NEW JORDANIAN TELECOM REGULATOR FACES CHALLENGES

C O N F I D E N T I A L SECTION 01 OF 04 AMMAN 002420 SIPDIS DEPT PASS USAID FOR ANE/MEA KIM FINAN USDOC FOR 4520/ITA/MAC/ONE/PAUL THANOS USDOC FOR 6000/ADVOCACY CENTER/CJAMES USDOC FOR 6400/RSTEELE/ITA/TD/OEC/RSTEELE TREASURY FOR PIPATANAGUL TDA FOR SIGLER E.O. 12958: DECL: 05/15/2007 TAGS: ECPS BEXP EINV JO SUBJECT: NEW JORDANIAN TELECOM REGULATOR FACES CHALLENGES REF: A) AMMAN 2200 B) AMMAN 1138 C) AMMAN 0794 D) AMMAN 0567 Classified by DCM Gregory L. Berry. Reasons 1.5 (B) and (D) -------------- SUMMARY -------------- ¶1. (SBU) The GOJ's recent reform of its telecom regulatory infrastructure thrusts its now fully independent regulator into the role of decision-maker at a time of transition, opportunity, and challenge. As it finds its feet, the regulatory agency must find creative ways to encourage market entry, (even at the risk of ruffling the monopolist, Jordan Telecom),ensure the provision of reliable and affordable service for Jordanians, and moderate a complex battle between mobile providers over interconnection rates. End Summary -------------- A MINISTRY IS BORN -------------- ¶2. (SBU) Under Jordan's new telecom law, the former Ministry of Post and Communications officially became the Ministry of Information and Communications Technology (MOICT) on April ¶22. Minster Fouaz Zu'bi said that the Ministry's mandate is to stimulate local and foreign technological investment, promote awareness of IT issues, and establish Jordan as a regional player in IT development. The Ministry will also oversee the implementation of the GOJ's e-government program. While the Ministry will continue to make telecom policy, the Telecommunications Regulatory Commission (TRC),newly independent under the law, will enforce it. Responsibility for the postal sector has been hived off from the Ministry in the form of the soon-to-be-privatized Jordan Postal Company. ¶3. (SBU) The TRC faces a number of challenges in establishing its independence. Dominated by a monopoly in fixed-line service and a combative duopoly in mobile, the sector is in need of new entrants, both to enhance quality and to bring about a reduction in rates. A potential new entrant, Real Time Communications (a U.S. led consortium) (REF B),is seeking to build a fiber-optic line between Lebanon and the Red Sea port of Aqaba as an alternate route for Europe-Asia telecom traffic, but faces opposition from Jordan Telecom, a dispute that will eventually make its way 
to the TRC. The TRC will also be called upon to resolve rate concerns at a number of levels: the high rate Jordan Telecom charges for international calls; the high intercompany settlement rates Jordan Telecom charges for inbound calls that encourages foreign companies to use cheaper, and lower quality, inbound routes; and mobile interconnection rates. -------------- THE REGULATOR -------------- ¶4. (SBU) Formerly part and parcel of the old Ministry, the TRC had, in the past, been perceived as a lapdog of Jordan Telecom (JT). Over the last few months, however, it has ruled against Jordan Telecom on two important and contentious issues. In the first, the TRC ruled that pay phone service was a public right, and that Jordan Telecom could not cut off service to a local provider embroiled in a billing dispute with JT. More recently, the Commission determined that mobile operators could issue seven-digit phone numbers, greatly expanding the pool of numbers available and enabling mobile operator Fastlink, a competitor of JT-owned MobileCom, to respond to customer demand (REF D). Both rulings were upheld by the High Court following challenges by JT. ¶5. (SBU) TRC Director General Mamoun Balqar told us these rulings were a "welcome reassurance of the professionalism" of the Commission. He said this reassurance meant that the TRC was on sound, legal ground in issuing the decisions, and was a vote of confidence in the pro-competitive direction the TRC was determined to move. Balqar added that, as a former employee himself of Jordan Telecom, he understood their position on a number of issues, but said what is right for Jordan is not always going to be what is right for JT. ¶6. (SBU) Balqar said that under the new law, the TRC will be even more professional. The Commission will be run by a full-time Chairman, selected by the Council of Ministers, with five commissioners. The commissioners will also be named by the Council, and will probably include a lawyer, an economist, a telecom specialist, and an IT specialist. Balqar said that he had no desire to be the Chairman, adding that administrative duties were a headache. Instead, it was his desire to be the telecom specialist on the Commission, a slot he expected to fill. Balqar said it was not yet clear who the Chairman would be, nor the make-up of the rest of the Commission. But he said they would be much more in tune with telecom issues than the "yes men" who had served on the TRC in the past. He expected the entire Commission to be named by June 1. ¶7. (SBU) Alluding to challenges facing the TRC, Balqar opined that it was not too early to start thinking about what the telecom playing field in Jordan might look like once JT's monopoly expired at the end of 2004. He said he saw most of the future opportunities in cellular and other mobile services, local and international operators, and IT backbone projects. He pointed to the Jordan Wireless Sector Market Liberalization Project, a U.S. Trade and Development Agency funded feasibility study to develop a national mobile strategy, as a demonstration of Jordan's commitment to open up the telecom market. -------------- A MONOPOLY ENTRENCHED -------------- ¶8. (SBU) We met with Pierre Mattei, Jordan Telecom's CEO, currently on loan from France Telecom. Adamantly defending JT's fixed-line monopoly, which runs until January, 2005, Mattei admitted he was very protective of JT's position in Jordan. He stressed that there was no need for a second network. "There is room for only one network in Jordan," he said. He emphasized the company's many contributions to the Kingdom, and said, "We are a strategic partner with the government of Jordan. We are also an employer, a customer, and a developer here. Jordan Telecom works for the interests of the people." ¶9. (SBU) Responding to concerns regarding quality of service on international calls and faxes (international service, particularly inbound calls and faxes, is haphazard; even when calls are able to get through, voices are often unintelligible, and the calls themselves are given to frequent, sudden cut-offs),Mattei attributed the problems to "hackers" who divert international traffic through voice-over internet networks. He said it was the TRC's job to catch these "pirates", but said that the Commission was "too weak" to work on the issue. Mattei also admitted that JT's high intercompany settlement rates worked to discourage international providers from using JT's lines. He pointed to JT's current intercompany settlement rate of 19 cents per minute (as opposed to 3 cents for outgoing calls) as a reason for foreign companies to bypass JT. He added that JT was in the process of reducing the rate to 16 cents and would eventually bring it down to 13 cents. But he said that tariffs for domestic calls were too low, forcing JT to keep international rates high. In addition, Mattei cited an arrangement among Arab League countries that keeps rates between those countries high as well. ¶10. (SBU) We posed the quality question to TRC's Balqar, who agreed with Mattei's interconnection argument, but said JT's high rates prompted long distance companies to route calls through cheaper land lines for five cents a minute, not so much via voice over internet. Balqar claimed that in the few hacker cases that came the Commission's way, the TRC, with the help of JT, had achieved some successful prosecutions. Balqar said the only way the quality issue might be solved would be if Jordan Telecom reduces its international rates to the point that foreign operators find it unnecessary to reroute calls to the least costly port of entry. -------------- REAL TIME -------------- ¶11. (SBU) As an example of JT's resistance to innovation and new entrants into the market, we posed the Real Time issue to Balqar. He mused that working with Jordan Telecom probably represented the "best and only option" for the American company to penetrate the Jordanian market. Sounding a theme we've heard before, Balqar said the monopoly is a fact of life, at least for the time being. He said that perhaps Real Time's strategy for the project, which includes a fiber-optic backbone linking Jordan to Cyprus and Europe via Syria and Lebanon, should be "if you can't beat them, join them". But he added that the Commission was entering the debate, and said the TRC would look at "legal angles" that might make Real Time's entry possible. ¶12. (C) JT CEO Mattei predictably expressed skepticism over the project. He asked rhetorically, "Where is the business plan? Where is the profit?" He added that there was already over-capacity in fiber-optic in the world. But, opening the door somewhat, he said that if Real Time "can show me that there is a market, we could discuss it". (Note: Jordan Telecom's plan to have an Amman hub in a link between Syria, Iraq, and Europe, coincidentally announced on the heels of Real Time's stated interest, suggests that indeed such a market exists. (REF A) End note.) -------------- THE MOBILE MARKET -------------- ¶13. (SBU) Two mobile providers currently serve Jordan: JT's affiliate MobileCom, and Fastlink, a subsidiary of Egypt-based Orascom under terms of a duopoly which is set to expire January, 2004. Although a newcomer to the market, Fastlink is the dominant mobile carrier, serving more than 800,000 subscribers, compared to MobileCom's 200,000. However, service outages and quality concerns, along with a concerted MobileCom effort to undercut Fastlink on rates, has recently prompted a number of subscribers to switch to MobileCom. ¶14. (SBU) Fastlink CEO Michael Dagher told us that despite the explosive growth in subscribers, the company was under financial pressures that were limiting its ability to invest in expanding and upgrading the network. The first such pressure came from a complex battle between the mobile providers has emerged over rates. Each company is promoting tariff plans that reduce rates between subscribers, but increase rates for calls to other providers, mobile or fixed. Balqar said the TRC has put a cap on rates for both mobile and fixed providers, and that it was up to the telecom companies themselves to set rates under the cap and that as long as they avoided the upper limit on tariffs, they were free to do what they want. While mobile rates continue to decline as a result of competition between the two mobile companies, JT has retained its interconnection fee of 3.5 cents per minute for both mobile providers, in accordance with the terms of its license. However, as MobileCom is an affiliate of JT, this interconnection fee disfavors Fastlink and in effect represents an indirect subsidy for MobileCom. ¶15. (SBU) Yet another challenge is the high cost of entry and doing business in the sector. Dagher said that Fastlink's revenues in 2001 were USD 160 million, but he said that the GOJ's 15 percent sales tax, 25 percent income tax, and other taxes in 2001 totaled USD 70 million for Fastlink. He complained that these taxes, along with the USD 35 million mobile license fee, were diverting capital away from investment and hurting the company's ability to expand and innovate. (JT's Mattei expressed the same concerns. He said it cost France Telecom USD 500 million to acquire its 40 percent stake in JT, not including license fees and taxes. He said that in addition to sales and income tax, JT paid USD 19 million in privatization fees in 2001 and USD 77 million in 2000.) ¶16. (SBU) Finally, Dagher did not mention, but we have heard from other sources, that the financial problem of Fastlink's Egyptian parent company Orascom, which owns 91 percent of the company (Motorola sold a 30 percent share in 2001) are also undercutting the company financially. According to local bankers, Orascom is siphoning money from Fastlink to help cover the cost of ambitious expansion plans in North Africa and Syria. In fact, they say that Fastlink has exhausted its credit in Amman (which Dagher attributed instead to the excessive caution of Jordanian bankers). -------------- COMMENT -------------- ¶17. (SBU) In response to concerns about the high cost of doing business, Balqar said that upcoming license fees and award procedures was among the priorities of the new Commission. He said, for example, that there is room for one or two more mobile operators in Jordan, and he expected those license would be awarded in a competitive bidding process. But he added that telecom companies in general had "learned their lesson" when they paid exorbitantly high fees for 3G licenses in the 1990s, and suggested they would be much more conservative from now on. Balqar also said the tax and revenue structure was very complicated, but, as it may represent a barrier to foreign investment, should and would be examined by the TRC. He emphasized, however, that despite the high taxes and fees JT had paid to the GOJ over the years, the company was still generating a profit and that in fact, France Telecom was likely to attempt to increase its stake in JT when the next tranche of shares goes on the market later this year. ¶18. (C) Commissioner Balqar is a competent professional who enjoys a thorough understanding of the telecom industry and the challenges facing the sector as it liberalizes. But the TRC under his leadership is a less dynamic and proactive regulator than Jordan needs today, and one hopes that the rest of the as-yet-unnamed commission can provide the leadership and expertise needed to recognize and meet those challenges head-on, even at the risk of confronting Jordan Telecom and its various interests and supporters. As the new TRC sorts through these complicated issues in the months and years ahead, we will continue to encourage and support an environment that fosters an open market leading to the provision of dependable and innovative service at rates that are fair and accessible. (USAID anticipates providing assistance to the TRC in strengthening its regulatory capablilities over the next few years as part of its Information Communications Technology initiative.) End comment. Gnehm