Iraq’s mobile operators have been relatively unscathed by the violence associated with Isis’ brutal advance across large tracts of the country. As significant users of the country’s mobile communications networks, the jihadists have had little incentive to attack telephone infrastructure. That comes as some relief in the circumstances.

Even so, the three major mobile operators, Asiacell, Zain Iraq and Korek, have all been affected by the deterioration in Iraq’s security situation and its knock-on effects on the economy.

Asiacell, the second-largest operator in terms of subscribers and majority-owned by Qatar Telecom, saw its profit for the first half of this year shrink by 36.3 per cent to ID205.4bn ($177m), compared with the same period in 2013. This was despite a 9.4 per cent increase in customers to 11.6 million. Revenues were down nearly 8 per cent to about ID1 trillion.

Conflict effects

The conflict has clearly had an impact. “The first half of 2014 has been a challenging period for Asiacell due to the ongoing security situation in some parts of Iraq,” said the firm’s chairman, Faruk Rasool, presenting the financial results on 1 September. Mostly, this has been due to the dislocation of subscribers from one city to another.

Rasool said the decline also reflects growing competition in the Iraqi telecoms market. Asiacell is having to fight off stiff competition from the largest operator, Zain Iraq, which has almost 16 million active customers (subscriber numbers grew by 18 per cent in the first quarter of 2014).

All Iraqi telecom groups also suffer from excessive bureaucracy, and that has prevented two of the operators from proceeding with their stock market flotations.  They are obliged to list at least one quarter of their shares on the Iraq Stock Exchange (ISX), as part of their $1.3 billion licences issued in 2007, under regulations introduced in 2011.

Asiacell’s initial public offering (IPO) in January 2013 doubled the ISX’s market capitalisation overnight, and it is now a $5bn company. As the only telecoms group on the ISX, it boasts 50 per cent of the market share on the bourse. The firm’s $1.2bn IPO was the biggest in the Middle East and North Africa region since 2008. However, despite some dividend payments, the share price performance has mirrored the underwhelming financial results. When Asiacell went public, the shares were trading above ID20; now, they are a few dinars below that level. 

Bureaucracy setback

“The biggest issue facing the Iraq telecoms sector is not the security and violence, which obviously has a dampening effect on the entire economy,” says Zaab Sethna, a founder of Northern Gulf Partners, an Iraq-focused investment firm. “In fact, red tape is one of the main issues holding the sector back.”

Excessive bureaucracy, inconsistent procedures and vaguely written regulations affect all businesses in Iraq, but have proved particularly troublesome for telecoms firms seeking a public listing.  For example, the wording on the listing regulations is so vague that by some interpretations, it might be possible for Zain or Korek to list without actually having to go through with the actual selling of shares to the public. 

Red tape has played a role in holding back Zain’s offering, with numerous hurdles placed in the path of its transformation from a limited liability company to a joint stock firm. By law, an Iraqi company has to be a joint stock firm before it can list on the ISX.

In Zain’s case, it is understood to have taken two years before the company obtained approval for its transformation, and a further year for the managing director and executive team to be approved by the companies registry.

Approvals for key appointees also have to be obtained from government security agencies, a hangover from Baathist-era Iraq. That has also introduced delays. Nonetheless, Zain has now completed the conversion process, establishing a locally domiciled joint stock company known as Al-Khatem Telecommunications Company. It has since held its first annual general meeting and has elected its board members.   

Shwan Taha, founder of Melak Investments, an investment advisory firm in Iraq, which has themandate for the Zain Iraq IPO, confirmed to MEED that the ease of doing business in Iraq remains a major issue, but is not the only challenge. “Bureaucracy is one side of the problem, the other is geopolitics,” he says. “When we did the Asiacell offering early last year, things looked more stable in Iraq. Today, you turn on CNN and you soon realise that things are not calm in Iraq. The insecurity exacerbates other problems.”

Foreign investors

There is still hope in some quarters that Zain will be in a position to go ahead with an IPO in the first half of 2015, although foreign investor appetite may be limited if the political climate does not improve substantially.   

Foreign investors acquired 70 per cent of Asiacell’s IPO in early 2013. Such outside interest may prove difficult to attract in the current climate.

“This is Iraq,” says Taha. “We’ve no idea if there will be sufficient appetite. What we have to do is list it and see.”

Zain still has other hurdles to navigate before its IPO will be ready to launch. Legal disputes with the telecoms regulator have proved a vexing issue. Fines have been imposed on the company on account of alleged mistakes in assigning phone numbers to subscribers, as well as for the delay in the public listing. The Finance Ministry has also been in litigation with Zain and Korek over tax issues.   

“Zain has at least four fairly significant legal issues outstanding, all of which will affect the valuation of the company – and the valuation is a key part of the listing process,” says Sethna. 

Whether an IPO by Zain or Korek will really change the market significantly is another question. While Asiacell’s IPO was large, the public take-up of the offering was limited. Post-listing, existing shareholders largely traded blocks of shares with each other, yielding little substantive change in the ownership structure.   

Flotation unnecessary

The IPO process is not driven by the need to raise capital. Iraq’s telecoms firms are sufficiently cash-rich and do not need to raise funds through a listing. The operators have little debt and enjoy fairly robust cashflow. When it comes to investing in expansion, and rolling out 3G or even 4G services, lack of cash is not likely to be an issue.   

Zain reported in July that an Iraqi court had lifted a freeze on future revenues, following the dismissal of a $4.5bn lawsuit over its 2007 acquisition of Iraqi telecom operator Iraqna from Egypt’s Orascom Telecom for $1.2bn.

Korek, the Kurdish mobile operator that has a presence across the country, remains the smallest player, with an estimated market share of about 13 per cent. Its IPO looks to be even further away than Zain’s.

Although it does not publish financial results, Korek will have to prove it is sufficiently profitable – another legal requirement of listing. The firm has also yet to make the transformation to joint stock company status.

Korek – in which France Telecom and Kuwait’s Agility hold stakes – claims a market share of 70 per cent in the northern Kurdish region of Iraq, but this is a small slice of the larger federal pie.

“The main issue with Korek is that they are finding it difficult to compete in Iraq outside their core area,” says Sethna. “They only have a dominant position in two provinces, Erbil and Dohuk, and are competitive in a couple of others. But in the rest of the country, they find it a struggle to compete and they don’t have the kind of infrastructure to ensure service quality.”   

Phone towers

One of the big challenges for mobile operators in Iraq is that they are not allowed to share phone towers. In most countries, third parties own the towers and are responsible for their upkeep, enabling mobile operators to take them off their balance sheets. In Iraq, the government is looking to encourage operators to build as much infrastructure as possible in order to jumpstart connections in far-flung provinces. As a result, it insists the operators own the towers, preventing them from sharing them among rival operators.

This has proved a particular challenge for Korek, which owns fewer towers than the two larger operators. That has undermined its service quality in some areas. The firm is seeking to rectify the situation, for example by awarding Ericsson a three-year services contract under which the Swedish group will provide provisioning and field maintenance services including day-to-day services for its network in Baghdad.

Iraqi mobile customers, meanwhile, keenly await news of progress on licences for 3G internet services, as pressure intensifies for an upgrade on the 2G services. Korek had hoped to launch a 3G network this year, but is waiting on the government to release the necessary spectrum frequencies.

With mobile penetration exceeding 90 per cent at 2G, there is sure to be strong uptake for 3G services.  There are still major opportunities for the incumbent mobile operators in Iraq, says Taha. “Iraq is a difficult market, but it is a hungry one, and the population is large and not poor. If you operate a mobile service correctly, the rewards are there for the taking.”