Monday, December 20, 2010

Third Mobile License: Syria Shortlists Five Companies but Disappointment Looms Out

December 20, 2010

Of the six firms that had submitted applications to compete for Syria’s third mobile license only five qualified for the second phase of the process. According to the list of the prequalified candidates, which was published on November 29, 2010 (the day when the pre-qualification phase was terminated) these companies are: Saudi Telecom Company, Etisalat (from the U.A.E.), Qtel (from Qatar), France Telecom and Turkcell. With the second phase, the offers proposed by the five mentioned companies will be evaluated and only the selected candidates will participate in the third phase, which is the real auction. According to the terms of the tender, the auction for the license will be held on April 12, 2011.  

The Syrian Ministry of Communications and Technology (MOCT) explained that only Iran’s Tamco was not admitted to the second phase. The evaluation committee (formed jointly by the MOCT and Germany’s advisory consultancy Detecon) did not accept Tamco’s proposal because of the company's inadequacy in meeting the tendering standards. Also before this pronunciation it was quite evident that Tamco was not capable of reaching the two main pre-qualification criteria (having operated a network with at least 1.5 million subscribers in at least two countries for a minimum of three years by the end of August 2010 and having started at least one network and operating it for 12 months by the end of August 2010). Etisalat and Turkcell have now the best chances of gaining the contest according to David Leach, a global telecoms analyst with TeleGeography, a research company. 

One week after the end of the pre-qualification phase, on December 8 2010, the MOCT organized a Pre-Application Conference at the Four Seasons Hotel in Damascus with all the involved parties: the five prequalified candidates, members of the MOCT among them Minister of Communications and Technology Imad Sabouni) and members of Detecon (this is the German consultancy advising the MOCT on how to award the license). The basic idea behind the decision to call up this conference was to implement an efficient coordination between the MOCT and the five candidate companies in order to have a high level of transparency in the process. Moreover, the MOCT wanted to have an information exchange with the five companies about the tendering process, the Syrian telecoms market and the opportunities for the third license operator. The second phase (Qualification Phase) started immediately after the end of the conference with the launch of the Request for Proposals (R.F.P.s).

The intentions for convening the conference were undoubtedly positive, but then the results were partly messed up. In fact, the executives of the five telecoms operators strongly contested the necessity of providing to the Syrian government revenue projections for their prospective businesses.  The third license will be auctioned so this request seemed very invasive as for the companies’ business strategy. Another pressing point for the contenders was the inevitability of regulating roaming agreements with Syriatel and M.T.N. Syria, the current two mobile operators already working in the country. It’s important that the new entrant does not face any disadvantages against both Syriatel and M.T.N. With reference to this last point, Mr. Sabouni expressed MOCT's intention of absolutely avoiding advantages and disadvantages, but rather of having a level playing field. Still during the conference, Mr. Sabouni was remembered about the need to comply with the Arab League boycott rules against Israel. With no doubt the vagueness and unclear applicability of the boycott rules play against a transparent and clear utilization of the third mobile license.

Vagueness about certain crucial clauses is inacceptable by modern business-oriented telecoms operators. Especially this time, with five foreign competing companies (none of the competing companies is Syrian), business pros and cons should be easily calculated. It’s still a very clear memory that nine years ago when the first two licenses (in reality BOT agreements) were awarded, later many irregularity surfaced (Egypt’s Orascom retired the investment in Syriatel just after two years in 2003). When two independent public figures criticized those irregularities, they were sent to prison for a total of twelve years. This time clarity is a must. Apart from this, good news for the telecoms sector is that, according to  the daily al-Watan, Mr. Sabouni announced that, by the end of December 2010 or at the latest at the beginning of 2011, the Syrian telecommunications authority would  be established.

Friday, November 19, 2010

Six Telecoms Companies Go at War for Syria’s Third Mobile License

November 19, 2010

As it was easily understandable given the appeal of the Syrian mobile market, six telecom companies have submitted bids for the third mobile communications license (it has a 20-year validity) in Syria. Regional and international operators are vying for this third mobile license that should increase the level of competition in the mobile market, which is expected to double in size by 2014. Moreover, the government has specified that once this license will be awarded, there won’t be any new licenses for the next three years.    

“There is heightened interest for the third operator. Syria remains a market operating under its true potential because the two operators are in a comfortable duopoly. With three operators, we will see penetration rates exceeding 100 per cent in the next four years and effectively doubling the market” said Jawad Abassi, the founder of the Arab Advisors Group, a consultancy.

The companies that presented their proposals in this pre-qualifying stage are Etisalat (U.A.E.), S.T.C. (Saudi Arabia), Qtel (Qatar), Turkcell (Turkey), France Telecom and Tamco (Iran). Kuwait’s Zain previously had expressed a strong interest in this bidding, but in the end it did not submit any tender. Zain’s reason for not tendering is linked to the fact that Etisalat is currently acquiring 46 percent of Zain for around $11.7 billion and Etisalat itself proposed its candidature for the third Syrian mobile license. Etisalat is aggressively expanding out of the U.A.E. and has activities through joint-ventures or real subsidiaries in 17 countries apart from the Emirates. With no doubt, Syria could be an interesting choice for the Emirati company.

France Telecom (F.T.) is the only one firm not belonging to the MENA region (in reality also Turkey’s Turkcell does not belong to the World Bank’s definition of MENA region, but following other classifications also Turkey belongs to the so-called extended MENA region). F.T. is already operating in the MENA region thanks to its 71.25 percent ownership of Egypt’s first mobile operator Mobinil. In the last months, there have been rumors that other European companies have been attracted by an expansion in Syria, but, in the end, France Telecom is the only European telecoms operator actively searching for opportunities in the Middle East and North Africa.

Notwithstanding the close political relations between Syria and Iran, Iran’s state-owned Tamin Telecom Company (Tamco) seems to be the competitor with fewer chances to get the license. In fact, already the pre-qualification criteria appear to be a difficult hurdle to overcome for this quite new Iranian company. According to its website, Tamco was established three years ago and it is currently operating only in one country: Iran. Recently, this year, Tamco has won the third mobile license awarded in Iran. Tamco belongs to Shams Tamin High Tech Investment Company, one of the ten holdings of Iran’s Social Security Investment Company (S.S.I.C.), which is the company that manages pension funds in Iran. Not being successful in raising financing resources — given the international sanctions applied to Iran — could be another big difficulty for Tamco.  

Some telecoms executives evaluate that competition for the third Syrian license will be fierce because the bidders constitute an interesting group of companies mixing both relevant economic resources, like Saudi Telecom, Qtel and Etisalat (their respective governments have important equity stakes in the companies and all the three companies have already implemented an expansion strategy in the MENA region) and significant knowledge of MENA’s telecoms markets, like France Telecom and Turkcell. In particular, Turkcell — the leading operator in Turkey — has already quite good an understanding of the Syrian telecoms, given its attempt to purchase Syriatel in December 2007. 

The current six bids will be assessed by a joint committee formed by Syria’s Ministry of Communications and Technology (MOCT) and by Germany’s Detecon, an advisory consultancy. By the end of December 2010, this joint committee has to evaluate the applications of the six candidates and decide which companies are allowed to the second phase of the competition. The decision will be taken according to the following pre-qualification criteria:

A) Having operated a network with at least 1.5million subscribers in at least two countries for a minimum of three years by the end of August 2010;

B) Having started at least one network and having operated it for 12 months by the end of August 2010.  

With the second phase, bidders will be requested to submit technical and investment proposals. The technical and investment proposal will be opened by mid-March 2011. At that point, the companies that will score at least 70 percent of the available points during the second phase will be admitted to the one-day auction in April 2011. Bids may be improved during the development of the procedure. 

The MOCT has now specified that the Syrian Telecommunications Establishment (S.T.E.) will own a 20 percent stake in the new company that the winner will set up. In addition to this, the winner will mandatorily pay 25 percent of its gross revenue to the Syrian government and an additional 0.5 percent that will be used to pay for the costs of the soon-to-be-established regulatory authority. 

Some sources inside the telecoms sector in Syria point out that it is quite possible that the winner will be the company offering the highest sum. Minister of Communications and Technology Imad Sabouni said that the reference price for the license is around S£25bn (US$500m), reported the Syrian newspaper Al Watan.



Sunday, October 31, 2010

S.T.C.’s Interest for Syria’s Third Mobile License

October 31, 2010

Last week state-owned Saudi Telecom Company (S.T.C.), the largest listed telecom operator in the Middle East, showed a great interest in bidding for a mobile license in the Syrian Arab Republic. In September, Syria tendered to sell a third mobile license. The deadline to submit pre-qualification applications will expire on November 14, 2010.

Given a very low rate of mobile penetration (44 users per 100 inhabitants) and promising growth chances, Syria is an attractive market. Out of a population of around 20 million Syrians and 3 million expatriates, Syria has 10.4 million of subscribers, comprising pre-paid cards, reports the Telecom Ministry. These numbers well explain that the market is absolutely not saturated. Currently in Syria there are two mobile operators Syriatel (55 percent of the market) and South Africa’s M.T.N. (45 percent of the market).

In the last four years telecoms deals in the Persian Gulf alone have been worth $33 billion. Once U.A.E.’s Etisalat acquires 46 percent of Zain (one Kuwait operator) for around $11.7 billion, Etisalat will be forced to sell Zain’s 25 percent stake in the subsidiary Zain Saudi Arabia, which is currently competing again Etisalat’s Mobily in the Saudi Arabian telecoms markets with reference to both 2G and 3G services. In fact, the Saudi I.T.C. regulator (Communications and Information Technology Commission, C.I.T.C.) could never accept to have two out of three mobile licenses controlled by the same operator (Etisalat). But apart from the Etisalat’s bid for Zain and the subsequent sale of Zain Saudi Arabia, from now on, according to many bankers and analysts, the telecommunications industry in the Gulf should develop a more designed and structured growth. This trend, which is also a necessity, comes out of scarce acquisition targets and increased competition in all of the Middle Eastern domestic markets, with declining ARPU (average revenue per user).

So, Syria’s license for sale is a very first-class target in a region where presently the only other attracting opportunities (obviously, excluding the Etisalat’s bid for Kuwait’s Zain and the Zain Saudi Arabia’s sale) could be Lebanon’s long-delayed privatization plans. In fact, many other players in the region are government-controlled companies and it is quite possible that at least in the medium term none of these will be sold or will change its proprietary assets.

On October 25, 2010, S.T.C. submitted its expression of interest to bid for the Syrian license through a letter sent to the Syrian Ministry of Communications and Technology (MOCT). S.T.C. is facing a strong and increasing competition in its own domestic market, which  is split among three mobile operators: S.T.C., Mobily (U.A.E.’s Etisalat) and Zain Saudi Arabia (Kuwait’s Zain). According to Ghassan Hasbani, S.T.C.’s chief executive officer (C.E.O.) of international operations, there are important and potential synergies between Saudi Arabia’s telecoms sector and the Syrian one. S.T.C. is an integrated telecom operator and is providing fixed line, mobile and internet services. Aside from Saudi Arabia, S.T.C. has already operations in Bahrain, India, Indonesia, Kuwait, Malaysia, South Africa and Turkey.

Recently this month, S.T.C. declared that its third-quarter net profits had soared 38 percent to a value of almost $900 million, from $640 million in the second quarter of 2010. This result was mainly due to the one-time gain linked to S.T.C.’s boosted earnings in India. In fact, S.T.C. affirmed that this positive boost in its profits was related to a 5 percent increase in its operating income and to a $200 million one-time gain, connected to S.T.C.’s share in the proceeds from Aircel India (S.T.C.’s unit in India), which sold some assets.

With no doubt, Syria’s mobile market is quite appealing and for this reason some interest for this third mobile license has come also from U.A.E.’s Etisalat, Kuwait’s Zain, Qatar’s Qtel, Russia’s M.T.S. and Turkey’s Turkcell. In addition to these companies, also Vodafone and France Telecom could be interested, although they do not possess any competitive edge over the other companies.


Wednesday, September 29, 2010

Syria’s Third Mobile License

September 29, 2010
On Thursday September 23, 2010, the Syrian government finally decided to tender a third mobile operator license. The aim of the Syrian government is to attract not only Syrian investors, but also international telecom companies that could desire to invest in an untapped market. The Syrian Arab News Agency (SANA) reports that this move will be done according to the following specific conditions:

  1. Deadline for prequalification documents on November 14, 2010.
  2. The tender will be made through a three-phase process including initial rehabilitation, investment & technical rehabilitation and the financial auction.
  3. The government has decided to convert the Build-Operate-Transfer (BOT) contracts of the two current operators into licenses. The unique condition is that the two operators pay their financial obligations to the public Treasury. One option would be for the two incumbents to pay an amount equivalent to that of the winning bid related to the third mobile license. Another option would be to convert the BOT contracts into 20-year licenses. This could be done through the payment of $537 million for each license. The two companies will have also to pay 25 percent of their annual revenues to the Syrian government (under the BOT contracts they are currently paying 50 percent of the revenues).
  4. Applicants need to have at least three years of working experience in operating a mobile license and it is mandatory for them to by now operate in at least two countries with 1.5 million customers in each of them.
  5. One bidder could include more than one operator, but the Syrian state-owned telecom company will always control a 20 percent stake in the company that will be awarded the license.

Syria’s Ministry of Telecommunications used the services of Detecon, a German consultancy, in order to organize the terms of reference for the new license and establish the procedure so as to implement the conversion of the BOT contracts into fully fledged contracts.

According to Minister of Telecommunications Imad Sabouni, the licensing process will be completed in the next five to seven months. In relation to the current two Syrian mobile operators, Syriatel and M.T.N., the minister also pointed out that following Detecon’s research activity, the state would get better returns through the sale of licenses and the implementation of a new revenue-sharing arrangement than what it previously obtained from the two companies. But an analysis by The Syria Report, an on-line economic newsletter, has calculated that with the BOT contracts the government would receive 40 billion Syrian pounds every year (assuming to maintain the 2009 revenue levels), while with new system the government would receive only 22.5 billion Syrian pounds. It is true that revenues could be increased if reduced mobile prices convince more people to use mobile services  in this way expanding the market. It is esteemed that there are in Syria at least 4 million of untapped potential new subscribers.
Rumors say that there are at least three international companies interested in bidding for the third license: Saudi Arabia's Saudi Telecom (S.T.C.), Emirates Telecommunications Corp (Etisalat) and Turkey’s Turkcell (In the past Turkcell had been reported to consider a bid to acquire Syriatel). During the summer it seemed that also Kuwait’s Zain was interested in tapping some opportunities in Syria. "Zain is waiting for Syria's government, which announced the opening of a bid for a third operating telecom ... to issue the terms and conditions required for applying and attaining the license," Kuwaiti newspaper al-Rai said quoting some sources. But then, at the beginning of September, Zain dropped its expansion plan in Syria and it is not interested anymore in bidding for the third mobile license. The basic idea is that the company should not enter new markets that could have some risks. In fact, winning a new license in Syria would surely burden Zain’s balance sheet with relevant losses for at least the initial three years of the operational activity in the country. In addition to this, today Etisalat has made a $10.5 billion (or $12 billion according to different sources) offer to buy a large stake in Zain trying to create the biggest telecom operator in the Middle East. Obviously, this could not be the right moment for Zain to compete for a Syrian license also because Etisalat will surely try to win the license. Also Egypt’s Orascom Telecom normally would show some interest in such an opportunity, but it could be discouraged by its past experiences in Syria. In fact, Orascom was the original partner of Ramy Makhlouf, who is the principal owner of Syriatel (Mr. Makhlouf is a cousin of the Syrian president Bashar al-Assad and he is currently under specific U.S. sanctions). This relationship started in 2001, but by 2003 it was over with a lot of resentment.
Syria’s telecoms market is quite promising. According to the International Telecommunication Union (I.T.U.) Syria has a very low mobile penetration with 44 users per 100 inhabitants. Syria lags behind its regional peers except for Sudan, Lebanon and Yemen (at this regard it should be understood that in Lebanon many mobile-phone users subscribe mobile contracts with networks in third countries rather than paying exorbitant fees to the state-owned service). Out of a population of around 20 million Syrians and 3 million expatriates, Syria has 10.4 million of subscribers, including pre-paid cards, according to the Ministry of Telecommunications. In other words, the market is not saturated. In the past, in other MENA countries, some new mobile entrants struggled a lot because the markets were much more mature. But in Syria, adding a third operator could boost the level of competition bringing an improved quality with reduced prices. In general, when there are two companies that control the whole market they tend not to be very much quality-driven. Already, many local news sites enthusiastically welcomed the possibility of having a third mobile operator that could introduce to Syria those packages and special deals that are widely common in the Persian Gulf and that are much better than the current available options provided by both Syriatel and M.T.N.
The opening of the Syrian telecoms market thanks to the new law governing the telecommunications industry (Law No. 18 of 2010) and now the issuing a third mobile license are two other important steps in order to attract foreign investments and develop the private sector. At this regard, there are some speculations that both the incumbents and the new licensee could decide to offer some shares to the public and in this way collect economic resources to cover the costs of the fees.

Friday, August 27, 2010

The New Syrian Telecommunications Law

August 27, 2010
On June 9, 2010, Law 18/2010, which reorganizes Syria's telecommunications sector, was enacted by presidential decree and then published on the Syrian Official Gazette on June 23.
Thanks to this law, a newly established institution, the Telecoms Supervisory Authority (T.S.A.) will be constituted as the telecoms sector’s regulatory body. Before this reorganization, the regulatory power pertained to the Syrian Telecommunications Establishment (S.T.E.), which at the same time was allowed to run the country’s landline network. Under the new framework, the S.T.E. will be replaced by a new institution, the Syrian Telecommunications Company (S.T.C.), which will continue to operate as the landline monopolist company. The S.T.C. will be required to abide by the Company Law and the government (the Syrian Treasury) will be its unique stakeholder (100 percent ownership).
The Ministry of Communications and Technology will appoint the T.S.A. members and the authority will start implementing the new regulatory functions at the beginning of 2011. The T.S.A. will have the power to grant new licenses, including: license fees; revenue sharing models; and the methodologies for selecting the operators (tender or other procedures) of the different sub-sectors (landline, mobile, radio waves, etc.). When granting new licenses, the T.S.A. will mandatorily consider the positions of companies already operating (having currently infrastructure and employees) in Syria as telecom operators.
The importance of this law is linked to the fact that the S.T.E. is one of Syria’s most profitable state-owned companies. In fact, it is the second largest contributor to the Syrian Treasury after the Syrian Petroleum Company. In 2009, the S.T.E. had revenues of 73.1 billion Syrian pounds (with an 18 percent increase). The current two Syrian mobile operators, Syriatel and M.T.N., in 2009 enjoyed total revenues of $ 1.02 billion and $829.8 million respectively. Since mid-2009, the S.T.E. has gotten 50 percent of the annual revenues of Syriatel and M.T.N. according to the terms of the build-operate-transfer (BOT) contracts under which the two companies are allowed to operate in Syria.
The two companies strongly complain that BOT contracts impede them to well invest in new expensive infrastructure, which eventually after some years will be handed over to the government. In addition to this, BOT contracts have always blocked the possibility of listing both Syriatel and M.T.N. Syria on the Damascus Securities Exchange. The reason is that this kind of contracts does not permit to evaluate the assets of the involved companies. Splitting the old S.T.E. into two different bodies — the T.S.A. (the new telecoms regulatory body) and the S.T.C. (the new landline monopolist company) — should permit to reform more easily the telecoms sector.
In particular, the T.S.A. — not being involved in the telecoms market as an operator and not receiving direct economic resources from Syriatel and M.T.N. as it used to happen with the S.T.E. — should be capable of modernizing the sector through an increase in the level of competition in this way protecting the rights of consumers. This could be achieved by transforming Syria's BTO contracts into classic licenses and introducing a third mobile license. For example, it is important to remember that the Syrian mobile market is not a saturated market. According to the Ministry of Telecommunications, out of a population of around 20 million Syrians and more than 3 million expatriates, Syria has 10.4 million of mobile subscribers, including pre-paid cards. It is esteemed that there are in Syria at least four million of untapped potential new subscribers. But with the current scarce competition (high mobile prices coupled with bad services) it is difficult to initiate these four million people to the mobile market.
The new law should be a sort of innovative model in order to limit government participation in relevant Syrian industrial sectors. In other words, in Syria from now on, it should be implemented a process oriented toward an increased role played by the private sector in industries previously 100 percent controlled by the state. Probably, the government will continue to have a controlling position, but the management should be linked more consistently to the private sector.

Sunday, June 20, 2010

U.S. Trade Delegation to Syria

June 20, 2010

A high-level diplomatic and trade delegation, including U.S. officials and executives of U.S. I.C.T. companies, was dispatched last week to Syria for a four-day visit. Officially, the mission had the target to understand the potential Syrian hi-tech demand and to discuss future cooperation projects between the U.S. and Syria. All the involved I.C.T. companies are at the moment subject to the U.S. sanctions versus Syria. Officially, on the State Department’s side there was the idea of testing the willingness of President Bashar al-Assad of Syria to find ways to improve the level of information technology in Syria and to expand Syria’s economic ties in general. Unofficially, this mission was to be considered as one of the latest attempts by the Obama administration to derail the strategic alliance between Syria and Iran. The State Department would like to help Syria establish a more democratic environment and the U.S. has still plans to send back a U.S. ambassador to Damascus (Washington pulled back its ambassador from Syria in 2005).

This mission was quite controversial and on Monday, June 14, before the departure of the delegation, some lawmakers and Syrian human rights activists criticized the necessity of dispatching a U.S. delegation to Syria. If, on the one hand, in the last months, many U.S. officials   among them some U.S. senators have visited Syria with the goal of discussing bilateral and regional affairs, on the other hand, in May 2010, the U.S. renewed for one additional year its sanctions versus Syria, which is still accused of supporting terrorists groups (recently there were U.S. allegations that Syria one more time transferred missiles to Hezbollah, although both Syria and Hezbollah denied the U.S. allegations) and of trying to obtain weapons of mass destruction (Damascus is still refusing to cooperate with the U.N. investigators looking into Syria’s possible development of weapons of mass destruction). Syria is considered to belong to the category of rogue states and to be a sponsor of terrorist activities. Many of these lawmakers and activists pointed out that Syria had never responded to all of the policy requests made by Washington since the policy shift that the Obama administration implemented last year in order to engage in a better way Syria and to disentangle it from Iran’s sphere of influence.

Apparently, some in the U.S. State Department, still to this day, remain committed to pursuing Assad to peel him away from Iran” said Mr. Farid Ghadry, the head of Syria's Reform Party, which opposes the regime. But what really scares many activists is that the Syrian government could use the new technologies in order to crush in an improved manner its political opponents and increase its grip on civil society. Secretary of State Hillary Clinton considers the spread of information technology as a tool of paramount importance in order to improve global development of democracy and civil society, but nowadays in Syria the spread of these technologies could really have the opposite results. Watchdog Freedom House ranks Syria as one of the most repressive regimes in the world. Leading Republican senators are threatening to block the White House nominee for the ambassador post in Syria, Robert Ford, until there is a clear picture of the relationships between Syria and Hezbollah.

Syria has been experiencing some U.S. sanctions since 2004. The most important sanctions are laid down in the Syria Accountability Act (S.A.A.) of 2003. This act bans the exports of the majority of goods that contain more than 10 percent of U.S.-manufactured component parts to Damascus. Moreover, the U.S. Patriot Act was enacted in 2006 explicitly against the Commercial Bank of Syria. Lastly, there are the Executive Orders of the U.S. president. These orders aim at blocking some Syrian citizens and entities from entering the U.S.

In the last months, the U.S. administration has started to ease the exports of certain types of telecommunications equipment and anti-filtering software that before were banned from being exported to countries such as China, Iran and Sudan. The basic idea was that these instruments rather than working for the public good would be instruments of oppression in the hands of authoritarian governments. As a matter of fact, while the overall structure of the U.S. sanctions toward Iran impedes the sale of all high-tech equipment and parts, at the same time some waivers could be decided by the White House. A good example could be last-year sale of spare airplane parts to Syria’s national carrier thanks to the facilitator role played by U.S. officials.

Last week the State Department sent top diplomats to Syria. In fact, the head of the delegation was Alec Ross, who is the senior advisor for innovation of Secretary of State Hillary Clinton. Apart from U.S. officials, the delegation included executives of Dell, Cisco, VerySign, Microsoft, Simon Tech and Fraser. The executives on Tuesday met with Deputy Prime Minister for Economic Affairs Abdullah al-Dardari, who strongly encouraged the U.S. companies to invest in Syria and to reap many benefits from these investments. According to SANA, the Syrian News Arab Agency, which belongs to the government, the delegation also met with Minister of Higher Education Ghayath Barak to discuss about how to develop cooperation with reference to education and training. Mr. Barakat said that the government aimed to introduce informatics in state jobs (in the future, the International Computer Driving License (I.C.D.L.), will be a must for all work applicants). During the meeting with the minister of high education, the deans of the informatics faculties in Syria openly expressed the point that their institutions had to improve their technological infrastructure and to have better trained personnel. The involved companies discussed about the possibility of setting up authorized centers in the territory of the Syrian Arab Republic. All this said, before any real commitment, it should be well analyzed for the mentioned U.S. companies where stands the balance between the economic profit of working in Syria and the negative collateral reputational damages.

Saturday, June 12, 2010

When a New Licensing Regime for Mobile Operators in Syria?

June 12, 2010

INTRODUCTION It has been a long time since Syria should have had to unveil a very long-awaited new telecommunications law, aimed at creating an independent regulator and a new licensing regime for mobile operators in the country. In addition to this, it has been more than one year since the Syrian government outlined the idea of licensing a third mobile operator by the end of 2009 or the beginning of 2010. After all these months, nothing has happened, and at the moment of this writing (June 2010) there is not much updated information available through the Syrian media in relation to the development of a new telecoms law, which is instead of crucial importance for the future economic development of Syria. On the contrary, neighboring Jordan is very committed to the process of rewriting the country’s telecoms law and it has perfectly understood the importance of the I.C.T. sector for the economic growth of Jordan. In Syria, all the interested actors seem, at least publicly, to agree that the mentioned steps should be implemented as soon as possible, but in the end nothing ever happens. Probably, the reason for this standstill is mainly rooted with the government side, but this could really impede the future progress of Syria's telecoms sector.

BRIEF OVERVIEW OF THE SYRIAN FIXED TELECOMMUNICATIONS AND BROADBAND SECTORS  Syria has currently the most regulated telecoms sector in the Middle East, and it is also one of the least developed. It is true that year-over-year growth for 2009 was impressive, and that the overall mobile penetration stood at 42 percent in June 2009 (according to Mobile World Database, mobile penetration was lower at 38 percent in September 2009), but it's also true that the average for all the MENA countries was around 75.6 percent (Syria ranks 15th out of 20 countries surveyed).

This means that this country has an interesting potential growth also in light of the presence of a growing young population (2.4 percent annual growth rate and only 40 percent of the population above the age of 65). All this is true, but regulations have necessarily to be improved in order to attract possible investors. Currently, the state-owned Syrian Telecommunications Establishment (S.T.E., also known as Syrian Telecom) has the monopoly of the of the fixed-line service.

In 2002, the E.U. started to support the S.T.E. with a grant for the Telecom Sector Support Program (T.S.S.P.). The final goal was to support policies linked to economic development, reform of the public sector and improvement of the private sector with a specific attention given to telecom infrastructure and modern communications services. The T.S.S.P., whose duration was for four years, had a €10 billion budget and was specifically trying to activate:

  • Improved framework conditions and internal reform of the S.T.E., the national telecom operator, and market regulations favourable to increased private participation in new telecom services;
  • Technological and managerial modernization of the S.T.E., aiming at a competitive position in regional telecom markets;
  • Strengthened institutional, managerial and financial autonomy and self-reliability of the S.T.E., aiming at a competitive position on the national market in conventional and new telecom services;
  • Improved and differentiated services to the public, elimination of capacity constraints in a growing telecom market. For this purpose, a number of targets have been adopted for the program concerning technical, managerial and financial indicators of the S.T.E., in order to provide clear orientations for project activities and benchmarks for progress evaluation.

The Strategy Paper 2007-13 “Syrian Arab Republic” published under the European Neighborhood and Partnership Instrument (ENPI) explains that the T.S.S.P. has produced a restructuring plan for Syrian Telecom that “will pave the way for its corporatization and for the creation of an independent regulator in the telecommunications sector” and that “the E.I.B. (European Investment Bank) has provided €100 million to expand the telecom network in rural areas” (for more information about this point please  see: Sadly, also from the E.U. side there is not much available information in relation to the T.S.S.P.

Following a five year plan (2008-13), the S.T.E. is now using $1.5 billion trying to cover with its improved network the whole country (universal fixed lines) by the end of 2013, adding 920,000 lines to its existing network. The target could be not very realistic and the plan seems now to be put on hold given the world economic turmoil of the last two years. This plan is based on contracts signed with multinational corporations (M.N.C.s), such as Ericsson and Siemens. It is certainly true that Syria in the last years has progressed consistently in extending the reach of its communication services and at the end of 2009, the state-owned fixed-line incumbent had 3.7 million of fixed lines. The persistent problem is that S.T.E. has a complete monopoly in relations to fixed-line services, i.e., there is no competition. This means that the S.T.E. financial results have improved steadily in the last years thanks to its increased subscriber base, which is linked not to the fact of quality improvements, but to the inexistence of competition. Moreover, customers still experience lengthy lags for the installation of landlines.

The S.T.E. is also the public body that is investing although in a very limited manner in connecting Syria internationally through the Ugarit submarine cable. This 239-kilometer cable infrastructure started to operate in 1995 with a defined capacity of 622 Mb/s. In November 2008, the S.T.E. together with the Cypriot Communications Authority signed a new document aimed at expanding the cable while increasing the internet capacity. At that time the two countries also decided to consider some feasibility studies to deploy a second cable in the sea. The Syrian government is also in talks with Jordan, Turkey, Cyprus and Iraq with reference to the possibility of running a submarine fiber optic cable among the five countries. In 2009, Minister of Communication and Technology Imad Sabouni of Syria said: ”one project underway is to try to find a link between operators in the Red Sea and those in the Mediterranean to benefit Syria and all the region.” Then, Mr. Sabouni added that the government would contribute with $2 billion of funds put aside for the country’s internet and phone network.

Internet penetration in Syria is very low and, obviously, broadband penetration is very reduced, with 50,000 broadband ports in H1 2009 (0.025 percent in 2008 according to I.T.U.). At the same time, the government applies a strict and enforced censorship in relation to many sites (like Facebook, YouTube, Amazon), blogs and websites critical of the Syrian government. These websites are all blocked. In some internet points (for instance, in the old city of Damascus, where the majority of users are tourists) it is possible that the manager unblocks the restrictions, but this is not something to take for granted. Also for Skype there are different policies in the various internet centers (no Skype at all, Skype to a specified landline or mobile number, and both Skype-to-Skype and Skype to a specified landline or mobile number). As a matter of fact, it is much easier to get information about Syria in English living outside of Syria than to rely on Syrian sources while living in the country. Broadband services are still expensive and it is not trouble-free to subscribe an ADSL line. Notwithstanding all these internet restrictions, there are no limitations at all on receiving DTH satellite TV channels. The majority of the population normally links the dishes to Arabsat and Nilesat. The third choice sometimes is Hotbird.

HISTORY OF TELECOM MOBILE SERVICES IN SYRIA   Nine years ago, in 2001, the Syrian government decided to award the first 15-year build, operate and transfer (BOT) GSM license to two operators, which were already operating some existing pilot projects. The first operator was Syriatel, which at that time was a joint-venture. The Egyptian Orascom Telecom Holding (O.T.) held 25 percent of the company while different Syrian investors (Drex) held the remaining 75 percent. The second BOT license was awarded to a Lebanese-Syrian joint venture called Investcom, which competed against Telsim,a Turkish mobile operator. At that time, Investcom was a branch of the Mikati Group of Lebanon, but in 2006 it merged with M.T.N. South Africa and it created one of the largest telecom groups in the emerging markets of Africa and the Middle East. During the year before the awards (February 2001), both Investcom and Syriatel run some experimental mobile networks in Syria. The two companies poured in around $31 million for these networks, which were based in Damascus, Aleppo and Latakia. The pilot projects were due to be run for just one year. With some difficulties, mobile operations started in Syria in April 2001. In fact, given the high subscription costs, demand for mobile services was below expectations. The result was that after six months the authorities were forced to drop costs by two-thirds. The BOT license needed an initial payment of frequency fees of $20 million for the GSM 900 Mhz network with an additional $15 million to permit the operator to use the GSM 1800 Mhz frequency band. The BOT contracts were also defining a revenue sharing agreement according to which the companies were bound to pay royalties for 30 percent of revenues for the first three years, for 40 percent for the second three-year period and for 50 percent from the seventh year of the BTO contract onward. The companies also had to pay some protection fees.

Initially, Orascom was planning to have more than 850,000 users by 2016 when the BOT contract would have expired. Notwithstanding the commercial difficulties, it was a very conservative appraisal. Things changed abruptly for Orascom in the following months and then, in June 2003, Orascom completed a transaction aimed at getting rid of its stake in Syriatel. In fact, Orascom wanted to settle a legal dispute with its local shareholder Drex Technologies (the owner of 75 percent of Syriatel). The motive, according to Orascom allegations, was that Drex was using its strong political connections to take complete control of Syriatel at the expenses of Orascom. The settlement was able to solve all legal disputes at both the international and the Syrian level. In 2003, Orascom exited the ownership of Syriatel and, according to some unconfirmed sources, it was compensated for all the previously incurred expenses and loans. For some years after getting out of the investment Orascom continued to provide management expertise to Syriatel on an external contractual basis.

MOBILE SERVICES IN SYRIA TODAY   Syria has in the MENA region among the highest tariffs and also one of the lowest mobile penetration rate. Mobile services are provided in Syria by two private operators  it is at the moment a duopoly Syriatel (55 percent of the market) and M.T.N. Syria (45 percent of the market). The first one is a Syrian company, while the latter is a subsidiary of South Africa's M.T.N. The two companies operate through Build-Own-Transfer (BTO) contracts, normally used across different industries in the initial stages of development. Under these BTO contracts the two companies have to build the country’s GSM technology and provide mobile and internet services before transferring everything to the Syrian government after 15 years. The rigid BTO scheme has been in place in Syria since 2002, but both companies would like to convert these BOT contracts into regular mobile operator licenses. One reason is surely the fact that after some years, Syriatel and M.T.N. have to pay very high royalties to the Syrian government, i.e., royalties for 50 percent of the revenues together with a 20 percent charge to cover the cost of the infrastructure.

Another reason for changing the BTO license with a simple license is that although the companies enjoy a consolidated market, the BOT scheme is absolutely a big hurdle for the implementation of competitive marketing, especially in the area of tariff flexibility and promotions. Summing up, Syriatel and M.T.N. claim that, given all the cost and taxes they have, there are no resources for investments targeted at adding further capacity and service upgrades. The result is that the two companies charge the same amount for calls and messages as well, plus they provide exactly the identical services with a perfect coordination so that it does not exist also in the mobile sector (like for landlines) any kind of competition. The only difference with fixed-line services, where there is a monopoly (S.T.E.), is just on papers, because with mobile services there is a duopoly that acts as a monopoly.

Syria has a population of around 20 million and today two operators are considered inadequate. As it was pointed out above, the country has been taking into consideration to add an additional third mobile operator for some years. Foreign telecom companies like U.A.E.’s Etisalat, Kuwait’s Zain, Qatar’s Q-Tel and Turkey’s Turkcell have always been considered as potentially interested in joining the Syrian market. Among them, in particular, a strong attention has been expressed by Etisalat and Zain. According to Business Monitor International, a consultancy, Zain could be “interested in investing in Syria’s mobile market, either through the acquisition of a stake in an existing operator or by acquiring a new operating license”.

Acquiring a new operating license could be easier for Zain than investing in an existing operator. In fact, Syriatel was blacklisted by the U.S. Dept. of the Treasury in 2008. The reason was a presumed link of the telecom company with the Syrian government. This political hurdle was bypassed in April 2009 when Zain tried to buy a stake in Syriatel although it did not succeeded. Things could be easier now with M.T.N. Syria, whose 75 percent is owned by M.T.N. South Africa. In fact, before selling for $10.7 billion in the first days of June 2010 all its African assets (Zain Africa B.V., operating in 15 African countries) to Bharti Airtel Limited, an Indian telecom company, Zain was a business rival with M.T.N. in Africa. Before this sale, Zain's offer for buying a majority stake in M.T.N. Syria would have never been approved by the Syrian regulations. Now things could be different. After the deal was concluded, the Zain Group C.E.O., Nabeel Bin Salamah said "Zain stands at the threshold of a new era, one that will allow the company to focus on its highly cash generative Middle Eastern operations, investing in new growth opportunities in our existing markets." Also Mr. Anas al-Khani, corporate affairs manager at M.T.N. Syria, thinks that a regional company is best placed in order to take up the license, but he hints at the fact that also “companies such as Orange, which operates in Jordan, France’s Telecom and Vodafone have reason to be interested.” 

Commentators affirm that if a third operator were to enter the market, this time it would be under a license agreement and not anymore according to a BOT contract. But such an occurrence would spark strong protests from the side of the current incumbents. On the one hand, it would not be possible to have a playing field where  one operator is working through a license and two with a BTO contract. On the other hand, it is not conceivable to have a new entrant especially a foreign company that easily accepts to be subject to the same price controls as its competitors For this reason, it is understandable that if the new Syrian telecoms law is ever released, it will necessarily change the whole telecoms panorama into a license-driven playing field. 

The fact that in Syria in the mobile arena there is no competition brings with it the fact that there are some of the highest tariffs in the whole region. Notwithstanding the introduction of prepaid cards in 2003, mobile services are disproportionately expensive. With the average Syrian salary around $200, mobile services are available up to now for just the Syrian elite. A 42 percent mobile penetration exactly one year ago (June 2009) is low and the comparison with some of Syria’s regional peers  using the two variables mobile penetration and current G.D.P. well exemplifies the scarce mobile penetration (see the graph below). There are now in Syria at least four million of untapped potential new subscribers. In May 2009, mobile phone users in Syria staged a one-day boycott of mobile services. This protest was decided in order to complain with reference to the high tariffs charged by the two operators Syriatel and M.T.N. Syria.

Clearly, a one-day boycott was not a very powerful tool in order to have a significant dent in the profits of the two telecoms, but it was at least a signal of an existing problem. According to Mr. Josep Maria Moya of Delta Partners, a consultancy, mobile users were probably angry at in addition to the high tariffs the restrictive validity of top-up cards. In fact, until last year customers who bought the 150-Syrian-pound ($3.25) card had only seven days in order to use the credit before disconnection (expiration). In other words, this system forced customers to spend at least 600 Syrian pounds every month. These fares are with no doubt too high for Syrians. This restriction was partially lifted with an expiration time of two weeks instead of one, but it is still a powerful constraint.

In public declaration released in the last months both M.T.N. Syria and SyriaTel have expressed the point that they would welcome a new competitor for mobile services in the Syrian market and they have already partially prepared the transformation of their not well competitive companies into more efficient firms. They have understood that the present tariffs have already reached the so-called saturation point. In other words, with current prices a certain part of the Syrian population will never buy mobile services. For example: M.T.N.’s average revenue per user for the first quarter of 2009 was $17 while Kuwait’s Zain was $52 and Qatar’s Q-Tel was $44 although in these countries per capita G.D.P. is much higher and the offered telecom services are of much better quality. Instead, should a license regime be implemented all the actors could have more flexibility, be more competitive and reduce the prices for consumers. According to Ismail Jaroudi, the C.E.O. of M.T.N., “While we have accomplished a lot over the past few years within the boundaries of the BOT, we have now reached a point where we are stuck, and growth is not what it should be without the ability to lower tariffs. Overall, a new telecoms law that can formalize the sector and define the scope of the operators will have a great impact on mobile growth and the company at large.” If the new telecoms law is not going to change the BOT contracts there is absolutely zero incentive for Syriatel and M.T.N. to invest resources in their networks or in their customer base when, given the BTO contracts, they can be obliged to hand over all their operations to the government. With no clear investment rules not many private companies are eager to invest in Syria.  

In general, many times new entrant strategies in the telecommunications  sector especially in developing countries at the beginning rely on price competition that could be achieved either through direct reductions in tariffs or other indirect measures such as per-second billing or increased pre-paid expiry periods. In a country like Syria, where at the moment there is no real competition, a new entrant is mandatorily obliged to act at a different level. There, a mobile network operator (M.N.O.) will look for different key factors in order to differentiate itself from its competitors. These key factors could be a strong existing brand or an increased range of service provisions. Among the latter, one of these could be mobile broadband that could reap the benefit from the fact that Syria does not have relevant fixed broadband services.  

The S.T.E. general manager, Nazim Bahsas, in 2009 said that "fulfilling the regulatory role is not our core business and consumes more than 30 percent of our management time, detracting from our ability to focus on and dedicate resources to the operational side of our business". And then he added that "Looking at global trends, in nearly every market where a separate regulator was established, tremendous progress was achieved for the sector as a whole, so the new telecoms law is a must for the country."  

Last but not least, the third eventual mobile license, Mr. Sabouni pointed out last year "is one of the last mobile licenses to be auctioned in the region" and the Syrian government is counting on this in order to raise a critical amount of money. 

A NEW TELECOMMINICATIONS LAW? In February 2010, a press release from Syrian Telecom and Sofrecom, a consultancy, explained that the partnership S.T.E./Sofrecom would modernize the network of Syrian Telecom transforming it into a “Next Generation Network”. In addition to this, it was said that the objectives of the new telecoms law, under study, were to open the market, to augment the penetration of telecoms services and to propose to Syrians quality telecommunications services with reference to broadband and mobile communications. In other words, this press release was in particular giving information in relation to the steps necessary to build up a network infrastructure able to deliver broadband, data and multimedia services in Syria. To reach this target was identified Sofrecom as an important consulting body, advising Syrian Telecom with reference to the main steps of the project for the following two years (Step 1: Audit & Description of the Current Network; Step 2: Demand Analysis & Definition of S.T.E.’s Target Network; Step 3 Proposition of Different Migration Scenarios & Recommendation of the Optimum Scenario to Migrate to N.G.N.; Step 4: Follow up of the Migration Program) and were identified positive benefits for S.T.E. such as lower Opex and Capex and the creation of a revenue stream in a much more competitive environment. Mr. Bahsas was enthusiastically affirming that “the migration of our network to N.G.N. is a must of our strategy. Indeed, the N.G.N. network will enable Syrian Telecom to deliver compelling services such as video on demand, broadband internet, and voice over a single line. Our customers are hungry for broadband internet and value added services and Syrian Telecom shall meet their expectations. Sofrecom will help us to deliver enhanced services supported on a cost-effective and efficient N.G.N. network.”  In other words, all the actors — the S.T.E., Syriatel, M.T.N. Syria, the Syrian government, the foreign telecom companies and the Syrian consumers  agree on the fact that a new telecoms law should be developed and that, thanks to this law, the mobile sector should be reformed with the transformation of the two BTO licenses into normal licenses and the auction of a third  mobile license. All these actors and stakeholders agree, but nothing is really happening. Once in a while there are some announcements and some press releases, then no concrete decision is ever taken and this could have very bad comebacks for the future economic development of Syria.

CONCLUSION With no doubt Syria has experienced a strong decline in its oil revenues over the last few years. This decline could push the Syrian government to invest in different business activities  like the I.C.T., which could be useful in order to improve the economic progress of Syria transversally through other economic sectors. Improving the competition in mobile telecommunications, providing one additional license and reframing the telecoms law, loosening the related regulations, could have very beneficial effects for the economic advancement of Syria. All the interested actors seem at least publicly to agree that the mentioned steps should be implemented as soon as possible, but then nothing ever happens. Probably, the reason for this standstill is mainly rooted with the government side, but this behaviour could really impede the future progress of Syria's telecoms sector. And Syria is a country already with a relevant development gap in comparison to bordering countries like Lebanon and Jordan, countries that are fully aware of the importance of the overall I.C.T. sector and that have already implemented important actions.