How Iraq's telecoms contest sank into disarray
By FT reporters
Published: November 25 2003 21:35 | Last Updated: November 25 2003 21:35
It was, say some of those who attended, like a high-stakes speed dating session. More than 400 executives paid $2,000 (£1,170) each to attend the one-day conference at the Hyatt Hotel in Amman, drawn by the prospect of lucrative contracts for establishing mobile telephone networks in Iraq.
Under Saddam Hussein's regime, economic sanctions had thwarted the development of a mobile phone network and even telephone lines were the preserve of the party faithful. For the telecommunications executives and the Arab entrepreneurs meeting in the Jordanian capital, it was a rare chance to enter one of the few remaining big mobile phone markets without having to pay a huge up-front fee. It was true the contracts would last for only two years. But how likely was a future Iraqi government to take the risk of changing operators after two years?
Equipment suppliers such as Motorola, Nokia and Ericsson, regional operators including Turkcell and Liban Cell and scores of Middle Eastern businessmen flocked to the conference. They would link up during the networking sessions, forming impromptu consortia, and break apart and reconstitute in different combinations.
The Iraqi businessmen there attracted special attention. Several participants believed they would need Iraqi partners to help negotiate on the gound. Even more importantly, many said the Coalition Provisional Authority, the US-established agency running Iraq, had made it clear that bidders should have an Iraqi partner. This was for political reasons: to show that the concessions were not a profiteering exercise for US companies but one of the first chapters in a rebuilding effort that would benefit the people of Iraq.
The organisers were emphasising speed. "We want quick results: Iraq needs a mobile communications system and it needs it now," Jim Davies, the CPA's communications adviser, told participants.
The date was July 31. Nearly four months later, no licences have been issued. Except for about 10,000 people - mainly attached to the CPA - who use a small network built by MCI WorldCom, Iraqis are without mobile phones.
A process of enormous symbolic and economic importance has become what many involved agree is a mess. Behind the delay is a story of infighting and mismanagement that illustrates the conflicting pressures on the US-led administration as it tries to speed the transition to Iraqi rule without rewarding those close to the former regime.
The contract was controversial even before the awards were announced. It was a battle between two competing technology standards: the Global System for Mobile Communications (GSM), favoured in Europe, and the Code Division Multiple Access (CDMA), developed by Qualcomm of the US. A decision in favour of GSM would allow, its proponents said, a better integration of Iraq's network with the rest of the Middle East. But CDMA had powerful supporters in Washington.
When the competition rules were issued, just before the July 31 conference, some participants cried foul.
One vocal critic was Liberty Mobile. Based in Ireland, but with UK, Iraqi and US partners, and backed by Qualcomm, Lucent and Samsung, Liberty planned to offer a hybrid technology that would allow callers to use GSM or CDMA.
According to officials in Washington, the furore was so great that two newly appointed CPA officials, Dan Sudnick and Darrell Trent, told bidders that the rules would be revised to create a "level playing field" between the technologies. As a result, new competition rules were issued on August 8, triggering further intensive lobbying in Washington.
The new rules did not change the decision to split the competition into three regions or to stage it as a "beauty contest" rather than an auction to the highest bidder. Some Iraqis who were to be part of the new communications ministry later questioned this decision.
They wondered about the wisdom of selling the three contracts for a total of $5m, when smaller neighbouring states, such as Lebanon, were talking about selling their licences for closer to $1bn. But a beauty contest with a low up-front fee (and a $30m performance bond for each licence winner) was seen as the best way to tempt contractors into a war zone. The two-year contracts were also a way to get the system running without committing a future Iraqi government to a decision taken by a US authority.
The process was further complicated by the entry into the process of Iraq's Governing Council. Paul Bremer, the CPA administrator, wanted to show Iraqi "ownership" of the contracts and asked Haider al-Abadi, the new Iraqi communications minister, to make the announcement. But Mr Abadi, a member of the al-Dawa Shia group who was exiled for many years, was not inclined to act as the CPA's rubber stamp and ordered that the licences be translated into Arabic.
On October 6, he made the announcement. The licences were awarded to three Arab-led consortia. In the north, the award went to Asia Cell Telecommunications, a new consortium including Kuwait's Wataniya Telecom. The central region, including Baghdad, went to a group led by Egypt's Orascom and the south to Atheer Telecom, for which the Kuwaiti operator MTC-Vodafone would provide expertise.
Liberty Mobile, and Turkcell, a GSM provider based in Turkey, claimed the process lacked transparency. Turkcell asked the General Accounting Office, the investigative arm of Congress, to review the process for accountability. But the GAO has decided that it had no jurisdiction to oversee the decision.
Turkcell was surprised not to have won at least one of the three contracts it bid for. Baris Öney, in charge of international business development at Turkcell, protested over the contract award. "Our bid was one of the three or four fully compliant bids in the process," he told the Financial Times.
The CPA debriefed Liberty Mobile on the reasons for its unsuccessful bid. One reason it gave was that "multiple submissions documented evidence that dual system handsets were unavailable at this time". Liberty Mobile was surprised because the CPA's own competition rules had stated that "dual mode GSM/CDMA handsets are believed to be available".
People close to the CPA describe the tender as "technology neutral". There was no requirement, for example, for international roaming - which CDMA could not provide - even though the CPA thought it desirable.
Meanwhile, complaints were also made to the Pentagon, whose inspector-general later decided to launch an investigation into the awarding of the contract to Orascom. The investigation, still in its preliminary stages, is into allegations that two CPA officials, together with Mr Abadi, had taken bribes.
Orascom denies it paid any bribes, as do its business partners, and Mr Abadi says he was not in a position to influence the decision since he accepted a CPA recommendation. Neither were the CPA officials accused part of the panel that made the decision.
People close to the CPA say the choice was made by a four-person panel, including two CPA officials, one of whom was Mr Sudnick. The committee's decision was sent to Mr Bremer who then conferred with Mr Abadi. Several people in Washington confirmed that Mr Abadi's role was mainly to rubber-stamp the CPA decision.
Another complaint made to the Pentagon was that one of the people involved in the contract was Nadhmi Auchi, an Iraqi-born British businessman. Mr Auchi was sentenced this month by a French court to a 15-month suspended prison term and a ?2m (£1.4m) fine for illegally profiting from an Elf oil company purchase. But the problem was that Mr Auchi also faced persistent allegations, which he describes as "a complete lie", of financial ties to the former regime of Saddam Hussein. These allegations recommended him neither to members of the Iraqi Governing Council in Baghdad nor to many people in Washington.
Mr Auchi's links to Orascom were said to have been twofold. He held an equity stake in Orascom, the Egyptian parent that had a 63 per cent stake in the Orascom Iraq consortium. He was also said to have helped finance the 27 per cent stake in the consortium owned by a long-standing business associate, Ala al-Khawaja, a Palestinian of Jordanian nationality who lives in Cairo.
Mr Auchi told the FT that he owns a stake in Orascom of not more than 6.5 per cent, which he obtained when Orascom sold the Jordanian mobile operator, Fastlink. But he said: "I'm not involved in decision-making, not on the board of directors. I was not even aware of their participation in Iraq."
Asked whether, as alleged, he gave Mr Khawaja $20m, he said: "That's not correct. Whether I gave him money or not is something between Ala and me. We do business. I haven't given him $20m for a year, even before the liberation of Iraq. We do business together. Sometimes he borrows money, sometimes we do a joint investment."
Mr Khawaja told the FT that he also owns shares in Orascom. He also said: "I'm a financial partner [in the consortium]. I had nothing to do with the technicality of the licence or the bid . . . I've never been [to Iraq] in my life . . . I know no one in the CPA, directly or indirectly."
Mr Abadi told the FT last week that Mr Auchi's stake in the deal was raised at a meeting of the Governing Council. His ties to the former regime, he said, meant that it "is not acceptable for him to bid".
But following a meeting with Orascom Iraq on Sunday, the minister said his inquiry would not delay the signing of licences. He said he received "categorical" assurances from Orascom Iraq that Mr Auchi was not a shareholder. "We will include a provision in the licence saying that if we find out that shares [of the successful bidders] were held by people connected to the previous regime we will take action," he said.
The allegations over the Orascom award were not the only complaints. Some shareholders of the two other successful mobile bidders had ties to officials now holding office. Faruk Mustafa Rasool, the chief executive officer of Asia-Cell Telecommunications, the winner of the northern concession, was said to be connected to Jalal Talabani, the head of the Patriotic Union of Kurdistan.
The Atheer Group, which won the southern concession, listed among its shareholders a former CPA official and a senior member of the Iraqi National Congress - a prominent exile group led by Ahmad Chalabi, a former banker and a leading member of the governing council.
Atheer's shareholders include - according to a partial list of the successful shareholders circulated by the communications ministry - Ali Mudhar Shawqat. His father, Mudhar Shawqat, is media director of the INC and ranks as one of its top officials. Mr Shawqat senior also admits to being a shareholder. "It was professional. I never had any influence, never interfered. He [my son] did it on his own initiative," said Mr Shawqat.
Mr Shawqat is a shareholder - the communications minister calls him the major shareholder - in the Dijla Telecom Corporation (DTC), chaired by his son Ali. He says DTC is a silent partner in the Atheer Group, leaving management to another shareholder, the Kuwaiti mobile operator, MTC. DTC holds 50 per cent of Atheer's shares, he says, and invested $30m into the start-up costs.
"Do I have no right to earn a living because I work for Ahmad Chalabi?" asks Mr Shawqat, who sports a pistol tucked into his belt and calls himself the INC strategist.
Terry Sullivan, an American formerly working for the US authority in Baghdad, was another shareholder. Mr Sullivan, who had recently retired from the US armed forces, said he had been hired by Jay Garner, Mr Bremer's predecessor, to work at co-ordinating relations with the exiled political parties, until he resigned last June to prospect for tenders. Mr Shawqat defends Mr Sullivan's shareholding, saying there were no rules to prohibit a former CPA official from submitting a bid.
Mr Abadi said later that the Iraqi Governing Council had agreed that its members and their immediate relatives should not receive government deals. But, he added: "Do you prevent a party member taking part? Do you prevent associates? We have to draw a line."
Other concerns of the minister also delayed the awarding of the licences. Once he had made the announcement, he made three demands that would have affected the contracts.
He wanted to tax international mobile calls to raise revenues for his ministry, which is required to be self-financing by January 1. He wanted to make the right of the companies to expand their regional coverage nationwide after the first year subject to his approval; and he wanted to bar companies from having shareholders with ties to the former regime.
He said the CPA replied that the terms of the mobile licence were subject to international law, and could not be changed.
The minister argued that Iraqi law, which he said allowed for post-tender changes to the licence, should prevail.
In Sunday's interview, the minister signalled his readiness to backpedal on all three counts. However, he continued to stick to his demand that the mobile phone companies sign the contracts with him, not the CPA.
The CPA will not comment on these issues except to insist it followed US federal regulations and conducted a competition in a transparent, fair and impartial way. Someone close to the CPA, however, says it is the authority, rather than the minister, that must sign the licences, for legal reasons.
The Pentagon investigation is due to two angry companies with "a couple of friends at the Pentagon", says this individual. The complaints and lobbying, he and others say, reached Donald Rumsfeld, US defence secretary.
There may be, he admits, some dubious characters in some of the contracts. "But was there enough to say they should be excluded from bidding? You have to look at the companies according to their bids . . . if it's the best bid on paper."
Privately, Bush administration officials express frustration over the delays in rolling out mobile phones in Iraq. National Security Council and Defence Department officials met last Friday and decided to bring the matter to the attention of Condoleezza Rice, national security adviser.
In part because of pressure from Congress, the US has decided to do things differently for future contracts. David Nash, a retired US Navy rear admiral, is director of the CPA's new Office of Programme Management. He will be responsible for the "execution" of the $18.6bn of contracts newly authorised by Congress. At a conference in London last week, he said there would be full and open competition for Iraqis, coalition partners and US contractors. Nash's organisation is expected to be in Iraq for several years, while the CPA is expected to be dissolved when a provisional government is established by the middle of next year.
Meanwhile, four months after the frenzied meeting in Amman, Iraqis still have no mobile telephone network.
Reporting by Nicolas Pelham, Demetri Sevastopulo, Stephen Fidler, Joshua Chaffin, Roula Khalaf and James Drummond |
