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Telecom reforms get jammed in the system

A year on, telecom services remain as dismal as ever

by Tarek Zein

Another year has passed, yet it seems that time is at a standstill for the Lebanese telecom industry. To date, there has been no privatization, the Telecommunications Regulatory Authority (TRA) is yet to appear, as is a third mobile operator, broadband internet access, and the reduction in call costs. It even seems that due to some developments within the sector – such as the sudden abandonment of the new numbering plan – time has been regressing rather than advancing. The Lebanese government should take a close look at the calendar and realize that 1997 – the industry’s golden year – is long gone and that 2006 is upon us. It is time for the decision makers to recognize that most Arab countries are reaping the full benefits of competition and liberalization within the telecom industry, while Lebanon is constantly being tagged as having one of the most expensive call rates in the world.

No progress

Apart from the fact that eight mobile phones played a central role in the assassination of former prime minister Rafik Hariri – according to the UN report released by German investigator Detlev Mehlis, who charged Rambo-look-alike police officers with raiding the premises of the two mobile phone operators to collect important cellular call logs – 2005 was surely one of the slowest years for the local telecom industry. There were however some events of note, especially an advertisement circulating towards the end of October in several Lebanese newspapers. The text-only advertisement read: “As part of the reform initiatives to establish a merit-based, transparent and objective recruitment system for senior positions in the Lebanese public sector, the government of Lebanon – ministry of telecommunication – is inviting Lebanese professionals to apply for full-time positions at TRA.” This advertisement, which was published along with two other similar ones for senior position openings at the Electricite du Liban and the Civil Aviation Authority, clearly implied that the previous recruitment system was neither transparent nor objective – a necessary step to frankly transform any corrupt system. It continued: “The telecommunication regulatory authority will be overseeing one of the most important sectors in Lebanon … This sector is looked at as the milestone of the knowledge-based economy which has become a major factor in development and critical to Lebanon’s comparative advantage.”

Such a statement cannot be closer to the truth, however, after years of observing the ups and downs (especially downs) of the telecom market, local experts have become extremely skeptical about any potential for a positive change and prefer to wait and see before crying victory. How right they are: Lebanon’s comparative advantage has significantly dropped and keeps on dropping while politicians constantly state that DSL is to be introduced “soon” and that communication costs are to fall “soon.” In any case, the deadline for applying to the positions within the TRA was November 30, and its results, if positive, will be released before the end of the year, and if negative, will no doubt dissipate into thin air.

Calling on the courts

2005 was the year that telecom companies used the courts to demand their rights from the Lebanese government. LibanCell and Cellis – two names that were considered long gone after the two mobile operators’ BOT contracts were prematurely cut off by the Lebanese government in 2003 – came back in force in 2005. A series of events dating back from 2000, when the government began criticizing both companies of exceeding the amount of allowed subscribers stipulated in the BOT contracts and demanded that both companies pay a hefty $300 million fine in compensation – was at last solved by the Paris-based International Court of Arbitration. The court voted in favor of both companies and refuted the government’s claim to any fine. Its verdict, which cannot be appealed, even went further by demanding that the government pay Cellis $166 million and LibanCell $265 million. To this date the government has paid Cellis – majority owned by France Telecom – $96 million as an amicable out-of-court settlement and is looking to follow suite with LibanCell by placing $125 million on the table. However, LibanCell has so far refused to nudge and instead launched a large awareness campaign maintaining their right to the $265 million sum – a strategy that is regarded by some as LibanCell’s joker card for re-entering the Lebanese mobile sector as an operator.

2005 saw another ruling against the Lebanese government, this time from the other side of the Atlantic Ocean, from a Michigan court. A US telecommunications company, American Telecom Company, owned by Lebanese immigrant Issam Beydoun, sued the Lebanese government in July 2004, after being disqualified from a bid to manage one of Lebanon’s mobile networks. The company stated that the disqualification took place even though its $3.99 million per month bid for management of the mobile networks was lower than that of Fal Dete (Alfa’s) $4.2 million and MTC (MTC Touch’s) $4.25 million. In the beginning of 2005, the court ordered the Lebanese government to pay American Telecom Company $420 million by default because it said Lebanon failed to respond to the suit. A couple of months after the ruling, the case was suddenly thrown out of court for reasons of “technicality,” clearing the Lebanese government from any of these charges.

Lebanese telcos

Even though events in the local telecom industry were scarce, the same cannot be said of telecom companies owned by Lebanese nationals – namely Mikati-owned Investcom and Hariri-owned Oger Telecom.

Oger Telecom, which according to some reports is seeking avenues for listing 20% of its shares on the newly established Dubai International Financial Exchange (DIFX), has made one major move this year. In mid-November, the company was able to acquire a 55% stake of Turk Telecom – the world’s 13th largest fixed-line operator – by joining hands with Telecom Italia and BT Teleconsult. The enormous $6.55 billion acquisition has increased Oger Telecom’s number of fixed and mobile lines under its management to more than 27 million spread over four countries. It is important to note that Oger Telecom’s bid was 15% higher than the Russian runner-up.

Investcom on the other hand made a splash in London and Dubai when its early-October Initial Public Offering (IPO) raised a total $741 million, at the top end of expectations, making it the biggest international share sale by a Middle Eastern company. Each of the 59.9 million Global Depositary Shares, listed on the London Stock Exchange (LSE) and the DIFX, were offered at a price of $12.35, initially valuing the company at $3.3 billion. The market capitalization of Investcom as of December 2, stood at $3.67 billion. But it was in Lebanon again that the negative effect was felt: a large number of would-be investors had released other investment engagements to purchase Investcom’s shares, but in vain due to stringent share allocation arrangements. Audi Saradar Investment bank, a distribution agent for the company’s IPO, had to release a statement to 360 clients who generated a $1.2 billion demand to apologize for the inconvenience.

The rise of Investcom

Investcom’s operations are currently focused in five sub-Saharan African countries, Syria, Yemen and Sudan, and soon Guinea and Afghanistan. It now has its shares listed on the LSE and DIFX and is registered in Dubai, making it Lebanon’s sole telecom adventure in 2005. The company has been able to transform itself from solely offering telecommunications engineering services to managing one of the largest mobile telecommunications empires in the region by acquiring licenses in 10 countries with a total population of some 147 million people. The company, owned and managed by the powerful Mikati family, clocked a total subscriber base of over four million customers for the third quarter of 2005 – an impressive 18% increase compared to the same figure from the second quarter of the year. However, the customer base of Investcom is rather volatile, especially since over 83% of the company’s customer base uses Investcom’s services via the easily accessible pre-paid cards rather than the more binding post-paid subscriptions. Additionally, Investcom’s current revenue stream makes it a very easy target of any political instability, especially in Syria. The company’s revenues originate from three different sources: mobile telephony, international (through its Monaco-based Med Net) and fixed-line telephony and other services such as the provision of engineering and consulting services to third parties. Standing at $551 million in 2004, mobile telephony alone represented a large 87.2% of the company’s consolidated revenues, compared to 83% in 2003, and 73% in 2002. And out of the total of $551 million, Syria and Ghana contributed the largest amount to Investcom’s gross operating revenues from mobile telephony, standing at 53% and 22% for 2004 respectively. These unbalanced ratios are currently considered a major soft point for the company, but management promises that the revenue stream will balance out in 2006, as soon as revenues from Sudan and Afghanistan kick in. These results were first seen when third quarter financials were released, showcasing an increase in revenues from $441.5 million for the third quarter of 2004, to $645.9 million for the same period in 2005.

Looking ahead

With a donor conference around the corner, the authorities need to project their true intentions for reform to raise much needed cash. And the shortest route to persuade the international community that the Lebanese government is willing to reform is by reactivating the dusty privatization process. It would be expected that the profitable telecom sector would be one of the first sectors to go, after a much-heated public debate. But it would be rather shallow to assume that privatization of the telecom sector would take place so soon, especially since such a statement has been abused over and over again.

In terms of broadband, Ogero showcased the DSL service for the first time during Termium, raising the eyebrows of many. It is expected that DSL will be available towards mid-2006, but again, such a statement has been abused over and over again.

In terms of pricing, with the expected set up of the TRA and the introduction of a third mobile operator, prices will decrease substantially to the advantage of Lebanese consumers. However, such a statement has been abused over and over again. It is wiser to wait and see.

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