US embassy cable - 03KABUL1022

C O N F I D E N T I A L SECTION 01 OF 09 KABUL 001022 
 
SIPDIS 
 
NSC FOR ZKHALILZAD, JDWORKEN, HMANN, RHANSON, DSEDNEY 
DEPT FOR SA/PAB, SA/AR 
MANILA PLEASE PASS AMB PSPELTZ 
USDOC FOR DAS/TD MURPHY AND AFGHAN RECON TASK FORCE 
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STATE PASS OPIC FOR RCONNELLY AND DZAHNHEISER 
 
E.O. 12958: DECL: 04/19/2013 
TAGS: ECPS, EINV, ECON, ELAB, AF 
SUBJECT: AFGHANISTAN TELECOMMUNICATIONS SECTOR UPDATE - 
APRIL 2003 
 
Classified By: AMBASSADOR ROBERT P. FINN FOR REASONS 
1.5 (B) AND (D) 
 
1. (C) The Ministry of Communications (MOC) is facing an 
assortment of challenges as the government of President 
Karzai enters the Afghan year 1382.  The Ministry,s 
relations with its sole telecom service provider, Afghan 
Wireless Communications Company (AWCC), continue to 
deteriorate while a second service provider led by the Aga 
Khan Fund for Economic Development (AKFED), is preparing to 
launch operations.  The Ministry of Communications is 
planning to unveil yet another strategy for developing a 
transparent and progressive telecom sector in early May ) 
which may even include plans for partial privatization of 
this sector.  For now, the government has decided to take a 
wait-and-see approach to privatization generally.  The Afghan 
government cites national security, national prestige, and 
instability caused by dislocation of public workers as 
factors in delaying privatization.  Ironically, two different 
roads to partial privatization for telecoms are available - 
both with little to no political risk.  An AWCC buy-out of 
the MOC,s 20 percent share of its stock, or MOC taking on a 
minority partner to help modernize and expand Afghanistan,s 
state-owned telecom sector both offer safe, albeit limited, 
privatization opportunities.  Meanwhile, the MOC is preparing 
to issue two new invitations to tender in coming weeks.  End 
summary. 
 
=================================== 
Background on Afghan Telecom Sector 
=================================== 
 
2. (SBU) The existing service provider, Afghan Wireless 
Communications Company (AWCC), began service in Afghanistan 
in 1998 as Telephone Systems International (TSI).  TSI 
contracted their Afghan operations out to a U.K. firm during 
the Taliban sanctions period from 1999 to 2001.  In 2001, the 
Rabbani government (based probably upon its legal standing as 
holder of Afghanistan,s UN seat and most of its embassies 
around the world, although at the time it controlled perhaps 
only 15 percent of Afghanistan,s territory) ratified TSI,s 
license.  AWCC was then formed in 2001 to operate the 
wireless telecom (GSM) system.  It was (and still is) 80 
percent owned by TSI and 20 percent owned by the MOC. 
 
3. (C) After a highly controversial bidding process for a 
second Generalized System for Mobiles (GSM) license in the 
latter half of 2002, (which involved the abrupt cancellation 
of the first invitation to tender and allegations of bribery, 
kickbacks, conflicts of interest and non-transparent 
tendering on the second invitation to tender), the MOC 
awarded a license to the AKFED consortium (which included the 
Aga Khan Foundation as its largest stakeholder).  According 
to AWCC, which did not bid on the second GSM license, the MOC 
notified AWCC during this lengthy bidding process that their 
license would no longer be exclusive and must be modified to 
reflect terms identical to those in the AKFED license. 
 
============================================= ======= 
AWCC Claims Effective Expropriation of Assets by MOC 
============================================= ======= 
 
4. (C) Officials from the Afghan Wireless Communications 
Corporation met with the Ambassador on April 4 to voice their 
growing concerns about their troubled relations with the MOC 
and seek his help.  Relations between AWCC and the MOC have 
been strained during the entire tenure of Communications 
Minister Stanakzai as reported previously.  Now, according to 
AWCC officials, the Ministry had imposed severe conditions on 
AWCC for license renewal, and had established a seemingly 
arbitrary April 23 deadline for compliance.  The provisions 
the MOC is seeking as conditions for license renewal include: 
Dissolution of the existing license; transfer of an 
additional 20 percent ownership stake to MOC without 
compensation (raising the MOC,s ownership share in AWCC to 
40 percent); transfer of one-third of international incoming 
call revenues; control of the AWCC Board of Directors; 
authority to appoint AWCC management; the settlement of an 
existing legal dispute between AWCC/TSI and its former U.K. 
subcontractor and several other taxes and conditions.  The 
AWCC reps asserted they are facing far more stringent 
conditions than AKFED did.  They were unable to confirm this 
disparity, however, as the MOC has not allowed AWCC to review 
the AKFED license. 
 
5. (C) AWCC claims 35,000 subscribers, operates in four 
cities with another pending, (Jalalabad service is reportedly 
being held up by the MOC), has made a claimed $70 million 
investment in the GSM network, employs over 600 local 
employees, and creates a $500,000 monthly expenditure in the 
local economy.  Substantial upgrading and expansion are 
planned for 2003.  The AWCC reps claimed that the MOC,s 
actions constitute a partial expropriation of their 
substantial private investment in Afghanistan.  They further 
claimed that the attorneys representing the MOC are very 
unsophisticated regarding telecommunications regulation and 
practice, and did not even realize the sum of their actions 
constituted effective expropriation until they were advised 
of this outcome.  Based upon the urgency of their situation 
and their investment at stake, they requested the Ambassador 
speak with appropriate Afghan government officials to prevent 
this pending expropriation.  Otherwise, they claimed they 
would have no alternative but to cease further investment and 
pull out of Afghanistan.  (Note: With the AKFED Consortium 
still months away from commencing operations, this would 
leave Afghanistan with virtually no phone service at all for 
the near term.  End note.) 
 
6. (C) The AWCC reps noted that Minister Stanakzai, despite 
trying to reach some compromise, appeared unable to balance 
his conflicting roles as policy-maker, government official, 
regulator, and shareholder.  They suggested one solution 
would be for the government to sell their 20 percent 
ownership stake to AWCC and get out of the business side of 
telecommunications entirely.  This &de facto8 partial 
privatization could send a positive signal to international 
investors. 
 
7. (C) The Ambassador raised the issue of possible 
expropriation during a meeting with President Karzai on April 
4.  Karzai was alarmed and understood the disastrous effect 
an expropriation would have on Afghanistan,s potential to 
attract foreign investment.  The Ambassador raised the 
possibility of &privatizing8 the MOC,s 20 percent 
ownership stake in AWCC through sale to AWCC.  President 
Karzai agreed that privatization was a good idea for telecoms 
and wondered why the Afghan government was involved in this 
sector at all.  Nonetheless, it was unclear what action 
President Karzai was prepared to take. 
 
============================== 
TDA-funded Consultant Bashes 
AWCC, Discusses Privatization, 
and Notes Upcoming Tenders 
============================== 
 
8. (C) On April 10, Econ/Commoff met with Ken Zita, (please 
protect) a TDA-funded telecom advisor to the Ministry of 
Communications, to review sector developments.  When the 
subject of AWCC was raised, Zita said AWCC was &probably the 
worst phone company anywhere in the world8.  He strongly 
disputed AWCC,s claim of a 98 percent call completion rate. 
(Note: Embassy can confirm that.  For whole days there is no 
AWCC service at all; other days perhaps one-third of calls 
made do not get through.  The joke around Kabul is AWCC 
stands for &Always Waiting, Can,t Connect8.  End note.) 
Zita maintained that the poor performance of AWCC had become 
a major liability and embarrassment to the Afghan government. 
 Contrary to AWCC,s claims that it has tried to cooperate 
with the Ministry of Commerce, Zita said AWCC had failed to 
rectify &not insignificant8 problems with the wireless 
network, despite being &put on notice8 as early as July 
2002 by the MOC.  He reported just having come from a meeting 
between the Minister and AWCC reps in which the Minister 
&escalated8 matters.  Stanakzai reportedly gave AWCC 20 
days to comply with the MOC conditions or their license would 
be revoked.  Zita noted that he had kept an open mind about 
AWCC since he first visited Afghanistan in April 2002, but 
that his opinion of the firm had declined steadily. 
 
9. (C) According to Zita, AWCC had not accomplished enough in 
the past year, offered poor and relatively expensive service, 
and &no one believes they,ve actually invested as much as 
they say they have8.  To increase the public pressure on 
AWCC, Minister Stanakzai announced publicly on April 14 that 
AWCC has three months to improve service or have their 
license revoked.  According to other Kabul sources, to drive 
home the message, one of AWCC,s management was detained on 
April 13 by the Ministry of Defense and ordered to improve 
service within ten days or face arrest.  Minister Stanakzai 
denies his Ministry was involved in the MOD action.  (Note: 
Of course, AWCC maintains that MOC obstruction and lack of 
support from the MOC were a major obstacle to their 
operations.  It is worth noting Zita was unaware and 
surprised that the MOC had refused to show AWCC the AKFED 
contract their license conditions were to match.  This last 
point is especially important if AKFED turns out to be 100 
percent privately owned.  This would greatly strengthen the 
AWCC position for buying out the MOC,s 20 percent share. 
End note.) 
 
10. (C) Turning to more positive matters, Zita noted that two 
telecom invitations to tender were scheduled to be announced 
in roughly two to three weeks.  The first tender would 
request bids for a management contract to establish a 
wireless local loop system in 11 cities.  The second tender 
was for the establishment of an International Satellite 
Gateway system.  (Note: As further information on these 
tenders becomes available, Embassy will pass along.  For the 
time being, relevant Washington agencies are requested to 
inform potentially interested U.S. firms.  Endnote.) 
 
11. (C) Econ/Commoff asked if the MOC had any plans to 
privatize Afghanistan,s telecom sector holdings ) which the 
Ministry would like to run as an independent SOE named 
&AfghanTel8.  AfghanTel would maintain the existing 40,000 
landlines and 5,400 public employees  (Comment: One employee 
for every 8 phones ) incredible!  End comment.)   Zita said 
he had advised the Minister that the Afghan telecom sector 
should be privatized, but noted that the Minister wanted to 
maintain state control.  The reasons he cited were: first, 
national security; second, national branding (i.e., 
prestige), and third, the desire to avoid any dislocations 
caused by widespread layoffs in the run-up to elections.  The 
International Telecommunications Union advisor working with 
the Minister, Mr. Sangin, also opposed near-term 
privatization of telecoms. 
 
12. (C) Zita suggested that private firms would probably have 
no interest in taking ownership of the existing telecom 
structure of AfghanTel.  Severance packages for displaced 
workers could even be included in private bids for telecom 
operations.  Most importantly, however, AfghanTel,s real 
value was its land holdings, which included 423 post offices, 
switching stations and rights-of-way throughout the country. 
Access to such land would offer tremendous commercial 
opportunities in telecommunications and other sectors for 
prospective bidders.  Despite the capacity to raise 
substantial assets and improve service through the 
privatization of AfghanTel, strong resistance remained. 
 
13. (C) Econ/Commoff noted that it was hard to see where the 
telecom sector was headed, and asked Zita if there was a plan 
for future development of the sector.  Zita replied that he 
was working on such a plan for presentation to the Minister 
by the end of April and would suggest publication of the new 
policy in mid-May. 
 
===================================== 
Future Options for Afghan Telecoms: 
Early Partial Privatization Suggested 
===================================== 
 
14. (SBU) On April 13, Zita sent an e-mail to the Minister 
and his advisors at the MOC outlining &Options for 
AfghanTel8 and provided a copy to the Embassy.  The e-mail 
details the difficulties facing AfghanTel within an open and 
competitive marketplace and is summarized here to indicate 
the aspects of the internal dialogue going on within the 
Afghan Ministry of Communications.  Zita notes AfghanTel will 
require investment capital to match its private sector 
competitors, and will be unlikely to raise these funds 
through either private borrowing or donor assistance.  Zita 
added that the ITU advisor, Mr. Sangin has suggested 
privatizing a minority position in AfghanTel &over time8, 
without a specific timetable.  Zita warned that if AfghanTel 
enters the market - especially with only limited financial 
resources - any failure to perform ) or to compete 
effectively ) might have a direct, negative impact on the 
credibility of the government. 
 
15. (C) Zita continued, noting that engaging a management 
partner would offset operational risk and improve generation 
of cash.  Zita acknowledged that maintaining majority state 
ownership of AfghanTel is politically important (for the 
reasons outlined above).  Under the circumstances, Zita 
recommended the immediate sale of a minority interest in 
AfghanTel (to a firm able to provide management and/or 
technical expertise and access to capital) as an alternative 
to a &wait-and-see8 timetable for privatization.  In this 
immediate partial privatization scenario, the investor would 
purchase a minority block of shares (25 percent) with an 
option to purchase up to 49 percent (or more) in the future. 
Zita concluded that telecom is &almost always a 
privatization pioneer in any country8 and that &no other 
sector is better suited to lead the way8. 
 
======= 
Comment 
======= 
 
16. (C) Appropriate development of the Afghan telecom sector 
could serve as a major revenue and job generator for the 
fragile Afghan government.  Privatization in telecom could 
also help generate revenue and smooth the path for future 
partial or full state-owned enterprises (SOE) privatizations. 
 The Afghan Cabinet reportedly debated privatization of 
telecoms on April 12 and decided to wait for the present. 
While the result is not what we had hoped, the fact that such 
a Cabinet debate took place is a healthy sign.  The merits of 
 privatization versus continued state control are being 
actively considered at the MOC, although it remains unclear 
whether economic or political considerations are paramount. 
While a partial expropriation of AWCC/TSI would represent a 
disaster for Afghanistan,s image, a partial privatization of 
AfghanTel would be a major boost. 
 
17. (C) The MOC allowing AWCC/TSI to buy out their 20 percent 
share would enhance perceptions of Afghanistan,s business 
climate even further.  Perhaps the notion of allowing 
AWCC/TSI to buy out the 20 percent stake would face 
resistance in light of AWCC,s alleged poor performance over 
the past year.  AWCC,s position will be considerably 
strengthened, however, if it turns out AKFED,s license 
conditions include 100 percent private ownership.  The 
&privatization8 of the 20 percent MOC share of AWCC would 
be virtually without political risk as all AWCC employees are 
private and not public employees.  AWCC has even agreed, if 
national branding/prestige is a consideration, to change 
their name to remove the identification with Afghanistan. 
 
18. (C) There is at least some reason to hope a more 
progressive and transparent telecom policy will be enacted 
soon and that the stated goal of delineating the MOC,s 
current multiple roles and possible scenarios for at least 
some telecom privatization will be part of this urgently 
needed reform.  If so, a fully private AWCC/TSI and a 
partially privatized AfghanTel would have to compete in an 
open telecom market with new entrants, improving telecom 
service and access for the Afghan population.  The Embassy 
will continue to advocate strongly for privatization and open 
competition as general themes, and particularly focus our 
privatization message on the Afghan telecom sector. 
FINN