VZCZCXRO7723
RR RUEHBC RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #2820/01 2350626
ZNY CCCCC ZZH
R 230626Z AUG 07
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 2954
INFO RUCNRAQ/IRAQ COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 002820 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 08/23/2017 
TAGS: ANET ECPS PGOV IZ
SUBJECT: GOI AUCTIONS TELECOMS LICENSES FOR USD 3.75 
BILLION AMID CRIES OF FOUL AND CHALLENGES TO THE DEAL'S 
FINALIZATION 
 
REF: A. A. BAGHDAD 02524 
     ¶B. B. BAGHDAD 2402 
 
Classified by Economic Minister Charles P. Ries for reasons 
1.4(b) and (d). 
 
¶1. (C) SUMMARY: The GOI auctioned three 15-year mobile 
telecommunications licenses, each one fetching USD 1.25 
billion up front, plus 18.5 percent of monthly gross revenues 
and 15 percent of net profits.  Two of three 
incumbents--Asiacell and MTC Atheer--won new licenses, and 
Korek Telecom won the third, potentially enabling it to 
expand its heretofore Kurdish regional operations.  The third 
incumbent, Orascom Telecom, owner of central Iraq's Iraqna 
network, withdrew as the bidding climbed; Orascom is out, but 
the future of its Iraqna assets remains unclear.  The 
auction's results were mixed: the licenses garnered five 
times the price the GOI had negotiated with the operators in 
March 2007, but the process elicited cries of foul from 
observers.  A member of Iraq's Council of Representatives 
(CoR) claimed the auction was unconstitutional, alleged 
irregularities, and vowed to undo the deal legislatively when 
the CoR returns from recess in September.  The price the 
licenses commanded evidenced some investors' willingness to 
make substantial, long-term commitments in currently 
profitable sectors of the Iraqi economy, but the high prices 
paid will be difficult to amortize over the medium term. 
Moreover, despite the involvement of Pricewaterhouse Coopers 
(PwC), there are real questions about the transparency of the 
process and uncertainties about whether the licenses will be 
finalized as negotiated.  These question may mean the 
auction's results do little to make Iraq more attractive to 
outside investors.  END SUMMARY. 
 
--------------------------------- 
LICENSES FETCH MORE THAN EXPECTED 
--------------------------------- 
 
¶2. (C) Originally scheduled for September 2006, Finance 
Minister Jabr chaired the auction, which took place in Amman, 
Jordan, August 19-20, overseen by PwC.  Representatives of 
Iraq's Ministries of Finance, Planning, Communication, and 
Science & Technology, as well as the Communications and Media 
Commission (CMC), the Board of Supreme Audit, the Commission 
on Public Integrity, and the CoR attended.  The GOI had hoped 
a dozen firms would participate, but only five did: 
Sulimaniya-based Asiacell; Baghdad-based MTC Atheer, owned by 
MTC of Kuwait; Cairo-based Orascom Telecom; Irbil-based 
Korek; and, Istanbul-based Turkcell.  Bidding began at USD 
325 million per license, and Jabr held eighteen additional 
rounds at USD 50 million increments.  Turkcell withdrew at 
USD 950 million, and Orascom at USD 1.15 billion. 
 
¶3. (C) In the end Asiacell, MTC Atheer, and Korek took the 
following terms: a lump sum USD 1.25 billion to be paid 
within one month of the auction; 18.5 percent of monthly 
gross revenues; and a 15 percent tax on corporate net 
profits.  Subscribers will also pay a .25 percent tax for 
universal service and .25 percent for number portability. 
Jabr publicly estimated that the licenses would bring the GOI 
roughly USD 8 billion over fifteen years.  The final license 
price was five times that negotiated between the GOI and the 
incumbent operators in March 2007.  Several auction attendees 
claimed that Jabr stated the evening beforehand he intended 
to return to Baghdad with USD 3 billion (NOTE: Saudi Arabia 
recently sold a license for USD 6.1 billion, and Egypt one 
for USD 2.9 billion. END NOTE) 
 
--------------------------------------------- ---- 
CONCERNS FOR LACK OF TRANSPARENCY PROVE JUSTIFIED 
--------------------------------------------- ---- 
 
¶4. (C) CoR members objected when the GOI announced plans to 
hold the auction in Amman, expressing concerns over a lack of 
transparency and potential corruption (reftel A).  Evidence 
suggests their concerns were justified.  A CoR member 
attending the auction claimed the auction was 
unconstitutional, arguing that the CoR removed executive 
power from the CMC, which had contracted PwC to manage the 
event, in September 2006.  The member stated that undoing the 
auction through legislation would be a top priority for the 
CoR when it resumes session in September.  In a separate 
meeting with EconOffs, CoR Member Yonadam Kanna--Chairman of 
the CoR's Economy, Investment & Reconstruction 
Committee--stated that because Korek was owned by the 
powerful Barzani family the firm received undue favorable 
consideration.  (NOTE: Kanna otherwise described the auction 
as a success.  END NOTE)  Asiacell, for its part, sent a 
letter to Prime Minister Nuri al Maliki arguing that Korek's 
participation in the auction was improper because it did not 
meet the requisite financial criteria by the date set forth 
 
BAGHDAD 00002820  002 OF 002 
 
 
in the bidding documents.  Asiacell stated it may challenge 
Korek's participation in Iraq's courts. 
 
¶5. (C) Others complained about Jabr's chairing of the process 
itself.  The CMC had worked with PwC on safeguards to ensure 
an orderly affair, but Jabr overrode several of them in the 
event.  Under the rules, once the license fee reached USD 500 
million bidding was to have switched to the regulatory fee, 
starting at 18.5 percent, but Jabr forged ahead to the 
ultimately agreed USD 1.25 billion.  In addition, a break was 
scheduled for 20:00 on August 19, to give the participants an 
opportunity to rest and review the terms, but Jabr pushed 
through to 04:00 the morning of August 20.  Jabr also added 
the 15 percent net profits tax to the terms on the day of the 
auction.  Winning bidders have stated that they will raise 
consumer prices by as much as 60 percent to compensate for 
the additional charges. 
 
--------------------------------------------- ------ 
THE FATE OF ORASCOM'S IRAQNA ASSETS REMAINS UNCLEAR 
--------------------------------------------- ------ 
 
¶6. (C) Jabr stated that he was surprised when Orascom 
withdrew.  Telecoms analysts estimate the firm had invested 
USD 300 million in its Baghdad-centered Iraqna network, and 
Orascom itself claimed to have approximately 3 million 
subscribers.  On August 19, Orascom representatives stated 
that the firm was "evaluating alternatives" with respect to 
its Iraqna assets.  A high-level GOI official said, however, 
that within hours of the auction's conclusion, MTC Atheer 
agreed to buy the Iraqna equipment and customer accounts for 
USD 1.25 billion.  The GOI official further stated that no 
announcement would be made until the two firms finished a due 
diligence review of the deal.  Media sources report that both 
MTC Atheer and Korek are in talks with Orascom to buy Iraqna 
assets. 
 
------- 
COMMENT 
------- 
 
¶7. (C) In addition to CoR members' threats to undo the deal 
legislatively, business concerns also threaten its 
finalization.  Korek based its strategy for expanding beyond 
Iraqi Kurdistan on acquiring Iraqna's network and customer 
base.  If MTC Atheer concludes its reported purchase of 
Iraqna's assets, Korek might renege and simply remain in its 
established Kurdish regional market.  Korek's withdrawal 
would leave only Asiacell and MTC Atheer in Iraq's mobile 
telecoms market.  Industry sources in Dubai and Zurich also 
report that MTC Atheer's parent company, MTC Kuwait, is 
discussing selling itself to Saudi Telecom, and Iraq 
presently has no telecommunications or competition law to 
prevent either MTC Atheer or Saudi Telecom from purchasing 
Asiacell and monopolizing the Iraqi mobile telecommunications 
market.  Such concerns could further encourage CoR 
intervention. 
 
¶8. (C) The good news from the auction is that it evidenced 
some investors' willingness to commit billions of dollars to 
long-term plans in sectors of the Iraqi economy believed 
profitable, despite the ongoing security challenges.  (NOTE: 
Iraq has an estimated 8-10 million mobile telephone 
subscribers out of an estimated population of 27.5 million, 
up from a pre-war level of near zero, and analysts project 
demand to grow.  END NOTE)  But the story is not all roses: 
the funds derived from the auction will go directly to 
Ministry of Finance coffers, and it is unclear how much of 
the auction's proceeds will be available to be invested in 
the telecommunications sector that generated them.  More 
important, the auction process--tainted by irregularities, 
eleventh-hour changes to terms, and allegations of political 
interference--did nothing to make Iraq more attractive to 
outside investors. 
CROCKER