REPORTS OF ZAIN'S IMMINENT DEMISE ARE GREATLY

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 001366

SIPDIS

SIPDIS

E.O. 12958: DECL: 05/01/2018
TAGS: ECON ECPS EINT
SUBJECT: REPORTS OF ZAIN'S IMMINENT DEMISE ARE GREATLY
EXAGGERATED

Classified By: Charles P. Ries for Reasons 1.4(b) and (d).


1. (C//REL MCFI) SUMMARY: Several former USG officials and
some non-mainstream media reports have claimed that Zain,
Iraq's leading mobile telecommunications operator, risks
the collapse of its network infrastructure on May 14, 2008,
if it fails to conclude negotiations with its private
security contractor. The reports have also asserted that a
Zain network breakdown would create dire consequences for
Embassy Baghdad and the Coalition, some of whose personnel
utilize Zain's services. A former Embassy Baghdad official
now involved in the dispute as a private consultant has,
however, informed Econoffs that: (a) Zain's differences
with its security contractor are in fact a sideshow to
buyout negotiations between Zain's majority and minority
shareholders; (b) the shareholders would likely resolve
their dispute before any ill befell Zain's network; and (c)
parties with financial interests in the outcome of the
negotiations have fed the Washington interagency and the
media a doomsday scenario of Zain's collapse to goad the
USG into pressuring the firm's majority shareholders into
making concessions to their junior partners.


2. (C//REL MCFI) SUMMARY CONTINUED: Post assesses as low
the risk that the shareholders would allow their
disagreements to deteriorate such that the very investment
over which they are arguing would be damaged and devalued.
Multi-National Corps Iraq (MNC-I) has analyzed the potential
fallout for the Coalition of a Zain network collapse and
judged that our forces would have sufficient communications
redundancy to manage any degradation in Zain's service.
Post has advised and reiterated to the interested parties,
as well as relevant GOI counterparts, that the USG and the
Coalition: (a) take no particular position in this dispute,
which is a private matter to be resolved by the parties
themselves; (b) encourage the parties to resolve their
differences quickly, amicably, peacefully, and within the
bounds of Iraqi law; and (c) are not represented by the
former Embassy Baghdad official involved in the
negotiations as a private consultant. END SUMMARY.

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THE HISTORY OF THE ZAIN SHAREHOLDER DISPUTE
--------------


3. (C//REL MCFI) Zain used to do business in southern Iraq
as MTC Atheer pursuant to a regional license granted by the
Coalition Provisional Authority (CPA) in 2004. MTC Atheer
was owned 31 percent by its parent company, MTC Kuwait, 31
percent by the Kuwaiti Kharafi Group, and 38 percent by the
Iraq-based Dijla Group. MTC Kuwait is a leading regional
mobile telecommunications firm with subsidiary companies
throughout the Middle East. After MTC Atheer won a
nationwide Iraq mobile telecommunications operator license
for USD 1.25 billion in September 2007, its parent company,
MTC Kuwait, bought the Karafi Group's 31 percent stake,
establishing itself as majority shareholder in MTC Atheer.
MTC Atheer subsequently acquired for USD 1.2 billion the
assets of the CPA-licensed central Iraq regional operator,
Iraqna. (NOTE: Iraqna bowed out of the bidding for a
nationwide license at the September 2007 auction. END
NOTE.) MTC Kuwait, and by extension its subordinate
companies, at the same time began the process of
re-branding themselves as "Zain."


4. (C//REL MCFI) Post understands that the Dijla Group
contributed little to no capital to MTC Atheer at its
inception in 2004, nor did it help pay for the nationwide
license or the Iraqna acquisition. Instead Dijla--a family
holding company with diverse commercial interests
throughout Iraq--contributed as an MTC Atheer, and later
Zain-Iraq, shareholder its personal connections to the GOI
and its management of a security contract with the
Iraq-based Babylon Eagles Security Company (BESC). A
leading Dijla Group investor, Mudhar al-Shawkat, is also
BESC's CEO. BESC has provided mobile security for the
firm's personnel, as well as static security for its Iraq
telecommunications infrastructure: towers, antennas, base
stations, generators, and the like. Providing static
security for such infrastructure in Iraq requires more than
posting guards: BESC oversees a network of relationships
with tribal sheikhs and other power brokers to ensure the
infrastructure goes unmolested.


5. (C//REL MCFI) Tensions between Zain-Kuwait--now the
majority shareholder of Zain-Iraq--and the Dijla Group
began to surface in late 2007: the Dijla Group complained
that Zain-Kuwait bought out the Karafi Group without
properly notifying Dijla, in violation of their shareholder
agreement. Zain-Kuwait also, according to the Dijla Group,

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unilaterally cancelled BESC's contract with Zain-Iraq in
December 2007, likewise allegedly contravening the
shareholder agreement. The Dijla Group claims that it has
been paying BESC's estimated 7,000-strong guard force out
of its own pocket since December 2007 and that Zain owes it
roughly USD 12 million for this expenditure. Several
months ago, Zain-Iraq contracted Peak Security--a firm
which also provides services to the Defense Department's
Task Force for Business Stability Operations (TFBSO)--to
provide some of its security needs. A standoff between
BESC and Peak personnel had to be mediated by the GOI
Ministry of Interior with MNF-I support. Tensions
mounting, the parties entered into buyout negotiations in
early 2008, as well as arbitration in the United Kingdom.

--------------
ENTER SOME FORMER USG OFFICIALS
--------------


6. (C//REL MCFI) In mid-April 2008 the Dijla Group hired a
former Embassy Baghdad official (the "ex-Emboff") as a
private consultant to represent them in their ongoing
negotiations with Zain-Iraq's majority shareholders.
(COMMENT: The ex-Emboff is therefore not an independent
mediator, but has direct business ties to one of the
parties to this dispute. His comments should be seen in
that light. END COMMENT.) The ex-Emboff--until March 2008
the senior consultant to the Ministry of Communications in
the Embassy's Iraq Transition Assistance Office
(ITAO)--began contacting former colleagues at the State
Department in Washington, as well as here in Embassy
Baghdad and MNF-I, warning that the shareholder dispute
could sour and imploring the USG to intervene. He shared
with us his grim assessment of the potential downside risks
if the negotiations deteriorated and the Dijla Group
ordered BESC off the job, as they have at times threatened
to do: Coalition communications capabilities badly
degraded, intelligence gathering and kinetic operations
compromised, severe economic disruption, and social unrest
leading to political instability. Econoffs and colleagues
at the Department advised him: (a) that the USG takes no
particular position in this dispute, which is a private
matter to be resolved by the parties themselves; (b) that
the USG encourages the parties to resolve their differences
quickly, amicably, peacefully, and within the bounds of
Iraqi law; and (c) that he must not in his private capacity
hold himself out as representing the USG, Embassy Baghdad,
MNF-I, or the Coalition.


7. (C//REL MCFI) The ex-Emboff came to Iraq on or about
April 22, and Econoffs met with him at the Rasheed Hotel on
April 24 to discuss the matter. He advised us then that
the essence of the dispute was not whether the majority
shareholders paid Dijla Group for its outlays to BESC, but
rather the sum of money the Dijla Group would receive for
its stake in Zain-Iraq: the majority shareholders have
offered USD 250 million, and the Dijla Group has countered
with USD 1.2 billion. The ex-Emboff said Dijla assessed
the fair market value of its stake in Zain at roughly USD
500 million. He said Zain-Iraq CEO Ali Dahwi told him the
USD 12 million for BESC was of little importance to the
overall dispute; Zain-Iraq would eventually pay BESC and
likely hire its employees to handle static security
anyway. Given the complicated tribal relationships
involved, Zain could not replace BESC's employees with
those of another firm.


8. (C//REL MCFI) The ex-Emboff said he believed the parties
would reach an amicable resolution before any tensions
resulted in violence against Zain personnel or
infrastructure, a threat that has lingered in the
background of the negotiations. He admitted that his
rhetoric in describing this matter to the Embassy, State
Department officials in Washington, and MNF-I was designed
to attract high-level USG attention. He claimed that the
parties have told him that USG involvement in the dispute
would help them finalize an agreement: "involvement" would
entail high-level Embassy or MNF-I officials contacting the
parties and encouraging them to resolve the dispute
quickly, amicably, and peacefully, for the sake of Iraqi
and Coalition interests in a well functioning mobile
telecommunications industry. Econoffs noted that we had
already advised relevant interested parties--Ali Dahwi,
Minister of Communications Jassim Mohammed Jafar, and
representatives of the Communications and Media Commission
that the USG: (a) takes no particular position in this
dispute; (b) encourages the parties to resolve this dispute
quickly, peacefully, and within the bounds of Iraqi law;
and (c) is not represented by the ex-Emboff in any way.


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9. (C//REL MCFI) The ex-Emboff admitted that that the tone
of his messages and presentations regarding the potential
risks of the negotiations souring was meant to excite USG
interest in intervening in the dispute, but he nevertheless
stood by his technical assessment of the worst case
scenario. He said that security ministries in the GOI, as
well as other mobile telecommunications firms, leased space
for their own antennas on Zain-Iraq's towers; BESC
abandoning the infrastructure or, worse, interdicting it
themselves (another lingering threat),could thus degrade
service not only for Zain-Iraq, but also for, e.g., Iraq's
other mobile telecommunications operators, the MOD, and the
MOI. (NOTE: MNC-I has analyzed its downside risks in the
unlikely event that the infrastructure collapsed and
assessed that Coalition forces would have sufficient
communications redundancy to manage any degradation in the
services they get from Zain-Iraq. END NOTE.)


10. (C//REL MCFI) The ex-Emboff told us that a group of
other former USG officials was trying to
draw attention to the shareholder dispute throughout the
Washington interagency with messages painting a doomsday
scenario that made his own stylized assessment look "tepid"
by comparison. The ex-Emboff reluctantly admitted that he
was not "guiltless" in providing this group of ex-officials
with "inputs" for their Washington engagement. He also
said that members of the group had "financial interests" in
the outcome of the negotiations. In a subsequent
conversation he admitted to Econoff his disappointment that
his ex-USG Washington-based contacts had not heeded his
advice to strike some of the more incendiary parts of their
messages to the Washington interagency. He was concerned
that their "analysis" was so histrionic that it would lack
credibility and undermine his own efforts to draw the USG
into the dispute.

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ONGOING ENGAGEMENT ON THE MATTER
--------------


11. (C//REL MCFI) Post continues to cooperate with MNF-I and
MNC-I to
monitor the matter, assess the risks, and reach out to the
interested parties and our GOI counterparts. With the
assistance of Embassy Kuwait, we have communicated our
position to Zain-Kuwait's Chairman Saad al-Barrak, who
welcomed the clarification and appreciated the USG's
position. We also have reiterated our position and
encouraged the Minister of Communications and the CMC to
take an active interest in ensuring that their mobile
telecommunications licensee dutifully performs its
responsibilities to deliver reliable service to the Iraqi
people. The Embassy Economic Counselor also attended the
Tuesday, April 29, meeting of Ahmed Chalabi's services
committee to reiterate and clarify the USG position to that
forum; Chalabi had invited the ex-Emboff to address his
committee on the matter. In coordination with Post, MNF-I
STRATOPS has also contacted the MOI to ensure that they are
aware of the potential risks. For its part, the MOI has
advised us that it is aware of the dispute, likewise
assesses the risk to Zain's system as low, and stands ready
to enforce the law should a genuine threat to Zain's
personnel or infrastructure materialize.


12. (C//REL MCFI) COMMENT: It is unfortunate that a
shareholder dispute generated fleeting tensions between
armed security forces and veiled threats of violence
against person and property. It is also unfortunate that one
party has
tried to prod the USG into intervening in what is a
strictly private commercial matter. More welcome, however,
has been the GOI's willingness--thus far--to strike a
moderate stance and not reflexively wade into a private
sector dispute. If Zain's shareholders resolved their
dispute through negotiation and arbitration, and without
government intervention, it would be a positive
example of maturation for Iraq's private and public
sectors. Investors would see that Iraqi shareholder
disputes do not necessarily lead to mafia-style or statist
"solutions." Post, MNF-I, and the MOI believe this to be
the more likely outcome. If the parties did lurch toward
the worst case scenario, however, Post and MNF-I will be
ready to support the MOI in its mission to protect Iraq's
communications infrastructure.
CROCKER