Turbulent outlook for Lebanon’s $1.3 billion mobile industry

18 August 2020 | Melanie Mingas

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Valued at US$1.3 billion, Lebanon’s mobile industry is facing an uncertain and turbulent future after operating licences were brought under ministry control and the entire government resigned.

The current situation emerged in May, when the Cabinet authorised the Ministry of Telecommunications (MoT) to temporarily take control of the two cellular network operators Alfa and Touch, ahead of a tender this summer.

With the government now gone, the incumbent operators have found themselves in an unprecedented situation – and a legal limbo. Compounding these issues, they are now are likely to see up to 80% of their revenues wiped out this year by the freefall depreciation of the lira.

Further, it could take up to two years for a new government to relaunch the tender process and award new contracts.

“There are multiple issues to consider here. The telecoms operators who are already there will want to try and maintain service as much as possible for brand reputation, and to safeguard the investments they have made,” said Andrew Kitson, head of TMT, country risk and industry research at Fitch Solutions.

“But there are other things that are maybe out of their control,” he added.

Among them, the country’s ongoing power crisis. A 2019 survey by TowerXchange found that only 15% of Lebanon’s mobile towers had reliable power supplies.

“If there are issues with the power sector – if there is a strike or the national power grid collapses – then operators will be in a very difficult position and they will have to then strategically focus on the busiest areas of the country, which would be Beirut and some of the outlying regions, particularly the business centres,” Kitson said.

For consumers, this could mean travelling to the borders to access the mobile networks of neighbouring countries, but as Kitson highlighted, “the options and alternatives are very limited”.

Attracting international players

When the Lebanese government announced the 2020 tender, it did so under the guise of attracting international investment.

However, as Kitson explained: “There were no terms and conditions outlined, no expectations [have been] set for licence fees, or quality of service metrics, or any of the things we would normally look for in the tendering of new licences in any country.”

While there is still an industry – and associated infrastructure – to invest in and maintain, sources on the ground have told Capacity that the situation is now so challenging, it is unlikely a major international player would consider a bid. 

Not only is the local currency near worthless, capital controls introduced in May have restricted most outbound international dollar transactions to $50,000, effectively preventing any operator from officially taking profits out of the country.

Further, legacy decisions by previous ministers around staff and salaries, continue to haunt the existing operators.

Against this backdrop many have called for privatisation and, in late 2019, even anti-corruption protesters added their voices to the cause. But the government’s May decision to re-tender only strengthened the state’s control over the Orascom-managed Alfa and Zain-backed Touch.

In part, the problems stem back to 2012, when the government took control of operating expenditure (OPEX) across both firms by amending fee structures in new contracts that were hurried through parliament by Nicolas Sehnaoui, who was then the minister of telecommunications.

This effectively took OPEX out of the operator’s hands – and later CAPEX, staffing choices, and even tariff structures – meaning all business decisions had to effectively be approved by the state.

At the time Alfa’s CEO and chairman, Marwan Hayek, was quoted in the media as saying that the company would make “at least 30% less” than it did the previous year, and accused the government of trying bring the lucrative industry under its full control.

In the years since, this business model has seen network infrastructure, such as towers, often deployed by both operators on the same sites, creating significant financial inefficiencies by doubling investment, ground rent and equipment costs while adding no additional coverage.

“If they still wish to exert influence or control over the sector and retain the old management style models then, as far as I can see, there is not really much incentive for either Zain or Orascom to come back and continue with business as usual,” Kitson said.

“We know that both companies have expressed dissatisfaction with the current model. They want more control, they want to be able to decide where, when and how to invest in the country, and also to decide for themselves what kind of services they should be able to offer businesses and consumers, and on what terms as well,” he added.

The way forward

With the two operators in a legal limbo, the government gone, and the Lebanese currency heading for a collapse similar to that of the Venezuelan bolivar, the situation is undeniably bleak. 

“It’s an unusual position for any industry to be in where you have the two principle providers of services operating in almost a vacuum,” said Kitson.

However, if the business model is addressed, the current situation could see several scenarios develop over the coming months to improve the outlook.

One is the election of a new government, in line with demands made since 4 August. However, despite calls to free the country from interference and corruption, a complete overhaul of the political culture is not a short-term project.

Another option would be to appoint international advisors to handle the tender process.

“They may decide to contract to international advisors, but that also takes time, due diligence needs to be done. Obviously, no-one has gone in and looked at the market since the 2015 tender was launched and aborted, so they would need to look at the market from the ground up,” Kitson added.

In an ideal world, such assessments would consider current dynamics and future potential market value. But given Lebanon’s recent refusal to allow international investigators to examine the events leading up to 4 August, such due diligence for the mobile industry seems unlikely for now.

While anything is possible at this point, there is no true precedent for the situation Lebanon finds itself in, making it difficult for any business or investor to accurately assess its risk and reward outlook.

“Africa is littered with all sorts of failed auctions for alternative operators but this… we very rarely see any market where the government owns the operator and then invites third parties to come in and manage it. It’s an usual one to say the least, and it’s very difficult to benchmark,” Kitson said.