Identifier
Created
Classification
Origin
07KABUL926
2007-03-20 13:13:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kabul
Cable title:  

AFTEL'S PUZZLING EXPANSION PLANS

Tags:  ECPS EFIN EINV ECON KPRV PGOV AF 
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VZCZCXRO0185
RR RUEHDBU RUEHIK RUEHYG
DE RUEHBUL #0926/01 0791313
ZNR UUUUU ZZH
R 201313Z MAR 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC 6949
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
UNCLAS SECTION 01 OF 03 KABUL 000926 

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E.O. 12958 N/A
TAGS: ECPS EFIN EINV ECON KPRV PGOV AF
SUBJECT: AFTEL'S PUZZLING EXPANSION PLANS


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SUMMARY
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UNCLAS SECTION 01 OF 03 KABUL 000926

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DEPT FOR SCA/FO, SCA/RA, AND SCA/A
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E.O. 12958 N/A
TAGS: ECPS EFIN EINV ECON KPRV PGOV AF
SUBJECT: AFTEL'S PUZZLING EXPANSION PLANS


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SUMMARY
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1. (SBU) State-owned Afghan Telecom plans to quadruple the number of
lines the company has by an aggressive build-out of wireless and
copper networks, funded by the GoA and donors. The wireless plans
will put AfTel into competition with mobile service providers, which
could bring charges of anti-competitive behavior because of AfTel's
government funding. The copper network plans appear to be
over-sized for the market of business customers for digital
services. The expansion is driven by a political imperative to
extend service to more of the population and a desire to add quick
value for privatization. To duplicate Afghanistan's remarkable
success in wireless telecom, the GoA would be better served focusing
on a quick sale to get the state player out of the way of private
investment. The Embassy intends to start a dialogue with the GoA on
its approach to privatizing AfTel. End summary.


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SUCCESS WHERE GOVERNMENT ISN'T
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2. (SBU) Because it has attracted over $700 million in foreign
direct investment, the telecommunications sector has been
Afghanistan's biggest economic success story: it has grown from
85,000 total subscribers (including 35,000 satellite phones) in 2002
to over 2.4 million now and has expanded coverage from a handful of
cities to all the provinces in the country. Nearly all of this
progress has happened on the wireless side, though, and it has
happened as a result of the GoA getting out of the way. The same
has not happened on the fixed-line side, in part because a
phlegmatic state-owned enterprise still has a monopoly and responds
more to political direction than to market forces.

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DRAMATIC PLANS--DO THEY MAKE SENSE?
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3. (SBU) In a recent meeting at Afghan Telecom, senior planning and
technical staff briefed Econoff and Afghanistan Reconstruction Group

(ARG) advisor on the company's plans for expanding its network.
These plans are, to say the least, ambitious: 150,000 new copper
lines, completion of facilities for 123,000 new CDMA (wireless)
lines, and an optical fiber ring around the country's ring road.
When completed, these plans would roughly quadruple the company's
capacity. The total cost of the copper and CDMA programs will be
$65 million, $17 million of which has been spent (mostly on CDMA
equipment). The CDMA project is partly funded by India ($13
million); the $40 million copper project is to be partly funded by
the GoA ($30 million),with the balance expected to be provided by
other donors. The company has recently awarded a contract for the
partly GoA-funded $65 million optical fiber cable ring around
Afghanistan to Chinese equipment provider ZTE.


4. (SBU) The decision to expand the AfTel network so dramatically is
somewhat puzzling from a business standpoint, given that AfTel's
largest problem at the moment is not the size of its network but its
ability to collect from its customers. AfTel described its
collection rate as about 30 percent, and it is uncertain how large
its subscriber base is. (NOTE: An advisor to AfTel has said 30
percent is a wild guess--probably on the high side--and that the
subscriber base might be something on the order of 70,000. End
note.) The company recently installed a new Afghanistan
Reconstruction Trust Fund (ARTF)-financed billing system for
post-paid customers (currently all AfTel customers are post-paid),
which should help with collections once it is operational. The
company's recently launched CDMA service is running on a post-paid
basis--an approach no other mobile provider dares to take in a
country with no street addresses, let alone credit ratings. AfTel
plans to roll out pre-paid billing later this year and to migrate
all of its mobile customers and most of its fixed-line customers to
that system.


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KABUL 00000926 002 OF 003


CDMA TO COMPETE WITH GSM
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5. (SBU) The CDMA system itself is something of a puzzle. AfTel had
been describing this as a build-out of digital fixed-line service
(wireless local loop),but has recently begun to describe it as
including "full mobility." Because AfTel enjoys the country's only
unified service license, it can offer any service it pleases,
including fully mobile telephony. (The regulatory authority made a
specific decision in 2004 to allow full mobility service under
AfTel's license.) But AfTel is receiving GoA and donor funding for
this and other projects, so it will be asking for trouble from the
GSM operators if it does begin to offer a directly competitive
service in areas covered by the GSM operators. At the very least,
this potentially anti-competitive behavior on the part of the GoA
could dampen enthusiasm for further outside investment in
telecommunications.


6. (SBU) Meanwhile, the Afghanistan Telecommunications Regulatory
Authority (ATRA) has granted a number of district-level CDMA
licenses for local fixed service providers (LFSPs) to provide
wireless local loop service. The first of these LFSPs is scheduled
to launch service this month in Mazar-i-Sharif, followed by a
roll-out in adjacent districts. While these licenses are intended
to accelerate service roll-out to previously under-served rural
markets, in practice they may lay the foundation for real
competition to AfTel's fixed-line service in provincial population
centers.


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COPPER FOR WHOM?
--------------


7. (SBU) The expansion of AfTel's copper network makes less than
perfect sense from a business perspective, too. AfTel describes
this part of its expansion as a move to deliver digital services to
its current and prospective business customers. But demand for
150,000 digital business lines is so far in the future that industry
insiders say this aspect of the expansion makes no business sense
now. That said, another consideration in the deployment of more
copper is the scarcity of electrical power in Afghanistan, which
makes wireless local loop far more problematic, since electrical
generators have to be installed at each base station, and some
source of power (usually battery) has to be available with each
subscriber. Installing copper lines is a way of avoiding the
electricity issue, since land-line technology does not require an
outside power source.


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COMMENT: A CERTAIN POLITICAL LOGIC
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8. (SBU) There is a certain logic to both the copper and the CDMA
expansions from the Ministry of Communications' perspective. First,
there is a political imperative to bring public utilities to more of
Afghanistan's population.
At this critical juncture in Afghanistan's history, getting service
out to the provinces is a legitimate priority. On paper, a quick
expansion looks like a good solution, if one ignores the economic
sustainability of AfTel. AfTel has been somewhat corporatized, but
in reality it is still part of the MoC. The expansion is
essentially a command performance by a state player that may believe
it is still operating in a command economy. The key question now is
whether the expansion will actually address the needs of the
underserved portion of the populace. To the extent that the
build-out does that, it will avoid direct competition with the
private-sector operators. But it is difficult to judge this from
the plans alone; the answer will become clear as the build-out is
actually implemented.


9. (SBU) Second, the MoC has been promising to privatize AfTel this
year. (NOTE: It has been promising, but until very recently not
planning, to privatize. This year's draft strategic plan initially
alluded to a privatization, but set no timelines and did not include
privatization within its lists of goals. In response to Embassy's

KABUL 00000926 003 OF 003


input, the plan was changed to include a target date of end 2008 for
privatization. End note.) With a small and flaccid subscriber
base, paltry revenues, and very modest technical progress to report
in recent years, AfTel is an unappetizing privatization offer. In
keeping with the usual course of state telecom privatizations, the
GoA appears to want to pump some quick value into AfTel to ready it
for the market. Thus there may also be some logic to expanding the
network before fixing a severe collections problem, and to entering
mobile competition against three (soon to be four) larger, more
established, and generally better funded GSM providers.


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COMMENT, CONT'D.: GET AFTEL OUT OF THE WAY
--------------


10. (SBU) At least one knowledgeable insider describes AfTel
leadership as undecided about when and how to privatize. As is
generally true for privatizations, there is disagreement among
technical assistance advisors as well. Some believe a quick sale
will make room for private investment to happen sooner, driving
expansion of services and tax revenues faster than the state
enterprise will ever do. Others want to maximize the value of the
sale to ensure serious and committed investors are running things.
This takes more time and investment from the state. Both courses
hold their own hazards, but inertia dictates the easiest and
politically most palatable course: continue to run AfTel as a state
enterprise, try to maximize social benefit, and make the
privatization decision later, when things might be better. Given
the sad record of much more capable and better-funded governments at
turning around faltering state enterprises, this easier course is
not likely to end well. Thus the Embassy intends to begin a
substantive dialogue with the MoC on its approach to privatizing
AfTel. End comment.

Neumann