LEBANON: TELECOM SECTOR -- AS CONFUSING AS EVER

C O N F I D E N T I A L SECTION 01 OF 04 BEIRUT 001546

SIPDIS

SIPDIS

NSC FOR ABRAMS/SINGH/GAVITO/YERGER/DEMOPULOS, STATE FOR
NEA/ELA

E.O. 12958: DECL: 10/03/2017
TAGS: ENIV PGOV PREL PTER LE
SUBJECT: LEBANON: TELECOM SECTOR -- AS CONFUSING AS EVER

Classified By: DCM William Grant for reasons 1.4 (b) and (d)

SUMMARY
--------------


1. (C) Both Telecom Minister Hamadeh and Transportation
Regulatory Authority (TRA) Chairman Shehadi are optimistic
about the launch of the mobile telecom sale, but Shehadi
appears to be struggling to get the TRA up and running. In
earlier meetings with USG officials, Hamadeh appeared to
support the TRA; Shehadi implied this might not be true any
longer. Ogero, the antiquated fixed line company, appears to
be the subject of special treatment by the Minister, and
received mobile telecommunications equipment as a gift from
China. The road show opening the sale of the two mobile
telecom licenses could launch, but there is no marketing plan
yet, and some details need to be resolved. End summary.

MEETINGS WITH HAMADEH AND
SHEHADI ON PRIVATIZATION
--------------


2. (C) In separate meetings September 13 and 14 EEB PDAS
Elizabeth Dibble, NEA/ELA Deputy Director Steve Newhouse and
Econoffs met with Minister of Telecommunications Marwan
Hamadeh, and Chairman of the Telecommunications Regulatory
Authority (TRA) Dr. Kamel Shehadi and met again with Dr.
Shehadi on September 27. This cable reviews the status of
the privatization of the telecommunications sector as
outlined by Hamadeh and Shehadi in these meetings, as well as
information from other contacts.

HAMADEH POSITIVE, BUT HINTS
OF OGERO GETTING AHEAD OF ITSELF
--------------


3. (C) In their separate meetings with PDAS Dibble, Shehadi
and Hamadeh were both very positive about the launch of the
road show to sell the two mobile telecom licenses, expected
to take place before the end of September, noting everything
was in place to proceed (note: it did not occur. End note).
Both appeared firm in their conviction that the GOL had the
political will to sell; only the emergence of a new
government after presidential elections that rejected the
idea of privatization might delay the proceedings. Hamadeh
in particular appeared to be at ease with the notion of
privatization, fully ready to move ahead immediately and
without any reservations about the process, the sale, or the
TRA. However, during the course of the meeting he
unexpectedly referenced Ogero's mobile telecom business.
(Note: Ogero, the antiquated fixed line company which the GOL
plans to corporatize and then privatize in 2008, does not
have a mobile service; the plan is to corporatize Ogero, then
privatize the company as Liban Telecom. Only then will the
TRA make the decision to allow Liban Telecom a mobile
license. End note.)

SHEHADI HAPPY WITH U.S. TRIP,
BUT DISAPPOINTED WITH GOL
PROGRESS ON PRIVATIZATION
--------------


4. (C) Shehadi was very positive about the reception he
received in Washington for a series of meetings, arranged by
U.S. Telecommunications Training Institute. He stressed the
opportunities for collaboration between the USG and the GOL
regarding training, telecom regulation, and business
opportunities. However, he was a lot less upbeat about the
overall privatization situation. He was very discouraged
about the lack of progress on the part of the GOL while he
was away. He described waiting in the office of Hamadeh all
day to try to push for decisions required to move ahead with
the sale.

TRA HIRING IN QUESTION
--------------


5. (C) According to Shehadi, the biggest issue for the TRA
currently is recruiting. The TRA is not following the
prescribed civil service hiring protocol, and he believes the
Prime Minister "has been convinced" that this is illegal.
Shehadi views his hiring process as transparent and within
the guidelines, but believes that Ministry of
Telecommunications Director General Abdel Menim Youssef is a
roadblock. Youssef is reportedly actively discouraging
Ministry of Telecommunications (MOT) staff from joining the

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TRA, including threatening them with legal action if they do
join. Shehadi is reluctant to continue hiring under these
circumstances.

TRA FUNDING IN
QUESTION AS WELL
--------------


6. (C) The second major issue is funding. Although the
cabinet approved the TRA's overall budget, each allotment of
funds requires cabinet approval. The TRA expected to receive
the second installment of funds this week, but even that
amount will only bring the allocated funds to less than 25
percent of the annual TRA budget. In order to keep the TRA
solvent for the balance of 2007, the cabinet must issue a
ministerial degree for an additional 25 percent of the total
at the next cabinet meeting. Because Parliament Speaker
Nabih Berri has not called a session of parliament since late
in 2006, no new laws can be passed through the normal
constitutional process. The only option, therefore, has been
for the cabinet to approve issues such as new funding. This
can only be done if the cabinet originally approves a
measure, say the funding of the TRA, and then, when the
degree cannot go for parliamentary approval, the constitution
allows the cabinet to review the same item fifteen days
later, and if still in agreement, the item can be re-approved
and it becomes legal. However, if parliament, which is
scheduled to resume October 16, resumes meeting and takes on
its normal work in the near future, it is not clear if the
TRA funding will be subject to the normal constitutional
procedure or if it will have already been passed by the
cabinet twice. Only after one of these two possible options
concludes will the TRA have the funding necessary to continue
operations.

CHINA AND OGERO: WHERE
DID THE DEAL COME FROM?
--------------


7. (C) Reflecting on the lack of funding and the recruiting
issues, Shehadi said he believes that the TRA might not have
the full support of Minister Hamadeh. He cited a number of
incidents that convince him of this. All of them involve
Ogero, the fixed line company, and its chairman Abdel Menim
Youssef. Shehadi believes Youssef intends to circumvent the
TRA in his bid to gain control of an upgraded Liban Telecom,
the company that will result from the privatization of Ogero.
According to Shehadi, China is supplying Ogero with $7.5
million in equipment and technical support to establish a
GSM/mobile telephone system for Ogero. Ogero and the GOL did
not tender this purchase, and have identified it as a
donation by the Chinese in response to Paris III. (Note: We
have no record of a Chinese donation of this type or
magnitude. End note.) To operate this system, Youssef
"took" ten megahertz of bandwidth for the sole use of Ogero.
Shehadi said that Youssef backdated the documentation
securing this bandwidth so that it appeared to predate an
August 25, 2007, letter from the TRA freezing the
distribution of bandwidth and attempting to identify
bandwidth currently in use. The control and allocation of
bandwidth is by law a TRA function.

MINUTE-BY-MINUTE RUMORS
--------------


8. (C) Shehadi later told us that the cabinet recently
extended the term of the Ogero board, and delegated to
Youssef specifically power to "do anything needed to launch
Liban Telecom." Shehadi believes that Youssef intends to
circumvent the TRA, and Shehadi vowed to "take the GOL to
court over this, if true." (Note: Our contacts within the
MOT and the Ministry of Finance (MOF) confirmed that the
cabinet extended the term of the Ogero board, which expired
in September 2007. End note.)

EXPLAINING THE
CHINESE CONNECTION
--------------


9. (C) A reliable source in the MOT, asked to confirm several
of Shehadi's remarks, was unaware of any decision to award
Youssef full control over the privatization of Liban Telecom.
We also received no confirmation of this decision regarding
Youssef and Liban Telecom from anyone present at the meeting.
However, a Ministry of Telecommunications official was able
to give more details about the GSM equipment from China.

BEIRUT 00001546 003 OF 004


According to him, it is critical to make a clear distinction
between Ogero -- the currently existing fixed-line company --
and Liban Telecom -- a potential and still unrealized concern
to be formed by the privatization of Ogero. The Chinese,
desiring an entree into the telecom market in Lebanon,
offered to donate $5 million in telecom equipment of any kind
to the GOL prior to Paris III. The GOL and specifically the
MOT were able to choose from a variety of equipment, and
chose GSM equipment to establish a mobile telephone system.
Ogero does not own a mobile license, but Liban Telecom will
have one when privatized. Although there is no way that
Ogero can legally operate a GSM system, Ogero is setting up
such a system, using expertise from the two mobile company
operators, Alpha and MTC. After privatization, any
intermingling of Liban Telecom and competitors Alpha and MTC
would be a conflict of interest, and the owner supervisory
board of the MOT would prohibit it. However, until
privatization takes place it cannot be forbidden. The
apparent desired outcome, according to our source, would be
that Liban Telecom would emerge with an operational mobile
telephone system, for which it paid nothing, and the Chinese
would have a lead in bidding on the company or any future
tenders.

DETAILS ASIDE,
ROAD SHOW IS READY
--------------


10. (C) Shehadi still believes that the preparations for the
sale of the two mobile licenses are on track, and the road
show is ready to go. The text of the required documents is
almost ready, and Minister of Finance is driving the process
within the cabinet. The PM decided that revenue sharing will
be either 0 percent or 10 percent. The final decision will
be made between the first and second rounds of bidding, and
will depend on the results of the first round, where bidders
will bid on both options. Shehadi admits that Minister of
Finance Jihad Azour might still wish to push for a higher
percentage; he previously pushed hard for 20 percent. The
cabinet has not yet decided how many shares the GOL will sell
to the companies who buy the licenses. Potentially the GOL
can hold back one third of the shares, to either sell later
or hold permanently. The cabinet must make this decision
prior to the sale, and Shehadi believes the GOL will never
sell those shares. Shehadi believes that a combination of
revenue sharing and the revenue earned on the 33 percent of
the shares that the GOL will not sell will replace the
revenues from the mobile companies, which represent both a
significant and the largest portion of the revenues of the
GOL.

AUCTION DETAILS
--------------


11. (C) At this point, the TRA would like to open the
"virtual data room" (VDR) which will allow the road show to
begin, and allow potential bidders to look at the offer. If
the TRA could do this, Shehadi could move ahead on other
issues. Asked what the potential bidders might think about
possible future nationalization of the newly formed
companies, Shehadi thought that bidders would all discount
their bids based on the security situation, but also believes
that there is sufficient precedent to indicate fair
treatment. The GOL legal advisors, Le Boeuf, are planning
the auction room. They are drafting the design, which will
require approval by the TRA and then the MOT. After that,
the VDR can open. The road show should launch soon in order
to meet the deadline of a sale prior to June 2008. This date
is both a benchmark date for Paris III donations (including a
U.S. tranche) and marks the end of the current management
contracts with the two mobile companies. However, the GOL
can extend these contracts on a month-by-month basis.

MARKETING PLAN MISSING
--------------


12. (C) What is missing, Shehadi believes, is a marketing
plan. Ziad Hayek of the Higher Council for Privatization,
who will be responsible for the sale along with the TRA,
reportedly told Shehadi he said he has no plan or budget for
a plan, and it will be "left to the banks" to market the
sale. Shehadi believes that this sale will need a special
marketing effort to attract the right bidders, such as U.S.
firms who will not otherwise notice the offer. However, the
GOL does not want a plan and does not want to spend the money
to develop one, he said.

BEIRUT 00001546 004 OF 004



COMMENT
--------------


14. (C) Tracking the status of the telecommunications sector
in Lebanon is often like trying to tell time by looking only
at the second hand of a watch, so progress is difficult to
measure. Despite all assurances that the privatization is
progressing in a timely manner, it appears that there are
still many obstacles to the sale of the mobile licenses.
Even the establishment of the Telecom Regulatory Authority,
which seemed to be secure, may be a victim of political
wrangling, unless the funding and hiring issues are resolved.
End comment.


15. (U) PDAS Dibble has cleared this cable.
FELTMAN