Tuesday, June 21, 2011

International Code +211, Zain Sudan Is Already There!

July 21, 2011

Welcome to the Republic of South Sudan! Following January 2011 referendum in which 98.83 percent of the population of the previously Southern Sudan Autonomous Region voted for independence, on July 9, 2011 the Republic of South Sudan became an independent state from Sudan. And then, five days later the new country was admitted to the United Nations (U.N.). South Sudan seceded from Sudan after decades of civil war (First Sudanese Civil War 1955-72 and Second Sudanese Civil War 1983-2005). South Sudan’s population is estimated at eight million people while the country gets almost all its revenues from oil.

A few days after the independence, the new country received by the Geneva-based International Telecommunications Union (I.T.U.) a new international country calling code, which is +211 (before it used Sudan’s international code +249).

The telecommunications era started in Sudan before the end of the nineteenth century. Since then the telecommunications sector had been divided until twenty years ago between several government-owned small entities with scarce operational and financial autonomy. Notwithstanding a myriad of development efforts until the beginning of the 1990s, the telecoms sector remained very poor.

Only with the Government’s Three-Year Economic Salvation Program (1990-93) the role of telecoms sector was incentivized. At that time, telecommunications were recognized as a primary tool for the socio-economic development of Sudan. The program required the abolition of the monopolistic structure of Sudan’s telecoms sector and it called for admitting local and foreign private sector investments. Summing up, important investments were required in order to build the lacking infrastructure. 

The system is now based on three different subjects: the Ministry of Information & Communications, the National Telecommunication Corporation (N.T.C.), which is the regulator, and the licensed operators. In relations to mobile telecommunications the licensed operators are three: Zain Sudan (57 percent of market share in Q1 2011, license released in August 1996), Sudan’s Sudani (24 percent, license since February 2006) and South Africa’s M.T.N. (19 percent, license since October  2003). Sheer numbers explain that the most important player in the Sudanese theater is with no doubt Zain Sudan.

Zain Group is currently operating in seven countries of which six are located in the Middle East (Bahrain, Iraq, Jordan, Kuwait, Lebanon and Saudi Arabia) and one in Africa (Sudan). Before selling Zain Africa B.V. (which was present in 15 African countries) to Bharti Airtel in June 2010 for $10.7 billion, Zain was operating in 22 countries. Now Zain in Africa has operations only in Sudan, which is indeed a very relevant market with an interesting potential yet to be developed.

In February 2006, Zain purchased the remaining 61 percent stake of Mobitel, which was Sudan’s first mobile operator. This deal was valued $ 1.332 billion and thanks to this operation Zain obtained 100 percent ownership. Later, in September 2007, the company was rebranded to Zain Sudan and subsequently it renewed its license for a period of 20 years. Zain’s operations started in April 2008.

Q1-2011 data  the latest published confirm potential of the Sudanese market. The company was able to increase by over 20 percent its customer base from Q1-2010 and to remain consistently the market leader with a market share of 57 percent. Notwithstanding the fact that Q1-2011 was one of the more problematic period of Sudan’s history  because of the political instability (January 2011 referendum decided for the independence of South Sudan), Zain Sudan reported in local currency (Sudanese pound) a 13 percent increase in revenues and an 11 percent increase in Ebitda in comparison to Q1-2011. In U.S. dollars the results are not as positive as with the local currency because of a more-than-13-percent devaluation of the Sudanese pound versus the U.S. dollar between the beginning of January 2011 and the end of March 2011. The graph below by ExchangeRate.com shows this trend.

In specific, on January 3, 2011, 2.5 Sudanese pounds were required for $1 while on March 29, 2011, (around the end of Q1-2011) 2.87 Sudanese pounds were required for $1. This translates into an almost 13 percent devaluation in just three months. As a matter of fact, Zain Sudan’s net profit was impacted by currency variance. Zain Sudan’s operation reported in Q1-2011 a foreign exchange loss (F.X. loss) of $52 million while in Q1-2010 there had been an F.X. gain of $32 million. Another factor impacting its operations was a 12 percent tax increase on the operations as of February 2011. This tax in 2011 reached 15 percent  while in 2010 it was just 3 percent. All this said, Zain Sudan aims at increasing its market share through an acquisition and retention strategy.  

Zain Sudan is currently in negotiations with the new country to pay a fee aimed at extending its Sudan license and being entitled to operate in South Sudan. Elfatih Erwa,  Zain Sudan’s managing director (previously a Sudanese state minister and Sudan’s permanent representative to the U.N.) pointed out that Zain Sudan would continue operating in South Sudan as it had done during the last three years (Zain started its operation in Sudan in April 2008) when this territory was not yet an independent country. Things may change once a new specific license is agreed upon.

It’s interesting to underline that although the fee to be paid to South Sudan, Zain Sudan excluded the possibility of demanding a reimbursement to Khartoum’s government in order to compensate the new costs required for operating in South Sudan The reason is that Zain Sudan’s plan is to split the companies into two entities: one operating in North Sudan and one operating in South Sudan.   

While in the last three years, the company has invested $1.2 billion in the whole Sudan, in the last five years it has invested around $300 million for what is now South Sudan. But, according to Elfatih Erwa, Zain is devoted to expanding its 3G services in South Sudan and the company is investing in 2011 around $110 million in fiber and its core network. In fact, the company is ready to roll out a fiber network to the Red Sea. Being a landlocked country, this fiber network will incur high costs because it necessarily has to be rolled out through North Sudan or Kenya for access to undersea cables. In South Sudan 3G services are already offered, but internet access is via satellite and for this reason the capacity is quite limited. A fiber network could really be a sea change.

In dealing with the poor South Sudan the real challenge for Zain Group will be to balance the possibility of an untapped, although poor, market with the high costs required for providing telecom services. What is positive now is that with a stabilized political environment companies deciding to do investments in South Sudan may base their strategic plans on a sounder basis.


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