US embassy cable - 05SANAA196

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 000196 
 
SIPDIS 
 
PLEASE PASS TO AMBASSADOR GROSS AND EB/CIP/SP 
 
E.O. 12958: DECL: 01/17/2010 
TAGS: PGOV, EFIN, ECPS, EIND, EINV, ETTC, KMPI, ECON/COM 
SUBJECT: YEMEN GOVERNMENT SEEKS TO CAPTURE TELCOM MARKET 
 
REF: SANAA 145 
 
Classified By: Deputy Chief of Mission N. Khoury for reasons 1.5 b and 
d. 
 
1. (C) Summary:  President Saleh's initiative to provide 
rural phone access through the use of CDMA technology 
expanded in 2004 to offer mobile phone service in Yemen. 
Yemen Mobile, though promoted as part of the rural access 
program, may serve to squeeze out its private sector GSM 
competitors, Sabafon and Spacetel.  The company offers some 
benefits to consumers by lowering rates, but several 
observers claim its tactics are corrupt.  Yemen Mobile 
received competitive advantages and indirect subsidies, and 
GSM companies say that the fact that the same officials run 
the regulatory agency and Yemen Mobile creates an unfair 
playing field.  A series of conflicts over tariff rates and 
network compatibility have erupted between the government and 
the GSM providers.  Saleh intervened directly on behalf of 
Yemen Mobile, and there are claims that members of his family 
have a controlling interest in the company.  Yemen Mobile,s 
entrance into the market has introduced a heated controversy 
about competition in the wireless sector.  End summary. 
 
--------------------------------------------- ---- 
Cell Phones in Yemen:  A Sweetheart Deal Gone Bad 
--------------------------------------------- ---- 
 
2. (C) Yemen Mobile, a government-owned company, entered the 
cell phone market in 2004 with a Code Division Multiple 
Access (CDMA) system.  Its two main competitors, Sabafon and 
Spacetel, use the Global System for Mobile Communications 
(GSM).  GSM and CDMA are the primary cellular phone systems 
worldwide.  According to Jamal Adimi, Yemen's representative 
for Transparency International and Hamoud Munasser, Bureau 
Chief for Middle East News, President Saleh, his son Ahmed 
Ali, and his nephew Tarik own 40-50 percent of Yemen Mobile. 
Director General of the Public Telecommunications Corporation 
(PTC) Kamal al-Jabry, however, insists that PTC owns 100 
percent of the company and is considering offering shares to 
its own employees or other government agencies. 
 
3. (U) Until recently Yemen lagged behind global wireless 
trends, offering only a minimal analog system operated by 
TeleYemen (owned at that time by Cable and Wireless).  In 
2000, the Ministry of Telecommunications signed a licensing 
contract with Sabafon and Spacetel to introduce GSM.  The 
companies agreed to pay a set tariff for each call made 
between government-owned landlines and the GSM system.  In 
exchange for these fees, Sabafon and Spacetel were guaranteed 
four years of exclusivity in the market, intended to allow 
them time to recoup investment costs.  Government officials 
generally refer to this agreement as a "monopoly."  CEO of 
Sabafon Tarik al-Haidary, however, contested this saying that 
there were two GSM companies and their rates were the lowest 
in the region.  Under this agreement, which went into effect 
in February 2001, Yemen experienced explosive growth in the 
wireless sector.  When the government granted the GSM 
licenses, there were approximately 300,000 landlines in 
Yemen, all belonging to government-owned TeleYemen.  At the 
time of the tenders, there were 28,000 TeleYemen analog 
mobile phones on the market.  Four years later, Sabafon and 
Spacetel together have 1.1 million subscribers, with high 
growth projections for the future. 
 
4. (C)  According to an accountant at Deloitte & Touche, both 
Sabafon and Spacetel undergo regular audits satisfying 
international standards.  Nevertheless, the initial GSM 
agreement with the government appears in itself an exercise 
in cronyism.  There was no public tender offered and the 
process was not transparent.  Sabafon was granted to Hamid 
al-Ahmar, son of the Speaker of Parliament and powerful 
sheikh Abdullah al-Ahmar.  Hamid is the manager of the 
al-Ahmar Group, his father's business conglomerate.  The PTC 
awarded a controlling interest of Spacetel to Shahar 
AbdulHaq, owner of the International Bank of Yemen and a 
chain of hotels, known to have strong ties to the government. 
 
-------------------------------- 
ROYG Grabs a Piece of the Action 
-------------------------------- 
 
5. (U) PTC launched a "fixed wireless" campaign to bring 
telephone access to rural areas using CDMA technology.  Like 
cell phone networks, this system uses towers to transmit 
signals, instead of copper or fiber-optic cables.  The PTC 
provides users with home phones at rates of less than one 
cent per minute.  There are now 200,000 such devices in use. 
Haidary said the GSM companies originally backed this 
strategy, on the assumption that it would focus on home 
phones in rural areas, rather than cell phones.  This would 
have increased the capacity of the wireless network by 
allowing it to reach outside the combined landline and GSM 
coverage area.  However, the PTC expanded the plan to include 
a cell phone business. 
 
6.  (SBU) Al-Jebry said that after conducting a study, the 
PTC realized that it would be less expensive to implement the 
rural access strategy by creating a CDMA cell phone network 
using the existing government-owned towers built for fixed 
wireless.  In his view, the PTC was not in violation of the 
exclusivity agreement because it was taking over the 
contracts of the existing 28,000 TeleYemen analog customers; 
the PTC was simply updating the technology of the older 
phones from analog to digital and transferring them from one 
government-owned company to another.  The wireless division 
of the PTC was renamed Yemen Mobile. 
 
7.  (C) The intention, said al-Jebry, was not to compete with 
the GSM companies, but to offer service to people whom GSM 
could not reach.  He claimed that the ROYG was too soft on 
the private companies in its initial agreement, and did not 
compel them to provide rural access.  According to al-Jebry, 
if the government had wanted to compete with Sabafon and 
Spacetel, it would have operated a GSM network as well. 
Instead, the PTC offered a competition for international CDMA 
providers to set up test networks in Yemen.  The ROYG 
ultimately offered the Yemen Mobile service contract to 
Hwawi, a Chinese company.  Al-Jebry says the proof that the 
government is not trying to the steal market share is that 
very few GSM users have migrated to Yemen Mobile.  He 
confessed, however, that most of Yemen Mobile's customers are 
from urban areas.  (Note: This may technically be true: 
handsets are very expensive for the average Yemeni and they 
are not likely to switch networks.  It does not mean, 
however, that Yemen Mobile is not competing with the GSM 
companies for future market share.  End note.) 
 
--------------------------- 
Saleh Intervenes Personally 
--------------------------- 
 
8. (U) In September 2004, the PTC clashed publicly with 
Spacetel and Sabafon over tariffs and network compatibility. 
Yemen Mobile does not exist as a formal company, but is 
instead treated as a division of the PTC.  The PTC waves the 
tariffs required of the GSM companies, allowing it to 
undercut prices substantially with what amounts to a large 
indirect subsidy. 
 
9. (C) According to al-Haidary, the PTC also insisted that 
GSM providers link their systems with the new CDMA network. 
Sabafon and Spacetel countered that they would not comply 
until the PTC instituted fair tariff rules.  They threatened 
to form their own closed network, which would have forced 
Yemen Mobile to construct a nationwide network from scratch. 
With the parties at an impasse, media sources reported that 
President Saleh personally forced the companies to agree to 
the new rules.  According to al-Haidary, the President 
threatened to shut down Sabafon by delaying imports, denying 
transmission frequencies, and instituting other bureaucratic 
impediments. 
 
--------------------------------- 
Admission to Conflict of Interest 
--------------------------------- 
 
10. (C) In early December 2004, Sabafon and Spacetel received 
a letter from the telecommunications regulator requiring them 
to inform the ROYG of all new technologies and services. 
According to a lawyer for Sabafon, the GSM companies viewed 
this request as a violation of fair competition rules, and as 
a case of government intervention in the private sector.  The 
PTC also implied that it might deny the GSM companies 
permission to introduce new services on their phones, such as 
wireless email or news reports. 
 
11. (SBU) Al-Haidary alleged that the Minister of 
Telecommunications, Abdul-Malik al-Moalimi, is also the 
chairman of both the PTC and the telecommunications 
regulatory office.  As a regulator, he can force Yemen 
Mobile's competitors to disclose strategic business plans, 
while as head of Yemen Mobile he can duplicate and undercut 
such plans to benefit the state-owned company.  Al-Jebry 
confirmed that the MOT chairs both bodies, and acknowledged 
that it gives the impression of conflict of interest.  In a 
meeting with representatives of the Millenium Challenge 
Corporation (reftel), he requested aid from the USG in 
setting up an independent regulatory agency.  (Note:  Embassy 
welcomes any input from EB/CIP/SP on how to proceed on this 
proposal.  End note.) 
 
12. (C) Al-Haidary insisted that his company would not object 
to competition from a private CDMA company, but Yemen Mobile 
is not constricted by normal business requirements.  Rumors 
suggest that the company began with $70 million in loan 
guarantees from China (part of a $500 million loan package). 
Al-Jebry denied this and said that it was financed entirely 
by the PTC.  He argued that Yemen Mobile could afford to 
operate with heavy initial losses because it received 
deferred payments from banks and had no investors to demand 
immediate returns.  Al-Jebry said the PTC's goal is to 
privatize Yemen Mobile, but he declined to offer a specific 
timeline. 
 
13. (C) Yemen Mobile benefits from captive markets and 
government ties.  Some ministries (e.g. Finance) have 
required their employees to switch to Yemen Mobile.  Senior 
managers within the government receive phones for free.  The 
PTC itself has 45,000 employees, all of whom are receiving 
discounted rates with the new company.  At this time, Yemen 
Mobile has 60,000 subscribers.  Despite low prices, the 
system is hampered by shortcomings in technology and its 
business model.  (Note:  According to a Yemen Mobile 
distributor, there are currently not enough handsets for 
customers and there is no roaming outside of Yemen.  Each 
phone ranges in price from $120-180, a small fortune for most 
Yemenis.  In a country where only half the citizens can read 
Arabic much less English, the handsets do not work in Arabic 
script.  End note.) 
 
------------------------ 
&We,re Ruled by Thieves8 
------------------------ 
 
14. (C) Comment:  The wireless business in Yemen reveals 
layer upon layer of corruption.  "We are ruled by thieves,8 
commented one local journalist.  The initial contracts to 
Sabafon and Spacetel were themselves gifts distributed as 
political favors.  When the business proved more lucrative 
than expected, government officials embarked on a process of 
reverse privatization.  The MOT abused its regulatory power 
in the process and demonstrated clear conflict of interest. 
Yemen Mobile is not required to comply with any accepted 
business or accounting practices, allowing the company to 
avoid disclosing financial details regarding ownership and 
operations. 
 
15. (C) Comment continued.  Saleh's personal intervention on 
behalf of Yemen Mobile seems to confirm rumors that he has a 
direct stake in the company, and it is likely that he sees 
himself in personal competition with al-Ahmar's Sabafon.  He 
or his family would benefit greatly from expanding further 
into the urban wireless market and from eventual 
privatization.  Considering the vested interest of the 
political elite, it remains uncertain whether the ROYG is 
serious about instituting an imparital regulatory regime. 
Nevertheless, reform-minded officials in the PTC are aware 
that government intervention in the telecommunications sector 
discourages future investment, and are seeking outside help 
to create an independent agency that could pursue more 
credible policies.  End comment. 
 
Krajeski