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Factoring in the regulator

Q&A with Kamal Shehadi

by Diala Ghalayini

Creating and empowering an independent, strong, fair, transparent, and accountable regulatory and supervisory institution is, by experience of virtually all countries with a thriving telecommunications sector, indispensable for the development of a viable sector. To assess the need for a revived regulator in the context of enabling the telecom sector to be a, or even, the spearhead of economic development, Executive had a virtual sit-down with Kamal Shehadi. Shehadi is not only an expert on regional telecom operations; he was the chairman of Lebanon’s telecom regulatory institution in the first years after its formation. 

By Executive’s reckoning, the once-promising national telecom regulator has fallen into deep dormancy. How do you, as its first chairman, today evaluate the role of Lebanon’s telecommunications regulatory authority, the TRA? Do you agree that the entire telecommunications and ICT sector has been stagnant or in a state of arrested development for too many years, and how, in your opinion, could the sector, and the TRA be revived?

I will start with the second part of the question; how do you revive the telecom industry and the ICT industry in general? Here, I want to focus on two different related issues. First, the telecom industry in Lebanon is in dire need of new and large investments, new management, a competitive market structure, and the ability to draw on international networks that promote innovation. This is something that cannot happen with the current market structure. So, we need to work on reviving the telecom industry, which requires injecting private investments [into existing operators] and allowing [strategic buyers] to bid for large percentages [of ownership] with a controlling stake in each [existing or newly formed telecom operator]. 

Today, the entire telecom industry in Lebanon is generating no more than $100 million of revenue for the government. This is down from a high of $1.2 billion, only three years ago. [Networks] cannot continue for much longer. To [engender investments into the networks] you need to have a different market structure, the government monopoly over mobile services as well as fixed [network] has to be ended immediately. That’s the only hope [for reaching] a vibrant, dynamic telecom industry.

And if I may add a note of caution, no one should be advocating [for] the privatization of the mobile or telecom industries in Lebanon on the basis of how much revenues they would generate, because that’s no longer the issue. Today, it is about the survival of the industry which can only be secured with a huge injection of capital into these companies and their networks, along with, of course, reforming the market structure taking it from a monopoly to a competitive one. 

There is another industry you’ve mentioned, which has always been important, even 15 years ago, when I [assumed office] as Chairman of the TRA in 2007. This is the ICT industry or the digital or tech industry as it is called today. Tech has always been the promise of a country [brimming] with talent such as Lebanon. [Actually, this potential for creating jobs and generating profits for the country is] the reason I went into telecom [and] into the TRA. [However, today] the tech industry is in need of attention and nurturing. But it also needs to be given a chance to thrive. It is one of the few promising industries in Lebanon today, and I don’t see anyone focusing on this industry on the policy side. To answer the first part of your question, the TRA, having an independent Telecom Regulatory Authority is an instrument, and a necessary one, to achieve the objectives that I mentioned earlier about a competitive telecom industry and vibrant technology industry. 

You’ve mentioned privatization. If it were to happen, how would it change the current telecom reality or the value proposition and economic impact of the state-owned telecom sector?

Reforms to the telecom industry, whether through privatization and, of course, transformation into a competitive market cannot be an isolated initiative. And by itself, it will not really change the dynamic of the overall economy. There has to be a restructuring of both the banking and public sectors. And above all, there must be a restoration of balance between the external and internal [sides] of the economy. The equilibrium [of the internal and external balance of trade and payments] is necessary [to address the] foreign currency problem. 

Reforms to the telecom industry can contribute to [creating such equilibrium] because it [can bring] hundreds of millions of dollars, and maybe a couple of billions of dollars as investments into the country over a number of years. I’m not saying [that reform of the telecom sector would be about the price or about] money going to the Treasury. [The issue is] no longer about getting money for the Treasury. Anyone who argues that privatization should happen because it will help close the budget gap, the debt gap, or the debt service gap, I think is losing the plot. 

Privatization is important because this is one of the most important industries in the real economy. Telecom and digital [developments] necessitate investments, opening up to the rest of the world, bringing in international expertise, [in order to elevate] Lebanon back to a level where it used to be: a leader in the [regional] telecom space. 

If new license bids were to be made, can you take me through what you visualize would be the process of negotiation and vetting?

The priority today should be to privatize the three networks that exist, two mobile and one fixed… Concurrent with privatization, there’s got to be an auction of licenses, and the use of the frequencies over the next 15 years or so. The only way to achieve privatization as the sale of operations is to move away from [the government’s telecom] monopoly. [On this condition], I think all three [operators] could be privatized with a single auction. It has to be done in a way that with each winning bid, the investing company [is awarded] a license and the network that they have been [bidding on]. Law 431 is clear that the terms of that license have to be defined by the TRA, and then submitted to and approved by the Council of Ministers. [Whereas] those licenses have to be issued by the Council of Ministers, only the TRA has the legal mandate today to draft those conditions.

But in that regard, would the TRA have to be revised or updated either in matters of the law, human capital, or its mandate? Would the TRA, as it is situated today, be ready to issue all the required documents and launch the whole process for creating a new type of public-private partnership in telecom?

The TRA board definitely has to be appointed and given time to bring in new blood and strengthen the team. Do we need to make changes to the law [to be able to launch tenders for licenses]? Given that time is of the essence, [the answer is] no, we don’t. Would it be good to make changes to the law? Of course. We started drafting this law, and I worked on it as an expert consultant, beginning in 1999. After the law was enacted [in 2002], the decrees were issued years later, and the TRA was appointed in January 2007. This leads me to think that if we were to tinker with the law, it’s going to take another year or two. So can we do it? Yes, the TRA needs time to get ready, the TRA needs time for the board to be appointed and prepare the work, and the Higher Council for Privatization will need to get its act together. There’s a lot of work to be done there. We’re talking about months and months of diligent work. But getting it ready, yes, if there’s a team that’s dedicated, given the proper environment, this is a matter of a few months, not years.

Given that according to the new competition law, policing of anti-competitive behavior falls under the jurisdiction of the Ministry of Economy and Trade, will exclusive dealership rights be affected in the telecommunications sector?

There is an issue of commercial law and there’s a competition law that’s been [held up] for years that deals with this matter. Now, in terms of the telecom industry, there are no exclusive agency or exclusive dealership rights. All of these rights, these distribution rights, wholesale and retail, are contracts that can be negotiated. The telecom industry, I think, is not the focus of the exclusive agency discussion. 

How will issuing licenses evolve, considering emerging technologies such as FinTech, 5G, and such?

First, the license should not specify what can and cannot be done in terms of new services, because the services you mentioned, from FinTech to health tech, to artificial intelligence, and the use of machine learning, all are not regulated [by the TRA]. This is except for data privacy, which is a very important component of the regulatory structure. Licenses, according to Lebanese law, have to authorize the construction and the investment in networks, the sale of mobile and fixed services, and the commercialization of these networks. The law today does not allow [the TRA] to regulate all the other services that you mentioned, from FinTech to others. However, these would be regulated today by the sector regulator. So if it’s FinTech, there could be and there are regulations that the central bank of Lebanon issues; if it is health tech, there will be other regulations that maybe the Ministry of Public Health [could co-determine]. 

But in the bottom line, this [provision of services] is not for the TRA or for the ministry of telecom to regulate, except from the one perspective of data privacy and data security. I am in favor of very strict data privacy and security legislation and regulation; there must be an empowered authority to enforce these regulations. A data privacy law has been approved by parliament; it’s not ideal, but it meets 80 to 90 percent of the requirements. It is not quite aligned with the GDPR, [the General Data Protection Regulation of 2016] which is the European standard, but it’s close enough [to protect data privacy] until we can amend and improve this law.

In addition to the GDPR regulation, the European Commission recently has been moving forward on a digital markets act (DMA) that is designed to curtail the data exploitation and market power of online behemoths. This act, similar to GDPR, is expected to have global implications. But in the Middle East, we are still very far from achieving GDPR. How can we close this mental gap between a very fast-moving knowledge industry where digital services are the future, and regional mindsets, which seem stuck in a previous era?

This gap is today even more shocking than it was 15 years ago when it already existed. If I were speaking to Lebanon-based businesses that have digital ambitions and ambitions to sell and market their services in Europe or to European citizens, I would advise them to make sure that they are compliant with GDPR and all [other] European legislation.

If we take into consideration the demographic and geographical size of Lebanon, how many telecom players do you think the market can absorb?

This is a very difficult question because Lebanon is a small market. The important thing is to have competition. Now, the law is clear that there have to be at least three mobile operators and I think that [three operators] are the maximum we can take. [At issue] is not just the market size, it’s about the distribution of spectrum. Because the more you divide the spectrum between different players, the higher the cost of coverage, unless you do what some people are advocating [for], which is [selective coverage], ‘give me some spectrum, and I will cover whoever I want to cover in any area that I want to cover.’ It doesn’t work that way. 

When you have public telecom licenses, for example as a mobile operator, you have coverage obligations. To provide this coverage of most of the territory, [operators] need to have enough spectrum. And as we move from one level of technology to another, from 3G to 4G, we require a lot more spectrum. From 4G to 5G, we’re gonna need a whole lot more spectrum. Then, once you set that threshold high enough, you must make sure that you are creating an industry that is competitive, but at the same time able to sustain itself. [You cannot allow things to] degenerate into a situation where you have small players that [exist] just because they have a license to access spectrum, but are unable to survive, invest, and innovate. Thus we have a big issue with the market structure. In terms of public telecoms, I think three is the maximum number; in terms of other providers like data providers, you could have an additional small number of those.

Do you specifically mean DSPs when referring to other providers?  

Yes. what’s called [data services providers and internet services providers] DSPs and ISPs. By the way, I think that the whole category has to be revised. In the Lebanese market, ISPs and DSPs are one and the same, which duplicates the structure, duplicates their cost. The issue is how do DSPs survive? This is a very important question for a regulator to answer; how do these data providers survive in an environment where mobile operators offer broadband with 4G and later maybe higher speeds, [such as] 5G? Are they able to compete with them? Or do they simply become resellers? These are questions that the regulator has to think about and provide a solution that is approved by the Council of Ministers because, in it, there’s the structure of the industry. 

While researching this special report, we spoke to several people who were advocating bundling the infrastructure and keeping it under the government while letting the TRA license the service layer. According to those ideas, a state-owned provider would wholesale the infrastructure services and in this way make sure that the cost of the infrastructure is reduced. Is that something you see as viable? 

I will need to look at [such proposals to evaluate them] but I can tell you one thing; it is foolish for anyone to imagine that the public sector in Lebanon for the next five to twenty years will have any funds to invest in anything other than what is socially urgent, [such as] social services, education, and healthcare. [The state] cannot be spending whatever they have in an area where the private sector can invest and can invest better.

[Secondly], I think it is reasonable [to aim for] a third [operator] as a competitor, but even that is going to be a stretch. I don’t think a third mobile operator in most countries makes a profit. That is not to say that we shouldn’t have a third one, it may be useful for competitive dynamics. Lebanon needs a huge inflow of foreign direct investment and this can only happen if these large industries are opened up for private investment or Public-Private Partnerships (PPP). PPP still is the most promising avenue and not just on a national level, [but also] on a municipal level, [since it] is the most promising avenue to attract investments and wealth found outside the country. 

Indeed, the proposals that the state should hold on to ownership of the infrastructure that this ownership should be retained ‘for the time being’ and also mentioned co-investment and PPP options. 

When you put the qualifier ‘for the time being,’ the question becomes what you mean. Is ‘the time being’ one, two, or five years? I agree that [temporary state ownership of the infrastructure is called for], but having said that, I am not talking about ‘the time being’ [in a non-specific way]. I am saying that if we are thinking six months to a year down the road when genuine reforms are being implemented, [the question needs to be solved] if this industry should remain in public hands. Should there be one single network [infrastructure]? [On this,] I can tell you that there is not one experience from around the world where a single wholesale network has proven to be a viable option. 

Lebanon is in dire need of regulatory competency and ethical regulatory institutions, which mandates putting a high priority on staffing the TRA with the most knowledgeable experts that can be found. How can we incentivize our expatriate experts in telecommunications, such as yourself, for example, to accept positions on the TRA?

The answer to your question is that I have seen in the last two years, especially since the October demonstrations, a huge outpouring of commitment and goodwill from younger generations and interest in public issues, in policy issues. Those of us who were in Lebanon in the 90s and early 2000s, all shared a concern that there weren’t enough smart young people being attracted to public service. Today I’m comforted because I saw over the last few years how people were engaging with the country and saying ‘this is my country, I want to improve the situation in Lebanon; I want to take care of those in poor areas, I want to provide coverage.’ 

When given the right opportunity, there are many talented Lebanese women and men who would be willing to roll up their sleeves and get to work in public service. But you have to provide them with the political environment that starts with a parliament pushing for reforms, and a government implementing them. Unless this happens, you’re not going to attract talent. No one wants to waste their time for a title or to have a position in the public sector. 

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Diala Ghalayini

Research assistant at Executive

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