With relatively low penetration rates, high tariffs and a pressing need to raise funds to lower debt levels, Lebanon's telecommunications sector appears ripe for privatisation, though the move has been long on the drawing board. Now it appears that the slump in the international economy, political divisions and slow bureaucratic processes have again put these hopes on the backburner.

Currently, Lebanon has two mobile phone networks and an extensive land line system, all state-owned and all slated for privatisation. Landline services are provided by the Organisme de Gestion et d'Exploitation de l'ex Radio Orient (OGERO), which operates under the supervision of the minister of telecommunications.

According to the results of a study conducted by the Telecommunications Regulatory Authority - the independent state organisation that began operating in 2007 to monitor and control the telecoms sector - just 50% of Lebanese households have fixed line connections.

Upon entering office in July last year, the new broad-based national government committed to implement a series of reforms in the telecommunications sector. Key to these reforms included the creation of Liban Telecom, a corporatised body to replace OGERO and a step towards selling off at least part of the state's landline monopoly; the privatisation of the two state-owned mobile networks; and the liberalisation of broadband services, which rely on OGERO for infrastructure access, despite being privately operated.

To date, none of these commitments has been met, and it has been announced that the reform process in the sector will be deferred until after the general election scheduled for early June.

In mid-December, the government announced it was postponing the planned auction for the two existing mobile phone licences, citing the downturn in the global economy as the reason for further delaying the sale. It had been hoped that the sale of the two licences would generate between $5-$6bn, which the government had said would be used to reduce the national debt, currently running at $46bn.

Since being taken over by the government in August 2002 following disputes with the original licence holders, the two networks have been run under a contract system on behalf of the state. For the past four years, Kuwait-based Zain has operated the MTC Touch network, with Deutsche Telekom and Saudi Arabia's Fal Holdings providing services through Alfa.

The situation changed in late 2008, when the licensing agreements expired, with the government deciding to call for bids for a short-term contract to operate the two networks, rather than privatise them.

On January 13, the government announced that Zain was to continue to manage MTC for a further year, while Egyptian corporation Orascom Telecommunications (OTC) had been chosen to operate Alfa for a similar period. The management contracts allow for the term of the agreements to be extended for a second year if the government so chooses.

Under the terms of the contracts, which come into effect at the beginning of February, both Zain and OTC are required to increase subscriber numbers for their respective networks to at least 1m each. At present, according to figures from the Ministry of Telecommunications, there are 1.3m wireless phone subscribers in Lebanon, out of a total population of 4m. This gives Lebanon one of the lowest penetration rates in the Middle East, a region where some countries have subscriber levels of 100% or more.

Announcing the agreements with Zain and OTC, Telecommunications Minister Gibran Bassil said that each company would be paid $140m to manage the two networks, with revenues going to the state.

In 2008, the treasury earned more than $1bn in fees from MTC and Alfa, with revenue from OGERO contributing a further $300m, the minister told a press conference on January 13.

Bassil also said that user fees for both networks would be cut by up to 10% by April, though this should not result in a fall in revenue as the planned increase in subscribers should offset any tariff reduction. This is welcome news to the country's mobile phone users, as Lebanon has some of the highest subscriber fees in the region.

The minister also announced what he described as a major modification to the terms under which the two networks will be sold off. "We want Lebanese citizens to be the major shareholders in any privatisation of the cellular networks," he told the conference, though he did not delve into details.

Under previous proposals for the sale of the mobile networks, there had been no stipulation that foreign operators could only hold a minority stake in the companies. If implemented, this requirement may make the two networks less attractive to potential overseas investors, as could government plans to launch a third network that would remain state-owned.

The new requirement could be a response to criticism over the proposed sale. There has been some opposition to the privatisation of the two networks, with critics asking why the state would sell off such profitable assets. Last year, before becoming part of the national unity government, the Islamist Hizbollah bloc opposed the privatisation, on the grounds that much-needed revenue would be lost and a strategic asset would be transferred out of Lebanese hands. By mandating majority local ownership, at least some of this opposition may be quelled. -Oxford Business Group