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.