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Tue 25 May 2004 04:00 AM

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High Pressure Partnership

MTC and Detecon take over the management of the two state-owned mobile networks in Lebanon next month and face the task of raising revenues and penetration. But can they breathe life into the sector amid high government expectations and market stagnation?

|~|mobile3.gif|~||~|"People will not be killing themselves to go after the mobile licenses in Lebanon”, predicted the head of one prospective bidder for Cellis and LibanCell, the country’s two GSM networks, last year.

At the time, the words reflected lingering concerns over the valuation of the two businesses and the shadow cast over their planned privatisation by political disputes. They also proved correct when the government failed to attract the level of bids it was looking for. Earlier this year, it opted instead to keep hold of the businesses and bring in third parties to manage them — cementing Lebanon’s unusual position with two state-owned mobile networks and no private players.

This month, Kuwait-based mobile operator, MTC, and Deutsche Telekom-owned consultancy, Detecon, will take on the task of managing LibanCell and Cellis respectively. In return for around US$200 million each in management fees, they will oversee a four-year project aimed at improving the networks’ performance; reviving subscriber growth; introducing new services, and putting themselves in pole position for the next time the government has a go at privatisation.

From June 1, the official takeover date, both companies will be faced with the task of assimilating the two networks’ systems and workforces and ensuring a smooth handover of control. But the most obvious challenge in the longer term will be to manage the government’s expectations and balance their priorities with those of the Ministry of Telecommunications (MoT).

“We are relying on good cooperation with the MoT,” says Dirk Münning, vice president, Detecon. “The management agreement was done in a very professional way but its execution relies on cooperation. We are two parties with our own interests, but up until now, the cooperation has been good,” he adds.

If any conflicts between the operators and the government emerge, observers say they are likely to centre on the operators’ ability to reduce tariffs — a move which would expand the market in terms of volume of users and minutes but could lower revenues in some areas for the government. The MoT is preparing a review of mobile pricing and says that it expects the operators to introduce competitive tariffs. But analysts point to the fact that the bonuses the operators are entitled to receive are linked to increases in earnings, not traffic or users, as a sign that the government will prioritise revenue gain.

“The government does not have the same perspective as the operators,” says Kamal Shehadi, managing director of Beirut-based Connexus Consulting. “It is looking at the networks as a cash machine. A business plan developed by an operator which includes lowering tariffs will be examined closely by the government — maybe even rejected — even if it would lead to growth in usage and subscriptions,” he adds.||**|||~|saad1.gif|~|Dr. Saad al Barrak, MTC’s director general|~|Questions have also been raised over the willingness and capacity of the MoT to invest in their improvement. Given the fact that the two operators are contractors and not licensees, their development plans must be assessed and approved by the MoT before they can be carried out. The burden of investment will also fall on a government that is focusing on raising funds to reduce its US$30 billion mountain of debt, not on capital outlay.

“That is going to be the bottleneck,” says Shehadi. “The MoT… has people who are not capable of responding to business plans adequately. And even if it brings in professionals, an operator’s perspective is different from an owner’s perspective — you are going to have the same business plan evaluated differently because they have different priorities,” he adds.

Beyond this relationship, various technical obstacles are likely to impede the operators’ ability to grow the market. One of the most striking aspects of the mobile sector in Lebanon has been a rapid slowdown in subscription growth since 2001, when the government took control of the networks from their previous owners and investment came to a stop.

The MoT’s numbering plan, which restricts both networks to 400,000 subscribers, also forms a major obstacle. According to the World Markets Research Centre (WMRC), Lebanon’s annual mobile subscription growth rate was a mere 0.6% in 2003, compared to 1.1% in 2002, 3.2% in 2001 and 18.5% in 2000. These constraints, and a grace period of only five days for prepaid subscribers to renew their accounts before they lose their numbers, have also led to a thriving prepaid black market that will need to be addressed.

On the plus side, the MoT is planning to heighten the ceiling that limits the networks’ capacity. The government says it has created new numbers that will allow the networks to sign up 160,000 users by the end of 2004. It is also planning to introduce a new numbering plan next year. “A migration from the existing six digit numbering plan to a new eight digit numbering plan, due in 2005, would allow for a large supply of GSM numbers,” says a source at the MoT.

Another advantage for the operators is that the backlog of demand is likely to boost efforts to increase penetration once the networks’ capacity is raised. It is estimated that the number of official mobile subscribers in Lebanon would have reached one million by the end of last year if the government had not had control of the networks. The WMRC predicts that penetration could rise from 17% last year to 50% by 2008. “Given the fact that LibanCell and Cellis stopped investing when their contracts were terminated, there is pent-up demand,” adds Lucy Norton, senior telecoms analyst, WMRC.

Considering Lebanon’s steep pre-paid charges relative to other countries in the Middle East, price cuts are expected to be a key weapon in tackling the grey market that has developed.

The availability of government funds will also dictate whether network expansion and improvement plans come to fruition. According to Münning, Detecon is planning to upgrade Cellis’ GPRS capability and to introduce EDGE into the network at a later date. MTC has also announced its intention to add another 250,000 lines to LibanCell’s network. “However, we will have to present the business plan to the MoT first since it will have to bear the capital expenditures of any necessary investments,” says Dr. Saad al Barrak, MTC’s director general.

High spending by mobile subscribers in Lebanon is also likely to prompt the two operators to focus on developing value added services (VAS). The networks have retained high average revenue per user (ARPU) levels of around US$75 per month, according to research group, Arab Advisors. “The operators will be able to generate high revenues from VAS because the population in Lebanon is quite well educated and it has higher GDP capita than other countries in the region, such as Jordan,” adds Faisal Hakki, research analyst at Arab Advisors.

Also on the operator’s ‘To Do’ list will be the performance of the networks themselves. The MoT recruited Ericsson in October 2003 to conduct a project to assess and recommend investments that would increase the networks’ asset value and earnings — as well as ensuring that revenues are reliably reported.

Although neither Ericsson nor the MoT would comment on the results of the project, both networks are believed to have maintained their quality since 2001 and to be fulfilling key performance indicators (KPIs). Additionally, the MoT says it will continue to receive monthly reports on the quality of the networks. ||**|||~||~||~|On a wider scope, the operators will also be keeping a close eye out for signs of further restructuring of the country’s telecoms sector over the course of their contracts. In particular, the planned privatisation of Lebanon’s fixed line operator, Ogero, and its re-branding as Liban Telecom, could alter the dynamics of the market, although it remains to be seen whether the government will manage to conduct a sell-off on schedule this year.

The fixed operator also has the option to enter the mobile market, although it remains to be seen whether the environment will be right for this to take place as well. “It is in the law that Liban Telecom will be issued with a mobile operating license,” says Alan Horne, project team leader for Lebanon’s upcoming Telecoms Regulatory Authority (TRA). “But it is not yet defined when this will take place. It can’t really happen until the new numbering plan has been introduced in 2005, and you could question whether the market is large enough,” he adds.

Another issue which has surfaced regularly over the last year is the potential securitisation of the networks’ future revenues. Considering the country’s level of debt and the expectation that international borrowing rates will rise over the next couple of years, Lebanon’s government is perceived to be keen to raise funds sooner rather than later. According to a source at the MoT, there are no immediate plans for securitisation but it is still an option that the government could decide to implement “in the near future”.

But after plans for a similar move in the tobacco industry were shelved earlier this year, there are doubts whether the government could push securitisation through. “The same disagreements that killed the securitisation of the tobacco industry will kill the securitisation of the mobile sector,” predicts Shehadi.

How the market is shaped over the period of their contracts will have implications for the two operators’ long-term position in Lebanon, as well as the networks themselves. Some analysts have claimed that the two companies will not be motivated to compete as intensively as if they were licencees, but others argue that that assessment ignores the long term rewards they could reap if the project turns out to be a success. Both will presumably be keen to gain a foot in the door if and when the two networks come to be sold off, and to use the time to get to know major clients and the networks themselves. “The operators don’t care if the contracts last for one year or four years — what they care about is that they are running the networks when it comes to privatisation,” adds Shehadi.

While MTC has well known regional ambitions and was shortlisted in last year’s attempted privatisation of the networks, Detecon argued at the time that it was only interested in the management contract. Its Saudi Arabia-based partner, FAL, however, has shown willingness to expand its regional telecoms investment through its current joint bid for the Kingdom’s second GSM license with Detecon’s parent company, Deutsche Telekom. “Last year, we were purely looking at the management contract but it is difficult to say where we will be in four years. It could be a very good opportunity and we could be in a good position to take it,” adds Münning.

How smoothly the management contracts run, however, will be a key factor in persuading investors that the environment for private sector involvement is suitable. Some hope that this will merely be a transitional period for the sector, pointing to the government’s ability to end the contracts at six months’ notice as a sign that a sell-off could happen before the management contracts are up. The other possibility, however, is that a sale could fall victim to the operators’ success and the state’s need for financing.

“The government owns all of the country’s telecoms networks — mobile and fixed,” points out Shehadi. “Its challenge will be to disengage from this. The fear is that it will get hooked on the cash cow that is the mobile sector and not see that the networks would provide more income to the Treasury if they were liberalised,” he adds.||**||

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