Paying to remain in a war zone

The award of three long-term mobile licences in Iraq earlier this week is a positive development given the unsteady history of the concessions since their award at the end of 2003.

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By  Tawanda Chihota Published  August 22, 2007

The award of three long-term mobile licences in Iraq earlier this week is a positive development given the unsteady history of the concessions since their award at the end of 2003.

It has become popular for economists to chart the direct correlation between the rise of mobile and internet penetration in a country and the growth of GDP, thus any provisions that permit further investment in Iraq's telecoms sector can only be viewed as positive.

The surprise of the licence auction process was the decision by Orascom Telecom, the de facto Iraqi incumbent by virtue of having been licensed to rollout its network in Baghdad ahead of the other two operators, to withdraw from the bidding as the price payable etched to US$1.25 billion per licence.

I was one of the commentators who prior to the auction in Iraq was confident the three existing international strategic investors behind the mobile operators - Orascom Telecom, Wataniya/Qtel and MTC Group - were all but certain to want to remain present in the market. After all, blended ARPUs in the market hover at an attractive US$14.50 per month, subscriber numbers have grown consistently since launch to top 10 million today, though overall mobile penetration still remains relatively low at just 32%.

In a statement Orascom stated the US$1.25 billion licence fee, plus the 18% of annual revenues set to be paid to the national government were unduly onerous conditions, thereby making the opportunity less attractive.

The stance taken by the Egyptian telco made me reminisce to the annual 3GSM Congress held in Barcelona in February, where Orascom Telecom's chairman and CEO Naguib Sawiris addressed delegates and explained how his view of investment opportunities differed to most of his CEO counterparts because in his case he actually owned the company.

He stated that as the majority shareholder of his company, issues related to risk, shareholder value and return on investment, probably impacted him more directly than the CEOs of many of the operators he competes against, because in their cases ownership and management are often time separated.

Thus in the case of Iraq, one might assume the business man in Sawiris led to the decision for Orascom not to pursue the licence at any cost. What will now follow is a complicated extrication process given Orascom-backed Iraqna is estimated to have invested upwards of US$300 million in the development of its GSM infrastructure over the past few years.

Wataniya/Qtel-backed Asiacell as well as new national licensee Korek Telecom have both expressed interest in the possibility of acquiring Iraqna assets, though the negotiations and estimation of the real value of the assets are set to be difficult figures to agree upon. For its part, Orascom has not ruled out the possibility remaining in the country, perhaps partnering with an interested party, which is potentially a shrewd move offering the company the possibility of contributing its fixed assets to the new entity in exchange for equity, allowing Orascom the potential to reap any financial benefits at minimal risk.

Market commentators have also suggested it may take a decade or more before a level of social stability is restored on the streets of Iraq, and that is a long time to be expected to invest further in the market, under constant threat of distabilisation.

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