When Iraq’s Ministry of Communications named the three winners of mobile phone licences on 17 August last year, reactions were mixed. Many reacted with glee to the failure of Orascom Telecom, an Egyptian mobile phone giant, to win one of the three licences to run a network in Iraq for the next 15 years despite it being an incumbent in the country.
But there was also scepticism that Korek Telecom, an operator in the Kurdish north of Iraq and the company that took Orascom’s place, would be able to compete effectively with the other two winners: Kuwaiti giant Zain, and Asiacell, backed by Qatari operator, Qtel.
It seems that the doubts were well-founded. According to Zain’s estimates, Korek had just 1 per cent of all Iraqi mobile users at the end of March this year. Zain had 69 per cent and Asiacell had 30 per cent.
Korek’s poor performance has been unhelpful in an Iraqi market that would benefit from as much competition as possible. Overall, there is still substantial progress. Between them, the three operators had sold 11.9 million mobile phone subscriptions by the end of March this year.
Penetration, which was close to zero in the aftermath of the US-led invasion, has now reached 41 per cent of the population. The three 15-year licences awarded in August, replaced temporary licences granted by the Coalition Provisional Authority (CPA) in December 2003.
The new licences were to provide the Iraqi government with much-needed funds and the Iraqi telecoms market with three operators that could invest in network infrastructure safe in the knowledge that they would be able to operate in the country for the foreseeable future.
The operators of the CPA’s temporary licences – Asiacell, Orascom and Zain – all attended the ministry’s auction in the Jordanian capital Amman in August 2007. They were joined by, among others, Korek, which had been operating in northern Iraq without a licence from the central government in Baghdad.
Korek was established during the 1990s when Western governments policed a no-fly zone above the Kurdish areas of Iraq, allowing businesses to set up independently of the Baath party for the first time.
The ministry organised the bidding in rounds. Each time one company increased its bid, all the operators were asked to commit to the new price or withdraw from the bidding. Late in the afternoon of 17 August, the only bidders left were Asiacell, Korek, Orascom and Zain. When Korek raised the price of a licence to $1.25bn, Orascom withdrew.
Korek, which had just 550,000 customers at the time of the auction, is in a different league from its rival operators. Asiacell and Zain are powerful global businesses with experience in multiple markets behind them.
Ultimately, they also have the governments of their respective home countries to call on in case of a crisis.
Asiacell’s parent, Qtel, is 55 per cent owned by Qatar’s government and Zain is 24 per cent owned by the Kuwaiti government.
When it won its long-term licence last August, Korek’s network was largely limited to the land controlled by the regional government since 2003. It had complete network coverage of just three out of Iraq’s 18 provinces – Dahuk, Irbil and Sulaymaniyah – and partial coverage of three neighbouring provinces: Diyala, Kirkuk and Ninawa.
Despite the uncertainty around its financial resources, Korek committed itself in May to a 12-month spending programme costing up to $400m that should see it expand beyond its heartland in the Kurdish north.
By the end of May next year, Korek will become a nationwide mobile network, says chief operating officer Hamid Akrawi. The network has already been extended to cover all of Kirkuk and Ninawa provinces, including the two provincial capitals, Kirkuk and Mosul. “We have already started planning for the nationwide network,” says Akrawi. “It will take maybe six months to one year and it will cost us between $300-400m.”
There are obstacles to the company’s plans, however. It has yet to appoint a network infrastructure supplier to carry out the work, and any big contract would be a significant drain on Korek’s cashflow. As Korek does not disclose its financial performance, it is impossible for outsiders to judge whether it has the money it needs.
Wireless Intelligence, the data-gathering arm of the GSM Association, estimates that Korek had 570,000 customers at the end of September 2007, but in the absence of better operational information from Korek, this figure simply remains guesswork.
The business is certainly much smaller than its two rivals. In February, the Communications Ministry in Baghdad announced that it had extended the deadline for payment of the licence fees. Asiacell and Zain have both confirmed that they were ready to pay, but Korek has so far declined to confirm that it has the money for the licence.
If Korek lacks the financial resources to compete nationally, the most straightforward answer to its problems would be to form a joint venture with a well-capitalised foreign operator.
In February, the chief executive officer (CEO) of Etisalat, the UAE telecoms giant, announced that his company was close to announcing a joint venture with Korek. But an announcement has not been forthcoming.
“We are still in negotiations with Etisalat and we have not finished the deal yet,” says Akrawi. “We hope to come to a conclusion, but we do not know when because this is a very complicated deal.”
Korek tried to form a joint venture with Orascom Telecom immediately after the latter lost out in last August’s auction. News that the talks had failed only emerged in December, when Zain announced that it had bought Orascom’s Iraqi assets for $1.2bn.
The acquisition of Orascom Telecom’s 2.8 million customers in Iraq took Zain’s total for the country to 7.1 million customers at the end of 2007, putting it far ahead of Asiacell’s share of the market.
Zain announced that it had 7.9 million customers at the end of June this year. Asiacell, which has also begun operations in the three provinces controlled by the Kurdish government, had 4.1 million customers at the end of March.
While Korek is expanding into central and southern Iraq, Zain is also building its presence in the area controlled by the Kurdish Regional Government. A deal between Baghdad and the regional government in Irbil in February this year gave Zain access to the Kurdish-speaking north for the first time.
Before the deal, says Ali al-Dahwi, the CEO of Zain’s Iraqi operation, the company had been denied access to the region.
Although Zain will not disclose how much it plans to spend on the expansion of its network, it hopes to launch mobile phone services in the Kurdish provinces of Dahuk, Irbil and Sulaymaniyah by the end of this year.
Al-Dahwi is also expanding the Zain network into the vast western province of Al-Anbar and the largely Sunni provinces of Diyala and Salah ad Din. Zain has only been able to expand into these areas this year because the insurgency there has partly subsided.
The deal between Baghdad and Irbil erodes Asiacell’s advantage over Zain in the north.
When the CPA first awarded temporary licences, each of the winners was given its own part of Iraq to develop. Asiacell, which is 51 per cent owned by Kurdish investors represented by chairman Farouq Rasool, was given the north.
From its headquarters in Sulaymaniyah, Asiacell was able to expand into the rest of the country when the Baghdad government converted the temporary licences into nationwide permits to offer mobile phone services.
The Irbil government asked Zain and Orascom to pay for a second licence fee to operate in the provinces under its control. They refused, leaving the north to Asiacell. The lack of competition played to Asiacell’s advantage in 2007 when a dispute between its largest shareholders led to a nine-month tussle for ownership of the company.
At the beginning of the year, Asiacell’s chairman, Rasool, filed for voluntary liquidation of the company in the Cayman Islands, where the company was domiciled, after a dispute with Kuwait’s Wataniya, which had owned 40 per cent of Asiacell since its foundation at the end of 2003.
Rasool invited MerchantBridge, a Luxembourg-based banking institution, to take over the 49 per cent of the company that he did not own.
The bankers were given a mandate to find another international telecoms operator to finance Asiacell.
Shortly before the licensing round in August 2007, MerchantBridge sold roughly 31 per cent of the firm to Qtel, which, coincidentally, had bought out Wataniya just a few months before.
As a result, Iraq now has two well-capitalised operators that will soon both have nationwide networks.
However, a country with a population of more than 29 million people needs at least one other serious operator to have a competitive market. Korek needs to hurry up and find a partner.