The Battle for a Cell-Phone Deal

Will non-Americans really get a chance in Iraq?

The 400 international telecom execs, equipment vendors, and financiers who crowded into the Grand Hyatt in Amman, Jordan, on July 31 for a briefing on plans to build a new mobile- phone network in Iraq had dollar signs in their eyes. At stake was nothing less than control of one of Iraq's most vital future assets. Since Washington had already awarded billions in uncontested reconstruction contracts to U.S. companies Halliburton Co. and Bechtel Group Inc., the conference attendees had reason to worry that telecom might be the next Americans-only honey pot.

Their concerns were heightened once they saw the terms: No bidder could be more than 5% government-owned. That meant that nearly every mobile operator in the Middle East and Europe was out of contention. Plus, the three winners would be required to post bonds covering the full cost of construction -- possibly as high as $150 million each. Such demanding terms, says telecom-equipment analyst Jason Chapman for researcher Gartner Inc., "would have made the short list very short."

But a surprising thing happened over the next few weeks. Responding to the outcry from potential bidders, the U.S.-led Coalition Provisional Authority (CPA) twice relaxed its terms. By the time bids were due on Aug. 21, the CPA had lowered the bond requirement to $30 million and agreed to permit up to 10% government ownership in any bidding consortium. That let state-owned carriers enter the running in conjunction with private investors. More than a half-dozen Middle Eastern telcos have thrown their hats in the ring.

The winners will be announced on Sept. 5. The CPA's tender for Iraq's mobile network is a crucial test of its willingness to engage Iraq and the rest of the Mideast in the job of rebuilding the ravaged nation. To date, says Walid Khadduri, editor of the Cyprus-based Middle East Economic Survey, "there has been very little reliance on Iraqi institutions." If the CPA were to award mobile contracts only to U.S. companies, it would shatter any illusion that America intends to spread the wealth.

Such concerns weren't foremost when the mobile contracts were being drawn up. Seeking a lightning-fast rollout, the CPA devised a scheme to carve Iraq into three wireless regions. Each will be served by different carriers. After 12 months, the operators are encouraged to invade other territories in the hopes of fostering competition.

The decision to limit the contracts to two years was perhaps the boldest stroke. After that, a new Iraqi government is expected to organize its own tender -- and there's no guarantee September's winners will be picked again. It's an assurance to Iraqis "that we're not giving it away forever," says a U.S. Senate Foreign Relations Committee staffer. Thus, most bidders have lined up Iraqi partners. "Having local investors in a winning consortium is seen as an insurance policy when a subsequent Iraqi government takes over," says Norman Sandler, director of global strategic issues for Motorola Inc. (MOT ).

On the other hand, the two-year term could make it nearly impossible for companies to recoup their investments. Iraq's infrastructure is so shattered that operators may need to build pricey fiber or microwave backbones to connect cellular towers. The threat of sabotage by rebels necessitates expensive security. And market potential is limited by widespread poverty. Motorola figures on only about 500,000 mobile users initially -- roughly a $60 million annual business if customers spend an average of $10 per month. Such small returns suggest that only the very brave -- or foolhardy -- are plunging into the fray.

If Iraq gets back on its feet, though, the mobile pioneers could end up profiting handsomely. Telecom analyst Bernt Ostergaard of Forrester Research Inc. estimates that mobile penetration in Iraq could rise to 20%, or about 4.6 million users, in three years. That could translate into a $1 billion annual market. With numbers like that, it's no wonder companies are seeing green. The hope is that some of it stays in Iraq.

By Andy Reinhardt in Paris

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