US embassy cable - 05SANAA2426

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 002426 
 
SIPDIS 
 
PLEASE PASS TO AMBASSADOR GROSS AND EB/CIP/SP 
 
E.O. 12958: DECL: 08/15/2015 
TAGS: PGOV, EFIN, ECPS, EIND, EINV, ETTC, KMPI, YM, CH, ECON/COM 
SUBJECT: YEMEN'S THIRD GSM TENDER: CHINESE MAKE AN OFFER 
ROYG CAN'T REFUSE 
 
REF: SANAA 196 
 
Classified By: DCM Nabeel Khoury for reasons 1.4 b and d. 
 
1. (C) Summary.  Ambassador met August 17 with Minister of 
Telecommunications and Information Technology Abdulmalik 
al-Moalimi to discuss the status of a third tender for a GSM 
mobile phone operator.  Post is advocating for Millicom, 
which has a vending agreement with Motorola.  On August 2, 
the ROYG announced five official bids.  The highest offer 
came from Unitel, a previously unknown Chinese company, at 
almost 50 million USD more than its closest competitor.  The 
Chinese bid raised questions about the transparency of the 
tendering process, and possible deals with the Minister of 
Telecommunications.  The ROYG-owned CDMA operator, Yemen 
Mobile, has proven highly unprofitable and left the Minister 
vulnerable to accusations that he cost the Government 
approximately 100 million USD by launching the venture. 
Sources report that the Minister hopes to award the tender to 
the Chinese, who will return the favor by covering the ROYG's 
losses on Yemen Mobile.  End summary. 
 
2. (C) After a delay of nearly two years, on August 2, five 
official bids were announced for a third GSM mobile phone 
operator in Yemen.  Yemen currently has two GSM companies, 
Spacetel and Sabafon, and one CDMA operator, Yemen Mobile. 
The highest bid came from Unitel (Chinese), at 149 million 
USD; second was Oman Communications at 101.5 million USD; 
Millicom offered 44 million USD, with an additional 7.5 
million USD set aside for a telecommunications training 
college in Yemen; Watania, the Kuwaiti telecom company, bid 
34 million USD; and a fifth entity calling itself al-Kon, bid 
51 million USD.  By several accounts, a sixth bid by 
SyriaTel, backed by Saudi billionaires Boqshan and al-Amoudi, 
was disqualified at the last minute. 
 
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Chinese Bid Shocks Observers 
---------------------------- 
 
3. (C) According to several witnesses, the Chinese bid caused 
audible gasps at the tender meeting.  Even the most 
optimistic analyses of Yemen's telecom market indicate that 
the bid is wildly overpriced, and immediately raised 
questions about side-deals with the Minister of 
Telecommunications.  (Note:  Minister Moalimi is Chinese 
educated and brokered several deals with Chinese vendors to 
support the ROYG-owned CDMA company, Yemen Mobile.  End 
note.)  Ambassador inquired about the Chinese bid, and 
Moalimi responded that he was "as surprised as you are."  He 
claimed he was distressed by the size of the bid, as he knew 
it would draw attention to his ties with the Chinese.  He 
theorized that the Chinese market was saturated and that the 
Chinese were anxious to expand to new countries, estimating 
that the Yemen market could bear 3.5 million new subscribers. 
 Suspicions have been exacerbated by rumors that Unitel has 
already unloaded two shipments of GSM equipment while the 
tender supposedly has yet to be decided.  According to the 
official tender document, the winning bidder must deliver its 
payment within two weeks in one lump sum.  Few believe that 
any company, the Chinese included, could deliver such a 
substantial amount within the required time period. 
 
4. (C) Tariq al-Haidary, General Manager of Sabafon, said 
that Unitel will make the bulk of its payment by forgiving 
loans owed by the ROYG to Chinese companies.  Unitel is 
unknown as a GSM operator, and was alternately reported by 
the official Yemeni press as China Mobile and China Telecom. 
It is widely believed that Unitel is a front for the Chinese 
vending giant Huawei, which provides the technical backbone 
for the Yemen Mobile system.  (Note:  All of these companies 
are state-owned.  End note.) 
 
5. (C) Yemen Mobile was reportedly established with 80 
million USD in loan guarantees from the Chinese Government, 
and has been running in the red ever since.  According to 
Deputy Prime Minister Ahmad Sofan, the state-owned company 
has yet to pay any taxes to the ROYG, despite Moalimi's 
promises of huge profit.  Yemen Mobile is closely associated 
with the President's family, most notably Saleh's nephew 
Yahya and his son Ahmad Ali, who are likely majority 
shareholders. (reftel) As such, the prospect of erasing loan 
payments to the Chinese is undoubtedly attractive to the 
Minister. 
 
-------------------------------- 
Some Bids More Equal Than Others 
-------------------------------- 
 
6. (C) Fathi Fahem, the local business partner for Millicom, 
believes that Unitel's bid is invalid under the terms of the 
tender.  Any association with Huawei would disqualify the bid 
due to conflict of interest.  According to the official 
tender document, no foreign company can hold more than sixty 
percent of the company, but Unitel's local investors are 
relatively unknown.  Moalimi identified them as former 
Spacetel Deputy Commercial Manager al-Mashdali (who 
reportedly has invested only 100,000 USD), as well as 
al-'Aisi and Abdulkarim Abdulelah.  In addition, the tender 
requires that all bids must include an established telecom 
operator and there is no record of Unitel providing such 
service anywhere in the world.  By these standards, the 
Al-Kon bid is also suspect.  The company is headed by 
Abdulsalaam al-Ghamesh, son of Ghaleb al-Ghamesh, Yemen's 
Intelligence Chief with the Political Security Organization. 
Despite claims that he is recruiting an American company, 
there is as yet no declared operating partner. 
 
7. (C) Of the remaining companies, Oman Communications is 
well-respected, but operates only in its home country.  Oman 
recently opened its own market to competition, which some 
believe is motivating the company to seek out new markets in 
neighboring Yemen.  Oman Communications, local partner is 
Saleh Ali Muhsen, brother of one of Yemen's most powerful 
regional military commanders, Mohammed Ali Muhsen.  Haidary 
believes that Oman was tipped off by the Minister about the 
Unitel bid, and as result raised their bid well above what 
they originally intended to offer.  In fact, Moalimi cited 
the Oman bid as proof that Unitel's investment was not beyond 
reason, accusing the other three companies of being too 
conservative.  Watania is also a well-known company that is 
expanding aggressively in the region, and has partnered 
locally with the business giant Hayel Saeed. 
 
8. (C) Legal, technical, and financial committees are 
currently evaluating the bids, and the Ministry will offer 
its recommendations for a short-list to the inter-ministerial 
High Tendering Committee by mid-September.  The Committee 
will then make its selection and refer the decision to the 
Cabinet.  The bids are evaluated according to a points 
system, in which 60 percent is based on the value of the bid 
and the remaining 40 percent looks at experience, quality of 
service, and other factors.  By the Minister's own admission, 
this rating system all but requires the Ministry to recommend 
Unitel as its first choice.  In Millicom's view, however, any 
bid that does not meet the basic requirements of the tender 
should be disqualified completely, and not referred to the 
High Tendering Committee. 
 
----------------------- 
Post Backs Millicom Bid 
----------------------- 
 
9. (U) Millicom is a NASDAQ-listed corporation with a 
majority of American shareholders.  As a result of a vending 
partnership with Motorola, post received approval from the 
Department of Commerce to advocate on their behalf.  Millicom 
is focused primarily on emerging markets, and is currently 
operating in such countries as Pakistan, Paraguay, and 
Vietnam, with over 400 million total subscribers.  As a 
member of the media conglomerate The Kinnevik Group, Millicom 
offers its subsidiary companies and host countries 
advertising space in media such as the free Metro paper 
available in many international cities.  Millicom executives 
believe this could be of great benefit to Yemen's tourism 
sector. 
 
10. (SBU) Of the five finalists, Millicom contends that it is 
most qualified to operate Yemen's third GSM company.  They 
have worldwide operating experience, a track record in 
increasing telecom penetration in developing markets, and 
submitted what they believe is a competitive bid.  Local 
partner Fahem is considered by fellow businessmen to be a 
respectable and highly successful entrepreneur, with diverse 
interests including commodities imports and large holdings in 
the U.S.  He has good contacts in the ROYG, but is not 
considered as much of an insider as competitors Hayel Saeed, 
Ghamesh, or Ali Muhsen. 
 
--------------------------------------------- -------- 
U.S. Demonstrates Some Influence in Tendering Process 
--------------------------------------------- -------- 
 
11. (C) In the days preceding the deadline, it seemed likely 
that the ROYG would bend the rules to accommodate powerful 
interests who were unable to submit bids on time.  A number 
of influential businessmen, including the Rowaishan family, 
Yahya Saleh (head of the Central Security Organization), and 
two Saudis of Yemeni origin, Boqshan and al-Amoudi, requested 
an extension.  (Note:  Yahya approached several competing 
companies, including Millicom, in an attempt to become a 
partner, and may still attach himself to the winning bid. 
End note.)   A number of potential international partners 
were mentioned, including Deutsche Telecom Consulting, 
Vodacom of South Africa, and Etisalat of UAE, but none was 
willing to commit by August 2. 
 
12. (C) Millicom representative David Kimche expressed to DCM 
that extending the deadline was contrary to international 
tendering practices and would open the door to backroom 
deals. DCM sent a letter to Minister Moalimi and Prime 
Minister Bajammal requesting that the ROYG honor its 
tendering guidelines for the sake of the broader investment 
climate.  According to Haidary, Moalimi was upset that the 
process had attracted outside attention, but ultimately 
decided to follow post's advice. 
 
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Will ROYG Give in to Chinese Temptation? 
---------------------------------------- 
 
13. (C) Comment:  Despite intense competition between the 
three existing wireless operators, mobile penetration remains 
low in Yemen with fewer than 1.5 million subscribers. 
Current rates are relatively low for the region, but remain 
expensive for the average Yemeni consumer.  Increased 
competition from a legitimate third GSM operator would 
benefit Yemeni subscribers and expand coverage throughout the 
country.  Despite indications that the Chinese bid does not 
follow tendering guidelines, ROYG officials will find the 149 
million USD windfall hard to pass up.  According to Moalimi, 
the Minister of Finance is already pushing to include tender 
profits in a supplementary budget.  If the Yemen Mobile 
experience is any indication, Unitel will likely recoup their 
up-front investment by delivering poor service and 
cannibalizing existing markets.  By choosing a shady operator 
in exchange for quick profits and loan forgiveness, the ROYG 
will deliver yet another blow to the overall investment 
climate, and undermine one of the few areas of private sector 
growth in Yemen.  End comment. 
Krajeski