MOBILE TELECOM PRIVATIZATION HELD HOSTAGE TO

C O N F I D E N T I A L SECTION 01 OF 03 BEIRUT 000953

C O R R E C T E D C O P Y (TAKING OUT WORD IN PARA 5)

SIPDIS

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E.O. 12958: DECL: 08/23/2019
TAGS: ECON EFIN EIND ECPS PGOV KCOR LE
SUBJECT: MOBILE TELECOM PRIVATIZATION HELD HOSTAGE TO
PRIVATE INTERESTS

REF: A. BEIRUT 920

B. 08 BEIRUT 1359

BEIRUT 00000953 001.2 OF 003


Classified By: Ambassador Michele J. Sison for reasons 1.4
(b) and (d).

SUMMARY AND COMMENT
--------------


1. (C) Once the Lebanese cabinet is formed and the USG begins
to work with the GOL to reform and build up its state
institutions, we must also push the Lebanese leadership to
move certain sectors out of the public realm through
privatization. The most logical place for the GOL to begin
would be in the mobile telecommunications sector, which is
ready to be privatized, though there is not yet a political
consensus on how it should be done. Not surprisingly, the
primary obstacle to privatization is the political class,
which worries that a sale might benefit political enemies
either politically or financially. In addition, many
political leaders may be working to ensure that they
personally receive a proportion of the profits from any
privatization transaction. Their maneuvering merely
highlights further how crucial it is to extract the telecom
sector -- simultaneously critical to the Lebanese economy and
vulnerable to use for political patronage and corruption --
from the politicians' grip. The USG should work with partner
donors to push Lebanese across the political spectrum to move
ahead with privatization. End summary and comment.

GOL COMMITTED TO REFORM AT PARIS III
--------------


2. (SBU) In its Paris III reform plan, the GOL committed to
reform and privatization in the telecom sector, and donors
pledged budget support to Lebanon tied to reform benchmarks.
The sale of the two state-owned mobile telecom licenses to
the private sector is expected to bring in $4-$8 billion,
money earmarked by law for paying down part of Lebanon's
massive debt burden, currently representing over 160% of GDP.
The disbursement of the $75 million final tranche of the
USG's $250 million budget support pledge from Paris III is
tied to this privatization.

MOBILE LICENSES READY
TO SELL, BUT HOW?
--------------


3. (SBU) Experts agree that the sale of Lebanon's two mobile
telecommunications licenses would be the easiest
privatization to execute and could be done reasonably
quickly. Ziad Hayek, Secretary General of the Higher Council
for Privatization (HCP),believes that once the government
decides to go through with the sale, the technical
preparations could be complete within nine months. Kamal
Shehadi, chairman of the independent Telecommunications
Regulatory Authority (TRA),agrees, saying that the sale
would be technically simple but politicians differ over how
it should be structured.


4. (SBU) While the original idea was that the GOL would
auction the licenses to foreign bidders, Embassy contacts
speak increasingly about the importance of Lebanese ownership
of a portion of the mobile operations, and chatter along
these lines has translated into public statements by current
caretaker Telecom Minister Gebran Bassil advocating Lebanese
participation in any deal. While a foreign mobile operator
might own a large portion of the new company, and would
certainly exercise management control, Bassil has pushed for
the Lebanese public to have a chance to reap financial
benefit from the privatized firms through partial ownership.

BEIRUT 00000953 002.2 OF 003


GOL officials are increasingly echoing this sentiment in
public and private comments, the most recent example being
Central Bank of Lebanon Governor Riad Salameh in an August 14
meeting with the Ambassador (ref A).


5. (C) While such rhetoric plays to Lebanese Christian and
Shia fears of Gulf Sunnis buying up valuable state assets,
neither Hayek nor Shehadi -- both of whom are strongly
pro-March 14 and pro-Hariri -- objects on economic
grounds to selling a percentage of the operations to
Lebanese, as long as it is done fairly and transparently.
They point out that floating a percentage of the mobile
companies on the Beirut Stock Exchange would not only give
the Lebanese people the opportunity to profit from the new
privately managed companies, but would also be a big boost to
the development of the exchange, where market activity is
currently dominated by trading in the shares of Hariri family
real estate giant Solidere. In addition, Shehadi notes that
many Lebanese banks, currently awash with liquidity, have
been inquiring about the possibility of investing in the
privatized companies, which they expect to turn a tidy profit
in the coming years.

POLITICIANS LOOKING FOR
FINANCIAL BENEFIT...
--------------


6. (C) Ultimately, lack of progress on reform leading to
privatization has been the result of political maneuvering by
various interested parties. The history of the telecom
industry in Lebanon is a sordid story of deals cut to benefit
political actors. Former PM Rafiq Hariri essentially handed
ownership of Lebanon's two mobile phone companies to the
Syrian occupiers and their Lebanese proxies (including at
least one close to Hariri himself) in the 1990s, and the
financial exploitation of that ownership led to a political
battle that resulted in their nationalization in 2003. A few
years later, then-Telecom Minister Marwan Hamadeh delayed the
issuance of spectrum licenses to internet service providers
(ISPs) until his son could set up his own company, Cedarcom,
and bid for a license. Today, the list of major ISP owners
is a who's who of advisors to Lebanon's political scions from
across the spectrum (septel).


7. (C) Despite the bad precedents, Gebran Bassil arrived as
minister in July 2008 professing enthusiasm for privatizing
the mobile pone companies (ref B). While the global
financia crisis offered a convenient and legitimate excuse
for delay, the change in the political discourse about the
sale is telling. Mandating "Lebanese participation" in the
ownership of the companies is a convenient way to ensure that
Lebanese political figures can negotiate a cut of the profits
of the privatized entities. HCP's Hayek believes strongly
that Parliamentary Speaker Nabih Berri is particularly
interested in finding ways to profit financially from the
telecom sales and might block legislative progress until he
is ensured of his personal financial benefit.


8. (C) Shehadi agrees that Berri will look for ways to
leverage his position in parliament to extract part of the
proceeds from the sale, but he stresses that Berri would not
be alone, as various political leaders appear to be jockeying
for a share in the spoils of privatization. Shehadi points
out that the interest banks have shown in participating in
the sale also reflects political intervention, as several of
the largest Lebanese banks are at least partially owned by
the political bigwigs, including the PM-designate's family.
Fortunately for the cause of transparency, Shehadi's
independent TRA, set up in 2007, should help to limit the
ability of the politicians to insert themselves into the
process.

BEIRUT 00000953 003 OF 003



...AND POLITICAL BENEFIT TOO
--------------


9. (C) In addition to personal financial concerns, Lebanon's
leaders will be loath to allow their political opponents to
reap any political benefit from a privatization. In fact,
most politicians' understanding of the economic and financial
implications of a sale is limited at best, so for them the
issue is either fodder for political horsetrading or simply
uninteresting. In these cases, outside pressure may be
effective in moving the process forward.


10. (C) Progressive Socialist Party leader Walid Jumblatt
recently came out publicly against privatization of any state
assets, in what he characterized as a return to his socialist
roots. Hayek insists that Jumblatt has no clear
comprehension of what the term means: "He thinks it will mean
giving away valuable assets to foreigners, but there are many
ways to do it, and it needs to be done," Hayek told us. A
recent Financial Times (FT) article quotes opposition Amal
party MP Yassine Jaber as saying the opposition is not
diametrically opposed to privatization, but would "look at
every case at its own merits." Jaber told us the same thing,
and though he displays a sophisticated knowledge of the
economic consequences of such a move, we agre with the FT
that his less sophisticated colleagus -- not to mention
Jumblatt -- may see the licese sale as an opportunity to
extract political concessions from new PM Saad Hariri, who
has said that he is committed to privatization.

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


11. (C) International pressure has so far yielded little
progress from the GOL on privatization of any kind, partially
because short-term political considerations have dominated
donor country discussions with Lebanese political leaders.
Contacts from other donor country embassies increasingly say
that the eventual formation of a new government represents a
fresh opportunity to engage high-level officials on the need
to move forward immediately, not only for fiscal reasons, but
also to improve service for the Lebanese people and remove
political interference from the sector as much as possible.
Since the technical steps are not difficult, a sustained,
coordinated expression of interest from the international
community might nudge the political class toward resolving
the impasse.

SISON