Fixed networks are ripe for expansion




Increased internet use across the region has been a big factor in the increased demand for lines, particularly in North Africa

By Mark Huband in Cairo

Financial Times, 8 October 1999

Governments and private sector operators throughout the Middle East have adopted a variety of strategies in the telecommunications sector, all of which have been dominated by the importance of responding to new needs while also attempting to meet existing demand.

The leap in demand for mobile telephones has been the most prominent feature of sectoral activity in the past two years. But an even greater amount of investment has been seen in the fixed networks which have currently reached between 10 and 20 per cent of the region’s population and are therefore ripe for expansion, upgrading and competition.

While full privatisation of fixed networks has yet to take place, markets from Morocco to Saudi Arabia have experienced deregulation, allowing private sector payphone services and card phones to rapidly become a feature of urban and rural landscapes. Generating interest and accelerating investment in fixed lines has largely depended upon the pace of privatisation, whereas newly established mobile systems have either been born into the private sector or relatively easily shifted into private hands following short periods of state control.

Determined to secure a significant share of foreign direct investment now being directed towards Middle East telecoms as a means of upgrading the network, the Saudi Telecommunications Company (STC) was established a year ago with the specific aim of broadening the role of foreign companies in its network expansion plans. Saudi Arabia currently has 2.4m fixed lines, 600,000 mobiles, 700,000 pager services and 6,000 data lines.

At the heart of STC’s strategy is the aim of trebling Saudi Arabia’s current capacity to meet growing demand from the 18m population. The system currently offers a penetration rate of 10.64 lines per 100 people, which is about half of the figure for countries of the Gulf Co-operation Council. Foreign investors have been competing for a share of the Saudi Arabian market since 1994, when a $ 4bn contract was awarded to Lucent Technologies.

STC, which was established as a joint stock company as part of the government’s privatisation programme, is now masterminding the TEP-8 project which will create a further 2.2m telephone lines. Five foreign companies have been competing for the $ 4bn-$ 5bn project, which is expected to be divided between all of them when aspects of the project are awarded in mid-2000. The project will also include provision of switchgear, fibre optic cables, wireless loops, intelligent networks and microwave transmission. Accompanying the larger projects have been moves towards deregulation in areas such as private pre-paid card phone facilities.

In Egypt, the prospect of the sale of 10-20 per cent of Egypt Telecom has intensified investor interest in what would be the sale of one of the crown jewels of the Egyptian state sector. A further 30 per cent is expected to be sold in the near future, although a full privatisation is not being considered. Telecom Egypt, which operates 4m landlines, is estimated to have a market value of E£30bn ($ 8.8bn).

Legislation passed in 1998 allowed private operators access to the market and led to the issue of two licences for nationwide public pay-phone systems of 20,000 lines each. France Telecom, which won the first contract, will pay the government 66 per cent of revenues, estimated at about $ 590m during the 10-year period of the contract. Landis and Gyr of Switzerland will operate the second system, also over 10 years.

Egypt is far ahead of Israel, where laws allowing private sector competition to the state-owned Bezeq Israel are now in force but no licences have been issued allowing competition with the monopoly landline provider.

Prospects for privatisation have been regarded in the region as a vehicle for attracting foreign investment as well as the only way of meeting growing demand for lines. While privatisation is a key aspect of economic policy in the majority of Middle Eastern countries, the pace at which governments have sought to reach their goals remains a clear distinction.

Morocco’s plans for a part-privatisation of the state telephone company Itissalat al-Maghrib attracted eight bids from investment banks hoping to secure the mandate for the first offering of shares, which is expected to raise $1bn early in 2000, when capital will be opened to private operators.

While Egypt is also moving towards part-privatisation of the fixed network, Tunisia has remained cautious about the benefit of privatisation in advance of further modernisation of the system.

Increased internet use across the region has been a big factor in the increased demand for lines, particularly in North Africa. The number of internet subscribers in Tunisia is expected to rise from 13,000 to 30,000 by the end of this year, increasing pressure for an expansion of the number of lines.. Government strategy now centres on expanding and upgrading the network before a partial privatisation is considered.

Marconi Communications of the UK is now embarking on a $19m upgrade to Oman’s fixed network, including the installation of fibre optic network between main cities, which may be expanded nationwide.

Similar upgrading is now under way in Syria, where the government aims to expand the fixed line network by 720,000 lines. A $41m contract for the expansion was awarded to Siemens, the German electronics and telecoms company, in May.

The project will involve expanding systems previously installed by Siemens, and is part of a longer-term plan to introduce a total 1.65m new lines.

© Financial Times