YEMEN'S THIRD GSM TENDER: CHINESE MAKE AN OFFER

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 002426

SIPDIS

PLEASE PASS TO AMBASSADOR GROSS AND EB/CIP/SP

E.O. 12958: DECL: 08/15/2015
TAGS: PGOV EFIN ECPS EIND EINV ETTC KMPI YM CH ECON COM
SUBJECT: YEMEN'S THIRD GSM TENDER: CHINESE MAKE AN OFFER
ROYG CAN'T REFUSE

REF: SANAA 196

Classified By: DCM Nabeel Khoury for reasons 1.4 b and d.


1. (C) Summary. Ambassador met August 17 with Minister of
Telecommunications and Information Technology Abdulmalik
al-Moalimi to discuss the status of a third tender for a GSM
mobile phone operator. Post is advocating for Millicom,
which has a vending agreement with Motorola. On August 2,
the ROYG announced five official bids. The highest offer
came from Unitel, a previously unknown Chinese company, at
almost 50 million USD more than its closest competitor. The
Chinese bid raised questions about the transparency of the
tendering process, and possible deals with the Minister of
Telecommunications. The ROYG-owned CDMA operator, Yemen
Mobile, has proven highly unprofitable and left the Minister
vulnerable to accusations that he cost the Government
approximately 100 million USD by launching the venture.
Sources report that the Minister hopes to award the tender to
the Chinese, who will return the favor by covering the ROYG's
losses on Yemen Mobile. End summary.


2. (C) After a delay of nearly two years, on August 2, five
official bids were announced for a third GSM mobile phone
operator in Yemen. Yemen currently has two GSM companies,
Spacetel and Sabafon, and one CDMA operator, Yemen Mobile.
The highest bid came from Unitel (Chinese),at 149 million
USD; second was Oman Communications at 101.5 million USD;
Millicom offered 44 million USD, with an additional 7.5
million USD set aside for a telecommunications training
college in Yemen; Watania, the Kuwaiti telecom company, bid
34 million USD; and a fifth entity calling itself al-Kon, bid
51 million USD. By several accounts, a sixth bid by
SyriaTel, backed by Saudi billionaires Boqshan and al-Amoudi,
was disqualified at the last minute.

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Chinese Bid Shocks Observers
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3. (C) According to several witnesses, the Chinese bid caused
audible gasps at the tender meeting. Even the most
optimistic analyses of Yemen's telecom market indicate that
the bid is wildly overpriced, and immediately raised
questions about side-deals with the Minister of
Telecommunications. (Note: Minister Moalimi is Chinese
educated and brokered several deals with Chinese vendors to
support the ROYG-owned CDMA company, Yemen Mobile. End
note.) Ambassador inquired about the Chinese bid, and
Moalimi responded that he was "as surprised as you are." He
claimed he was distressed by the size of the bid, as he knew
it would draw attention to his ties with the Chinese. He
theorized that the Chinese market was saturated and that the
Chinese were anxious to expand to new countries, estimating
that the Yemen market could bear 3.5 million new subscribers.
Suspicions have been exacerbated by rumors that Unitel has
already unloaded two shipments of GSM equipment while the
tender supposedly has yet to be decided. According to the
official tender document, the winning bidder must deliver its
payment within two weeks in one lump sum. Few believe that
any company, the Chinese included, could deliver such a
substantial amount within the required time period.


4. (C) Tariq al-Haidary, General Manager of Sabafon, said
that Unitel will make the bulk of its payment by forgiving
loans owed by the ROYG to Chinese companies. Unitel is
unknown as a GSM operator, and was alternately reported by
the official Yemeni press as China Mobile and China Telecom.
It is widely believed that Unitel is a front for the Chinese
vending giant Huawei, which provides the technical backbone
for the Yemen Mobile system. (Note: All of these companies
are state-owned. End note.)


5. (C) Yemen Mobile was reportedly established with 80
million USD in loan guarantees from the Chinese Government,
and has been running in the red ever since. According to
Deputy Prime Minister Ahmad Sofan, the state-owned company
has yet to pay any taxes to the ROYG, despite Moalimi's
promises of huge profit. Yemen Mobile is closely associated
with the President's family, most notably Saleh's nephew
Yahya and his son Ahmad Ali, who are likely majority
shareholders. (reftel) As such, the prospect of erasing loan
payments to the Chinese is undoubtedly attractive to the
Minister.

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Some Bids More Equal Than Others
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6. (C) Fathi Fahem, the local business partner for Millicom,
believes that Unitel's bid is invalid under the terms of the
tender. Any association with Huawei would disqualify the bid
due to conflict of interest. According to the official
tender document, no foreign company can hold more than sixty
percent of the company, but Unitel's local investors are
relatively unknown. Moalimi identified them as former
Spacetel Deputy Commercial Manager al-Mashdali (who
reportedly has invested only 100,000 USD),as well as
al-'Aisi and Abdulkarim Abdulelah. In addition, the tender
requires that all bids must include an established telecom
operator and there is no record of Unitel providing such
service anywhere in the world. By these standards, the
Al-Kon bid is also suspect. The company is headed by
Abdulsalaam al-Ghamesh, son of Ghaleb al-Ghamesh, Yemen's
Intelligence Chief with the Political Security Organization.
Despite claims that he is recruiting an American company,
there is as yet no declared operating partner.


7. (C) Of the remaining companies, Oman Communications is
well-respected, but operates only in its home country. Oman
recently opened its own market to competition, which some
believe is motivating the company to seek out new markets in
neighboring Yemen. Oman Communications, local partner is
Saleh Ali Muhsen, brother of one of Yemen's most powerful
regional military commanders, Mohammed Ali Muhsen. Haidary
believes that Oman was tipped off by the Minister about the
Unitel bid, and as result raised their bid well above what
they originally intended to offer. In fact, Moalimi cited
the Oman bid as proof that Unitel's investment was not beyond
reason, accusing the other three companies of being too
conservative. Watania is also a well-known company that is
expanding aggressively in the region, and has partnered
locally with the business giant Hayel Saeed.


8. (C) Legal, technical, and financial committees are
currently evaluating the bids, and the Ministry will offer
its recommendations for a short-list to the inter-ministerial
High Tendering Committee by mid-September. The Committee
will then make its selection and refer the decision to the
Cabinet. The bids are evaluated according to a points
system, in which 60 percent is based on the value of the bid
and the remaining 40 percent looks at experience, quality of
service, and other factors. By the Minister's own admission,
this rating system all but requires the Ministry to recommend
Unitel as its first choice. In Millicom's view, however, any
bid that does not meet the basic requirements of the tender
should be disqualified completely, and not referred to the
High Tendering Committee.

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Post Backs Millicom Bid
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9. (U) Millicom is a NASDAQ-listed corporation with a
majority of American shareholders. As a result of a vending
partnership with Motorola, post received approval from the
Department of Commerce to advocate on their behalf. Millicom
is focused primarily on emerging markets, and is currently
operating in such countries as Pakistan, Paraguay, and
Vietnam, with over 400 million total subscribers. As a
member of the media conglomerate The Kinnevik Group, Millicom
offers its subsidiary companies and host countries
advertising space in media such as the free Metro paper
available in many international cities. Millicom executives
believe this could be of great benefit to Yemen's tourism
sector.


10. (SBU) Of the five finalists, Millicom contends that it is
most qualified to operate Yemen's third GSM company. They
have worldwide operating experience, a track record in
increasing telecom penetration in developing markets, and
submitted what they believe is a competitive bid. Local
partner Fahem is considered by fellow businessmen to be a
respectable and highly successful entrepreneur, with diverse
interests including commodities imports and large holdings in
the U.S. He has good contacts in the ROYG, but is not
considered as much of an insider as competitors Hayel Saeed,
Ghamesh, or Ali Muhsen.

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U.S. Demonstrates Some Influence in Tendering Process
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11. (C) In the days preceding the deadline, it seemed likely
that the ROYG would bend the rules to accommodate powerful
interests who were unable to submit bids on time. A number
of influential businessmen, including the Rowaishan family,
Yahya Saleh (head of the Central Security Organization),and
two Saudis of Yemeni origin, Boqshan and al-Amoudi, requested
an extension. (Note: Yahya approached several competing
companies, including Millicom, in an attempt to become a
partner, and may still attach himself to the winning bid.
End note.) A number of potential international partners
were mentioned, including Deutsche Telecom Consulting,
Vodacom of South Africa, and Etisalat of UAE, but none was
willing to commit by August 2.


12. (C) Millicom representative David Kimche expressed to DCM
that extending the deadline was contrary to international
tendering practices and would open the door to backroom
deals. DCM sent a letter to Minister Moalimi and Prime
Minister Bajammal requesting that the ROYG honor its
tendering guidelines for the sake of the broader investment
climate. According to Haidary, Moalimi was upset that the
process had attracted outside attention, but ultimately
decided to follow post's advice.

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Will ROYG Give in to Chinese Temptation?
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13. (C) Comment: Despite intense competition between the
three existing wireless operators, mobile penetration remains
low in Yemen with fewer than 1.5 million subscribers.
Current rates are relatively low for the region, but remain
expensive for the average Yemeni consumer. Increased
competition from a legitimate third GSM operator would
benefit Yemeni subscribers and expand coverage throughout the
country. Despite indications that the Chinese bid does not
follow tendering guidelines, ROYG officials will find the 149
million USD windfall hard to pass up. According to Moalimi,
the Minister of Finance is already pushing to include tender
profits in a supplementary budget. If the Yemen Mobile
experience is any indication, Unitel will likely recoup their
up-front investment by delivering poor service and
cannibalizing existing markets. By choosing a shady operator
in exchange for quick profits and loan forgiveness, the ROYG
will deliver yet another blow to the overall investment
climate, and undermine one of the few areas of private sector
growth in Yemen. End comment.
Krajeski