Lines to liberation

There was much speculation that 2004 would bring sweeping liberalisation of the region's telecommunications sector. But did anyone answer the call?

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By  Mark Johnson Published  January 27, 2005

|~|ciscochap1.jpg|~|One of the biggest projects that we have focused on is the modernisation of TE by building an IP/MPLS core, says Yasser El Kady, general manager, Cisco Systems.|~|From the western tip of North Africa to the eastern part of South Asia is a vast area, comprising many countries, that could be about to witness the next big boom in telecommunications. These countries have much to gain from the liberalisation of their telecoms industries, and that goes for individual customers, the many companies keen to enter these markets, and their respective governments. According to recent figures from Arab Advisors Group, a regional telecoms consulting and research firm, the Arab telecom market is currently made up of over 300 million users, across 22 Arab states. Overall, the market is served by 41 mobile operators; 23 fixed line operators; as well as 36 datacomm providers and around 300 internet service providers (ISPs). Liberalisation of the telecoms industry is vital to expanding the sector and will be a key factor in attracting investors to future telecoms initial public offerings (IPOs). Many of the countries in the Gulf region are keen to join the World Trade Organisation (WTO), and part of the membership requirement includes the opening or partial opening of certain markets, one of which is telecoms. There is a deadline for the Gulf States, which are supposed to have this process completed by 2005, and this is why there has been so much focus on the sector. WTO membership is only one factor driving liberalisation across the region. Simple economics is also forcing change. End user spending on telecoms, whether data transmission, fixed or mobile voice, or internet access, is considered to be very high, and both government and other internal forces, such as a swelling liquidity pool and private sector companies, throughout the region are pushing for opportunities to better tap this reservoir. Moreover, in addition to the United Arab Emirates (UAE), countries such as Saudi Arabia and Bahrain have made sweeping moves to diversify their economies away from their dependency on oil and gas production. Opening up new markets, even partially, helps create competition and encourages private sector investment, which is deemed vital for a region that is awash with liquidity, but which suffers from a dearth of asset classes and local investment opportunities into which these funds can be poured. This is especially true for telecoms, where privatisation and liberalisation of markets have proven very effective drivers in other regions. A large percentage of the population of the Gulf and Arab world as a whole are young, and most will be entering the labour force in the coming years. The job opportunities created by the private sector in a competitive environment are another vital factor in convincing the region's governments to open up the sector for competition. For consumers, telephone calls in the Gulf Co-operative Council (GCC) states will cost around 40% less thanks to an agreement earlier this year by GCC communication ministers in Riyadh. Cheaper calls and a wider choice of operators are expected to increase traffic across the industry. Jordan's telecommunications market looks set to be fully liberalised by the beginning of 2005, according to the country's industry watchdog, the Telecommunications Regulatory Commission (TRC). This will spell the end of Jordan Telecom's monopoly over the fixed-line business and the TRC expects the market will be fully subject to demand and supply. Marwan Juma is chief executive of Batelco (Bahrain Telecommunications Company) Jordan and chairman of the Kingdom's Information Technology Association (INT@J). He says the country has come along way: "Four years ago, people probably had the longest waiting period to get a fixed line. But now we have all the technologies in town and, with fixed liberalisation, costs will hopefully go down substantially. So as far as the infrastructure is concerned as an enabler for education, government, private enterprises and home users, we have come a tremendously long way." Meanwhile, the world's largest mobile phone maker, Nokia, recently won a third-generation radio access network expansion deal from MTC-Vodafone Bahrain, for an undisclosed sum. With this expansion MTC-Vodafone says it will be in a position to offer 3G services nationwide by the end of this year. In Egypt, the market's been moving a little slower, but the wheels of liberalisation are turning. More important, large global players are playing increasing roles in development plans through strategic links with national carriers. For example, Telecom Egypt (TE) and Vodafone Egypt are putting the finishing touches to their delayed joint mobile venture. The move, originally scheduled for April this year, was completed in September, giving TE a minority stake in the mobile operator but relinquishing its opportunity to enter the GSM market on its own until 2007. Telecom Egypt has also been focusing on meeting pent-up demand for basic telecoms services. After recruiting Huawei and ZTE to provide it with a CDMA-based wireless local loop system in May 2004, the operator is now concentrating on raising tele-density to 10% in rural areas by 2007. "Waiting lists are an old problem in Egypt," says TE chairman, Akil Beshir. "The list peaked in 1998, when we had 1,350,000 applicants. But in the last four years we have doubled our rate of deployment. The number of subscribers is now approaching nine million, and we have almost 90,000 on the waiting list," he adds. Various value added services, meanwhile, are being prepared for the operator's fixed network, including video-conferencing and SMS, once interconnection with the country's two mobile operators has been agreed. Beshir says that this is likely to happen by the end of the year. Investors will doubtless be watching this market closely to see how it develops. Meanwhile, plans are also in the offing to introduce IP (internet protocol) technology into the operator's infrastructure, allowing it to support any new entrants into the fixed space. For example, an IP/MPLS network being supplied by Cisco, will cover Cairo and parts of the Delta region and allow next generation solutions to be offered including Ethernet to the 'X' (ETTx). The US vendor is working to build expertise within the operator and develop a service creation model that would complement the new infrastructure. "One of the biggest projects that we have focused on is the modernisation of TE by building an IP/MPLS core," says Yasser El Kady, general manager, Cisco Systems, North Africa and Levant. "It will provide peering for all the network service providers," he adds. The last couple of months have also seen the start of the biggest shake-up of the UAE telecoms market since 1991. In a move that got private investors sitting bolt upright in their seats, Federal Decree No.3 of 2003 revoked the monopoly status of incumbent operator, Etisalat, and provided for the reorganisation of the UAE's telecoms market. A policy-making committee with wide ranging powers has been established and a regulatory authority has been set-up. A key feature of the decree is that Etisalat's exclusive right to undertake telecoms services, as well as to operate, maintain and develop the UAE telecoms network, has come to an end. Etisalat's licensing powers have also been transferred to a new policy-making committee, which will be responsible for overseeing the UAE telecoms sector. Crucially, the decree does not repeal Article 7 of the 1991 Telecoms Law, which provides that the UAE Government must own at least 60% of the shares in Etisalat, and there is no reference in the decree to Etisalat's shares being made available for public subscription. However, given the telecoms overhaul going on elsewhere in the region, this could change at some point in the future. Instead, as part of a shift in management control, the Ministry of Finance and Industry became the government shareholder in Etisalat in place of the Ministry of Communications, and the Minister of Finance and Industry became the chairman of Etisalat's board of directors. The power to appoint the members of Etisalat's board of directors has also transferred from the Ministry of Finance and Industry to a newly created policy committee. Some would argue that these reforms are not privatisation at all. But privatisation has become a generic term for a range of market-oriented reforms of which the sale or transfer to private companies of state assets is just one component. ||**|||~|te.jpg|~|Waiting lists are an old problem in Egypt, says TE chairman, Akil Beshir.|~|Saudi Arabia has been slower than some of its neighbouring countries to open its telecoms market to competition, having focused instead on improving the performance of incumbent operator, Saudi Telecoms Company (STC). But now that STC has commercialised its operations and invested huge sums in the modernisation of its sprawling networks, major restructuring of the Kingdom's telecoms sector is on the way. Moreover, in October STC slashed its prices by up to 35% as it prepared to face competition in its domestic mobile market for the first time. Ettihad Etisalat, a UAE-led consortium, is expected to launch the Kingdom's second GSM mobile service in early 2005. Shareholders who own stock in the consortium, which only had its IPO in October, will be hoping the reduced rates will lead to greater volumes and therefore higher returns for the new entrant. Four very small aperture terminal (VSAT) providers were handed licences to provide domestic services in the Kingdom recently, and initial bids are due in this month from applicants vying to enter the data-communications and mobile sectors. Of these three, the mobile sector - in which a single licence is being offered for now - will arguably provide the most exciting opportunities. GSM services have been the main driver behind STC's revenue growth over the last few years. The launch of pre-paid services in 2002 proved a tipping point for the operator in the mobile space, allowing it to accelerate its acquisition of subscribers after lowering the entry barrier for those without a credit history and less cash to spend. Reflecting this, mobile services provided the main thrust behind a 129% rise in STC's net profit to US$1.7 billion in the first nine months of 2003, and subscriptions were expected to continue to increase rapidly during 2004. "The introduction of pre-paid services has hugely benefited STC, as well as its better segmentation of the market," says Jawad Abbassi, president, Arab Advisors Group. "Wireless services accounted for 65% of STC's revenues (in the first nine months of 2003) and its revenues have grown by 45% over the last year," he adds. With STC's GSM unit, Al Jawal, estimated to have signed up around 25% of a population of over 23 million, there is expected to be ample room for the new entrant to tap into subscription and voice revenue growth. And while the operator says it will increase its mobile data portfolio this year with the launch of various applications such as SMS-based TV voting and mobile banking, the newcomer is expected to keep an eye on pent-up demand for value added services (VAS). According to the World Markets Research Centre (WMRC), Lebanon's annual mobile subscription growth rate was a mere 0.6% in 2003, compared to 1.1% in 2002, 3.2% in 2001 and 18.5% in 2000. These constraints, and a grace period of only five days for prepaid subscribers to renew their accounts before they lose their numbers, have also led to a thriving prepaid black market that will need to be addressed. This is hardly likely to create the right conditions for attracting new regional and foreign investors to the industry. On the plus side, the Ministry of Telecoms is planning to heighten the ceiling that limits the capacity of the country's two GSM networks. The government says it has created new numbers that will allow the networks to sign up 160,000 users by the end of 2004. It is also planning to introduce a new numbering plan next year. "A migration from the existing six digit numbering plan to a new eight digit numbering plan, due in 2005, would allow for a large supply of GSM numbers," says a source at the MoT. The backlog of demand is also likely to boost efforts to increase penetration once the capacities of the networks are raised. It is estimated that the number of official mobile subscribers in Lebanon would have reached one million by the end of last year if the government had not had control of the networks, which is a compelling argument to give private ownership a chance. The WMRC predicts that penetration could rise from 17% last year to 50% by 2008. "Given the fact that LibanCell and Cellis stopped investing when their contracts were terminated, there is pent-up demand," adds Lucy Norton, senior telecoms analyst, WMRC. Considering Lebanon's steep pre-paid charges relative to other countries in the Middle East, price cuts are expected to be a key weapon in tackling the grey market that has recently developed. High spending by mobile subscribers in Lebanon is also likely to prompt the two operators to focus on developing value added services (VAS). The networks have retained high average rate per users (ARPU) levels of around US$75 per month, according to Arab Advisors Group. "The operators will be able to generate high revenues from VAS because the population in Lebanon is quite well educated and it has higher GDP per capita than other countries in the region, such as Jordan," adds Faisal Hakki, research analyst at Arab Advisors. On a wider scope, the operators will also be keeping a close eye out for signs of further restructuring of the country's telecoms sector over the course of their contracts. In particular, the planned privatisation of Lebanon's fixed line operator, Ogero, and its re-branding as Liban Telecom, could alter the dynamics of the market, although it remains to be seen whether the government will manage to conduct a sell-off on schedule this year. The fixed operator also has the option to enter the mobile market, although it remains to be seen whether the environment will be right for this to take place as well. "It is in the law that Liban Telecom will be issued with a mobile operating licence," says Alan Horne, project team leader for Lebanon's upcoming Telecoms Regulatory Authority (TRA). "But it is not yet defined when this will take place. It can't really happen until the new numbering plan has been introduced in 2005, and you could question whether the market is large enough," he adds. It's clear that the liberalisation drive will carry on into and beyond 2005. However, those states that continue to drag their feet over deregulation of their markets could find themselves the ultimate losers as the sector develops across the region. Moreover, strong investor interest in telecoms stocks means there is a strong incentive and opportunity for the entire industry to restructure, re-develop and re-position itself as a world-class telecoms force.||**||

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