UPDATE ON COMMERCIAL DISPUTES AFFECTING US

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000134 SIPDIS STATE PASS TO USTR DOC PASS TO ITA ZHEN GONG CROSS STATE FOR EAP/CM, EB/IFD/OIA AND EB/CIP SENSITIVE SIPDIS E.O. 12958: N/A TAGS: KIPR ETRD ECON PGOV MG SUBJECT: UPDATE ON COMMERCIAL DISPUTES AFFECTING US TELECOMMUNICATION FIRM IN MONGOLIA Ref: A) ULAANBAATAR 00564, B) ULAANBAATAR 00572 SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. ¶1. (SBU) SUMMARY:. Summary. Potential American investment into the wireless telephony business in Mongolia, based on a recent case, turned soursouth, when the Mongolian government agency responsible for regulating telecommunications unilaterally cancelled an operating license in apparent violation of Mongolian regulations, laws, and international treaty obligations. The Mongolians have failed to justify their actions, and further review into the affair reveals conflicts of interest among state-owned operations, private monopolies and new American entrants into the wireless field. However, the American investors in this case are not without blame, giving the appearance that they are willing to use political connections to circumvent transparent rules and regulations. American lapses aside, the apparent failure of the Mongolian government to conduct itself transparently, according to its own current regulatory and legal environment, points to weaknesses in the administrative system that should encourage investment and innovation but has only discouraged it. Post recommends that tThese problems and remedies for them should bbe discussed at the March 2006 Trade Investment Framework Agreement (TIFA) discussions and be considered as road blocks to any ffree trade talks down the pike. END SUMMARYEnd Summary. BACKGROUND OF DISPUTE BETWEEN AMERICAN FIRM AND MONGOLIAN REGULATORS -------------- -------------- -------------- 2.(SBU) In winter 2004, the American wireless telephony provider UTStarcom (UTS) came to Mongolia with US$30 million to invest in a wireless network that would go head-to-head with existing cellular-phone services providers. To this end, UTS created a joint venture company (JVC),Citiphone, with a Mongolian firm, LOMAX. Citiphone's primary competition was not the state-owned telephone company, which has limited investments in wireless networks; but the two privately owned and operated cellular providers. Over 2005 Citiphone obtained an operating license from the Mongolian Communications Regulatory Commission (CRC) for US$50,000, prepared software, and began shipping in the handsets and transmitting equipment into Mongolia for a fall startup. However, just as Citiphone was set to provide service in autumnFall 2005, it learned that its license had been revoked by the MCRCat Mongolian Communication Regulatory Commission (CRC),at the order of the Chairman of the Mongolian Information and Communication Technology Agency (ICTA). We advised Citiphone to obtain the services of legal counsel to advise it on the Mongolian laws that might be relevant to the issue. 3.(SBU) Post's Commercial Specialist then met with the ICTA Chair to discuss his motives for, and process used, to force the CRC to cancel a license(Note: The Chair is a member of the Democratic Party of Mongolia and was educated in Texas). He claimed that Citiphone found a loophole in the licensing regime that might give them an advantage over existing service providers. We then asked him to explain how his action was consistent with current law and regulation, as well as Mongolia's WTO obligations to not use non-tariff barriers to restrict market access. He assured us that this was all done openly and transparently. But we raised two objections then and these still remain unanswered. -- (1) Motives aside, does not the Government of Mongolia have an obligation to honor licenses it issues?; -- (2)Contradicting the Chair, we noted that no one among Citiphone, post, our contacts in Parliament or the Mongolian Ministry of Industry and Trade, knew that ULAANBAATA 00000134 002 OF 003 a revision of the licensing regime was in the offing, had a chance to comment upon it, or were allowed the opportunity to contest administratively. 4.(SBU) The Chair refused to answer these questions, claiming that revision of the licensing regulations was done internally without outside comment or review, because only ICTA would understand the complexity of the issues. CURRENT STATUS OF THE CITIPHONE DISPUTE -------------- 5.(SBU) In December 2005, Ambassador Slutz met with thethis ICTA Chair to discuss this dispute. The Ambassador pressed the Chair to explain his motives and answer the questions posed by the Commercial Specialist. The ICTA Chair stated that technical concerns of law and regulation had nothing to do with his decision to cancel the valid license. Intense political pressure from the telecommunications duopoly that currently controls the wireless market and a desire to save cellular service in Mongolia from cheap competition drove him to cancel the license unilaterally. Explicitly disdaining markets and the rights of consumers to choose the sort of services they want, he said that he had no plans to reconsider his decision, leaving it to Citiphone to pursue the matter through the Mongolian courts. ICTA'S NON-MARKET APPROACH TO TELECOMMUNICATIONS REGULATION -------------- -------------- -------------- 6.(SBU) During the same meeting, the Chair amplified on his views about free market provision of telecommunication and Internet services. Basically, consumers are ignorant about the needs of the state and would always choose cheaper technologies over higher- end expensive services that offer neat things like streaming video over the cell-phone. Hence the state must step into to prevent thoughtless consumers from voting with their pocket books. In this light, he proposeds a floor price for internet access charges, forcing all Internet Service Providers (ISP) to charge the same price, thus avoiding the pernicious affects of competition on the private and state-owned ISPs. 7.(SBU) In addition, he would force all private ISPs and voice over phone (VOIP) service providers to use the state-owned telecom as the portal for international and domestic both originating or terminating in Mongolia. The stated aim here is to plump up the value of the state-owned telecom prior to privatization by giving it a monopoly franchise over its rivals. He argued that this would make both pricing and service cheaper, efficient, clear, and stable but was not able to offer an example where this sort of policy actually produced those results. Given that Mongolians pay pennies now for reliable international phone connectivity and relatively low cost for Internet access, it is hard to see how placing access rights and charges under state control could improve the situation for the consumers. More obvious is that the state as both regulator and service provider has a conflict of interest that is affecting policy formation and regulation. WEAKNESSES IN THE AMERICAN CASE -------------- ¶8. (SBU) The American firms that financed and provided technical expertise to Citiphone are not blameless in this dispute. The Mongolian partner firm has extensive political ties that reach into Parliament. The brother of one of Citiphone's Mongolian investors is a Member of Parliament, a member of the current MPRP government, and man whose business interests may involve Citiphone, although all current owners of Citiphone deny any such involvement. While the American investors deny that they ever used these connections to their advantage, ULAANBAATA 00000134 003 OF 003 they have often pointed them out to us as positive assets. ICTA has complained about the apparent double standard of Americans demanding to receive open and consistent treatment under the current legal environment, and then turning to political connections to grease the wheels. These complaints culminated in the ICTA Chair claiming to the Ambassador that an agent of Citiphone attempted to bribe him to reverse his license cancellation (Note: Details of this charge were submitted to the Department of Justice on January 27, 2006). Accusations of bribery aside, the Americans appear somewhat hypocritical in how they have pursued Citiphone's interests, an appearance which has weakened their hand with Mongolian government. COMMENT -------------- ¶9. (SBU) We would prefer, and have advised all parties, that a settlement reached transparently following all relevant regulations and statutes would be the ideal goal, but not one of the players has taken any steps to such an end. Putting aside the merits or weaknesses of each side's respective positions, the GOM appears to have acted in an extremely high-handed and arbitrary manner that prejudices consumer interests in favor of state-owned and private monopoly interest, without reference to its own laws, regulations and treaty obligations. Post recommends eExploring why this system failed, why that failure harms both investors and consumers, and how to correct it, should be topics discussed at the 2006 March 2006 TIFA meeting and highlighted as kept in mind as we consider roadblocks to any free trade agreement talks. SLUTZ