AFGHANISTAN TELECOMMUNICATIONS SECTOR UPDATE -

C O N F I D E N T I A L SECTION 01 OF 09 KABUL 001022

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E.O. 12958: DECL: 04/19/2013
TAGS: ECPS EINV ECON ELAB AF
SUBJECT: AFGHANISTAN TELECOMMUNICATIONS SECTOR UPDATE -
APRIL 2003

Classified By: AMBASSADOR ROBERT P. FINN FOR REASONS
1.5 (B) AND (D)


1. (C) The Ministry of Communications (MOC) is facing an
assortment of challenges as the government of President
Karzai enters the Afghan year 1382. The Ministry,s
relations with its sole telecom service provider, Afghan
Wireless Communications Company (AWCC),continue to
deteriorate while a second service provider led by the Aga
Khan Fund for Economic Development (AKFED),is preparing to
launch operations. The Ministry of Communications is
planning to unveil yet another strategy for developing a
transparent and progressive telecom sector in early May )
which may even include plans for partial privatization of
this sector. For now, the government has decided to take a
wait-and-see approach to privatization generally. The Afghan
government cites national security, national prestige, and
instability caused by dislocation of public workers as
factors in delaying privatization. Ironically, two different
roads to partial privatization for telecoms are available -
both with little to no political risk. An AWCC buy-out of
the MOC,s 20 percent share of its stock, or MOC taking on a
minority partner to help modernize and expand Afghanistan,s
state-owned telecom sector both offer safe, albeit limited,
privatization opportunities. Meanwhile, the MOC is preparing
to issue two new invitations to tender in coming weeks. End
summary.

===================================
Background on Afghan Telecom Sector
===================================


2. (SBU) The existing service provider, Afghan Wireless
Communications Company (AWCC),began service in Afghanistan
in 1998 as Telephone Systems International (TSI). TSI
contracted their Afghan operations out to a U.K. firm during
the Taliban sanctions period from 1999 to 2001. In 2001, the
Rabbani government (based probably upon its legal standing as
holder of Afghanistan,s UN seat and most of its embassies
around the world, although at the time it controlled perhaps
only 15 percent of Afghanistan,s territory) ratified TSI,s
license. AWCC was then formed in 2001 to operate the
wireless telecom (GSM) system. It was (and still is) 80
percent owned by TSI and 20 percent owned by the MOC.


3. (C) After a highly controversial bidding process for a
second Generalized System for Mobiles (GSM) license in the
latter half of 2002, (which involved the abrupt cancellation
of the first invitation to tender and allegations of bribery,
kickbacks, conflicts of interest and non-transparent
tendering on the second invitation to tender),the MOC
awarded a license to the AKFED consortium (which included the
Aga Khan Foundation as its largest stakeholder). According
to AWCC, which did not bid on the second GSM license, the MOC
notified AWCC during this lengthy bidding process that their
license would no longer be exclusive and must be modified to
reflect terms identical to those in the AKFED license.

============================================= =======
AWCC Claims Effective Expropriation of Assets by MOC
============================================= =======


4. (C) Officials from the Afghan Wireless Communications
Corporation met with the Ambassador on April 4 to voice their
growing concerns about their troubled relations with the MOC
and seek his help. Relations between AWCC and the MOC have
been strained during the entire tenure of Communications
Minister Stanakzai as reported previously. Now, according to
AWCC officials, the Ministry had imposed severe conditions on
AWCC for license renewal, and had established a seemingly
arbitrary April 23 deadline for compliance. The provisions
the MOC is seeking as conditions for license renewal include:
Dissolution of the existing license; transfer of an
additional 20 percent ownership stake to MOC without
compensation (raising the MOC,s ownership share in AWCC to
40 percent); transfer of one-third of international incoming
call revenues; control of the AWCC Board of Directors;
authority to appoint AWCC management; the settlement of an
existing legal dispute between AWCC/TSI and its former U.K.
subcontractor and several other taxes and conditions. The
AWCC reps asserted they are facing far more stringent
conditions than AKFED did. They were unable to confirm this
disparity, however, as the MOC has not allowed AWCC to review
the AKFED license.


5. (C) AWCC claims 35,000 subscribers, operates in four
cities with another pending, (Jalalabad service is reportedly
being held up by the MOC),has made a claimed $70 million
investment in the GSM network, employs over 600 local
employees, and creates a $500,000 monthly expenditure in the
local economy. Substantial upgrading and expansion are
planned for 2003. The AWCC reps claimed that the MOC,s
actions constitute a partial expropriation of their
substantial private investment in Afghanistan. They further
claimed that the attorneys representing the MOC are very
unsophisticated regarding telecommunications regulation and
practice, and did not even realize the sum of their actions
constituted effective expropriation until they were advised
of this outcome. Based upon the urgency of their situation
and their investment at stake, they requested the Ambassador
speak with appropriate Afghan government officials to prevent
this pending expropriation. Otherwise, they claimed they
would have no alternative but to cease further investment and
pull out of Afghanistan. (Note: With the AKFED Consortium
still months away from commencing operations, this would
leave Afghanistan with virtually no phone service at all for
the near term. End note.)


6. (C) The AWCC reps noted that Minister Stanakzai, despite
trying to reach some compromise, appeared unable to balance
his conflicting roles as policy-maker, government official,
regulator, and shareholder. They suggested one solution
would be for the government to sell their 20 percent
ownership stake to AWCC and get out of the business side of
telecommunications entirely. This &de facto8 partial
privatization could send a positive signal to international
investors.


7. (C) The Ambassador raised the issue of possible
expropriation during a meeting with President Karzai on April

4. Karzai was alarmed and understood the disastrous effect
an expropriation would have on Afghanistan,s potential to
attract foreign investment. The Ambassador raised the
possibility of &privatizing8 the MOC,s 20 percent
ownership stake in AWCC through sale to AWCC. President
Karzai agreed that privatization was a good idea for telecoms
and wondered why the Afghan government was involved in this
sector at all. Nonetheless, it was unclear what action
President Karzai was prepared to take.

==============================
TDA-funded Consultant Bashes
AWCC, Discusses Privatization,
and Notes Upcoming Tenders
==============================


8. (C) On April 10, Econ/Commoff met with Ken Zita, (please
protect) a TDA-funded telecom advisor to the Ministry of
Communications, to review sector developments. When the
subject of AWCC was raised, Zita said AWCC was &probably the
worst phone company anywhere in the world8. He strongly
disputed AWCC,s claim of a 98 percent call completion rate.
(Note: Embassy can confirm that. For whole days there is no
AWCC service at all; other days perhaps one-third of calls
made do not get through. The joke around Kabul is AWCC
stands for &Always Waiting, Can,t Connect8. End note.)
Zita maintained that the poor performance of AWCC had become
a major liability and embarrassment to the Afghan government.
Contrary to AWCC,s claims that it has tried to cooperate
with the Ministry of Commerce, Zita said AWCC had failed to
rectify ¬ insignificant8 problems with the wireless
network, despite being &put on notice8 as early as July
2002 by the MOC. He reported just having come from a meeting
between the Minister and AWCC reps in which the Minister
&escalated8 matters. Stanakzai reportedly gave AWCC 20
days to comply with the MOC conditions or their license would
be revoked. Zita noted that he had kept an open mind about
AWCC since he first visited Afghanistan in April 2002, but
that his opinion of the firm had declined steadily.


9. (C) According to Zita, AWCC had not accomplished enough in
the past year, offered poor and relatively expensive service,
and &no one believes they,ve actually invested as much as
they say they have8. To increase the public pressure on
AWCC, Minister Stanakzai announced publicly on April 14 that
AWCC has three months to improve service or have their
license revoked. According to other Kabul sources, to drive
home the message, one of AWCC,s management was detained on
April 13 by the Ministry of Defense and ordered to improve
service within ten days or face arrest. Minister Stanakzai
denies his Ministry was involved in the MOD action. (Note:
Of course, AWCC maintains that MOC obstruction and lack of
support from the MOC were a major obstacle to their
operations. It is worth noting Zita was unaware and
surprised that the MOC had refused to show AWCC the AKFED
contract their license conditions were to match. This last
point is especially important if AKFED turns out to be 100
percent privately owned. This would greatly strengthen the
AWCC position for buying out the MOC,s 20 percent share.
End note.)


10. (C) Turning to more positive matters, Zita noted that two
telecom invitations to tender were scheduled to be announced
in roughly two to three weeks. The first tender would
request bids for a management contract to establish a
wireless local loop system in 11 cities. The second tender
was for the establishment of an International Satellite
Gateway system. (Note: As further information on these
tenders becomes available, Embassy will pass along. For the
time being, relevant Washington agencies are requested to
inform potentially interested U.S. firms. Endnote.)


11. (C) Econ/Commoff asked if the MOC had any plans to
privatize Afghanistan,s telecom sector holdings ) which the
Ministry would like to run as an independent SOE named
&AfghanTel8. AfghanTel would maintain the existing 40,000
landlines and 5,400 public employees (Comment: One employee
for every 8 phones ) incredible! End comment.) Zita said
he had advised the Minister that the Afghan telecom sector
should be privatized, but noted that the Minister wanted to
maintain state control. The reasons he cited were: first,
national security; second, national branding (i.e.,
prestige),and third, the desire to avoid any dislocations
caused by widespread layoffs in the run-up to elections. The
International Telecommunications Union advisor working with
the Minister, Mr. Sangin, also opposed near-term
privatization of telecoms.


12. (C) Zita suggested that private firms would probably have
no interest in taking ownership of the existing telecom
structure of AfghanTel. Severance packages for displaced
workers could even be included in private bids for telecom
operations. Most importantly, however, AfghanTel,s real
value was its land holdings, which included 423 post offices,
switching stations and rights-of-way throughout the country.
Access to such land would offer tremendous commercial
opportunities in telecommunications and other sectors for
prospective bidders. Despite the capacity to raise
substantial assets and improve service through the
privatization of AfghanTel, strong resistance remained.


13. (C) Econ/Commoff noted that it was hard to see where the
telecom sector was headed, and asked Zita if there was a plan
for future development of the sector. Zita replied that he
was working on such a plan for presentation to the Minister
by the end of April and would suggest publication of the new
policy in mid-May.

=====================================
Future Options for Afghan Telecoms:
Early Partial Privatization Suggested
=====================================


14. (SBU) On April 13, Zita sent an e-mail to the Minister
and his advisors at the MOC outlining &Options for
AfghanTel8 and provided a copy to the Embassy. The e-mail
details the difficulties facing AfghanTel within an open and
competitive marketplace and is summarized here to indicate
the aspects of the internal dialogue going on within the
Afghan Ministry of Communications. Zita notes AfghanTel will
require investment capital to match its private sector
competitors, and will be unlikely to raise these funds
through either private borrowing or donor assistance. Zita
added that the ITU advisor, Mr. Sangin has suggested
privatizing a minority position in AfghanTel &over time8,
without a specific timetable. Zita warned that if AfghanTel
enters the market - especially with only limited financial
resources - any failure to perform ) or to compete
effectively ) might have a direct, negative impact on the
credibility of the government.


15. (C) Zita continued, noting that engaging a management
partner would offset operational risk and improve generation
of cash. Zita acknowledged that maintaining majority state
ownership of AfghanTel is politically important (for the
reasons outlined above). Under the circumstances, Zita
recommended the immediate sale of a minority interest in
AfghanTel (to a firm able to provide management and/or
technical expertise and access to capital) as an alternative
to a &wait-and-see8 timetable for privatization. In this
immediate partial privatization scenario, the investor would
purchase a minority block of shares (25 percent) with an
option to purchase up to 49 percent (or more) in the future.
Zita concluded that telecom is &almost always a
privatization pioneer in any country8 and that &no other
sector is better suited to lead the way8.

=======
Comment
=======


16. (C) Appropriate development of the Afghan telecom sector
could serve as a major revenue and job generator for the
fragile Afghan government. Privatization in telecom could
also help generate revenue and smooth the path for future
partial or full state-owned enterprises (SOE) privatizations.
The Afghan Cabinet reportedly debated privatization of
telecoms on April 12 and decided to wait for the present.
While the result is not what we had hoped, the fact that such
a Cabinet debate took place is a healthy sign. The merits of
privatization versus continued state control are being
actively considered at the MOC, although it remains unclear
whether economic or political considerations are paramount.
While a partial expropriation of AWCC/TSI would represent a
disaster for Afghanistan,s image, a partial privatization of
AfghanTel would be a major boost.


17. (C) The MOC allowing AWCC/TSI to buy out their 20 percent
share would enhance perceptions of Afghanistan,s business
climate even further. Perhaps the notion of allowing
AWCC/TSI to buy out the 20 percent stake would face
resistance in light of AWCC,s alleged poor performance over
the past year. AWCC,s position will be considerably
strengthened, however, if it turns out AKFED,s license
conditions include 100 percent private ownership. The
&privatization8 of the 20 percent MOC share of AWCC would
be virtually without political risk as all AWCC employees are
private and not public employees. AWCC has even agreed, if
national branding/prestige is a consideration, to change
their name to remove the identification with Afghanistan.


18. (C) There is at least some reason to hope a more
progressive and transparent telecom policy will be enacted
soon and that the stated goal of delineating the MOC,s
current multiple roles and possible scenarios for at least
some telecom privatization will be part of this urgently
needed reform. If so, a fully private AWCC/TSI and a
partially privatized AfghanTel would have to compete in an
open telecom market with new entrants, improving telecom
service and access for the Afghan population. The Embassy
will continue to advocate strongly for privatization and open
competition as general themes, and particularly focus our
privatization message on the Afghan telecom sector.
FINN