The ministry’s call

New mobile contracts leave a question mark over who is really in control

Reading Time: 9 minutes

It’s the classic hustle: squeeze a sucker for time so he signs on the line before he has the chance to think twice. Right now there are more than a few Lebanese wondering if they’ve just been duped. 

At the end of January this year, the Lebanese government signed new contracts with Orascom Telecoms Media and Technology (OTMT) and Zain to manage the two state-owned mobile phone operators, Mobile Interim Company 1 (MIC 1) and Mobile Interim Company 2 (MIC 2), commonly known as Alfa and MTC, respectively. 

The signing of the new contracts initially caused little commotion. That was until Future Movement opposition parliamentarian Ghazi Youssef publically denounced the Ministry of Telecommunications (MoT) for forgery and underhand dealings. The ministry was swift in its rebuttal, accusing Youssef of abusing his parliamentary immunity in order to level slanderous accusations. 

What has helped raise the eyebrows of suspicion is the fact that Minister of Telecommunications Nicolas Sehnaoui only presented the new contracts to the cabinet on the day that the old ones were set to expire. 

“Exactly on the night of the end of the contract there was a council of ministers {Lebanon’s cabinet) meeting and the minister asked for a new contract to be signed with the managers,” complains Youssef. “It was put on the table on the last day and it should have been discussed at least two months before.” 

With the deals presented as fait accompli there was little room for debate or discussion before the vote, yet there were some significant changes in the details of the new contracts. 

In negotiating the new agreements the MoT has settled a new reward scheme for the managers, which Minister Sehnaoui has touted as a shrewd deal that will pump more of the telecommunications bounty back into the public purse. 

Alfa’s Chief Executive Officer and Chairman Marwan Hayek told Executive that in the best of scenarios OTMT can expect to pocket at least 30 percent less of the company’s revenues than they did last year. Perhaps the ministry can claim this as a victory due to its ploy to keep the companies guessing until the last minute. However, Youssef says the new arrangement is a ploy by the ministry to harness excessive control over this lucrative sector while sidestepping any meaningful oversight. 

The new deal

The original deal was signed in 2009 — and renewed as was in 2010 and 2011 — with Zain and Orascom. As part of this contract the management fee Alfa and MTC collected was a fixed $2.5 million per month, supplemented by an 8.5 percent share of total revenues; from this combined income the managers had to cover all of the companies’ operational expenditure (OPEX) such as salaries and transport. 

Under this agreement Orascom and Zain were left looking pretty, reportedly taking home some $50 million in combined profits last year. However, in the new contract the minister has set a monthly fixed fee of just $600,000 for OTMT and $700,000 for Zain, which will be supplemented by a variable fee dependent on their respective managers meeting a list of 13 key performance indicators.

“Today all the OPEX will be borne directly by the ministry, meaning the minister will decide who to hire and fire, which company to use for supplies, security, distribution channels… he decides everything,” says Youssef. “The minister can use it as a tool for spending on favored providers for electoral purposes, by taking it under his direct control.”

Executive examined copies of the previous contract and the new one signed in January, and found that while there are differences with regards to control of the OPEX it would seem that Youssef is overstating his case. The Owner Supervisory Board (OSB), a body of industry consultants directly answerable to the MoT, is in both contracts designated considerable oversight into the monitoring and evaluation of the companies including, “the right to previously authorize and approve revenue generating service provider contracts, expenditure on new marketing initiatives, capital expenditure” and so on. 

  The 2012 document further stipulates that the manager is entitled to spend in each quarter “an amount not to exceed the amount for each of the specified categories during the equivalent quarter of the proceeding year without the approval of the Owner Supervisory Board.” 

“The total [operating] expenditures of last year are our level and anything over and above that level of expenditure we will have to go to the OSB for approval,” says Hayek. The catch is that while the OSB is external to the telecommunications ministry, it is under the direct control of the minister, effectively concentrating operational authority and oversight in the same hands. 

“It seems to me that the OSB are more and more involved in the day-to-day business of the companies and the managers are just acting as a front,” says a source within the MoT, who spoke to Executive on condition of anonymity. He also anticipates the budgets will increase this year much more than the forecasted 10 percent, and will more likely be in the range of 40 percent given the developments in the 3G telecommunications network. 

In regard to this, Alfa’s Hayek contends that, “All the approvals are done from a budget perspective and not from [the suppliers’] perspective so they will never say we advise you to spend such and such amount with ‘X’. It is up to the management to follow their own internal procurement procedures.”

While this is the case on paper, the ministry insider says the practice is often very different. “Have [the managers] ever refused a direct request from the ministry? They are not willing to say no, and if the ministry wants to impose something, there are many ways they can do that and the operators know that.  They are just hiding behind a theoretical approach to the whole thing.”   

Details defined later

Concerns are also being raised regarding the nature of the incentives scheme in the 2012 contract. The list of 13 key performance indicators on the contracts is nondescript and open to considerable interpretation. For instance, when it requires the company increase the number of seats in a call center, by how many exactly and with what supporting infrastructure? Or if it is necessary to create an innovation department, how many staff should it employ and what will be their objectives?

The financial reward for meeting these targets could exceed $20 million over the year and as such critics argue their vagueness could be used as a lever with which the ministry will be able to decide how much and on what conditions money is paid out.  

However, says Alfa’s Hayek, “Each and every objective in the incentive scheme now, but not at the signing, has a defined scope. The entire negotiations were less than two weeks. We did not have time to clear all of the details. This is the way it is with the ministry, negotiations always happen at the last minute.”  

Antoine Hayek, advisor to the telecommunications minister (and no direct relation of the Hayek at Alfa) explained further: “The number of seats for a call center within an operator is something that has a global standard, so we know we need around 1 seat per 10,000 subscribers… We have stipulated objectives of the innovation department, how many staff it must have and how much experience they must have. Everything is clear.”

If the devil is in the details then it would surely have been preferable to have had such a key component of the contracts, which covers a major part of the reward structure, agreed upon before the Council of Ministers were asked to consent and put pen to paper. 

Who owns what?

Another source of contention regarding the new telecommunications contracts finds its roots not in Lebanese soil, but in Egypt. The company managing Alfa from 2009 until the signing of the new contract in January 2012 was Orascom Telecoms Holding (OTH), a telecoms giant established in 1997 to consolidate the interests of the Orascom group of companies controlled by the Egyptian Sawiris family. Over the past year the Orascom empire, presided over by Naguib Sawiris, has undergone radical changes that mean the name on the 2012 contract with the government is no longer Orascom Telecoms Holding S.A.E., but rather Orascom Telecom Media and Technology S.A.E. (OTMT). 

Youssef claims that “it is forgery” to have renewed, without any review or tender process, the contract with what he claims is a different company. In April 2011 the mother company of OTH, Wind Telecom, underwent a ‘merger’ with another global telecommunications heavyweight, the Russian firm Vimpelcom. 

As part of the deal, certain assets were de-merged from Wind Telecom and transferred back to Weather Investments II S.A.R.L, which has the same share holders as Wind Telecom and as such is also under the control of Naguib Sawiris. The new entity that was born from this spin-off was  OTMT. The question that arises is can OTMT legitimately slip unchecked into the shoes of OTH as the manager of Alfa?

The same, but different

“It is a totally different company,” claims Youssef, a view echoed by many of his supporters in the opposition.

However, the MoT’s Hayek dismisses such accusations: “The company didn’t change, they are the same… A group of shareholders entered into a merger and in the deal related to Lebanon they remain the owner and controller,” he said. “So they say we will change the name of the company from X to Y. But they are the same, and they have continued to commit to all of the agreements of X.” 

In reality, however, the two companies are not identical. OTH and OTMT are both traded separately on the Egyptian stock exchange with different registrations, market capitalizations and trading values, and are involved in different global operations. According to the Egyptian General Authority of Investments, OTH’s pre-merger capital of EP5.25 billion ($870 million) was split 58 percent to OTH and 42 percent to OTMT.

Alfa’s Hayek referred to the company’s official statement when challenged over the legality of the transfer, which acknowledges that OTMT is a new entity but also argues it is the legal successor to OTH. The reasoning is that it has the same administrative and executive structures and it is legally bound to abide by all the contractual obligations previously held by OTH. 

Both share the same majority shareholder, with Wind Investments owning 51.7 percent of OTH and Weather Investments II owning 51.7 percent of OTMT. Both Wind and Weather II Investments are 100 percent owned by Naguib Sawiris. 

But the source within the telecommunications ministry says that there are some important issues to consider: “For the new entity to be accepted as the new manager it would have to be qualified on the same basis that Orascom was qualified to start with. It should have gone back through a qualification process. Does it have the qualifications? I have major doubts.”

The same source explains that two major benchmarks that would be used in such an assessment would be the market capitalization of the company and its experience in managing networks of at least the same size and scope. In both cases there is at the very least room for debate over OTMT’s viability. 

On the first count of qualification, the new company has working capital of just more than $350 million, which is around half of what Alfa generates. But the MoT’s Hayek retorts that: “There is a financial warranty deposit at the BDL [Bank du Liban, Lebanon’s central bank] of around $40 million. This money is in our hands and is much stronger than putting your expectations on someone’s capital. If there is any dispute then we [are able to] take hold of that money directly.” 

Furthermore, both Alfa and the ministry cite the backing of Sawiris as the security, though opponents point out that the contracts were signed with OTH and OTMT, and not Sawiris as an individual.

On the second qualification criteria, OTMT has a fraction of the involvement in other mobile networks that its predecessor did. In 2010, OTH had more than 100 million subscribers in networks across countries as far flung as Canada, Pakistan, Iraq and Algeria. OTMT, on the other hand, is in the process of selling the majority of its stake in Egypt’s Mobinil, which will leave it with a 5 percent stake and 30 percent voting rights, with its only majority stake in another telecommunications company being with North Korea’s Koryolink.   

Opposition MP Youssef takes aim at the company saying, “OTMT, in terms of expertise and experience in managing a cellular company, only has one company in North Korea which has 810,000 subscribers.” That is roughly half of Alfa’s current 1.6 million subscribers. 

The unnamed source at the MoT argues that in assessing a company’s viability to manage, “You are looking for an entity that has already managed a mobile operation the size of [Alfa]. This is a must.”

Challenged on this point, advisor to the minister, Hayek, says, “We did not change any member of the board and there is the same technical support. In the current board those guys have been here from around 2008 to 2009. They were here from before the merge and they are still here. Are you telling me before they were smart and now they are stupid?”

That all-important pinch of salt

There is good reason to be suspicious when assessing the broadsides from opposition parliamentarians such as Ghazi Youssef, who have an axe to grind as their old fiefdoms in government ministries are ruled over by their foes. But in the lucrative enclave of Lebanon’s telecommunications sector, which is free from virtually any oversight and exists in a dubious legal limbo, there is perhaps even greater reason to be skeptical of the current ruling masters. 

It is easy to understand the potential motive for the MoT to extend its control over the bountiful industry. What is more, the clinching of deals at the eleventh hour and the penning of multi-million dollar details after the signatures have dried does little to inspire confidence in the process.  

Zak Brophy was Executive's Economics and Policy Editor from 2011 until 2013.

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