Home Economics & Policy Desperate bid for a profitable future


Desperate bid for a profitable future

To learn or not to learn from the past abuses of the telecommunications sector

by Thomas Schellen

On a sunny morning in spring 2022, confusion reigns for but a moment. Executive has an appointment to interview Imad Kreidieh, the chairman and general director (CDG) of state-owned enterprise (SOE). Still, the company’s gates are closed and plastered with snap labor strike announcements. However, a brief conversation through the closed gate’s metal bars later, and we can enter via a broad and uninvitingly bare courtyard into the telecommunications infrastructure operator’s and services provider’s sprawling administrative complex. 

Walking into the building, a visitor with some background in navigating public offices and varied ministries in Beirut will quickly feel ‘at home’ – if one can ever develop any homey feelings in a structure that seems to have been designed in the past century for signaling the greater glory of a mighty state to its anonymous supplicants. The setup is admin-perfect for echoing those ‘wells of silence’ that people easily stumble into when trying to communicate with their state: you pass an empty reception desk in a mentally chilling, sub-utilitarian foyer, ride in elevators that are adorned with large, albeit in one case cracked, mirrors, and then proceed along lengthy CCTV camera-embellished hallways – a common hallmark of local edifices of government bureaucracy. 

One can only imagine how the corridors might look bursting with human activity (on non-strike days?), but the first individuals to greet visitors today are the obliging personnel at the security station in front of the executive suite on the head office’s upper floor. Then a surprise: instead of the micro-culture-shock-inducing contrast that one commonly suffers when stepping from the average government ministry’s drab corridors into the ostentatious offices of the respective minister, the vestibule and office of Ogero’s CDG exudes a cool corporate air, type top-management utility. 

Instead of the one of over-the-top luxury of your average political dragon’s lair, the place feels more functional than representative, with an atmosphere just on the accommodating side of austere. Also, verbally, with Kreidieh’s first comments on his employees’ strike expressing explicit support for their action, the conversation starts with an encouraging vibe of realism.

Ogero, the oldest state-controlled corporate unit in the byzantine telecommunications mosaic of Lebanon, thus presents itself as a suitable waypoint on the quest to unravel the dystopian mysteries of a sector that has for three decades been key to many ups and downs of the Lebanese economy while situated on the frontlines of policy conflicts and shrouded in allegations of corrupt shenanigans and brutally counterproductive political influences.  

Institutional memories 

As Lebanon is moving toward (or at least hoped to get to) the end of its crisis of everything, one hypothetical economic value proposition of the telecommunications sector can be shouted out loudly as conditio sine qua non, an indispensable condition: a prosperous future is unimaginable without vital knowledge economy inputs and digitization. However theoretical a multi-year vision of digital GDP improvement for Lebanon might be, and to what degrees such ideas and realities might diverge in the end, a competitive telecommunications industry and solid, multi-faceted communications infrastructures are by the wisdom of international economists and local telecom experts both decisive and irreplaceable for a productive economy in Lebanon’s future. 

But can Lebanon rebuild technical capacities that have recently been tethering on steep funding cliffs or ever hope to recoup a comparative regional telecom edge that the country has not held for over 20 years? On operational grounds, the current picture is as dismal as one can imagine, judging by the many worrisome developments that Ogero’s Kreidieh, along with civil society advocates, and this year also, the minister of telecommunications, have been sharing in interviews and social media messages over the past two years.   

Among these well-publicized headaches are, for example, Ogero’s pain of losing qualified engineers and the SOE’s inability to resolve the financial struggles of its employees who, according to Kreidieh strive, despite their woefully insufficient remunerations, to provide the last reasonably stable and affordable bright spot in the lives of their compatriots, acceptable internet access. To other day-to-day worries, Kreidieh also can talk in detail about the high frequency of thefts of cabling and infrastructure components by possibly desperate but certainly not public-minded crooks, the constant need to find fuel for running Ogero’s nodes, and the ridiculousness of the fact that less than $20 million dollars could equip all of the networks with renewable energy by the installation of photovoltaics. 

Beyond the operational struggles and the fiscal incapacitation of having nowhere near the needed 2022 funding allocated to Ogero for OPEX (Kreidieh cites a hard ceiling of $2 million, a fraction compared to the 2019 operations and maintenance budget of $42 million), let alone CAPEX (zero in 2022 versus $20 million in 2019), however, loom two existential questions which existentially concern telecommunications, all connectivity, the information technology industry, and the entire future of Lebanon. 

First question: can past telecommunications policies and practices in the government-controlled sector teach us lessons to lead the country into a profitable digital future? 

The second question concerns the value proposition of the digital future and, as such, is a tripartite question: what value proposition would be currently adequate when trying to monetize the financially dysfunctional telecommunications industry of Lebanon as a public asset; how and how fast can this industry be capitalized for public economic good and profitability; and how important will this asset be in the context of a new and more digital economy on the condition that it is properly positioned and managed? 

Those who do not learn 

The first question has a short answer and a longish one in the opinion of every industry stakeholder and telecommunications expert whom Executive approached during our inquiry into the value of this public asset. The short answer is yes; the past political mistakes regarding telecommunications are apparent, and repetition can be avoided. The longer answer expands on the short one by insisting that policymakers repent for, henceforth shun, and by all means swear off ever thinking again about short-term revenue and public coffers when dealing with telecom. 

The decisive no-go term is “cash cow.” 

“Many people used to believe that the telecommunications sector is a cash cow for the government,” laments, for example, politician Ghassan Hasbani. Before entering the political field, Hasbani, a former deputy prime minister of Lebanon, had held consulting roles and senior corporate positions with several regionally essential telecommunications operators in the 1990s and 2000s. According to him, the cash cow approach meant that mobile telephony earnings were “wrongly applied as a tax revenue rather than being used as an economic driver.”

By Kreidieh’s judgment, freely expressed with choice words such as “insane” and “completely stupid” to describe past and recent handling of the telecom industry as a tool of extractive economic and fiscal behavior, the cash cow treatment of telecommunications could not have been more misguided. 

Under a virtuous strategy, the unexpectedly strong cash flows generated from mobile telephony operations in the early years “would have been invested to a large extent into improving the quality of service with innovative products and services. This would have engaged the economy into a positive loop. But instead of investing and promoting a proper environment for startups and companies to grow, we considered the telco sector as a cash cow and started financing the rest of the administration through monies that were generated by the telco sector,” Kreidieh says. 

To him, the trajectories of the past twenty years are blatantly clear: worse decisions were being piled upon bad ones. The vicious cycle commenced when the government canceled 10-year build-operate-transfer contracts and prematurely retook control of the mobile operator duopoly in the early 2000s. 

In the following period, attempts at privatization of the mobile operators through license auction in the mid-2000s could have created “a totally different situation than what we find ourselves in today,” Kreidieh says, and a window for competition and the blossoming of a different ecosystem could have been opened. “There is no doubt in my mind that privatization would have transformed the telecommunications sector into a very serious economic leverage for the whole country. It has been the case in all different countries where economies grow with the help of technologies.”

This chance was missed, however, and so were opportunities to bring order to the opaquely government-run affairs of telecommunications in the later 2000s and early 2010s. Owing to political obstruction, the institutional launch of the regulator, years delayed, was rendered meaningless. Likewise, plans to break up the operator duopoly and incite competition through the creation and partial flotation of a third operator, Liban Telecom, under the inclusion of Ogero as an awardee of the third license, did not come to fruition. 

“The creation of the regulatory authority was a second chance after the misery that took place when the government decided to claim back the two privately owned [mobile] operators LibanCell and Cellis. The Lebanese administration obviously again missed that opportunity to set up a proper environment to develop the telecommunications industry,” Kreidieh opines and concludes, “In a summary, we missed (our chance) when the administration claimed back the operators, missed it again when failing to implement and put in place a regulatory authority and we missed a third opportunity which was the implementation of [telecommunications] Law 431 and creation of a third mobile operator.”

A better framework

Plotting the missed takeoff points along a cognitive timeline makes it evident that the telecommunications’ protracted government ownership and value-extraction was a grave error. Can privatization and public-private partnership (PPP) reopen the door of digital opportunity and innovation that the country needs? 

At least in the framework sense, there is some prospect of investment and development by a new competition law, Amine Salam, the minister of economy and trade, tells Executive. According to Salam, this law, the concept of which has been bandied around unsuccessfully for twenty years, has been highlighted by the International Monetary Fund (IMF) as a critical piece of legislation for invigorating the future economy of Lebanon. 

Salam says that the new law comprises two competition-enhancing aspects: the abolition of state protectionism of exclusive agencies and lifting restraints in the public sector. “Some people thought the law would only be about removing constraints of exclusive agencies from the private sector. This is one [part of it], but the more important aspect of this legislation is that for the first time in more than 55 years, we have opened the public sector to private investment,” he boasts. 

Elaborating further, he emphasizes: “This law opens up the entire public sector for FDI. Anyone, foreign or local investors or a joint venture between a foreign and local investor, can now apply and co-invest together to do a telecom project or an energy project. They can start a new airline or open a new casino, [or] go into a water desalination project.”

But no ready mold 

Yet, legislative innovation and leveling of the competitive arena would be a long shot to expect a short and straight path to successful telecom privatization or any PPP wins today. Even the theory of telecom privatization under a PPP model – without even venturing into the nitty-gritty of negotiations, valuations, and building of contractual trust – does not lend itself to a straightforward application under present circumstances, says Ziyad Hayek, international PPP consultant and the former secretary-general of Lebanon’s Higher Council for Privatization and PPP (HCP). 

While he asserts that the existing PPP law of 2016 is sufficient to manage a partnership process and also agrees that the telecom sector is a rare area where privatization would make sense, he points to a strong semblance between the current situation and a post-conflict environment where there is “no financials, no clarity, nothing to base anything on” from a valuation and project perspective. 

“A decision to privatize the sector under these economic circumstances is nonsense. We would not get enough for what we have,” concurs Kreidieh. 

Given that there is no clarity even on the degree to which international accounting standards are applied in the country, “everything related to financial statements and accounting today in Lebanon is just a matter of opinion,” Hayek tells Executive. He goes on to warn that conflicts would be programmed if a license auction under a conventional telecom privatization strategy were attempted.

“If the government were to auction a license without having a base of calculating value, they would be making a big mistake. If the price paid for a license turns out to be too low, the government is going to regret [issuing the license] as it will be bad for the country. If the price is too high, the government’s problems will be with the company that bought the license,” Hayek says, advising that the tendering terms for telco PPP packages would need to be invented from scratch and fine-tuned in direct negotiations with the prospective private sector participants to make sure that the terms of the agreement are acceptable to both sides.

The obfuscation of value, the unknown when, and the why not now

Hasbani agrees that a proper assessment of the telecom sector is not feasible as “the net present value of the company’s returns could generate in the coming 20 years is very low because of the current situation.” He, therefore, argues against an immediate attempt to privatize in favor of a two-phased approach of corporatization followed by privatization. Adding a political economy angle to the question, he frames his vision for the telecommunications sector in the context of the big dispute over state debts and depositors’ compensation.

“The first things to do post-election are to start implementing law 431, start unbundling the structure [of the sector], create Liban Telecom as a stand-alone corporatized entity for the fixed operations with published financials, [and put] the regulatory authority into a proper position so that it starts covering its own costs from license fees, [by way of] issuing licenses to the two mobile operators and the fixed operator,” he says. 

In a second implementation phase, he advocates for “gradual privatization and handover of some of the value to the Lebanese public who lost money in the banks.” This would require the government to list telecommunications entities, provide a stable stock price environment, and allocate shares, albeit with initial selling restrictions, to depositors to compensate for their losses in the banks. 

Once the share values of the state assets turned listed companies claw back some of the ground lost in the economic crisis, the sale of shares would be allowed, Hasbani says, adding that an international strategic investor in the telco assets could become at first a partial owner of the listed entities and later on be obliged to offer buying shares from compensated depositors if these want to cash out their holdings.  

Overall, the main objective in the governmental telecommunications strategy should neither be revenue generation with the state as operator and ultimate beneficiary – a path that long was heading towards diminishing revenues due to mismanagement – nor the achievement of high receipts in a privatization of the sector. Instead, “privatization will be about improving the service, lowering the cost burden, shifting it away from the government and enhancing the economic benefits of telecommunications through price competition,” Hasbani insists. 

The privatization chorus’ subtly diverging tunes and challenges 

Like Hasbani and Kreidieh, civil society representative Albert Konstanian sees privatization as the right path for a reversal of the cash cow approach and the activation of the telecom industry under a competition and innovation enhancement formula. This focus would treat telecom privatization as a sectorial play, not a financial one, he believes, meaning that “revenue for the government is not really an objective because the selling price today would be the net present value of the future cash flow and no investor is stupid enough to overpay.”

Having researched a study on SOEs and their valuations in late 2019 unfair use of publicly available data and acknowledging that his estimations of SOE valuations at the time are far from helpful today, he regards privatization as a no-brainer for some SOEs (such as the state carrier MEA and Casino du Liban), as totally non-sensical for others – namely the utilities and transportation. But in a third category, among which he sees the telecom entities, privatization is prudent if strong regulation underpin it, publicly determining strategies, and powerful, independent regulatory institutions. 

On such grounds, privatization would not only be the best but practically the only sentient choice for telecommunications as a fast-moving industry where innovation plays a central role and best practices have been established around the world. “Telecom is not meant to be run by the government. It should definitely be privatized, but there are many preparatory steps. For me, the objective of privatization is first to boost investment and second to enhance competition. Those are the two main objectives,” he emphasizes. 

Despite strongly favoring privatization as the final objective, Kostanian takes the same view as his political and industrial peers to not rush into the process. Specifically, he regards it as untimely before the sharp decline in monthly revenue per user – which he estimates as having fallen from $18 to $20 before the crisis, to the neighborhood of $3 or $4 – is halted and an upward RPU trajectory initiated. In other preparatory requirements for telecom privatization, he sees a need for reorganizing the sector structurally. In his opinion, distinctions between operators of mobile and fixed networks and separate data services providers are a legacy of the 20th century and are not appropriate anymore because these realms have converged.

A phase-wise transformation and privatization emerge as a consensus view of the experts that divulged their telecom visions to Executive – but that does not mean that this transition will be free of hurdles and divergent options. Kostanian, for example, sees the 2002 telecommunications law 431 as requiring a revision and significant update. In contrast, Kreidieh and Hasbani see it as basically still ready to deploy out of the box – the latter being extremely mindful of the law’s tortuous and lengthy adoption process in its original iteration and arguing that only a few technical terms in the text would need to be updated.

Under phased privatization, the near-term management of the infrastructure is the retention of state ownership, reduction of infrastructure costs by consolidation, and the provision of this infrastructure to corporatized operators under a wholesale concept. However, albeit designed to be temporary, this concept could be applied in different ways and could have a bad ending in the pitfalls of monopolistic behavior. 

Hasbani says he has confidence that prominent strategic players would not be deterred by Lebanon’s old track record of breaking its BOT contracts and would instead be enticed by today’s exceedingly rare opportunity to acquire an existing mobile network from a state-owner. According to him, privately held telecom assets will typically be put on the market when they are not doing well, but state-owned networks in a privatization deal are tasty morsels. “The upscale and delta of improvement is usually much bigger when buying a state-owned entity.” An additional benefit of enrolling a larger international player with extensive market power – much more market power than the Lebanese state could muster as the owner of a relatively small network – as a strategic partner would be able to implement infrastructure investments at a lower cost. 

Nonetheless, there is a great deal of uncertainty about every financing aspect throughout the coming year, and this uncertainty casts doubts on the likelihood of much-needed investments. Financial experts, telecom stakeholders and international observers invested in the Lebanese case declaring in unison that the time for privatization by sale is not now because no fair valuation is possible. However, the sector’s current valuation question is a delay factor, not a deal-breaker. A long-term view is of value in countering negative expectations rooted in the experience of high inflation and extreme volatility of the currency.

“The problem is not the currency but the other risks. Once Lebanon can stabilize the currency at any level, and issue reliable regulations, making sure that there is a stable and independent TRA that allows the investor to know what they get into, the next step is having a judiciary system that protects them; all this reduces investment risk. Once all this is in place, the Lebanese telecom market still has great growth potential,” Hasbani says. 

Whether this potential is viewed through the narrow lens of the ICT industry’s role – where Hasbani estimates that the direct GDP contribution of ICT could be in the two to three percent range five years from today – or through wider lenses under which Kreidieh envisions that the contribution to GDP from digitally-enabled telecommunication services should be between 8 and 13 percent of GDP after five years, or an even more engulfing view under which in a Lebanese knowledge society and e-government enabled polity (e-government development still being the ardent wish of technology stakeholders from the ICT industry chief lobbyist Camille Moukarzel to a host of corruption fighters and civil society advocates of transparency) everything is connected to everything in terms of econometrics and telecommunications is the tech backbone of a massive, long-term digital upside and an immeasurable but dominant slice of overall societal income and wealth.  

In this context, it also is worth noting what Kreidieh says about the most significant danger to the sector, the value of human capital, and having a solid vision. On the one hand, he is openly more fearful of losing people than of seeing the daily deterioration of Ogero’s material assets.  “Physical assets are easily replaceable. But whenever you lose a good engineer, you have lost him for good. This is more serious and why I consider the brain drain as the most imminent danger for the telecommunications sector in Lebanon,” he says, but juxtaposes this on the other hand by emphasizing strong existing opportunities such as the provision of cloud services and having the company become a payment solutions provider, emulating successes of African regional telecom heavyweight MTN as an enabler of banking services or even the Chinese model of WeChat. 

“There is always something to be done in the telecommunications industry. There is always hope, and the salvation of Lebanon is technology, the brains that go with it, and telecommunications,” he enthuses, all the while acknowledging how being optimistic in all circumstances is a Lebanese business stereotype. Nonetheless, he says it with verve. “We have a chance, but we need decision-makers with vision and guts to make it happen.”  

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Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail
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