Path to privatisation

Lebanon’s telecoms sector remains hamstrung by state ownership, but holds huge potential

Tags: Oliver Wyman Group
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Path to privatisation
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By  Roger Field Published  July 12, 2010

If the rise in Lebanon’s mobile penetration rate in the past couple of years was anything to go by, the country could have been mistaken for having one of the world’s fastest improving telecom markets.

Indeed, the country’s mobile penetration rate has doubled since June 2008, reaching about 62% in June 2010. But this growth, which was led by a significant reduction in mobile tariffs, was a rare achievement in a market that remains among the most expensive mobile markets in the world, lacks any 3G services, and has a broadband penetration rate of about 15%.

Lebanon ranked last in Arab Advisors’ recent Cellular Competition Intensity Index, which awards each Arab country’s telecoms sector with a percentage score, taking into account factors including the number of operators, packages and services available. Lebanon trailed in last place, with a score of 31.2%, behind Syria and Libya.

And while the low mobile and internet penetration rates may indicate huge opportunities for telecom operators and vendors in the future, it is clear that telecom players in Lebanon remain frustrated by ongoing political problems that stifle the development of the sector.

For most people involved with the sector, the problem afflicting the Lebanese telecoms market mainly stem from a lack of political consensus on how to improve the country’s two state-owned mobile operators and single fixed operator.

The mobile sector is dominated by two operators, MTC Touch and Alfa, which are run by Zain Group and Orascom Telecom respectively. These two operators run mobile services under two-year build operate and transfer (BOT) contracts for the country’s Ministry of Communications.

The system has been broadly criticised for failing to incentivise the two mobile operators, which are reluctant to invest heavily in their networks in case they lose their contracts to continue running operations.

The BOT system also stifles innovation and leads to a lower rate of investment in telecoms infrastructure. Indeed, Mark Kremers, an associate partner at consulting firm Oliver Wyman, points out that only about 8% to 9% of revenues are re-invested in mobile infrastructure projects in Lebanon, compared with an average of about 20% in other countries in the region.

Kremers has spent significant time analyzing the Lebanese telecoms sector, and he sees politics as being at the centre of the country’s telecom problems.

“What we see in Lebanon is that the telecommunications sector is the result of a fairly hectic political time period in which many different parties have been trying to run the country, and up until today it has been very difficult to get consensus on big topics such as telecom liberalisation,” Kremers says.

“Based on our analysis, Lebanon is roughly six to seven years behind the average mobile market that we see in the Middle East.

“We are not even comparing it to very advanced markets, but if you look at the fact that there are still two operators, there is a controlled duopoly and basically no commercial freedom for the operators to really compete, and there is a very low level of competition and penetration rates are around 70%,” he says.

He adds that the lack of 3G services and the fact that some 98% of revenues still come from voice services also clearly indicates just how much the sector lags behind its regional peers.

The problems are exacerbated by the lack of freedom the two operators have to set their own tariffs and special offers, or to launch any new services. To implement any changes such as these, the operators must apply to the Ministry of Telecommunications.

But despite the apparent lack of will to privatise the telecom sector in Lebanon, many industry insiders think that the country is now edging closer to change, with the subject being discussed more openly and the benefits of a liberalised telecoms sector evident from other countries in the region.

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