Murky connections hobble effort to install Iraq cell phone network

WASHINGTON - The Bush administration has repeatedly promoted its efforts to develop Iraq's private-sector economy as an engine of job creation and hope for the country's beleaguered population and a model for an economically backward region.

But if Iraq's experience with one of its earliest and most important private business ventures - a mobile telephone network - is any indication, progress in grafting a free-enterprise system onto what had been a state-controlled economy will be slow and rocky.

More than four months after occupation authorities invited companies to compete for the potentially lucrative cell-phone licenses, none has been finalized. And the process of picking the winning bidders is the subject of an investigation by the Pentagon inspector general amid accusations of corruption, secrecy and involvement by one or more firms with ties to the regime of Saddam Hussein.

The story opens a window into the murky world of business in Iraq, marked by fierce international competition, a strong need by the U.S.-led Coalition Provisional Authority to show progress in rebuilding the country, and reports of friction between the authority and the interim Iraqi government it appointed.

The United States highlighted the need for private enterprise when it took charge of a country where most major industries were state-controlled and where profit-making opportunities were steered to Hussein's relatives and their cronies.

"If we're going to succeed in Iraq, we have to have a vibrant private sector," L. Paul Bremer III, the U.S. civilian administrator for Iraq, told a congressional panel in September.

A reliable communications network is a crucial building block for economic growth. In Iraq, it could also be a valuable tool in combating the insurgency by giving U.S. forces quick access to varied sources of information, said Frederick Barton, an international security specialist at the Center for Strategic and International Studies, a Washington think tank.

At the time of the U.S.-led invasion, Iraq, a nation of 25 million, had just four telephones for every 100 inhabitants. Equipment was outmoded, and connections between provinces were poor. Under Hussein, mobile phones were denied to all but a tiny elite, though a separate network developed in the largely autonomous Kurdish region in northern Iraq.

Because of the time-consuming task of upgrading existing land-line service, U.S. officials looked to mobile telephones to provide an early start for a nationwide communications system.

The phone scramble

"The CPA was under time pressure to soothe Iraqi sentiment. Speed was emphasized at the expense of a reliable, transparent regulatory framework," said Jonas Lindblad, a London-based analyst at Pyramid Research, a consulting firm specializing in telecommunications.

At a business conference in Amman, Jordan, in July, Jim Davies, a CPA communications official, sounded an urgent note: "We want quick results. Iraq needs a mobile communications system and it needs it now."

The process of selecting separate licensees for the northern, central and southern sectors of Iraq set off a scramble among regional and international firms. As one of the last virgin territories for marketing mobile service in the Middle East, Iraq offers the prospect of hundreds of millions of dollars in cell-phone revenue. Questions were raised about licensing fees that analysts say were strikingly low, given the potential return.

The scramble included competition not just between companies but between technologies, pitting the American-based Code Division Multiple Access (CDMA) technology against the Global System for Mobile Communications (GSM) technology widely used in Europe and the Middle East.

CDMA proponents say their technology provides better data transmission and thus gives a key advantage to business. GSM proponents say Iraq would be isolated without their technology, though a CDMA bidder, Liberty Mobile, offers handsets that work on both systems.

Good connections

With some of the 35 applicants enlisting well-connected Washington lawyer-lobbyists and members of Congress keeping watch, the competition put the Bush administration in a delicate position. Heavily criticized this year for granting large reconstruction contracts to firms with close ties to top U.S. officials, the administration has tried to show a strong involvement by Iraqis.

The Coalition Provisional Authority allowed the Iraqi telecommunications minister, Haider al-Abadi, to announce the winning bidders. But the CPA played the lead role in planning a conference of potential bidders and in drafting and revising rules for the competition.

Al-Abadi was appointed by the Iraqi Governing Council, whose members were picked by U.S. officials. Winning bidders were selected by two CPA officials and two Iraqis, advised by a group drawn from among the provisional authority and Iraqis.

Charles Heatly, a CPA spokesman, said the authority "went to great lengths to ensure that the licensing process was transparent and open to full and even competition" and that license winners "were those that would give the best value for money to the Iraqi consumer."

But after a delay of several weeks, controversy erupted once the winning bids were announced, and the authority offered what other bidders said were vague and unsatisfactory explanations of how the three winners were selected.

All three sectors of the country were to get GSM phones, shutting out a consortium using CDMA technology, Liberty Mobile, that was backed by U.S.-based Qualcomm and Lucent Technologies and the South Korean manufacturer Samsung.

Other losers included one of the region's biggest mobile phone companies, Turkcell, and a Grand Rapids, Mich., technology firm, VoEx Inc., led by an Iraqi-American, which says it submitted a much lower bid than the companies that won.

The selection of the Egyptian firm Orascom created a furor among losing bidders and prompted allegations that the CPA had failed to investigate the company thoroughly.

One of Orascom's investors is Nadhmi Auchi, an Iraqi-born British businessman widely reported to have brokered deals with Hussein's regime. Last month, a French court fined Auchi and gave him a two-year suspended sentence for accepting illegal commissions from Elf, the French oil company.

A CPA official who declined to be identified said Auchi's stake in Orascom was "not very significant."

But Charles R. Johnston, a Washington lawyer who represents Turkcell, said: "If Orascom, with these connections, is entitled to win a license and operate, it neutralizes the [Bush administration's] whole concept of de-Baathification of Iraq."

An investor in another winning company, the Atheer Group, is the son of Mudhar Shawkat, a senior official of the Iraqi National Congress party, whose leader, Ahmad Chalabi, sits on the governing council and maintains close ties with Pentagon officials. The CPA official said the connection was too remote to raise a question about the license. An INC spokesman likewise denied any impropriety but raised questions about Auchi's ties to Orascom.

Neither the provisional authority nor the Pentagon will comment on the specific allegations the inspector general is investigating. But London's Financial Times, which first reported the probe, says they include allegations of bribery.

Whatever the merits of the allegations, Lindblad said, the fact that the Pentagon launched the probe indicates a lack of faith by U.S. officials in the bidding process and points up a longer-term problem.

"Iraq had been seen as a land of great risks but also of great opportunities," the telecommunications analyst said. "But if there is a perception that it is a land of nepotism and preferential treatment, it will deter the foreign investments needed in the rebuilding of Iraq."

Jonathan Spalter, a key figure in Liberty Mobile, said: "This is the worst possible way for the CPA to introduce a country to the principles of the free market."

The licenses, meanwhile, have been held up by a dispute between the provisional authority and Abadi over who will have the right to sign them, the Financial Times reported.

Heatly, the CPA spokesman, said the licenses could be signed this week and insisted that neither the Pentagon probe nor losers' complaints would stand in the way of the project.

But observers in Washington are skeptical of his contention that mobile-phone service will get under way by the end of the year. Earlier projections by the provisional authority called for the system to begin operating last month.