Telecom’s tortuous tangle

In a country where people seem to do more fighting than talking, the need for an efficient telecommunications sector could hardly be more essential. But like many things in Lebanon, the possibilities are often overridden by reality.

“The [telecommunications] situation in Lebanon in many respects, if not all respects, resembles a disaster zone,” says Riad Bahsoun, telecom expert at the International Telecommunications Union (ITU).

The country’s government-run telecommunications sector lags far behind the rest of the region, with customers suffering exorbitant fees, bad service, poor governance and policies based more on political considerations than economic impetus.

In Jordan for example, the purchase price of a postpaid mobile line (around $12) is about one-fourth the cost of its $50 Lebanese counterpart. Lebanon’s mobile rates per minute are three to four times higher than the world average. The mobile market penetration rate stands at around 32 percent in a region where the penetration rates of some countries are over 100 percent. Lebanon still does not have access to broadband Internet.

The problems started in 1994 when the Lebanese government began rebuilding the telecommunications infrastructure destroyed during the civil war. That is when the government issued four decrees that dictated the manner and direction the telecommunications sector would take.

Calling in the dark

“The government arbitrarily decided to separate the telecom industry, without any knowledge, into fixed services, mobile services or data and internet services,” explains Bahsoun, who is also vice-chairman of the South-Asia Middle East & North-Africa Telecommunications Council.

The resulting governance structure is what Lebanese see today when they look at the tangled web of telecommunications institutions, agencies, regulators and companies.

The decrees resulted in the creation of two general directorates within the Ministry of Telecommunications (MoT). It also created OGERO, the government-owned company that, confusingly, contracts with the government to provide fixed line and internet services. It also created the Global System for Mobile (GSM) office to operate the mobile market.

Bahsoun says the government’s creation of the telecom sector left much to be desired.

“In each segment [the government] started to interfere — govern wrongly with wrong political decisions — in operational decisions,” he says. “Enormous amounts of money and chances were lost.”

In terms of potential however, Lebanon is a telecommunications pot of gold. Its strategic location, educated population and low penetration rates make it a prime candidate for a thriving telecom sector. But it has not come to pass.

“There is a direct correlation between government ownership… and inefficiency,” says Ghassan Hasbani, vice president and partner at the consultanting firm Booz & Company.

Nearly all telecommunication revenues go directly to the government. The only exceptions are providers of end-user Internet and data service such as Inconet Data Management (IDM), Cyberia and others. But even these providers are dependent on the government- owned infrastructure and are subject to revenue sharing agreements with the government. That said, no one seems to know how much money the providers and data operators are making, and how much they are paying to the MoT.

“The Ministry of Telecommunications has something like a dozen revenue sharing agreements with data operators where by the government receives 20 percent. They have never been audited,” says the ITU’s Bahsoun. “Those who may decide to audit are those who receive the money.”

Originally forecasted Lebanese telecommunications reform schedule

Market indicators

Privatization

Many industry experts say privatization is the key to improving Lebanon’s telecommunication sector. But efforts to free telecoms from government control have proved futile despite attempts to corporatize and privatize the sector.

In July of 2002, the Lebanese government passed Law 431/2002, called the Telecommunications Act, which established the legal framework for the creation of a joint stock company named Liban Telecom.

“I took part in about 35 committee meetings to pass the telecommunications law and we had a dream that it would be implemented immediately,” says Yassine Jaber, current member of the Lebanese Parliament and former Minister of Economics and Trade.

Liban Telecom is intended to be a government-owned body with a corporate framework that eventually replaces the MoT. It is mandated to encourage development, approve licenses, participate in privatization and encourage transparency. But it doesn’t exist yet.

What does exist is the Telecom Regulatory Authority (TRA). The TRA was also created by Law 431 to regulate Liban Telecom’s operations and to encourage competition and investment in the Lebanese telecommunications market.

Although Liban Telecom is nonexistent, the TRA was established in April 2007 “in a sort of cloud,” says one telecom executive. Its first five-member board meeting was held almost five years after Law 431 was enacted.

Kamal Shehadi, chairman and CEO of the TRA, says Lebanon’s politicians lack the will to implement the reforms stipulated in Law 431. He points out that putting the law into action would “cut the umbilical cord between politics and telecommunications.”

The TRA to date has no legal mandate over the MoT or any of its organs, which include both mobile, fixed line telephony as well as Internet access.

“We regulate the market. We don’t regulate the internal governance of a company,” Shehadi says. “We do not get involved in the internal governance of the ministry; that is not our business.”

MP Jaber explains, however, that according to the law, the TRA should be the only entity that manages the sector. “Unfortunately, because of politics [the MoT] has sidestepped the TRA.”

As Lebanon’s telecommunication drama has dragged on, the allure of maintaining government ownership has outweighed the benefits of privatizing the sector.

In January, Telecommunications Minister Jibran Bassil said the Lebanese treasury earned more than $1 billion from the mobile market in 2008, and banked over $300 million from the operations of OGERO. The government’s control over the telecommunications sector is often justified as necessary to ensure a constant revenue flow into the government’s coffers and to pay its debt. But that argument has become less justifiable as the rest of the region leapfrogs the Lebanese telecom industry.

“Government ownership in mobile [telecommunications] is generally not conducive to productivity,” says Booz & Company’s Hasbani.

The idea to privatize the networks inched closer to realization in November 2007, when Lebanon was slated to auction its mobile networks. The decision was reversed only a few months later due to Lebanon’s political stalemate. After the Doha accords, privatization was again put on the table. Then the financial crisis hit, and the proposal was put on the shelf. Again.

In February, the mobile management contracts of Lebanon’s two mobile networks were renewed under a new agreement between the government and Lebanon’s two mobile operators: MTC, part of the Zain group, and Alfa, now managed by Orascom.

“The contracts have to be renewed because there was simply no way for the council of ministers and the TRA to proceed,” Shehadi says.

Previously, MTC and Alfa were paid a flat fee of around $5 million a month to manage the networks. In the past, both operators paid all the operating costs associated with running the networks. This arrangement was, by nature, antithetical to encouraging growth in the sector, because any increased expansion of the networks would increase operating costs, thus reducing the bottom line of the operators.

But Claude Bassil, general manager of MTC in Lebanon, says that under the new management contracts, “the objectives of both the Ministry of Telecommunications and our own are aligned.”

MTC currently receives $6.66 per active subscriber and Alfa receives $6.75 per active subscriber, drastically changing the revenue model, and giving the operators incentive to expand.

Probably the most important element of the new arrangement that will impact the growth of the mobile market is the new pricing structure put in place by the government at the beginning of April.

The plan lowers 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) in a move that has been eulogized by many as the sector’s first shift toward a viable pricing structure. The new contracts can be renewed for a period of one year, or revoked if privatization of the mobile networks ever becomes a reality.

With a subscription-based revenue model, the interests of the mobile operators now focus on expanding Lebanon’s overburdened and aging mobile network infrastructure, part of which fizzled out in late March during the prime-time hours.

Samer Salameh, chairman and CEO of Alfa, says the problem was caused by a software bug in a faulty switch that was provided by Nokia Siemens Networks. The switch has been replaced by the company.

“The network… is around 14 years old,” Salemeh says. “Imagine a car that is 14 years old and how it will run today if you don’t change the oil. This is what we have.”

As Executive went to print, both mobile operators were aiming to expand their respective networks by 400,000 subscribers each by May, to reach a nationwide total of 2.4 million subscribers.

The expansion is made possible by an agreement between the operators and the government. The government has agreed to take on the costs associated with any kind of capital expenditure, purchasing everything from towers to switches to buildings. The operating costs are being incurred by the mobile operators. Such an arrangement has made their bottom line look rather dim.

“We would be lucky if we actually make any money this year,” says Salameh. “We are actually forecast to lose some money.”

So why are the mobile operators willing to accept a loss-making agreement? The answer, it would seem, is that they want to get their foot in the door if the government ever decides to sell a chunk of the mobile network.

“We are not interested in [just] managing the network,” says Claude Bassil of MTC’s unique contract in Lebanon. His company usually owns and manages all aspects of the telecommunications network it operates.

At this point the government’s privatization yo-yo has become commonly accepted practice. And further conditions are now being applied to the sale of the networks. The government changed its sales pitch in February after signing the management agreements, saying that it will only offer a minority share for sale to a strategic partner, because the “majority should be reserved for the Lebanese as investors, as individuals or as funds,” says Minister Bassil.

The idea of a minority share has been met with staunch opposition from industry experts who fear that such an initiative would be contrary to the promise of privatization. Hasbani says the move could also reduce the perceived value of the networks, and scare off potential investors. TRA’s Shehadi says the plan is ludicrous.

“These are proposals that have no basis whatsoever in the reality of the telecommunications market,” he says. “They are unprofessional proposals made by people who have never transacted in the telecom market and have never worked on a licensing effort or privatization.”

Proponents of selling a minority stake say such an arrangement is in the interest of Lebanon’s citizens.

Hizbullah — allies of Minister Bassil’s Free Patriotic Movement — has come out in favor of the minority share plan. In the party’s political platform it stresses “the preservation of this national wealth through the sector development and improving its services.”

Ought to audit

Aside from the problems with operations and debates surrounding privatization, irregularities abound in the telecom sector, especially in the auditing process, ITU’s Bahsoun says.

“For 14 years the fixed services network has never been physically audited,” he says. “The operations of OGERO have never been financially audited. And the two mobile networks that have existed in Lebanon since 1995 have never been physically or financially audited.”

The decision to physically assess and audit the networks rests with the Lebanese government, through the MoT, and there is a disagreement as to whether a full technical assessment of the mobile networks has been completed. Shehadi says that OGERO to date does not have an updated fixed asset registry, making it impossible to perform a financial or technical audit.

“There is no such thing as an audit for OGERO,” says Shehadi. OGERO did not respond to requests for comment on this allegation.

On the mobile side of things, the government has appointed PricewaterhouseCoopers (PWC) to produce an audited financial statement in order to gauge the financial position of Lebanon’s mobile telecommunications. Gilbert Najjar, head of the Owner Supervisory Board, the government entity that oversees the GSM office at the MoT, explains that according to International Financial Reporting Standards (IFRS), PWC has fulfilled its obligations and both mobile operators have provided their financials. That said, his office requires a full audit of all the major accounts of the two operators, instead of just the sampling procedures carried out under the IFRS.

“I told the auditors that I will not approve accounts on this basis because I am dealing with the accounting of government money and I need to have a proper check of all documentation,” says Najjar. “I need the major accounts checked and audited on a proper basis, I cannot do it on a sampling basis.”

The issue has been pending since the mobile operator’s contracts were signed in 2004. Only when all parties involved sign off on a final audit will the case of the mobile operators’ financial standing finally be closed.

“At the end of the day you need the government of Lebanon, the operator, and the auditor to come together and this has not happened,” says Claude Bassil of MTC.

This creates a problem for the TRA, because as Shehadi says, his agency is tasked with providing potential investors with the information they need to invest in the mobile networks.

When asked about why these requests have fallen on dead ears, Minister Bassil says, “[The TRA] has nothing to do with privatization; it is something that the minister decides and a policy that has to be adopted by the council of ministers and by our parliament.”

The Owner Supervisory Board is currently in the process of an internal audit of its major accounts.

“These are unprofessional proposals made by people who have never transacted in the telecom market”

Goop in place of governance

In 2005, then Telecommunications Minister Marwan Hamade appointed then general director of operations and maintenance at the MoT, Abdulmenem Youssef, to be chairman and general manager of OGERO. OGERO is contracted to, and paid by, the Office of Operations and Maintenance at the MoT. Bahsoun says this arrangement presents a clear conflict of interest where “the right hand plays the left hand.”

Executive attempted to contact Youssef several times, but he did not respond to requests to address Bahsoun’s allegations.

The Capital Expenditure Committee, called CAPEX, of the Owner Supervisory Board is the government entity that monitors the mobile network operator’s capital expenses. The CAPEX Committee also contains members of OGERO’s board.

“All the CAPEX Committee members either work for OGERO or the MoT and that has been the case for the past few years so there is nothing new,” says MTC’s Claude Bassil.

But Gilbert Najjar says only one board member of OGERO, Alain Bassil, also currently sits on the CAPEX committee.

“It was a decision taken by [former] Minister Hamade and by the general directors of telecommunications who at the time had the powers of the TRA,” Najjar says.

Lebanon currently buys its bandwidth from the cypriot telecom authority, effectively making it a bandwidth colony

Internet at a snail’s pace

The cost of the telecom sector’s spider web of authority is apparent in the archaic speed of Lebanon’s Internet connections. The minister himself seems to have little hope in curing the situation.

“I am sorry to say that as the telecommunications minister, I tried to make some headway with respect to [improving Internet access and services,] but was incapable of doing so,” he said in a speech at the Arab Telecom and Internet Forum last month.

Lebanon currently buys its bandwidth from the Cypriot Telecom Authority (CYTA), effectively making it a bandwidth colony. Plans are in motion to increase Internet speeds. In June, a government project will lay 4,700 kilometers of fiber optic cables in the form of an outer ring and an inner ring to encircle the country. The project is set to be completed by 2011 and cost the government $64 million.

Shehadi says the TRA has also initiated a plan to allow private license in the broadband arena. There is also a plan to connect Lebanon to the International Middle East Western Europe 3 (IMEWE3) network, which could add more bandwidth to the country’s decrepit Internet infrastructure. But Riad Bahsoun of the ITU says the plan would require someone to cut through what may be considerable bureaucratic red tape.

“IMEWE3 is a good decision, but it has to go through Alexandria, and the internal security services in Egypt are not happy because they probably haven’t gotten their share of the corruption,” says ITU’s Bahsoun.

There is little hope that the ills of Lebanon’s telecom sector will be remedied until the results of the June parliamentary elections are in and a new government has been formed. When asked whether any headway can be made with regards to privatization or reform during the current government’s term, Minister Bassil laughed and said, “Definitely not. We can wait.”