Middle East Intelligence Bulletin
Jointly published by the United States Committee for a Free Lebanon and the Middle East Forum
  Vol. 5   No. 1 Table of Contents
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January 2003 

Lebanon's Cell Phone Scandals
Gary C. Gambill

Lebanese cell phone subsribers

The launch of an international public auction for the sale of 20-year GSM (Global System for Mobile Communications) licenses in early January was hailed by officials in Beirut as a promising first step in the government's privatization program and a leap forward in efforts to reduce Lebanon's massive $31 billion public debt (equal to nearly 180% of its gross domestic product). However, only investors with strong ties to Lebanese and Syrian political elites are likely to submit competitive bids for the licenses.


When the Lebanese civil war came to an end twelve years ago, the country's telephone network was in shambles. Many areas where telephone service did exist remained under the political control of militia warlords-turned cabinet ministers in the Syrian-installed postwar government, who impeded the collection of service fees from their constituents, leaving the state-owned telephone company heavily in debt. What others might have seen as a serious problem, the country's Syrian and Lebanese powerbrokers saw as an opportunity to create an artificially lucrative GSM market.

Members of Syrian President Hafez Assad's inner circle developed close ties with postwar Lebanese political and commercial elites who profited from the Syrian occupation. Nearly all sectors of the Lebanese economy were dominated by Lebanese firms and individuals in partnership with Syrian officials, but the mobile phone industry was the most lucrative. In 1994, two 10-year build-operate-transfer (BOT) contracts were awarded to two cellular phone companies, LibanCell and Cellis. Although shares in both companies have changed hands somewhat since then, a majority stake in the former and a large minority stake in the latter have been owned by Lebanese political elites with close ties to the Syrian government.

On paper, 86% of LibanCell came to be owned by Ali and Nizar Dalloul, sons of former Defense Minister Mohsen Dalloul, a close ally of Lebanon's billionaire prime minister, Rafiq Hariri. According to reliable sources, the Dalloul brothers actually fronted for Syrian Vice-president Abdul Halim Khaddam and former Syrian Chief of Staff Hikmat Shihabi. Cellis came to be 30% owned by a close friend of the Assad family - Public Works and Transport Minister Najib Miqati, along with his brother, Taha, and nephew, Azmi.

Due to the government's failure to provide reliable fixed-line services, the LibanCell-Cellis "duopoly" made a killing over the next eight years. In a country of just 3.5 million people, nearly 800,000 have cell phones today (over 22% of the population, compared to 2% in Egypt). The government, which controls pricing, allowed the two companies to set subscription fees that were nothing short of highway robbery. Whereas mobile telephone calls cost around 3-8 cents per minute in other Arab countries, in Lebanon the cost was 13 cents per minute for dedicated lines and 35 cents per minute for pre-paid phone cards. Elsewhere in the world, companies gave away free cell phones to attract customers. In Lebanon, subscribers were forced to pay a $500 deposit.1

Although the BOT contracts stipulated that the government was to receive 50% of the profits earned by LibanCell and Cellis, both companies allegedly understated their revenues. The contracts also limited each company to 250,000 subscribers, but both exceeded this limit. So long as Hariri was prime minister, however, the government looked the other way.

After the ascension of President Emile Lahoud in 1998, Hariri was replaced by Selim al-Hoss, who promptly launched an "anti-corruption" campaign designed to dismantle Hariri's patronage network. In 1999, state auditors went to work on the two mobile phone operators, compiling a list of 24 infractions that shortchanged the Lebanese treasury of hundreds of millions of dollars. Following the audit, Hoss's cabinet imposed a $300 million penalty on each firm to compensate for lost government revenue. Both companies refused to pay, however, confidant that the Syrian political barons reaping part of their profits would not permit Hoss to revoke their licenses.

Transition in Syria

The political order in Syria began to change during the waning months of the late Syrian President Hafez Assad in early 2000. Assad's son and heir apparent, Bashar, launched an anti-corruption campaign of his own, designed to eclipse the power of certain political and security figures appointed by his father, including Khaddam and Shihabi, who objected to the ascension of a 34-year old eye doctor as president of Syria. These members of the so-called "Old Guard" had amassed enormous wealth through drug smuggling, money laundering and other illicit activities in Syria and Lebanon, allowing them to buy the loyalty of poorly-paid bureaucrats and officers in the military and security forces. In order to ward off a potential challenge to his authority, Bashar launched an aggressive campaign to end their control of this illicit revenue and divert it to his own allies. In order to redirect profits from Shihabi and Khaddam to Bashar's allies, the mobile sector in Lebanon had to be reorganized.

After Bashar formally assumed power in July 2000, however, the Lebanese economy was on the verge of complete collapse and public support for Hoss had plummeted. Hariri was mobilizing his formidable financial resources to take revenge on his rivals in upcoming parliamentary elections and still retained the backing of Saudi Arabia - a critical source of desperately needed investment in Syria. The young Syrian dictator resumed dialogue with Hariri and agreed to his return as prime minister after the elections. However, the Syrians granted exclusive control over security policy to President Lahoud - a fierce political rival of Hariri and unswerving ally of Syria who owed his entire political career to Damascus. Significantly, an ally of Lahoud, Jean-Louis Qordahi, was appointed Minister of Telecommunications.

In June 2001, the Lebanese government announced its intention to cancel the BOT contracts of LibanCell and Cellis three years ahead of their expiration. Suspiciously, the Dalloul brothers greatly increased their stake in LibanCell just prior to the announcement, apparently because they believed the cancellation would entitle the company to financial compensation. Hariri quickly declared that the companies would be fully compensated even as Lahoud and his allies swore that this would never happen.

For over a year, debate raged within the regime and in the country at large over what to do with the mobile phone sector. Hariri initially favored upgrading the BOT contracts to full licenses, in return for a large lump sum payment, but this was clearly a non-starter. Instead, he proposed an international auction to sell two 20-year operating licenses for an up-front fee, ostensibly to help relieve the country's debt burden. Lahoud opposed the sale of operating licenses, fearing that Hariri and his allies would outbid other investors, and demanded that the mobile phone sector be nationalized. Hariri won the first round of this dispute, in part because his long-time friend, French President Jacques Chirac, made Lebanon's commitment to privatize the telecommunications sector a precondition for convening a conference of international donors and financial institutions on its behalf in Paris. In the spring of 2002, it was decided to hold an international auction for the licenses, eventually scheduled for February 2003.

A fierce struggle between the two rivals erupted over what to do in the interim, with Lahoud demanding that the state temporarily take over the network and Hariri pushing to keep the status quo until the auction. Lahoud's plan received the endorsement of the half-Lebanese Saudi Prince Al-Walid bin Talal, who had expressed interest in replacing Hariri. After months of fierce in-fighting between the two sides, during which Hariri repeatedly accused the president of conspiring to "dynamite the Paris II conference," a compromise was reached whereby LibanCell and Cellis would operate the networks on behalf of the state until the end of January 2003 for a flat monthly fee.

The next several months witnessed an increasingly acrimonious dispute between Hariri and Lahoud over the terms of an agreement to transfer the networks to the government. Hariri argued that, in order to reassure potential investors that the government will honor its contractual obligations, LibanCell and Cellis must be compensated for the early termination of their BOT contracts. As is so often the case, the prime minister's argument was both justifiable on economic grounds and completely self-serving, given his ties to LibanCell's shareholders.

Lahoud and his allies insisted that no offer of compensation should be made until the two companies had agreed to pay the $600 million penalty imposed by the Hoss administration. Since neither LibanCell nor Cellis was likely to accept such terms, the policy advocated by Lahoud would have made an amicable settlement with the operators impossible, driving down bidding for the licenses. This suited the president just fine, not only because it would sabotage Hariri's debt-reduction plans, but also because low bids for the licenses could be used as a justification for retaining state ownership of the networks. The Telecommunications Ministry, headed by Qordahi, would then hire a third party to run the networks on behalf of the state, greatly increasing Lahoud's patronage power.

Hariri's position was strengthened after the Paris II conference in November, where international donors and financial institutions spoke in one voice regarding Lebanon's need to fast track privatization. Hariri won support from the Syrians on this issue and secured the backing of Parliament Speaker Nabih Berri by dropping his opposition to a bill that would cancel unpaid water and electricity bills prior to 1995 (most of the overdue bills were for Shi'ite households).

Hussein Rifai

On November 28, after a marathon round of closed door negotiations which delayed the weekly cabinet meeting for almost two hours, Lahoud and Hariri presented the cabinet with a draft agreement which offered the two companies $179 million in compensation and referred the government's $600 million claim against them to international arbitration. By mid-December, though, LibanCell Chairman Hussein Rifai and Cellis Chairman Salah Bou Raad had signed an agreement to this effect.

The battle over Lebanon's telecom sector is not over, however. Although Hariri has frequently boasted that the auctioning of cellular licenses will raise $2 billion, most telecom experts predict that the sale will yield considerable less then that - due in no small part to the months of rancorous political battles which preceded it. While the licenses may indeed be worth such a price to those who are well placed to manipulate government telecom policy, few outside investors will find competing in the Lebanese market to be such an attractive prospect.

Both sides are preparing for the battle over what to do once the bidding falls short of expectations. While Hariri has said that the licenses must be sold this year, irrespective of how high the bids are, Qordahi has said that he will hire a third operator to manage the networks on behalf of the state in the event that it does receive a "fair" price for the bidding. Interestingly both have accused each other of seeking to sabotage the auction to ensure that bids are low - the Lahoud camp argues that Hariri wants low bids in order to pave the way for LibanCell to buy back a license, while the prime minister worries that his enemies will use low bidding as a pretext for the state to assume control of the networks.

As the clash between Hariri and Qordahi escalated in January, allies of the prime minister began to raise the taboo issue of constitutionality, arguing that Qordahi does not have the authority to overrule the prime minister and cabinet. "He should either abide by the Constitution and laws that set up the framework of relations between ministers and head of the Cabinet or leave office," said Tripoli MP Ahmed Fatfat of Qordahi. Beirut MP Walid Eido declared that Qordahi "has opened his own private shop."2 While such accusations may win Hariri greater public support, they are not likely to intimidate the telecommunications minister. Constitutional mandates mean little in Lebanon - an official wields only as much or as little authority as Syria permits, and Qordahi enjoys the solid backing of Damascus.

A second acrimonious debate erupted between the two camps over the answer to a question that should be virtually self-evident in a properly-functioning political system: has government revenue from the mobile phone sector increased or decreased since the Telecommunications Ministry assumed ownership of the network in September? Hariri and his allies claim it has dropped, bolstering their argument that privatization will increase state revenue, while Qordahi insists that it has increased. However, around 200 million Lebanese pounds that Qordahi claims to have raised has not been accounted for, according to records at the Finance Ministry (which happens to be controlled by a Hariri ally). The fact that it is not entirely clear who is right is symptomatic of how opaque the Lebanese government has become.

The continuing struggle for control of Lebanon's cell phone industry underscores that privatization is not likely to cure the country's economic ills in the absence of major political reforms.


  1 The Daily Star (Beriut), 17 August 2002.
  2 The Daily Star (Beriut), 21 January 2003.

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