Monday 15, 2007

1. Monday 15, 2007 The Case for Liberalizing Telecommunications in Lebanon “Paris III and the Post War Landscape: Lebanon’s Economic Policy Imperatives” Kamal Shehadi

2. Country Incumbent Operator 2000 2006 Date of Opening of Last Market Segment Comments Local Voice Intl Voice Mobile Data Local Voice Intl Voice Mobile Data Algeria Algerie Telecom (2003) M M M M D D C D 2005 Market entry still highly regulated Egypt Telecom Egypt (1998) M M D M M C D  C C 2006 Third mobile and 2 international gateway licenses Jordan Jordan Telecom Company (1997) M M PC C C C C C 2005 Open licensing regime since January 2005 Morocco Maroc Telecom (1996) M M C C C C D C 2005 Market entry still highly regulated Bahrain Batelco (1981) M M M M C C P C 2004 Open licensing regime since January 2005 Saudi Arabia Saudi Telecom Company (1998) M M M M M  D C C C 2007 Fixed and mobile licenses to be issued in 2007 Oman OmanTel (2001) M M M M D D D  C C 2006-2007 Fixed and data network licenses to be issued in 2007 Lebanon Ministry/Ogero Not corporatized M M D C M M D PC TBD Liberalization expected with the implementation of Law 431/2002 Lebanon remains far behind its neighbors in terms of telecommunications liberalization Comparison of Telecom Market in Key Arab Markets (2000-2006) Notes: M = Monopoly; D = Duopoly; C = Competition; PC=Partial Competition Sources: ITU Trends in Telecommunication 2001, 2006

3. As a result, its telecom is underdeveloped when compared to international benchmarks and there is a high pent-up demand for services • Lebanese Telecommunications Performance Fixed Line Penetration vs. GDP per Capita (2005) Mobile Penetration vs. GDP per Capita (2005) Internet Penetration vs. GDP per Capita (2005) PSTN Penetration Mobile Penetration Internet Penetration GDP per Capita (USD/ Year) GDP per Capita (USD/ Year) GDP per Capita (USD/ Year) Sources: Economist Intelligence Unit, interviews with industry

4. Note: All Rates corresponds to the lowest first minute rate The cost of a mobile postpaid minute in Lebanon is among the highest in the region due to the lack of competition and a high excise tax Mobile Prepaid Peak On-net Minute Rates (2006) (US$ per peak minute) Mobile Postpaid Peak On-net Minute Rates (2006) (US$ cents per peak minute) More than double the lowest regional rate 60% higher than the lowest regional rate

5. Telecommunications has suffered from slow mobile penetration growth… • Mobile Penetration Evolution in Lebanon +10% +0.4% CAGR +8% Sources: AAG, 2006 data from OSB (till November), CIA, ITU, Ministry of Telecommunications * Up to October 2006

6. … which has been stunted compared to the rest of the region … • CAGR of Mobile Penetration Sources: ITU, AAG, OSB

7. … particularly over the last few years • Mobile Penetration Evolution in the MENA Region Lebanon Sources: ITU, AAG, OSB

8. Lebanon lags behind in broadband technology and penetration • ADSL in Lebanon xDSL technologies (Wireline broadband technologies) are the most commonly used infrastructure to deliver broadband services in OECD countries Lebanon lags behind MENA and OECD countries in the introduction of xDSL Sources: ITU, OECD

9. Governments have pursued a number of objectives when embarking on telecommunications liberalization • Liberalization Objectives 1 Increase Penetration • Increase service penetration • Increase customer choice • Improve price to quality ratio • Introduce new technologies and services • Reach underserved areas Customer Oriented 2 Lower Tariffs Increase Customer Choice • Keep up with technological advances • Introduce good governance and management • Ensure more effective infrastructure • Improve sector productivity • Improve financial performance • Increase overall telecom revenues • Attract private and foreign capital • Improve connectivity and penetration of ICT 3 Efficient Industry Sector Oriented Objectives of Telecom Liberalization Attract Investments Networked Readiness • Spur job creation throughout the economy • Generate revenues from licenses • Generate revenues from privatization • Join international trade organizations (e.g. WTO) • Join the global trading system (e.g. EU association) • Catalyze growth of information economy • Improve global competitiveness of the economy • Improve general economic performance 4 Job Creation Economy Wide Trade Integration Economic Diversification

10. Liberalization will improve penetration and decrease telecommunications tariffs • Impact of Telecom Liberalization on Penetration and on Prices 1 2 Evolution of Mobile Penetration In Jordan Evolution of Lowest Mobile Peak Minute Rate Umniah Xpress Mobilecom Fastlink Year competition introduced in concerned markets, 2004 for Qtel In Jordan, a country with comparable population and size but much lower per capita income, liberalization and licensing of new mobile operators met with jumps in mobile penetration. Real benefits were realized after the introduction of the third and fourth mobile operators Prices start decreasing prior to competition in a move to prepare for the entry of a new operator As a result of competition prices tend to continue decreasing after liberalization unless capped by the regulator Sources: Tarifica, Operators, Booz Allen and Hamilton, Global Investment House, World Bank

11. Employment (normalized)Index 1990 = 100 120 Competitive Markets 110 Monopoly Markets 100 90 1990 1991 1992 1993 1994 Liberalization improves enterprise performance throughout the economy and drives higher employment in telecommunications • Impact of Telecom Liberalization on the Industry and on Employment 4 3 Effect of Liberalization on Employment Effect of Liberalization on Industry Worldwide, telecom liberalization has positively impacted sector performance and the penetration of key services. A 2006 World Bank study demonstrates how greater ICT use in enterprises results in and improvement of performance A comparative analysis of 26 countries in Asia and Latin America between 1990 and 1994 shows that employment in competitive markets increased by 20.73% while employment in other markets grew by only 3.13% Sources: Petrazzini, World Bank

12. There are a number of issues that will shape Lebanon’s liberalization • Key Issues Shaping Lebanon’s Liberalization Strategy Exclusivity and Additional Licenses • How will granting an exclusive international license impact the fixed and data markets • When should a 3rd mobile license be issued? How will the timing impact performance? The economy? The financial performance of existing operators? Type of Competition • What type of competition is the most apposite to the development of the mobile and fixed market in Lebanon? Service-Based or Facilities-Based Competition? • What is the impact of each type of competition on the telecommunication market? What lessons could be drawn from other countries? Government Ownership • How much of a stake will the government maintain in telecom operators? • How will cross ownership management issues be resolved, particularly with the government’s ownership of all operators today? • What will the impact be on performance and investment? Revenue Sharing • Is the argument for high revenue sharing still valid considering today’s telecommunications landscape?

13. Some governments have been lured by the false promise of exclusivities Impact of Exclusivity Periods Exclusivity Periods Potential of Exclusivity Periods • In order to attract greater investment, liberalizers (particularly in the MENA region) offered telecom operators exclusivity periods • This was balanced with exclusivity terms that required high quality of service and rollout • Both Jordan and Egypt offered their fixed line operators exclusivity resulting in delayed competition and greater incumbent dominance in the market • Exclusivities have detrimental effects on network growth and performance (up to 40% less coverage), despite the increased valuation of such operators • It is for this reason that many Latin American countries such as Chile, Bolivia and Brazil, have chosen not to give privatized operators any exclusivity periods • Lebanon is embarking so late in the game that exclusivities will be difficult to justify on economic or even financial grounds Price of Privatized Telecom Operator 50% Telecommunications Performance 40% Source: Wallsten, 2000

14. EU Y+1 Leb Y-1 Leb Y+1 EU Y-1 The launch of a third mobile license has, traditionally, increased mobile penetration by an average of 32 % within two years • Timing and Impact of a Third Mobile License Average = 31.5 % The average incremental growth in mobile penetration witnessed in Europe upon introduction of the third mobile license was 32%; In the Lebanese context, this is translated into a doubling of penetration to 60% in the span of two years Source: GSM World, ITU, Connexus Analysis

15. Late liberalizers, such as Lebanon, should be able to complete their liberalization in a relatively short time frame taking advantage of the accumulated international experience in liberalization • Liberalization Path Timing of Third Mobile License Timing of Telecom Liberalization • In a properly regulated market, the award of a third mobile license marks the beginning of effective competition and therefore liberalization • Empirical analysis shows that late liberalizers have introduced competition in a short time frame; Bahrain was able to complete its liberalization process in less than two years • Lebanon must, therefore, consider the possibility of further mobile licensing in the near future to ensure real and effective competition Sources: Connexus Analysis, ITU

16. It became common among best regulatory practices to include international gateways among licensed mobile services • Liberalization Sequencing Legend • 81 • … • 88 • 89 • 90 • 91 • 92 • 93 • 94 • 95 • 96 • 97 • 98 • 99 • 00 • 01 • 02 • 03 • 04 • 05 • 06 • Chile • Korea • Argentina International • Mexico Mobile • Hungary • Peru Data Only • Singapore • Brazil Fixed • Egypt • Morocco Licenses granted together, however the SP had to wait before providing international services • Jordan • Algeria • Saudi Arabia • Bahrain • The general trend is moving towards liberalizing all services within a shorter span of time • In late liberalizers, the trend is to start with the early liberalization of mobile, followed by data then fixed • Mobile licenses are no longer being granted without international licenses (except in the case of Egypt) , although in some cases, the mobile licensee had to wait one or two years before providing international services Sources: Regulator Websites, ITU

17. Based on international benchmarks, the impact of swift liberalization on service penetration is indisputable • Impact of Competition and Liberalization on Penetration Full Liberalization Start of Liberalization Start of Liberalization Full Liberalization Full Fixed Liberalization Start of Liberalization Source: ITU, Global Investment House, World Bank

18. The benefits of competition can be reached through a combination of facilities-based and service-based competition • Types of Competition Introduced in Liberalization Competition in telecommunications is achieved through: Facilities- Based Competition Service-Based Competition • Encouraging Facilities Based Competition: • Licensing Facilities Based Operators (Mobile and Fixed Operators) • Encouraging Investment • Promoting private sector participation • Providing incentives for deploying heavy infrastructure requiring massive investments • Adopting technology neutrality • Encouraging Service Based Competition: • Licensing Mobile Virtual Operators and Service Based Operators (Mobile and Fixed) • Encouraging wholesale services • Mandating and regulating Local Loop Unbundling • Mandating and regulating wholesale access, interconnection by incumbent operators Facilities-based operators (FBO) deploy telecommunication networks, systems and facilities, to offer telecom services to third parties, which may include other licensed telecommunication operators, business customers or the general public Service-based operators (SBO) lease telecommunication network elements (such as transmission capacity and switching services) from facilities-based operators, or to resell the telecommunication services of FBOs, to third parties

19. Service based operators have typically led to more competition (as measured by market concentration) and lower prices for end-users Impact of Service Based Competition on Market Dynamics *A wave of consolidation in the Finnish market in 2005 resulted in major MVNOs being acquired by MNOs +The Herfindahl-Hirschmann Index provides an indication of the development of competition in the mobile markets. Usually, 0.18 is considered the threshold for "effective competition" Source : Regulators’ market reports

20. Government ownership in general has a detrimental effect on telecommunications investment… • Impact of Government Ownership on Investment Source: ITU 2005. Countries Studied: Denmark, Italy, Korea, Spain, UK, Portugal, Australia, Morocco, Bahrain, Greece, Germany, Jordan, France

21. High Gov Ownership Average = 139 Moderate Gov Ownership Average = 217 No Gov Ownership Average = 340 … It also tends to result in decreased efficiency • Impact of Government Ownership on Efficiency “Normalized” Total Lines per Employees – Selected Operators (2003) Average 230 Source: Annual Reports 2003; Arab Advisors Reports, “Telecom Management & Policy Program, University of San Francisco report, Regulation and State Ownership”, Johannes Bauer, Michigan State University, February 2005

22. There has been a trend, even in the region, to minimize government cross-ownership of telecom operators, except in countries that have not committed to liberalization (e.g., Kuwait and the UAE) • Cross Ownership Total Gov’t Ownership Ownership Comparison of Non-incumbent Mobile Operators in Arab Countries - - - 12% - - 25% 24% 100% 100% 8% - 15% - - - 40% - - (*) Both Syrian Operators are operating on a BOT contract. At the end of the agreement, ownership of the network goes back to the government Source: EMC World Cellular Database; Zawya; Arab Advisors Group; Operators

23. High royalties rates were a tool to offset the unpredictability of the telecom market. Today, they negatively impact growth… • Impact of Royalties ILLUSTRATIVE The above chart illustrates the impact of royalties on a company’s sustainable growth rate, assuming no new investment is made in the company. In the given year, the company is assumed to make USD 5 Billion in profit, USD 1 Billion of which are dividends. Return on Equity is 15% Connexus Consulting Analysis

24. … and discourage investment in the sector • Impact of Royalties In Ireland, lower tax rates have contributed to attracting investment to the telecom sector. The above graph shows investment in telecom per capita in Ireland as a % of investment in telecom per capita in the OECD as tax rates decreased Irish Development Agency Report, ITU

25. Conclusions On Liberalization • No or limited exclusivities granted • Launch of additional mobile licenses 1 • Prepare for facilities-based and service-based competition 2 • Divestment of government ownership from the exiting mobile businesses • Maintain government stake in Liban Telecom after restructuring and privatizing • Prohibition of any form of cross ownership between telecommunications operators whether public or private 3 4 • No revenues sharing in competitive market segments