Iraq at the Crossroads

The National Communication and Media Commission faces a considerable task in addressing the multitude of legal, technical and investor confidence issues in time for Iraq's mobile licence auction, scheduled for December.

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By  Tawanda Chihota Published  September 1, 2005

|~|3-ceos-again200a.jpg|~|From L to R: Ali Al Dahwi, CEO of MTC Atheer; Alain Saint Marie, CEO of Orascom Telecom Iraq; and Human Abuammara, CEO of Asia-Cell.|~|As the telecoms industry awaits the imminent issue of request for proposals (RFPs) for Iraq's forthcoming mobile licence auction, a number of key questions still remain unanswered. As recently as July 2005, the National Communications and Media Commission - Iraqi's 12-month old regulator - stated that even a decision on the number of licences had yet to be taken. And this is merely one issue among many critical and difficult choices that the NCMC needs to make, under the auspices of the Ministry of Communications, as it gears up for its first major test as the regulator of Iraq's nascent telecommunications sector. Indeed, every aspect of the process, from the method of bid evaluation to the number of licences to be issued, will be held up to close scrutiny by potential bidding operators, financial institutions and international observers. Transparency is the key gold standard that the NCMC will need to meet, if it is to engender the confidence required to stamp some much needed authority on Iraq's wild-fire telecoms expansion. The Incumbent Problem Iraq's lack of political stability and security were always going to make the liberalisation of the telecoms sector difficult. The experience of other post-war markets shows that striking a balance between investor concerns of profitability and consumer issues of affordability and universal service is no mean feat. However, this particular balancing act is not the only problem facing the NCMC. Indeed, a need to guarantee bidders an even playing field, both in the auction itself and in the competitive market that will follow, is arguably the regulator's most pressing challenge. The reason that 'equity' has become the buzzword in the run up to the auction is clear. Three of the expected bidders in the forthcoming auction - Orascom Telecom, MTC and Wataniya Telecom - are already operational in Iraq. Furthermore, these three operators own the infrastructure over which they have been offering mobile services for the past two years. And it is this complex situation inherited by the NCMC that threatens to hold up the liberalisation of the sector with a potential raft of legal disputes. Since December 2003, Iraqna (Orascom), MTC Atheer and Asia-Cell (Wataniya) have been offering mobile services in Iraq under 2-year licences issued by the Coalition Provisional Authority (CPA). In that time, the three operators have been aggressively expanding their respective networks in a bid to meet demanding rollout obligations, but also to shore up market share in expectation of the forthcoming auction. While issuing 'temporary' licences has proved a highly effective strategy, in terms of speeding investment into Iraq's mobile market - the three operators will count close to 3.5 million subscribers between them by December 2005 - it has also stored up some particularly thorny 'ownership' issues that the NCMC must now deal with. For example, if an incumbent is outbid in the forthcoming auction, the transfer of infrastructure and subscribers to the new licence holder will have to be managed in a fair and effective way. The key sticking point will be reaching agreement on the method of valuation of the current mobile businesses. In a market such as Iraq, subscriber acquisition costs are as much a financial burden as capital spending requirements. Indeed, all three incumbent operators have stated that the security situation has proved a far greater impingement on their business plans than expected. Operating expenditure has spiralled as extra spending has been committed to securing facilities and personnel. And while such negotiations may be essentially a matter for commercial negotiation, some legal arbitration must be made available, so as to ensure that negotiations do not drag on, damaging market development. ||**|||~|Lucy_norton200.jpg|~|The author of this article, Lucy Norton, is a senior telecoms analyst for the Middle East at Global Insight.|~|The Need for Law and Order The tricky legal issues that must be tackled are in addition to further challenges facing the NCMC in regulating the sector. At July 2005, Iraq was still without a Telecommunications Act, which is needed to provide the legal framework of the sector, as well as enshrine the powers of the regulator. It will therefore be crucial, if such legislation is not passed by the new Iraqi parliament in time for the auction, that the rights and obligations to be assigned the new operators are detailed comprehensively in their licences. But perhaps an even greater cause for concern is the fact that, along side Iraqna, MTC Atheer and Asia-Cell, a further two companies are offering mobile services in Iraq. Sanatel, based in Suleimaniah, and Korek Telecom, based in Dohuk and Erbil, have both been offering GSM services in Kurdish northern Iraq since 2001, under licences issued licensed by Kurdish authorities. However, while Sanatel subsequently applied for a licence from the CPA to offer services in Kurdish-administrated Northern Iraq, Korek Telecom remains unlicensed by the NCMC. Furthermore, Sanatel and Korek Telecom have reportedly connected their networks, an act deemed illegal by the NCMC. Between them, the firms have in the region of 400,000 subscribers. Sanatel's CPA licence will expire on December 22, 2005, along with those of Iraqna, MTC Atheer and Asia-Cell. However, it remains unclear whether Sanatel and Korek Telecom will cease operations at this time, and take part in the new licensing process. Looking Ahead: The Opportunity and the Outcome The NCMC's proposed strategy for dealing with these various problems will be detailed in September's RFP. And as the date approaches, speculation regarding the number of licences to be issued and the terms attached will mount. 15-year timeframes are expected, while bidders are also expecting an open auction. In the meantime, Iraq's three incumbent operators will continue to publicly confirm their commitment to expansion in the Iraqi mobile market. Asia-Cell, which currently claims 800,000 subscribers in northern Iraq, has stated that it expects to have 1 million subscribers by December 22. Meanwhile, MTC Atheer and Iraqna each expect to claim 1.5 million subscribers each by the same point. Combined, the three operators will have invested over US$500 million in expanding their networks by the time their current licences expire. Their efforts will see Iraq with a penetration rate of around 13.5% by the end of 2005. The three operators are keen to leave potential competitors in no doubt as to their intentions to stay in Iraq for the long term. And this is small wonder, given that none of the operators can expect to see a return on their investment by the end of this year. However, their accelerated investment also indicates the huge opportunity that Iraq presents for generating high levels of mobile operator profit. Consider Iraqna's 1Q05 results; the operator reported EBITDA of US$38.2 million on revenues of US$63.8 million - a margin of 60%. Furthermore, revenues were almost double those made by Orascom's Tunisian affiliate Tunisiana - operational since December 2002. And with ARPU levels at over US$25 at March 2005, it does seem that the three firms will not need to wait long before seeing a healthy return. As for who is likely to challenge their positions through the upcoming licence auction, no international operators have yet confirmed their participation. Turkish operator Turkcell has shown some interest, submitting a reply to the NCMC's consultation paper published in June 2005. Meanwhile, UAE incumbent Etisalat has also been linked to the auction, although the operator is barred from taking more than a 10% stake in any bidding concern, given restrictions on foreign government ownership. In the meantime, however, the strong performance of Iraq's three existing operator's will act as a compelling advertisement for profit that is to be earned by operating in Iraq; an opportunity that some companies will find too attractive to resist. ||**||

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