By Lucy Norton
It was clear from discussions at the Iraq telecoms conference in London last month that security is still a paramount issue for both existing and prospective investors in the country's fledgling telecoms sector. However, another form of instability was of immediate concern; namely the lack of a clear liberalisation policy. The Risk Advisory Group's Lucy Norton comments.
|~|Iraqman200.jpg|~|Iraq’s mobile penetration stands at approximately 25%, and despite the remarkable progress achieved by the three operators, remains below regional averages. |~|The lack of clear policy in Iraq's telecoms sector is apparent. Nine months since the Coalition Provisional Authority's licences to Iraqna, MTC Atheer and AsiaCell officially expired the government has yet to agree a strategy for liberalising the sector. The Ministry of Communications (MoC) has officially announced that four licences will be available.
However, there is confusion surrounding whether the ministry will be a player or a regulator in the new market; the former currently appears most likely. There would also appear to be disagreement over where the powers of the National Communication and Media Commission (NCMC) end and the ministry's begin. In the meantime Korek Telecom and Sanatel's networks in Kurdish Iraq continue to develop, apparently regardless of central policy developments.
In the absence of clear decisions regarding how many licences to award and by what means, the existing operators have found it difficult to invest in their networks under temporary licences. The most recent extension, for three months until December 2006, came last month and provided little room for large-scale capital investment.
There is also no doubt that the persistent and increasing levels of violence in Iraq have served to restrict investment in the country's telecoms sector to date. The instability has slowed the rollout and investment rates of the current operators. In the case of the mobile players, progress has been hampered by restricted access to facilities caused by fierce fighting. Facilities, especially generators, have to be constantly guarded to counter theft attempts. And, most gravely, insurgent groups have directly targeted staff, kidnapping and threatening personnel for either political or financial gain.
Negotiating these challenges has cost operators time and money, to the detriment of capital investment in Iraq. And while it would appear from the growth of mobile subscribers that the market is receiving substantial investment at least in this area — cellular penetration is estimated to be in the region of 25% — comparing capital spending across markets tells a slightly different story.
Take as an illustrative example Orascom Telecom's spending in Algeria compared with its commitments in Iraq. In the first two years of operation, Iraqna committed US$214 million in capital investment. This figure came in US$9 million under the amount spent by Djezzy just in its second year of operation, 2003, when in spent US$223 million. By 2005, Djezzy's annual capital spending had climbed to US$457 million. In the first six months of 2006, Iraqna had committed US$63 million.
The lack of investment in the country's fixed sector is clearer. Security concerns have made the provision of public services other than telecoms, such as electricity and water, a government priority. As a result, fixed market indicators in Iraq remain low by regional and global standards.
Fixed line penetration is currently less than 5%. Meanwhile, the number of internet users is estimated to be no more than 250,000. However, more importantly to the development of the entire infrastructure market and the subsequent service provisioning, Iraq still lacks backbone connectivity. This is slowly being addressed by the state-owned operator Iraq Telecommunications and Postal Commission (ITPC) and Nortel Networks.
A comprehensive fibre-optic backbone network rollout is planned up to the end of 2007. However, progress is slow and mobile operators, especially those with substantial infrastructure some distance from Baghdad, are increasingly frustrated by the lack of supporting networks. Without this infrastructure, they must invest in their own wireless infrastructure to provide inter-city connectivity.
Operational and physical threats posed by Iraq's lack of security have certainly contributed to this story of under investment. However, it is arguably true that it is security's impact on political stability that is having the greatest negative impact on development. It is because Iraq's security problems are seen to be thwarting efforts to build political consensus and effective policy that they are viewed to be so problematic by foreign investors. Indeed, the subscriber growth profitability levels enjoyed by the current mobile players are testament to the fact that security threats can be mitigated. However, operators' arguably restrained capital spending to date points to the inherent legislative uncertainty they still face.
The nature of Iraq's transition to having an elected government has played its part in constraining efforts to establish a clear policy for the sector. Since the entry of the mobile operators in October 2003 (they began operating in January 2004), there have been four governing authorities in Iraq. Only in December 2005 did the country vote for a permanent national assembly. This uncertainty has stalled the formulation of clear policy and regulation.
With a permanent ministry in place with a full term of office ahead of them, there is now the opportunity to start providing policy and regulation for the long term in Iraq. Part of this process would appear to be finalising clear licensing terms for the wireless local loop licences that were awarded just before the current minister Mohammed Allawi was elected to office. Investment in the backbone network should also be a policy priority. However, the most critical issue for resolution is the future liberalisation of the mobile market.
It would appear that the key issue for policy makers is the appropriate role of the MoC, NCMC and IPTC in the sector. There also appears to be real indecision regarding how best to realise critical government revenues from market growth. Licence auctions, a service provisioning role for the MoC and revenue sharing agreements are all options being evaluated. However, regardless of the final strategy adopted by the MoC it is clear that stability and clarity of policy would do much to mitigate perceived uncertainty in Iraq and trigger the investment the market needs to develop in the long term.
Lucy Norton is an associate at the Risk Advisory Group in London.