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Wed 5 Nov 2008 04:00 AM

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Iraq's regulatory woes

Healthy competition is helping develop Iraq’s telecoms sector, but a regulatory vacuum is leading to doubts about the market’s potential.

Healthy competition is helping develop Iraq’s telecoms sector, but a regulatory vacuum is leading to doubts about the market’s potential.

For most telecom professionals, Iraq holds huge potential for growth. With a population of some 28 million people and relatively low mobile and fixed-line penetration rates - about 53% and 5.2% respectively in 2007, according to Arab Advisors - Iraq is rightly viewed as a market with huge growth potential.

Iraq is also home to the world's second biggest proven oil reserves after Saudi Arabia, according to the US Energy Information Administration, and this is likely to help fund big infrastructure projects in the coming years as the political and security situation in the country improves.

It is not at all unheard of in the Middle East to see the government control the international gateways. It is a lucrative business, of course, and some governments still appear hesitant to let go in that area. - Milan Sallaba.

After the fall of Iraq's Baathist regime in 2003, the country had just one state-run landline operation, and no mobile services.

Five years on, Iraq is more competitive market than most of its Southern neighbours.The country has five cell phone operators including Asiacell, Zain Iraq and Korek Telecom. The fixed-line sector is also increasingly competitive, with IPTC (Iraq Post and Telecom Corporation), the country's legacy copper network, competing with fixed-wireless networks Kalimat Telecom and Itisaluna Abr Al Iraq.

But despite strong, growing demand for fixed and mobile voice and data services, the market has its share of challenges for both private and state-run operators.

And the main bugbear for the operators at present is the poor state of telecoms regulation in the country.

Indeed, Iraq's telecoms regulator, known as the CMC (Communications and Media Commission), has been without a director since about April 2008, when the previous head, Dr Siyamend Othman, completed his term in office.

With the CMC languishing, regulatory decisions are now being made by the Iraqi government's Ministry of Communications [MOC]. The situation is far from ideal, as the Ministry also oversees IPTC and SCIS, a state-owned company that provides internet services, and so lacks the impartiality and independence required by a regulator.

The situation is a major concern for Iraq's operators, most of which were partly attracted to the country because they were impressed with its independent regulator. But since the demise of the organisation, operators are becoming increasingly frustrated with a lack of information and clarity about new regulations. They are also concerned about whether past regulatory decisions made by the CMC will be overturned.

This has resulted in what many operators refer to as a "regulatory vacuum". The subject dominated October's Iraq Telecoms conference in London, which attracted key representatives from all of Iraq's operators, as well as vendors and regulatory and government officials.

"With respect to the Iraq telecom market, there is a huge potential but the main problem we are facing is a vacuum in the Iraqi telecom regulatory board," says Wilson Varghese, CEO of Kalimat Telecom.

"At the moment the regulator doesn't have a head to lead it. Ever since Dr Siyamend completed his term of office, he has not been replaced and it is basically handled by the Ministry of Communications, which is not really fair.

"Almost all the operators bid for their licence and took the licence because it was an independent body doing the regulation in Iraq. And now since that is not there, everyone is facing a problem.

"We have been asking why this is happening and explaining that we need a regulatory head as soon as possible. They [MOC] are working on it but so far they have not given us the assurance that they will be doing it, and they haven't given us any timetable," he adds.

Varghese is concerned that key points on Kalimat's licence, which the company acquired back in 2006, including provision for its own international gateway and to lay fibre, may be taken away from the company.

This level of doubt means that Kalimat and its rivals face a tough choice between investing in infrastructure and then possibly being told they have no permission for it, or delaying plans at significant cost and risk.

"What you have on the licence has to be guarded by the regulator," Varghese says. "At the same time, the regulator is the one to mediate between the operators and to formulate structures for interconnection and other issues between the operators and government," he adds.

Dr. Nasi Abachi, Kalimat's chief technical officer, is also familiar with the headaches caused by a lack of regulation. He points to high interconnection fees as one of the main problems. "If you don't have interconnection with other large operators with reasonable fees, you have a big problem.

"If there is no regulatory body to make sure that the interconnection is cost-based, rather than market-based, it causes problems, because when a new WLL [wireless local loop) operator goes to a large existing operator controlling the interconnection, they are usually asked to pay very high interconnection fees," he adds.

"This has the effect of making the new players pass on prices to their subscribers that are very high and uncompetitive, and this stifles competition and can impede the progress of the new players very much. We are hoping to have a better regulatory environment in future," Abachi says.

"This is something we would like to see improve in Iraq. The regulatory atmosphere now is very vague. "The CMC, the main regulatory body has had no CEO or director and thus there is no leadership. Even the government does not seem to be decided whether to keep this body or not."There has been some speculation concerning the reasons behind the decline of the CMC, with rumours that the government is intent on giving an advantage to the state-run telecom operations.

But IPTC and SCIS disagree. Indeed, they claim that a lack of regulation is also difficult for them, making planning difficult, just the same as the for the private operators.

Kassim Mohammed Jassim Al-Hassani, director general of SCIS, Ministry of Communications, an organisation that runs internet services in Iraq, agrees with private operators such as Varghese that a strong independent regulator needs to be put in place soon.

If there is no regulatory body to make sure that the interconnection is cost-based, rather than market-based, it causes problems, because when a new WLL operator goes to a large existing operator controlling the interconnection, they are usually asked to pay very high interconnection fees. - Dr. Nasi Abachi.

"There is a vacuum. The regulator should be there. Operators are complaining because nothing is being done. Parliament has to make a decision soon," he says.

"Pressure should be put on parliament to select a suitable person [to head up the CMC]. There is no point of the telecom regulator if there is no leadership."

However, on an upbeat note, Al-Hassani is optimistic that the situation will be resolved soon, perhaps even by the end of the year.

Whether or not a new chief is appointed to head up the CMC, it looks likely that individual operators will not be able to operate their own international gateway.

Varghese thinks Kalimat will be denied an international gateway. GSM operators have already been informed that they will have to use the government's gateway, and Varghese expects to be told the same thing. "We presume that yes, we will be [losing the gateway]," he concedes.

Al-Hassani confirms that Iraq's mobile operators will have to use a government run international gateway. "There is a mobile licencing issue to do with the international gateway. At the moment, mobile operators had their own gateway.

"The government decided it wanted to have an international gateway and that all of the operators would have to go through it. We have an order from the government that everybody has to use the Ministry of Communications' gateway," he says.

For Milan Sallaba, partner at management consulting firm Oliver Wyman, the situation is not unusual. "It is not at all unheard of in the Middle East to see the government control the international gateways," he says. "It is a lucrative business, of course, and some governments still appear hesitant to let go in that area.

"It basically monopolises international traffic and very often has a negative impact on rates, compared to more open markets," he continues. "For the consumer this is bad news, of course. With liberalisation of the markets, nonetheless, I would expect operators to be allowed to manage their own gateways," he adds.

Network rollout

Despite these problems, Iraq's operators remain optimistic about the overall outlook in Iraq - a sentiment that is reflected in the continued, rapid rollout of their networks. For example, Ali Al Dahwi, CEO, Zain Iraq, says his company has pumped some US$4.25 billion into developing its network, which it acquired from Orascom in 2007.

Meanwhile, GSM mobile operator Korek Telecom is branching out from its Kurdistan-Erbil stronghold to build a high capacity network throughout Baghdad. The company also plans to increase its network capacity to more than 1 million customers and expand coverage to neighbouring provinces and eventually the rest of Iraq.

Kalimat is also driving ahead with ambitious plans. The company, which offers fixed-wireless voice and data services, has already started offering services using CDMA Rev-A and WiMAX to users in Iraq's main cities, and is targeting to cover Baghdad, Basra and Kirkuk in 2008, with the rest of the country due to be covered by the second phase of the rollout in 2009.

"At the moment we have made an investment of US$98 million.

"By the end of 2009 we anticipate that we will have invested $275 million, and the complete project is estimated at $500 million," Varghese says.

Varghese anticipates that Kalimat will gain about 5 million household and business subscribers in four years, which is almost 20% of the market share.

He estimates that about 70% of Kalimat's revenue will come from voice, and about 30% data. And of this business, the majority - more than 80% - is expected to be with household customers, with the remainder coming from business customers.

Al-Hassani of SCIS adds that his organisation is also investing a significant sum in data networks for the government and private sectors throughout Iraq.

"For the private and public sectors, we are giving licences to private companies. We have already licenced broadband DSL for the whole of Iraq as well dial-up, and we have almost finished a licence for WiFi. In the near future we will be licencing WiMAX for public and business use.

"For the government we have our own wireless broadband technology which is linking all the ministries, around 40 of them altogether. We're investing more than US$15 million for government data infrastructure," he says.

He adds that SCIS recently signed an agreement with Flag Telecom worth US$36 million for a submarine fibre optic cable from Basra to Kuwait and Iran, and to the Gulf, the Red Sea and Europe.

Fibre will eventually also cover all of Iraq. "That will reduce the price for voice and internet services.

"We already finished the first phase and it should be completed by the end of 2009," Al-Hassani says.

Iraq fact file

Population:28 million

Mobile penetration in 2007:53%

Fixed-line penetration 2007:5.2%

Main operators:IPTC (incumbent operator), SCIS (data), Asiacell (mobile), Zain Iraq (mobile), Korek Telecom (mobile), Itisaluna (fixed-wireless), Kalimat (fixed-wireless).

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