Mixed messages on Iraqi 3G

Sadik Al Jadir, an executive working for a regional firm operating in Iraq, has been waiting for the 3G era to come to his workplace for three years.

“I get emails on my BlackBerry but it’s not the same quality in terms of data services,” Mr Al Jadir says. “For example, it doesn’t give you web access like here in the UAE – at least not reliably.

“For normal users, I don’t see it as a huge limitation in doing business. But if one is a heavy user who requires remote services, a VPN with their laptop, it’s not going to work very well because of the 2G network.”

After years of deliberation and alleged pressuring of Iraqi mobile operators, the country’s communications and media commission (CMC) finally agreed to the introduction of 3G services last week at a cost of US$307 million each for its three operators – Zain Iraq, Asiacell and Korek.

For some market analysts, the introduction of 3G at such a turbulent moment for Iraq has come as a surprise amid a fully fledged battle between Iraqi national forces and Kurdish security forces against ISIL. But for others, the award of radio spectrum to operators seems like a tacit strategy for much-needed replenishment of government income after lower oil prices and widespread turmoil in the country.

The IMF says it expects Iraq’s economy to shrink 2.7 per cent this year, after growth of 4.2 per cent in 2013. The war against ISIL has greatly slowed the expansion of Iraq’s oil production, which is expected to decline to 2.9 million barrels per day, the IMF states in its report.

“We’re passing through a difficult time,” says Mohammed Allawi, the minister of communications from 2006 to 2007 and 2010 to 2012.

“Iraq really is a rich country, but most of the budget has been utilised by the previous government. Nothing has been achieved in the last eight years, except rampant corruption,” Mr Allawi says. “On top of that, the oil price has been falling, which means there will be less demand for oil production from now to 2017. So it makes sense that the cabinet passed 3G now.”

Telecoms is the second-biggest industry in Iraq after oil and gas. Satellite television and mobile phones were banned under the police state of the former president Saddam Hussein. The US-led war in 2003 rapidly introduced a new and thriving sector that generates $5 billion a year.

The 3G award was spearheaded by Iraq’s new premier Haider Al Abadi, and passed through cabinet in the absence of an auction. Mr Al Abadi previously served as the minister of communications from 2003 to 2004.

“His ideas regarding business are fantastic and he really understood the importance of 3G in the economic development of the country,” Mr Allawi says. The former minister, who resigned in 2012 amid clashes with the previous government, now says he is “optimistic about the future of the country”.

But Iraq’s introduction of 3G, already a more than decade-old technology, comes as much of the world has embraced 4G and is preparing to introduce 5G. Afghanistan, where there was a telecoms boom following the US-led war, already offers 3G through Etisalat Afghanistan and MTN.

The Iraqi telecoms operators have voiced their frustration, mostly in private, about how the 3G spectrum has been allocated with just eight years left on their licences. The short lifespan triggers questions over if and when they will they be able to break even after the $307m they each paid for the 3G spectrum and following the investment required to roll out the service.

Zain Iraq, Asiacell and Korek in 2007 paid $1.25bn for their 15-year operating licence. Zain Iraq is a subsidiary of the Kuwaiti operator, Asiacell is part-owned by Qatar’s Ooredoo, and Korek is part-owned by Kuwait’s Agility and France-based Orange Telecom.

Mobile operators have estimated they must invest almost $1bn each on equipment to get 3G up and running at a time when profits are plummeting amid an exodus of Iraqis after the ISIL takeovers of parts of the western province of Anbar and the city of Mosul in the north.

Zain Iraq recorded revenues of $1.24bn in the third quarter, a decline of 4 per cent year-on-year, “primarily seen from data and service outages and effect of internally displaced customers”, it said this month.

Net income fell 14 per cent to $224m.

Ranjan Sharma, a JP Morgan Mena telecoms analyst, has estimated the licence cost to offer 3G translates to about a 200 per cent premium on European levels.

“While the spectrum details have not been disclosed at this stage, our initial analysis indicates that the 3G licence is potentially issued at a premium to EU levels even though the spending power of consumers is significantly lower in Iraq.”

Mr Sharma, who covers both Ooredoo and Zain, says: “Licence cost and life [eight years compared with the 10- to 15-year standard licence terms in Europe] indicate it is likely to be more challenging to generate strong investment returns from the 3G licence.”

As part of the licence award in 2007, operators are obliged to pay royalty fees to the government through the ministry of finance. But the fees are not consistent.

The CMC regards Zain Iraq as a foreign company, despite being part-owned by Iraqis. As such, Zain Iraq is paying 18 per cent in royalty fees.

Asiacell, part-owned by Qatar’s Ooredoo, is considered a local company and is obliged to pay 15 per cent. Asiacell, however, provisions the remaining 3 per cent annually, just in case the government decides to riase its royalty fee to 18 per cent. Korek, part-owned by Orange, also pays 15 per cent.

Zain Iraq, which is obliged to disclose its earnings results because it is an affiliate of the Kuwaiti operator, paid about $316m in royalty fees last year after achieving revenues of $1.76bn. The payment was just below Zain Iraq’s net profit of $365m.

All three operators paid a combined estimate of $1bn a year in royalties to the CMC. Zain Iraq estimates a 10 per cent increase in revenues from the introduction of 3G.

But there are other tangible and intangible effects on the introduction of 3G for the Iraqi economy.

“For companies who want to invest in Iraq this level of service ... 3G, it’s very essential,” Mr Allawi says. “Nowadays the internet is covering most of Iraq but really the service level and capacity is very low.”

The introduction of 3G enables e-government services through apps, as seen in the UAE and elsewhere.

Mr Allawi says he thinks the introduction of 3G will cut down on a bloated government sector by reducing the number of public servants, and also reduce corruption.

“It will be cut down when you reduce the number of government employees that contact ordinary citizens,” Mr Allawi says.

“Also the performance will be much better, in terms of services offered by government and it should also open the door for more employment in different fields.”

halsayegh@thenational.ae

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