VZCZCXRO0185
RR RUEHDBU RUEHIK RUEHYG
DE RUEHBUL #0926/01 0791313
ZNR UUUUU ZZH
R 201313Z MAR 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC 6949
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 KABUL 000926 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/FO, SCA/RA, AND SCA/A 
DEPT FOR EB/CIP 
NSC FOR AHARRIMAN 
CENTCOM FOR CG CFC-A 
OSD FOR BRZEZINSKI 
 
E.O. 12958 N/A 
TAGS: ECPS EFIN EINV ECON KPRV PGOV AF
SUBJECT: AFTEL'S PUZZLING EXPANSION PLANS 
 
 
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SUMMARY 
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¶1. (SBU) State-owned Afghan Telecom plans to quadruple the number of 
lines the company has by an aggressive build-out of wireless and 
copper networks, funded by the GoA and donors.  The wireless plans 
will put AfTel into competition with mobile service providers, which 
could bring charges of anti-competitive behavior because of AfTel's 
government funding.  The copper network plans appear to be 
over-sized for the market of business customers for digital 
services.  The expansion is driven by a political imperative to 
extend service to more of the population and a desire to add quick 
value for privatization.  To duplicate Afghanistan's remarkable 
success in wireless telecom, the GoA would be better served focusing 
on a quick sale to get the state player out of the way of private 
investment.  The Embassy intends to start a dialogue with the GoA on 
its approach to privatizing AfTel.  End summary. 
 
 
------------------------------ 
SUCCESS WHERE GOVERNMENT ISN'T 
------------------------------ 
 
¶2. (SBU) Because it has attracted over $700 million in foreign 
direct investment, the telecommunications sector has been 
Afghanistan's biggest economic success story: it has grown from 
85,000 total subscribers (including 35,000 satellite phones) in 2002 
to over 2.4 million now and has expanded coverage from a handful of 
cities to all the provinces in the country.  Nearly all of this 
progress has happened on the wireless side, though, and it has 
happened as a result of the GoA getting out of the way.  The same 
has not happened on the fixed-line side, in part because a 
phlegmatic state-owned enterprise still has a monopoly and responds 
more to political direction than to market forces. 
 
----------------------------------- 
DRAMATIC PLANS--DO THEY MAKE SENSE? 
----------------------------------- 
 
¶3. (SBU) In a recent meeting at Afghan Telecom, senior planning and 
technical staff briefed Econoff and Afghanistan Reconstruction Group 
(ARG) advisor on the company's plans for expanding its network. 
These plans are, to say the least, ambitious: 150,000 new copper 
lines, completion of facilities for 123,000 new CDMA (wireless) 
lines, and an optical fiber ring around the country's ring road. 
When completed, these plans would roughly quadruple the company's 
capacity.  The total cost of the copper and CDMA programs will be 
$65 million, $17 million of which has been spent (mostly on CDMA 
equipment).  The CDMA project is partly funded by India ($13 
million); the $40 million copper project is to be partly funded by 
the GoA ($30 million), with the balance expected to be provided by 
other donors.  The company has recently awarded a contract for the 
partly GoA-funded $65 million optical fiber cable ring around 
Afghanistan to Chinese equipment provider ZTE. 
 
¶4. (SBU) The decision to expand the AfTel network so dramatically is 
somewhat puzzling from a business standpoint, given that AfTel's 
largest problem at the moment is not the size of its network but its 
ability to collect from its customers.  AfTel described its 
collection rate as about 30 percent, and it is uncertain how large 
its subscriber base is.  (NOTE: An advisor to AfTel has said 30 
percent is a wild guess--probably on the high side--and that the 
subscriber base might be something on the order of 70,000.  End 
note.)  The company recently installed a new Afghanistan 
Reconstruction Trust Fund (ARTF)-financed billing system for 
post-paid customers (currently all AfTel customers are post-paid), 
which should help with collections once it is operational.  The 
company's recently launched CDMA service is running on a post-paid 
basis--an approach no other mobile provider dares to take in a 
country with no street addresses, let alone credit ratings.  AfTel 
plans to roll out pre-paid billing later this year and to migrate 
all of its mobile customers and most of its fixed-line customers to 
that system. 
 
 
------------------------ 
 
KABUL 00000926  002 OF 003 
 
 
CDMA TO COMPETE WITH GSM 
------------------------ 
 
¶5. (SBU) The CDMA system itself is something of a puzzle.  AfTel had 
been describing this as a build-out of digital fixed-line service 
(wireless local loop), but has recently begun to describe it as 
including "full mobility."  Because AfTel enjoys the country's only 
unified service license, it can offer any service it pleases, 
including fully mobile telephony.  (The regulatory authority made a 
specific decision in 2004 to allow full mobility service under 
AfTel's license.)  But AfTel is receiving GoA and donor funding for 
this and other projects, so it will be asking for trouble from the 
GSM operators if it does begin to offer a directly competitive 
service in areas covered by the GSM operators.  At the very least, 
this potentially anti-competitive behavior on the part of the GoA 
could dampen enthusiasm for further outside investment in 
telecommunications. 
 
¶6. (SBU) Meanwhile, the Afghanistan Telecommunications Regulatory 
Authority (ATRA) has granted a number of district-level CDMA 
licenses for local fixed service providers (LFSPs) to provide 
wireless local loop service.  The first of these LFSPs is scheduled 
to launch service this month in Mazar-i-Sharif, followed by a 
roll-out in adjacent districts.  While these licenses are intended 
to accelerate service roll-out to previously under-served rural 
markets, in practice they may lay the foundation for real 
competition to AfTel's fixed-line service in provincial population 
centers. 
 
 
---------------- 
COPPER FOR WHOM? 
---------------- 
 
¶7. (SBU) The expansion of AfTel's copper network makes less than 
perfect sense from a business perspective, too.  AfTel describes 
this part of its expansion as a move to deliver digital services to 
its current and prospective business customers.  But demand for 
150,000 digital business lines is so far in the future that industry 
insiders say this aspect of the expansion makes no business sense 
now.  That said, another consideration in the deployment of more 
copper is the scarcity of electrical power in Afghanistan, which 
makes wireless local loop far more problematic, since electrical 
generators have to be installed at each base station, and some 
source of power (usually battery) has to be available with each 
subscriber.  Installing copper lines is a way of avoiding the 
electricity issue, since land-line technology does not require an 
outside power source. 
 
 
---------------------------------- 
COMMENT: A CERTAIN POLITICAL LOGIC 
---------------------------------- 
 
¶8. (SBU) There is a certain logic to both the copper and the CDMA 
expansions from the Ministry of Communications' perspective.  First, 
there is a political imperative to bring public utilities to more of 
Afghanistan's population. 
At this critical juncture in Afghanistan's history, getting service 
out to the provinces is a legitimate priority.  On paper, a quick 
expansion looks like a good solution, if one ignores the economic 
sustainability of AfTel.  AfTel has been somewhat corporatized, but 
in reality it is still part of the MoC.  The expansion is 
essentially a command performance by a state player that may believe 
it is still operating in a command economy.  The key question now is 
whether the expansion will actually address the needs of the 
underserved portion of the populace.  To the extent that the 
build-out does that, it will avoid direct competition with the 
private-sector operators.  But it is difficult to judge this from 
the plans alone; the answer will become clear as the build-out is 
actually implemented. 
 
¶9. (SBU) Second, the MoC has been promising to privatize AfTel this 
year.  (NOTE: It has been promising, but until very recently not 
planning, to privatize.  This year's draft strategic plan initially 
alluded to a privatization, but set no timelines and did not include 
privatization within its lists of goals.  In response to Embassy's 
 
KABUL 00000926  003 OF 003 
 
 
input, the plan was changed to include a target date of end 2008 for 
privatization.  End note.)  With a small and flaccid subscriber 
base, paltry revenues, and very modest technical progress to report 
in recent years, AfTel is an unappetizing privatization offer.  In 
keeping with the usual course of state telecom privatizations, the 
GoA appears to want to pump some quick value into AfTel to ready it 
for the market.  Thus there may also be some logic to expanding the 
network before fixing a severe collections problem, and to entering 
mobile competition against three (soon to be four) larger, more 
established, and generally better funded GSM providers. 
 
 
------------------------------------------ 
COMMENT, CONT'D.: GET AFTEL OUT OF THE WAY 
------------------------------------------ 
 
¶10. (SBU) At least one knowledgeable insider describes AfTel 
leadership as undecided about when and how to privatize.  As is 
generally true for privatizations, there is disagreement among 
technical assistance advisors as well.  Some believe a quick sale 
will make room for private investment to happen sooner, driving 
expansion of services and tax revenues faster than the state 
enterprise will ever do.  Others want to maximize the value of the 
sale to ensure serious and committed investors are running things. 
This takes more time and investment from the state.  Both courses 
hold their own hazards, but inertia dictates the easiest and 
politically most palatable course: continue to run AfTel as a state 
enterprise, try to maximize social benefit, and make the 
privatization decision later, when things might be better.  Given 
the sad record of much more capable and better-funded governments at 
turning around faltering state enterprises, this easier course is 
not likely to end well.  Thus the Embassy intends to begin a 
substantive dialogue with the MoC on its approach to privatizing 
AfTel.  End comment. 
 
Neumann