In virtually every Arab state, from the Atlantic coast to the Gulf of Oman, big changes are happening in the telecoms sector. State monopolies are being privatised, competitive mobile phone licences are being auctioned, laws and regulations are being updated, and private investors are getting the opportunity to take part in major new share offerings.

The impetus for change has come first and foremost from the need to keep pace with global developments and attract new private investment into the sector. The other main driver of change is the internet. Existing telecoms providers simply cannot keep up with the explosion in demand for internet access, and new private operations offering internet-related services are mushrooming all over the region. This is forcing even the most jealously-guarded monopolies to yield up parts of their empires, as looks like being the case with Etisalat in the UAE. It is also providing opportunities for the better-managed, established firms to spread their investments across the region, as Bahrain's Batelco has done through buying internet service providers (ISPs) in Saudi Arabia, Kuwait and Jordan.

September will mark the start of a season of major privatisation deals in the Middle East. The first will involve a 20 per cent strategic stake in regional giant Turk Telekom, for which bids are due on 15 September. Turkey is a more familiar prospect for international investors than most of the Arab states, because its telecoms sector has been open to competition since the early 1990s. The value inherent in the Turkish market is clear from the result of two deals already struck this year. The sale of a global system for mobiles (GSM) licence, to a group led by Telecom Italia, brought in $2,525 million, while the 11 July initial public offering (IPO) of a 10 per cent stake in pioneer GSM operator Turkcell raised $1,900 million. The Turk Telekom stake is expected to go for at least $3,000 million.

Next on the block will be stakes in Maroc Telecom and Telecom Egypt. The Moroccan government has decided to offer a strategic stake first, followed by a share offering.

Egypt is going for an IPO, and is reserving its options on offering a strategic stake later.

Of the two, the Moroccan deal appears to be the more straightforward. Maroc Telecom has a thriving GSM business, albeit now facing competition from the private Medi Telecom, and the Moroccan government has set up an effective regulatory body and legal framework for the sector. A team led by JP Morgan has been carefully laying the groundwork for the sale, and several international operators have expressed lively interest. The invitation to bid is expected to go out in September.

Matters are more complicated in Egypt.

The government is pinning its hopes on the Telecom Egypt IPO to bring in a lot of cash and galvanise the privatisation programme.

The company has a new board, including top-notch private businessmen, and the government is drawing on the skills of an army of American Egyptian telecoms executives to present the company's plans in a positive light. However, there are issues to be clarified over Telecom Egypt's plans to launch a mobile service, and some prospective investors say they would be more comfortable if a strategic partner was involved.

The depressed state of the Egyptian stock market is also a problem. The long-awaited IPO of Cairo-based Orascom Telecom closed in July oversubscribed, but had to be priced aggressively to pull in foreign institutional buyers. 'I hope the government learns a lesson from the Orascom Telecom experience and sets a realistic price for Telecom Egypt, ' says one Egyptian telecoms executive. The IPO is expected to be launched in October.

In the Gulf, the spotlight is on the planned privatisation of Saudi Telecommunications Company (STC) and Oman Telecommunications Company (Omantel).

Advised respectively by JP Morgan and Merrill Lynch, the two operators are understood to have opted to take the strategic investor route first, to be followed by an IPO.

Both countries are now working intensively on the drafting of a new legal framework.

While the groundwork is being laid for privatisation, telecom operators are pressing ahead with the task of upgrading their systems to accommodate demand for cheaper and faster access to the internet. One company that has done good business in helping to satisfy this demand is FLAG Telecom, whose fibre optic link between the UK and China has several landing points in the Middle East.

FLAG has signed five agreements so far this year to provide broadband access to New York via its cable system. Two of the agreements are with Telecom Egypt, which decided in July to upgrade its initial capacity to 155 megabits a second (Mbit/s). Saudi Arabia has signed up for 620 Mbit/s, the UAE for 155 Mbit/s and Jordan for 45 Mbit/s. Walid Irshaid, FLAG's vice-president for the Middle East and Africa, says that in the eight months since the Saudi deal was signed, 50 per cent of the capacity has already come into use. 'That tells us what the potential market for the internet is, ' he says. 'When the telecoms operator can provide a fast, cost-effective and high quality service, it will find a good response from the whole range of internet service providers and users.'

Irshaid says talks are now being held with Iran, Tunisia and a number of Gulf Arab states about further broadband links. He also sees potential for deals with Morocco and Algeria. FLAG is planning to start up its own Atlantic cable in March 2001, and has started work on a Pacific loop.

Within Middle East countries, the arrival of the internet has given rise to a host of new business initiatives, including ISPs, local broadband access providers, audiotext firms and ventures offering satellite links to the internet.

However, while some countries are surging ahead with new telecoms-related services, others are only just waking up to the possibilities. This offers fresh opportunities for the more intrepid investor. Algeria, for example, has decided to seek the services of international consultants to work on the modernisation of the telecoms regulatory system and to arrange the offering of a private GSM licence. The attractions of investing in a market of 30 million people have to be set against the security risks and the rudimentary state of the Algerian financial sector.

A second GSM licence is due to be offered to private investors in Tunisia in the next few months, and Syria has also indicated interest in upgrading its pilot GSM systems. Lebanon has said it plans to offer two GSM licences in September, after failing to agree terms with the existing pair of operators on upgrading their build-operate-transfer (BOT) contracts.

Middle East telecoms is entering a new era, and the message has finally sunk in that no one can afford to be left behind.

Bahrain

HIGH growth in internet and mobile phone services could not have come at a better time for Bahrain Telecommunications Company (Batelco). With the monopoly having reduced its international call charges by an average of 50 per cent since 1997, it has fallen to Batelco's global system for mobiles (GSM) and Inet businesses to maintain the monopoly's long record of rising profitability.

Like other PTTs in the Gulf, Batelco's mobile segment has been the undisputed star of its business. Last year 's 11 per cent rise in profits to BD 48.1 million ($126.5 million) was largely driven by a 45 per cent surge in mobile subscribers to 133,500, representing a market penetration of 20 per cent. The performance was greatly assisted by the launch of Batelco's prepaid mobile service, known as SimSim, in May 1999, which in the space of seven months attracted 44,100 customers.

Demand has continued into this year. When in early August Batelco announced that net profit before appropriations for the first six months of the year had climbed by 25 per cent to BD 27.7 million ($72.9 million), it also reported that the service had secured its 100,000th customer.

To satisfy the growth, Batelco is pushing ahead with a major expansion of its GSM network. Under a BD 7.5 million ($19.7 million) contract with Sweden's Ericsson, awarded last November, capacity will be increased in three phases by 80,000 lines to 230,000 by December 2001. Phase one, completed in the spring, added 20,000 lines to the existing network of 150,000. Phase two, due to be operational by December, will add a further 30,000 lines, while the remaining 30,000 lines will become operational by the end of 2001.

While demand on the fixed line network has been more subdued, rising by just 5 per cent to 165,400 in 1999, Batelco's internet service has managed double-digit growth. Last year, subscriber numbers jumped by 22 per cent to 15,200 and is expected to climb much further, given that internet penetration is only 2 per cent.

Batelco's internet business stretches well beyond Bahrain. Last year, it acquired a controlling interest in Kuwaiti internet service provider (ISP) QualityNet and formed an ISP joint venture with Saudi Arabia's Abdulrahman al-Jeraisy. Its investments have continued this year, having recently acquired a 75 per cent stake in Bahrain's Arabian Network Information Services Company.

Egypt

The big headline news in the Egypt telecoms sector is the upcoming initial public offering (IPO) of shares in Telecom Egypt.

However, this only tells part of the story.

The entire sector is a hive of new activity, as private investors respond to the government's drive to make Egypt a regional communications centre. Telecommunications & Information Technology Minister Ahmed Nazif has announced plans to invest $1,000 million over the next 12 months in creating a high-speed voice, data and image network that will enable Egypt to pursue its ambitions in this field.

The modernisation plans are aimed in part to convince prospective investors in the IPO that they will be buying into a company with a dynamic future, rather than an old-fashioned fixed-line operator resistant to change.

Creating this perception will be important, given that the government has decided not to bring in a strategic investor at this initial stage of the privatisation plan. Spreading the word will be not only the investment bankers working on the deal - ABN AMRO Rothschild and Commercial International Bank (Egypt) - but also a brand new board of directors, including some of the leading lights of Egyptian business.

The new chairman and chief executive of Telecom Egypt, appointed in June, is Akil Bashir, 55, who has worked since the mid1970s at the software development arm of the Alkan Group, one of the first private Egyptian companies to invest in telecoms and IT. He is flanked by Taher Helmy of the Cairo office of the US Baker & McKenzie legal practise, Ayman Laz of the Egypt Kuwait Holding Company, and computer company executive Adel Dannish, along with senior ministry official Tarek Kamel and existing Telecom Egypt executives Azza Turk and Gamal Shehata. 'This team is going to make a strong impression when they go out on the IPO roadshow, ' says one Cairo telecoms executive.

One crucial issue that the investors will want to clear up is Telecom Egypt's cellular plans. The company maintains that the global system for mobiles (GSM) licence it was awarded in 1996 remains valid, although two years later it sold its GSM operations to Egyptian Company for Mobile Services (MobiNil).

The agreements signed in 1998 with MobiNil and Misrfone specify that no new licence will be awarded until 27 November 2002, four years after Misrfone started its service, and that the award should be through an auction at a starting price of $515 million plus compound interest over four years. Telecom Egypt has made clear that it believes it is within its legal rights to activate its existing licence after November 2002, and officials are understood to be talking about setting up a 3-G network when the time comes. It will be up to investors to decide the merits of the case.

Telecom Egypt's 191.5 million shares were listed in January giving the company a market capitalisation of £E 19,150 million ($5,500 million). The IPO is expected to be launched in October, and will involve a 10-20 per cent stake. It will be the second Egyptian telecoms IPO of the year, following the Orascom Telecom offering in July that raised $320 million. The arrangers of that deal had to lower the offering price to get major Western investors on board, and analysts say it will be interesting to see what effect, if any, this experience has on the pricing of the Telecom Egypt deal.

Investors looking at Orascom Telecom had to make judgements about a wide variety of markets in Africa, the Middle East and even Asia, while the Telecom Egypt offering is focused on one country. One of the critical elements in the Telecom Egypt valuation will be the company's internetrelated activities.

Telecom Egypt has stakes in two new ventures that are investing heavily in internet infrastructure systems. It holds 20 per cent in Egyptian Company for Networks (EgyNet), set up in 1999 by National Telecommunications Company with a 10-year licence to set up and operate a backbone data services network, aimed mainly at financial institutions. Lucent Technologies of the US is working on a $51 million initial contract to set up the new system. Telecom Egypt is also an investor in Nile on Line, which has a licence to set up and operate a fibre optic digital network that will have the capacity to serve 2 million internet users. Cisco Systems of the US and Siemens of Germany are understood to be in line for contracts to set up the core network, and Lucent, France's Alcatel and Sweden's Ericsson are expected to receive orders for the access network.

Further revenue streams for Telecom Egypt will come from licences it has granted to private ventures providing specialised services.

One example is audiotext, for which two three-year licences were awarded in April.

The appointment of Nazif as minister has resulted in a rapid expansion of Telecom Egypt's horizons. If this message can be successfully transmitted to international investors, the IPO could be a catalyst for the revival of Egypt's economic fortunes.

Iran

IRAN's telecoms sector has started moving again in 2000, with attention focused mainly on expansion of the country's cellular network. Up to 1.4 million new mobile lines may be added during the year, raising the total number available to a population of more than 60 million to about 2 million.

Telecoms firms are waiting for a tender issue by the Telecommunications Company of Iran (TCI) in early 2001 for 400,000-1 million lines. Hopeful bidders say the exact number will not be known until the last moment.

In April 2000, TCI selected Sweden's Ericsson for an expansion project involving 400,000 lines. The scheme will expand the national network to 1.1 million lines in early 2001. The $35 million contract is being financed through a credit line from the French bank Credit Agricole Indosuez.

Ericsson is supplying the GSM 900 network, including a complete turnkey solution.

Plans to expand and upgrade the existing mobile network in Tehran finally started moving ahead during the year. The 390,000line network in the capital was set up by Finland's Nokia in the early 1990s and was expanded by Italy's Italtel and Germany's Siemens. However, the network is described by some as a mess. Nokia was in early 2000 called back to carry out an expansion of 200,000 lines and it has just won a further expansion order.

In early August, the Finnish company announced another contract from TCI for a network for 300,000 subscribers on the switching side and 650,000 subscribers on the radio network. As with the Ericsson contract, this involves expanding capacity as well as replacing existing equipment.

The Tehran mobile network will have a capacity of 1.5 million subscribers by mid2001. The network will then be dominated by Nokia and Ericsson.

There has not been much news out of TCI on fixed lines, which were to have been increased to 10 million in 2000. There were only small tenders in mid-year for three small fixed-line projects involving switches of 5 K to 20 K.

The outgoing parliament in early 2000 gave final approval for privatising the telecoms sector. The government's intention is to privatise most telecommunications, especially mobile services, but experts said in July foreign investors have yet to submit concrete proposals.

Jordan

JORDAN's second cellular telephone operator, MobileCom, will launch services on 15 September while Jordan Mobile Telephone Services (Fastlink), which has been in the market for four years, is sharpening its pencil on prices and moving into wireless application protocol (WAP) services. Jordanian subscribers are happily anticipating a war between the two operators that will bring prices tumbling down and improve service quality.

Beyond a $508 million boost to the treasury, the arrival of MobileCom is the first concrete result of the government's sale of a 40 per cent stake in Jordan Telecom to a consortium of France Telecom and Arab Bank in January 2000. The new management team at Jordan Telecom wasted no time getting MobileCom, a fully-owned subsidiary, underway with the award to Sweden's Ericsson of a $35 million contract for equipment supply just two months later.

Jordan Telecom has also moved quickly to upgrade Jordan's data communications and internet access network, signing contracts with France's Alcatel and Cisco Systems of the US. New equipment will support the development of an improved national internet hub with national and international connectivity through its FLAG Telecom cable connection in Aqaba. Jordan Telecom is promising a December launch for the network in Amman, with nationwide service by March 2001.

The new network is good news for Jordan's six internet service providers (ISPs) and six data transmission companies, which are themselves the product of a telecommunications sector liberalisation that began in 1985 when the then Jordan Telecommunications Corporation lost its monopoly of non-fixed line services. Other benefits have been the creation of a properly functioning nationwide network of payphones provided by two private companies and the introduction of two private paging services.

Fixed-line services are not being forgotten and Jordan Telecom anticipates adding a further 100,000 new lines a year. Regional connections are also due to be upgraded with the first improvements coming from a new fibre optic cable link to Israel and a microwave link to the Palestinian self-rule areas.

Following the MobileCom launch, Jordan Telecom is planning to launch its own data transmission and internet service before the end of the year. It will then be in the delicate position of offering services to both its cellular and ISP competitors. Jordan Telecom chief executive officer Pierre Mattei has promised fair treatment but the Telecommunications Regulatory Commission (TRC) will also need to be seen to play a stronger role. If all players in the field are effective, the changes will provide a major justification for the government's overall policy of economic liberalisation.

Lebanon

FIGURES recently issued by the Posts & Telecommunications Ministry show the sector remains a strong area of revenue growth for the government. Total profits are expected to rise to £Leb 970,000 million ($641 million) in 2000, representing a 32 per cent increase on last year, fuelled mainly by increased revenues from mobile phone operations.

The growth of mobile phone operations continues. The total number of mobile subscribers has reached 715,000, higher than the forecasts for 2000 of 600,000. The subscriber base will not be able to grow indefinitely within the existing structure, however. The two cellular operators, Libancell and France Telecom Mobile Liban, will be unable to expand their subscriber base to more than 380,000 each, or 740,000 in total, until the numbering system is upgraded. The average usage per month, on both pre-pay and postpay mobile phones, is at 600 minutes. On post-pay alone, it is 900-950 minutes a month.

The overall average usage is forecast to decline as the number of pre-pay phones used as a proportion of the total rises to 70 per cent from 60 per cent.

To meet a ready customer appetite for upgrades, new technology continues to be introduced. UMS was launched recently and the potential for introducing wireless application protocol (WAP) and a general packet radio service (GPRS) is being actively considered. However, a spokesman for Libancell says large-scale investments are unlikely in the next few months.

Privatisation of the sector remains elusive.

The government has announced that tenders for permanent mobile licences will be launched in the autumn. However, the will to divest has been called into question by the recent handling of offers from Cellis and Libancell to pay $1,350 million apiece to convert the existing build-operate-transfer (BOT) concessions into 20-year licences. Ongoing government claims for sums of $300 million, which it says is owing from each of the operators for breaches of contract terms, are likely to cause further delays.

Divestment of the fixed-line network is also on the cards. Several US and European banks have expressed interest in advising the government on the fixed-line sell-off and a selection is expected to be made in the autumn. A technical committee is in the process of being appointed. The government's preference as far as the fixed-line is concerned is understood to be for the sale of a strategic stake, followed by an initial public offering (IPO).

Morocco

MOROCCO is at the forefront of regional telecoms activity, having set a recordbreaking benchmark with the sale last year of a licence to set up and operate the country's first private global system for mobiles (GSM) network. Events since then have served only to accelerate the momentum.

Medi Telecom, the Spanish led consortium which won the licence, began operations in March, ahead of schedule. In July, ABN AMRO and SG Investment Banking won the mandate to arrange and underwrite the commercial debt tranches of Medi Telecom's Eur 1,000 million ($959 million) project financing facility. The International Finance Corporation (IFC) is also providing loans as part of the credit facilities - Eur 100 million ($96 million) of which is extended directly from the IFC's own books. Observers say the arrangers are unlikely to experience any difficulties placing the loan, as there has been a dearth of project finance opportunities in Morocco of late.

Competition Competition between Medi Telecom and state-run Maroc Telecom's GSM service has already pushed down prices and caused a dramatic increase in the number of subscribers. Maroc Telecom in July registered its millionth GSM subscriber; its target is to cover some 92 per cent of the population. However, penetration rates in the populous country are still sufficiently low to provide a lucrative market for operators interested in the upcoming privatisation of Maroc Telecom.

Plans for the sale have reached an advanced stage, with JP Morgan and the local Banque Centrale Populaire (BCP) selected to advise the government. The first step, the sale of a 25-35 per cent strategic stake, is scheduled for September, to be followed by an initial public offering (IPO) of a further 10-15 per cent on the local and an international bourse.

In the meantime, Maroc Telecom's value looks substantial. In December 1999, the company was valued at $5,000 million, substantially more than previously estimated, and the 55 per cent rise in 1999 profits to MD 2,034 million ($189 million) have helped add to the company's attractiveness.

Prospective bidders for the strategic stake in Maroc Telecom will be substantial players.

They must have at least 1 million fixed-line subscribers or 750,000 GSM subscribers, and a market capitalisation of $20,000 million or at least $1,000 million in paid-up capital. The offer is not open to companies with direct or indirect links to the Medi Telecom licence.

Among those to have already expressed an interest in the sale are French utilities and communications group Vivendi, France Telecom, SBC Communications of the US and Telecom Italia.

Qatar

DELIVERING telecommunications services is proving far easier for Qatar Telecom (Q-Tel) than maintaining its share price.

Despite strong growth, a global depositary receipt (GDR) listing in London and the appointment of a new board of directors, Q-Tel's shares are still trading below the issue price of QR 60 ($16.50), set 20 months ago when the government sold off a 45 per cent stake in the state monopoly.

The poor share performance has been blamed on technical factors rather than Q-Tel's fundamentals, which are solid. Its listing on the Doha Securities Market (DSM) in early 1999 coincided with the start of a slide on Gulf equity markets, which has still to be reversed a year-and-a-half on. Tight liquidity in Qatar has also not helped, nor has oversupply of Q-Tel shares in the market.

Q-Tel is hoping that increased access to its shares will boost the price. Following the GDR listing on the London Stock Exchange in July 1999, the new board of directors has approved plans to list the company on the Bahrain Stock Exchange and the Abu Dhabi Stock Exchange, which is to go live in the autumn.

The share price may not reflect it, but Q-Tel's financial position has been improving steadily. In the first six months of this year, net profit reached QR 357 million ($98 million), a 15 per cent rise on the corresponding period in 1999, while revenues were up 5.5 per cent to QR 662 million ($182 million).

The growth is being fuelled by strong demand for Q-Tel's mobile services. While subscriber numbers are increasing by a modest 3 per cent a year on the fixed-line network, which now has 157,000 subscribers, global system for mobiles (GSM) penetration is expanding rapidly. In the 12 months to the end of June, the number of subscribers climbed by 25 per cent to 87,149, giving a penetration rate of almost 17 per cent.

Further increases are on the cards. In June, Q-Tel launched a pre-paid GSM service, which attracted 5,000 new users in its first three weeks. Further services are due to be made available by the end of the year including GSM voice mail and short message.

To cope with the rising demand, an expansion of the GSM network is now underway, following the award in late May of a $21.6 million contract to France's Alcatel. The 12-month contract calls for the addition of 100,000 lines and provides for the introduction of wireless application protocol (WAP).

Other services are also enjoying growth.

At Qatar Cablevision, Q-Tel's pay TV division, the number of subscribers has now crossed the 35,000 mark and is set to grow further with the launch of the new MVDS pay TV service. The company also expects to see rising demand for its internet service, which at the end of 1999 had almost 9,000 subscribers.

Having been granted in November 1998 a 15-year monopoly over the telecommunications and pay TV sectors, Q-Tel is not expected to face any competition at home in the near future. Overseas, the company is studying a number of investment opportunities as part of a strategy to diversify its income sources. At present, Q-Tel's overseas interests are confined to satellite communications companies Thuraya, Intelsat, Inmarsat, Arabsat and ICO Global.