and referred us to Toufic Chebaro, director of IT at Ogero. In a brief exchange before having this journalist ushered out of his office, Youssef told Executive at the time that private sector ISPs didn’t need more bandwidth. Chebaro, who refused an interview request for this report, said in June the ISPs were selling bandwidth to illegal service providers as well as the two mobile network managers, alleging that the networks used it to supplement bandwidth they were buying from Ogero to offer 3G services. 

Falling behind

While Lebanon was a regional leader in building both mobile phone networks and internet infrastructure in the 1990s, the country did not stay on top for long. The Ministry of Telecommunications has an ownership stake in three submarine cables completed in 1995 and 1997, capable of carrying both voice and data traffic, but Lebanon did not make another investment in extra international capacity until signing a 2008 agreement to build the IMEWE (India–Middle East–Western Europe) cable that runs from India to France. Similarly, Cellis and LibanCell introduced an early version of mobile internet — GPRS, also known as 2.5G — in 2001, but 3G didn’t arrive in Lebanon until 2011. 

That said, the 3G investment was more forward looking as it included an LTE component. While 3G coverage is almost nationwide, only Beirut has access to LTE. Gilbert Najjar, head of the owner supervisory board at the telecom ministry, tells Executive that the board — which acts as a bridge between the government that owns the networks and the private companies that manage them — is in talks with the network managers to increase LTE coverage in 2015. Najjar says he anticipates that the managers will each invest $100 million to expand coverage. 

On the internet side of ICT infrastructure, the private sector led the way in developing new ways to bring customers faster connection speeds than the dialup service, which is all Ogero offered until 2007. Private data and internet providers were making use of satellites and various wireless technologies before Ogero slowly began rolling out a digital subscriber line (DSL) service, which uses copper wires instead of existing phone lines, in 2007. Rumors of an imminent DSL roll out began spreading five years before the service was actually offered. 

One element in the delay, according to news reports from the time, was fear that widespread and fast internet would lead to more Voice Over IP (VOIP) activity, particularly for international calls. With the government having a monopoly on telephone calls in Lebanon, VOIP has long been a feared revenue thief and remains officially banned. Following the introduction of DSL, the next major investment in infrastructure was the 2011 contract awarded to construction firm CET to install a fiber optic backbone for both voice and data traffic. As Executive went to print, however, we have not been able to verify whether or not the backbone is actually being used.

 

Matt Nash

Matt is Executive's Economics & Policy Editor. He has been reporting on Lebanon since 2007 with a focus on oil and gas, policy and legal matters.

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