Political instability stalls reform in Lebanon

30 August 2011

Lebanon’s fractious political environment has delayed the telecoms sector’s privatisation. But with a new government in place, Beirut is now ready to put its modernisation plan into action

In numbers

Revenues at state-owned mobile operators Alfa Telecom and MTC Touch in 2010

Amount invested by the government to upgrade 2G mobile networks to 3G

Source: MEED

Lebanon has the least competitive and least developed telecommunications market in the region and, despite efforts to modernise and privatise the sector, political uncertainty and controversy have held back progress.

Alfa Telecom and MTC Touch are the country’s only two mobile operators, both are owned entirely by the state. All the revenues generated by the two operators go back to the government. In 2010, revenues reached $2bn, accounting for about 8 per cent of gross domestic product (GDP).

Egypt’s Orascom Telecom manages Alfa Telecom’s operations and Kuwait’s Zain manages MTC Touch in return for a management fee. Mobile penetration is about 70 per cent.

This lack of competition and political will to make any changes has crippled the sector.

Privatisation stalled

“The main challenge for growth is political instability, which is hindering progress and development, not just for telecoms but the entire economy,” says Marwan Hayek, chairman and chief executive of Alfa Telecom.

“The main challenge for growth is political instability, which is hindering progress and development”

Marwan Hayek, Alfa Telecom

Lebanon’s Higher Council for Privatisation (HCP) has made attempts to privatise the two mobile operators, but the country’s fractious political environment and short lifespan of its parliament has repeatedly stalled his plans.

“Privatisation is desperately needed in the telecoms sector. We are way behind most countries that are comparable to us,” says Ziad Hayek, secretary general of HCP.

“We used to be the leader in mobile telephony when we established our networks in 1994, we are now probably among the laggards.”

According to HCP’s Hayek, the biggest obstacle is the lack of continuity in government policy. Developing the telecommunications sector takes many years. The quick turnover of ministers breaks the cycle of reform.

“Ministers often change the policies of ministers that preceded them. We have a tremendous lack of continuity that causes programmes to be put off repeatedly,” says Hayek.

The HCP took steps to privatise the two operators back in 2006 and came very close in 2007. The government established the Telecommunications Regulatory Authority (TRA) to prepare for an open market, but the efforts came to a standstill with the onset of a political stalemate.

Since then the proposed tenders worth $3bn each have been delayed and plans to privatise the two operators are still on hold.

Despite this, many in Lebanon are still hopeful. The legislation for the tender is already in place and so the process can begin again at any time. “The prospects for privatisation are still very good, there is no reason why, other than political, that Lebanon should not be able to privatise its telecoms sector,” says Hayek.

“Privatisation is desperately needed in the telecoms sector. We are way behind most countries”

Ziad Hayek, Higher Council for Privatisation

The initial indispensable ingredient, however, will be the communications minister and his willingness to forgo the power and revenues that a state-owned mobile sector yields. If the minister favours privatisation and adopts it as a policy, it will need the majority backing of the council of ministers.

Until then Alfa and MTC will remain in the government’s hands.

Developing infrastructure

For now the ministry is keen to invest in the country’s infrastructure, but even that has not gone without controversy and complication.

“Industry development particularly in the state-owned mobile industry is a decision taken by the Telecommunications Ministry, which takes time,” says Marwan Hayek.

The sector is still in its early stages of development when compared to its neighbours.

Lebanon is one of the few countries in the region without third-generation (3G) mobile technology.

The ministry has invested about $80m to upgrade the 2G mobile networks to 3G by October in a bid to keep pace with new technological developments and the rising demand for voice, data and social media.

Swedish vendor Ericsson is deploying

3G technology for Alfa Telecom and China’s Huawei is working with MTC Touch.

On 11 April, Lebanese internet service provider Cedarcom filed a lawsuit against the Telecommunications Ministry and the two mobile operators for deploying 3G technology without obtaining the required licence.

According to Cedarcom’s chief executive officer Imad Tarabay, the ministry is acting illegally and is in breach of the Telecom Law 431.

“We are in favour of advanced technologies and we support anything that has the capability of bringing high-speed connectivity, but we want the Telecom Law 431 to be respected, and fair competition enforced on all operators, regardless if they are owned by the government or private sector,” says Tarabay.

Since the mobile operators’ licences are technology specific, they are required by law to purchase the spectrum before they can deploy the technology and offer the service to customers. Law 431 states that the sole authority to licence frequencies is the TRA.

There is concern that Alfa and MTC’s move into the mobile broadband sphere will give them an unfair advantage.

“There is a lot of unfair competition, the private sector companies in the industry pay over 60 per cent in direct and indirect taxes. They cannot compete with government companies that do not pay any taxes and do not have licences,” says Tarabay.

The case has not been settled and the two operators have gone ahead with the upgrade.

Technological milestone

According to Marwan Hayek, the 3G deployment project is a technological milestone for Lebanon, which will enable the operators to provide better coverage and more capacity to customers.

“Third-generation technology will provide higher connectivity and bandwidth, which will open the doors for small-to-medium sized enterprises (SME) to become connected and contribute effectively to economic growth in Lebanon,” says Marwan Hayek.

Alfa Telecoms is working on the network upgrade to cover the entire country with

650 sites and 3G mobile internet speeds are expected to reach 21 megabits a second.

The appetite for adequate speeds is huge across all sectors in Lebanon, particularly in the financial sector where many feel it will facilitate the ease of doing businesses to help boost the economy.

The fixed-line internet sector has experienced slower development compared with the mobile sector. Broadband services were only introduced in 2007 and even now the availability of international bandwidth is limited and the capacity is not enough. This has led to higher prices for connectivity compared with other countries, which has created a frustrated market for the internet service providers (ISPs).

In March, internet speed testing company Speedtest.net identified Lebanon as the country with the world’s slowest internet. ISPs pay on average $2,700 for each international line, with a capacity of as low as two megabits a second. This means that customers are charged about $200 a month.

Lebanon’s fixed-line sector is currently served by state-owned Ogero, which also provides a fixed-line internet service. The internet market is served by 16 private companies with only seven of them offering broadband services.

In a bid to meet the demand for better connectivity, the Telecommunications Ministry has pledged about $80m towards fibre-optic infrastructure and expansion.

Lebanon is in need of 14,000 kilometres of fibre-optic cables to enable high-speed internet. Work has already begun on laying down 4,400km, half is already in place and the rest should be ready in the first quarter of 2012. The government is aiming to provide speeds of 10 megabits a second by 2015, increasing to 20 megabits by 2020.

The Telecommunication Ministry recently commissioned Ericsson to set up a fibre-optics grid in Lebanon for $6.3m. The entire cost of the grid is expected to hit $67.4m over a three to five-year period.

On 23 August, the council of ministers signed a decree to decrease internet tariffs by 80 per cent and increase speeds by up to eight times in a bill outlined by recently appointed Communications Minister Nicholas Sahnawi. Lebanon is finally putting into use the India Middle East Western Europe marine cable to increase bandwidth.

The changes are expected to be implemented by the end of September. The move is likely to increase internet subscriber numbers, which currently stand at just 700,000.

While the TRA has developed a regulatory framework and has helped to push through reforms and reduced tariffs, it is weak when dealing with the Telecommunications Ministry and Lebanon’s Shia militant group Hezbollah, which managed to build its own telecoms network in Lebanon without any need for licensing.

Illegal networks

The network was only uncovered in 2008 by the Lebanese authorities and was thought to have been funded by Iranian money. The fibre-optic network was being used to pass information undetected.

In May, Lebanese President Michel Sleiman asked the justice minister to take necessary measures against police chief general Ashraf Rifi for refusing entry to Charbel Nahhas, the communications minister at the time to Ogero’s building for an inspection.

Rifi allegedly refused to pull his officers from the building where the company is secretly working on a third mobile network funded by China. The network was established in 2007, but is not available for commercial use. The exact purpose of the network is unknown.

More controversy has plagued the telecoms sector. Most recently three employees of Alfa Telecom were arrested on suspicion of spying for Israel’s spy agency Mossad.

Such incidents are likely to continue unless the drive for reform and privatisation becomes potent enough in parliament.

With a new government now in place after months of stalemate and a communications minister that seems to be pro-reform, Lebanon may finally be back on track to modernising its telecoms sector.

“In the absence of competition in the market and infrastructure, we’re losing on all fronts,” says Imad Hoballah, acting chairman of TRA.

“Without full and fast internet access for all sectors in areas outside of the cities, we will not be able to create new jobs, improve on education and the economy will be limp at best,” he adds.


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