GOI AUCTIONS TELECOMS LICENSES FOR USD 3.75

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 002820

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/23/2017
TAGS: ANET ECPS PGOV IZ
SUBJECT: GOI AUCTIONS TELECOMS LICENSES FOR USD 3.75
BILLION AMID CRIES OF FOUL AND CHALLENGES TO THE DEAL'S
FINALIZATION

REF: A. A. BAGHDAD 02524

B. B. BAGHDAD 2402

Classified by Economic Minister Charles P. Ries for reasons
1.4(b) and (d).


1. (C) SUMMARY: The GOI auctioned three 15-year mobile
telecommunications licenses, each one fetching USD 1.25
billion up front, plus 18.5 percent of monthly gross revenues
and 15 percent of net profits. Two of three
incumbents--Asiacell and MTC Atheer--won new licenses, and
Korek Telecom won the third, potentially enabling it to
expand its heretofore Kurdish regional operations. The third
incumbent, Orascom Telecom, owner of central Iraq's Iraqna
network, withdrew as the bidding climbed; Orascom is out, but
the future of its Iraqna assets remains unclear. The
auction's results were mixed: the licenses garnered five
times the price the GOI had negotiated with the operators in
March 2007, but the process elicited cries of foul from
observers. A member of Iraq's Council of Representatives
(CoR) claimed the auction was unconstitutional, alleged
irregularities, and vowed to undo the deal legislatively when
the CoR returns from recess in September. The price the
licenses commanded evidenced some investors' willingness to
make substantial, long-term commitments in currently
profitable sectors of the Iraqi economy, but the high prices
paid will be difficult to amortize over the medium term.
Moreover, despite the involvement of Pricewaterhouse Coopers
(PwC),there are real questions about the transparency of the
process and uncertainties about whether the licenses will be
finalized as negotiated. These question may mean the
auction's results do little to make Iraq more attractive to
outside investors. END SUMMARY.

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LICENSES FETCH MORE THAN EXPECTED
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2. (C) Originally scheduled for September 2006, Finance
Minister Jabr chaired the auction, which took place in Amman,
Jordan, August 19-20, overseen by PwC. Representatives of
Iraq's Ministries of Finance, Planning, Communication, and
Science & Technology, as well as the Communications and Media
Commission (CMC),the Board of Supreme Audit, the Commission
on Public Integrity, and the CoR attended. The GOI had hoped
a dozen firms would participate, but only five did:
Sulimaniya-based Asiacell; Baghdad-based MTC Atheer, owned by
MTC of Kuwait; Cairo-based Orascom Telecom; Irbil-based
Korek; and, Istanbul-based Turkcell. Bidding began at USD
325 million per license, and Jabr held eighteen additional
rounds at USD 50 million increments. Turkcell withdrew at
USD 950 million, and Orascom at USD 1.15 billion.


3. (C) In the end Asiacell, MTC Atheer, and Korek took the
following terms: a lump sum USD 1.25 billion to be paid
within one month of the auction; 18.5 percent of monthly
gross revenues; and a 15 percent tax on corporate net
profits. Subscribers will also pay a .25 percent tax for
universal service and .25 percent for number portability.
Jabr publicly estimated that the licenses would bring the GOI
roughly USD 8 billion over fifteen years. The final license
price was five times that negotiated between the GOI and the
incumbent operators in March 2007. Several auction attendees
claimed that Jabr stated the evening beforehand he intended
to return to Baghdad with USD 3 billion (NOTE: Saudi Arabia
recently sold a license for USD 6.1 billion, and Egypt one
for USD 2.9 billion. END NOTE)

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CONCERNS FOR LACK OF TRANSPARENCY PROVE JUSTIFIED
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4. (C) CoR members objected when the GOI announced plans to
hold the auction in Amman, expressing concerns over a lack of
transparency and potential corruption (reftel A). Evidence
suggests their concerns were justified. A CoR member
attending the auction claimed the auction was
unconstitutional, arguing that the CoR removed executive
power from the CMC, which had contracted PwC to manage the
event, in September 2006. The member stated that undoing the
auction through legislation would be a top priority for the
CoR when it resumes session in September. In a separate
meeting with EconOffs, CoR Member Yonadam Kanna--Chairman of
the CoR's Economy, Investment & Reconstruction
Committee--stated that because Korek was owned by the
powerful Barzani family the firm received undue favorable
consideration. (NOTE: Kanna otherwise described the auction
as a success. END NOTE) Asiacell, for its part, sent a
letter to Prime Minister Nuri al Maliki arguing that Korek's
participation in the auction was improper because it did not
meet the requisite financial criteria by the date set forth

BAGHDAD 00002820 002 OF 002


in the bidding documents. Asiacell stated it may challenge
Korek's participation in Iraq's courts.


5. (C) Others complained about Jabr's chairing of the process
itself. The CMC had worked with PwC on safeguards to ensure
an orderly affair, but Jabr overrode several of them in the
event. Under the rules, once the license fee reached USD 500
million bidding was to have switched to the regulatory fee,
starting at 18.5 percent, but Jabr forged ahead to the
ultimately agreed USD 1.25 billion. In addition, a break was
scheduled for 20:00 on August 19, to give the participants an
opportunity to rest and review the terms, but Jabr pushed
through to 04:00 the morning of August 20. Jabr also added
the 15 percent net profits tax to the terms on the day of the
auction. Winning bidders have stated that they will raise
consumer prices by as much as 60 percent to compensate for
the additional charges.

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THE FATE OF ORASCOM'S IRAQNA ASSETS REMAINS UNCLEAR
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6. (C) Jabr stated that he was surprised when Orascom
withdrew. Telecoms analysts estimate the firm had invested
USD 300 million in its Baghdad-centered Iraqna network, and
Orascom itself claimed to have approximately 3 million
subscribers. On August 19, Orascom representatives stated
that the firm was "evaluating alternatives" with respect to
its Iraqna assets. A high-level GOI official said, however,
that within hours of the auction's conclusion, MTC Atheer
agreed to buy the Iraqna equipment and customer accounts for
USD 1.25 billion. The GOI official further stated that no
announcement would be made until the two firms finished a due
diligence review of the deal. Media sources report that both
MTC Atheer and Korek are in talks with Orascom to buy Iraqna
assets.

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COMMENT
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7. (C) In addition to CoR members' threats to undo the deal
legislatively, business concerns also threaten its
finalization. Korek based its strategy for expanding beyond
Iraqi Kurdistan on acquiring Iraqna's network and customer
base. If MTC Atheer concludes its reported purchase of
Iraqna's assets, Korek might renege and simply remain in its
established Kurdish regional market. Korek's withdrawal
would leave only Asiacell and MTC Atheer in Iraq's mobile
telecoms market. Industry sources in Dubai and Zurich also
report that MTC Atheer's parent company, MTC Kuwait, is
discussing selling itself to Saudi Telecom, and Iraq
presently has no telecommunications or competition law to
prevent either MTC Atheer or Saudi Telecom from purchasing
Asiacell and monopolizing the Iraqi mobile telecommunications
market. Such concerns could further encourage CoR
intervention.


8. (C) The good news from the auction is that it evidenced
some investors' willingness to commit billions of dollars to
long-term plans in sectors of the Iraqi economy believed
profitable, despite the ongoing security challenges. (NOTE:
Iraq has an estimated 8-10 million mobile telephone
subscribers out of an estimated population of 27.5 million,
up from a pre-war level of near zero, and analysts project
demand to grow. END NOTE) But the story is not all roses:
the funds derived from the auction will go directly to
Ministry of Finance coffers, and it is unclear how much of
the auction's proceeds will be available to be invested in
the telecommunications sector that generated them. More
important, the auction process--tainted by irregularities,
eleventh-hour changes to terms, and allegations of political
interference--did nothing to make Iraq more attractive to
outside investors.
CROCKER