assessments

Bid Restriction Could Affect Future Iraqi Projects

8 MINS READAug 5, 2003 | 16:17 GMT
Summary
The Coalition Provisional Authority has barred any company in which a government owns more than a 5 percent stake from bidding on Iraq's lucrative mobile phone licenses. Although this gives Anglo-American firms an advantage, they still likely will seek to partner with state-owned Middle Eastern firms using GSM-based technology. The state-ownership exclusion likely will be recreated for tenders in other important sectors, including petroleum.
Representatives from about 300 companies attended a conference for the tender of Iraqi mobile phone licenses held July 31 by the U.S.-led Coalition Provisional Authority (CPA) in Amman, Jordan. In a move that angered many participants, the CPA announced rules barring any company with more than 5 percent government ownership from bidding on the three lucrative regional mobile phone licenses — one each in northern, central and southern Iraq. The stated reason was to keep foreign governments from controlling Iraq's telecoms sector; the unstated reason might be to keep unwanted companies from leading Iraq's telecoms revival. That state-ownership restriction, if strictly followed, would exclude most Middle Eastern and many European companies from participating in Iraq's mobile sector, which is expected to be one of the country's most lucrative industries outside of petroleum. European companies such as Orange (France), T-Mobile (Germany), Telefonica Moviles (Spain) and KPN (Netherlands) are leading global providers with the ability to service one or more of the licenses, but all would be barred under the rules. The same goes for Japan's NTT DoCoMo and state-owned firms from places such as China. Knowledge of markets in the region leaves Middle Eastern companies such as Batelco (Bahrain), MTC-Vodafone (Kuwait) and Etisalat (United Arab Emirates) well positioned to bid on the Iraq tenders, but these companies have even greater percentages of state ownership, which would exclude them from bidding. However, the companies might not be left completely in the cold. Linton Wells, a deputy assistant secretary of defense, said Aug. 1 there still would be room for partially state-owned companies to participate in Iraq's mobile network through consortia with other companies — presumably with the lead company being a wholly, private-owned enterprise. Allowing for minor partner participation of some state-owned companies is a pragmatic decision for the CPA, which apparently recognizes that some participation might be necessary to meet the administration's ambitious timeline of having the three regional mobile networks up and running by November. Partners with real market experience in the region will be valuable to lead companies, especially if they have proven track records of operating in Iraq's risky security environment. Even more than European companies, Middle Eastern firms are well positioned to serve as minority partners. This is particularly true for Batelco, which in July set up a short-lived system in Baghdad without CPA approval and established an Iraqi subsidiary, Batelco Iraq. Less than a week after it went live, Batelco bowed to CPA threats that it would quash the unlicensed network and shut the system down itself — a smart move if the company hopes to join a consortium for the long haul. Nevertheless, the experience in setting up the network in volatile Baghdad, as well as operating in the region, would make it a valuable partner to a Western firm in the central region. Another advantage for Baletco: British Cable & Wireless owns 20 percent of the company. Another company that is well positioned for a minority stake — particularly for the southern region — is Kuwait's MTC-Vodafone, which already provides limited cellular services to British forces around Basra. Having a relationship with British telecom giant Vodafone won't hurt, either. Other potential regional partners include Kuwait's National Mobile Telecommunications Co. (Wataniya Telecom) and Cairo-based Orascom Telecom, a regional telecom heavyweight. Clearly, the state-ownership limitation gives yet another edge to private U.S. firms such as Nextel, as well as British companies such as Vodaphone. Anglo-American firms likely will be the lead partners in the three regional networks, and they might look to forge partnerships with state-owned companies from other Middle Eastern countries. However, one U.S. firm, MCI, almost definitely is out of the running. The company was awarded a $45 million contract in May to set up a temporary mobile network to serve international and Iraqi officials; it now might be excluded following a July 31 ruling by the U.S. government that suspended MCI from competing for federal contracts. The ruling resulted from ongoing investigations into whether the bankrupt company lacks necessary internal controls and ethics. Although this does not explicitly restrict MCI from Iraqi contracts, the CPA would have a very difficult time justifying the selection of MCI and could run afoul of government watchdogs back in the states. GSM or CDMA? Another key issue in the bidding process will be whether to build Iraq's mobile phone network with the CDMA standards used in the United States or the GSM standards used throughout Europe, the Middle East — save Israel — and most of the rest of the world. U.S. companies and their congressional supporters have been lobbying the White House and Pentagon to opt for a CDMA system in Iraq, but the current tender is technology-neutral. Despite the corporate advantage of having a CDMA-based system in Iraq, other considerations actually make a GSM model more likely. First of all, the U.S. Defense Department is said to prefer keeping the entire Middle East on the same GSM system, rather than making Iraq a technological outlier in the region, RCR Wireless News reported in June. Defense officials hold sway over the CPA and most big decisions in Iraq, and security and defense issues definitely have priority over economic considerations in the Pentagon. Second, the parts of Iraq that do have cell phone service — including parts of Kurdish northern Iraq, MCI's Baghdad service and MTC-Vodafone's services in Basra — already are operating on GSM and could serve as the building blocks for the three regional networks. Finally, it is unclear that there is sufficient interest from U.S. firms to install CDMA networks across Iraq's three regions. Nextel is one of the few companies to express interest publicly, while RCR Wireless News reported June 23 that wireless equipment companies such as Motorola, Qualcomm and Lucent Technologies all are taking a cautious approach to Iraqi opportunities. Also, U.S. firms are concerned that the two-year term of the contracts is too short to guarantee an adequate return on investment, especially considering initial operating costs, which will be heavy on security outlays. The CPA has not ruled out having different network technologies in different regions, but it will be averse to sticking the future Iraqi government with incompatible technologies. Going with the GSM standard might be the best way to avoid the use of multiple technologies. In some respects, the CPA already has leaned toward GSM by stipulating that its temporary network was established under GSM, not CDMA, standards. A Vision of Tenders to Come The mobile license tender might be a preview of bidding rules for contracts in other key industries. The CPA's rationale was philosophical: Wells said Aug. 1, "We feel that having a significant share of Iraq's telecommunication system owned by a company with major foreign government ownership is not necessarily in the best interest of the Iraqi people." That rules out any sole-source bid by a largely state-owned company, he said. Washington might adopt the same strategy of excluding partially state-owned companies from bidding on projects in other sectors, including construction, utilities and — most significantly — petroleum. This would have the same effect of excluding many companies from the Middle East, Europe and Asia, including China. The stated rationale for keeping Iraqi interests out of other government hands — through state ownership — will be particularly strong for the petroleum sector, where ownership and extraction of petroleum reserves traditionally is tied with issues of national sovereignty, as a quick look at Saudi Arabia, Kuwait, Venezuela and Mexico will attest. The U.S. administration of Iraq — and Iraq's inability to rebuild its oil sector without help — has ensured there will be vast foreign participation. However, the CPA easily could apply the same rationale of protecting Iraq's strategic economic interests to exclude partially state-owned firms from bidding to explore and develop Iraq's vast oil reserves. Such exclusions would be advantageous for the coalition and Iraq's Oil Ministry, providing a powerful rationale for reviewing and negating so many of the prewar contracts signed by Saddam Hussein's government. Companies such as France's TotalFinaElf, China National Petroleum Co., Turkey's TPAO, Malaysia's Petronas, Algeria's Sonatrach, India's ONGC, Indonesia's Pertamina, Syria Petroleum, Petrovietnam, Russia's Zarubezhneft and Tunisia's ETAP not only could find themselves holding useless contracts, but also unable to bid on future Iraqi oil development contracts. Washington might show similar flexibility in the oil sector as it is doing in mobile telecoms, but for different reasons. It might look to funnel some contacts to companies from countries that the United States still needs as allies in the region and would not want to loose, such as India and Russia. Excluding them completely might unnecessarily spoil relations. The alternative — downgrading and lessening their participation in Iraq as minority partners in a consortium — could be a nice middle-ground option that dovetails nicely Washington's Iraqi and regional strategies.

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