Given the state of world telecoms stocks, favourable comparisons are inevitable. After the disastrously bad year the global sector endured in 2001, 2002 saw shares remain moribund while the WorldCom collapse rubbed salt into already painful wounds. By contrast, Middle East telecoms providers enjoyed healthy growth and were often able to capitalise on the weakness of their international rivals to gain new market share in the region.
Capital expenditure on telecoms in the region makes for yet more positive reading. In 2002, Middle East and North Africa (MENA) spending was down only 5 per cent against a world decline of 15 per cent, according to a December report prepared by the US' Pyramid Research. And unlike global spending, MENA capital investment is projected to rise by 10 per cent to nearly $4,000 million in 2004.
But the picture is fractured along geographical and technological lines. Put simply, growth will be technologically driven in the GCC states, and fixed-line and GSM driven in North Africa and the Levant.
According to Pyramid, Egypt will lead the growth. It is forecast to spend some $2,585 million in 2002-04 on its fixed-line services alone. This comprises about 23 per cent of total MENA spending on all telecoms over the period. Indeed, so strong is the demand for fixed-line services that GSM subscriptions are unlikely to overtake it before 2007. The reasons for the new spending are obvious: Egypt now has only 7.6 million fixed lines and 4.3 million GSM lines for a population of over 65 million. Moreover, new capital investment was curtailed last year as the post-11 September economic crunch took hold.
Other North African states are also spending strongly on basic infrastructure. Morocco, Algeria and Tunisia are each expected to spend more than $1,000 million between 2002 and 2004, more than any other Middle Eastern countries except Egypt and Saudi Arabia.
The rest of the GCC is not lagging far behind. Although much of the Gulf has a surfeit of basic infrastructure, there is still a need for some fixed-line expansion. It is also notable that over the next two years, capital investment in GSM services in the Gulf - rising to $545 million by 2004 from $371 million in 2002 - will actually overtake spending on the fixed network as operators strive to increase the market penetration levels. These already stand at 60 per cent in the UAE and about 50 per cent in Bahrain.
For many Gulf operators, this can best be done through introducing next-generation technology. The rapid increase in data traffic across fixed and GSM services has caused significant demand for 2.5G in GCC states, while the UAE is leading the fast-followers with plans to install 3G services now under trial.
But introducing next-generation services should not be seen as a financial panacea. 'Most of the regional operators want to be seen as progressive - adopting new technologies and innovative service offerings,' says Ibrahim Kadi, head of the International Telecommunications Union (ITU) Arab regional office. 'But they certainly don't want to put in lots of investment for very little or uncertain return. Business decisions must be based on market needs and right now the customer demand in the Arab region is for voice and text infrastructure, rather than data.'
Almost all capital expenditure is still being made by monopoly holders. A vital question for the region is how far the privatisation of many of these holders and the introduction of competition to their markets will affect future spending patterns.
Theoretically, new technologies will again be the winners. As markets become saturated with basic fixed-line and GSM services, operators will seek a competitive edge by providing next-generation services. For example, when Bahrain introduces competition in the telecommunications sector this year, the incumbent Bahrain Telecommunications Company (Batelco) and the new licence holder are expected to introduce 2.5G services to attract new custom.
Financing should certainly not be an obstacle to providing new services. Middle East providers generally enjoy healthy balance sheets, mainly as a result of operating monopolies.
However, the limited size of GCC markets means Gulf operators need to look around for new growth opportunities, and in this they are well positioned to take advantage of the troubles now affecting the global industry.
One regional operator that has proved it is possible to expand even with a small subscriber base is Orascom Telecom (OT). In the late 1990s the company embarked on a spectacular spending spree, buying licences across sub-Saharan Africa and in the MENA region. Companies looking to do the same thing, however, can also read a cautionary lesson into OT's expansion: it grew too fast and over the past 18 months it has divested non-core assets in an attempt to alleviate a significant debt mountain.
OT was seeking by the end of 2002 to sell its 80 per cent stake in Telecel International, which operates 12 GSM licences in sub-Saharan Africa. It is also reducing its investments in the MENA region. In October, it sold 50 per cent of its stake in Tunisia's GSM licence to Kuwait's National Mobile Telecommunications Company (Wataniya). More recently, it offloaded in late December its 96.5 per cent stake in Jordan Mobile Telephone Services (Fastlink) to another Kuwaiti company - Mobile Telecommunications Company (MTC).
As the two cases highlight, retrenchment provides new opportunities for Gulf operators. Batelco recently showed interest in Morocco's abortive attempt to introduce a second licence to run the fixed-line network. Qatar Telecom (Q-Tel) and Emirates Telecommunications Corporation (Etisalat) are also looking at investment opportunities in the region.
The expansion of regional telecoms companies goes hand-in-hand with market liberalisation. In 2003 the Middle East will put many of its liberalisation plans to the test and, so far, the omens are mixed. In addition to Bahrain's liberalisation, Lebanon is also tendering for new GSM licence-holders, following the resolution in December of a long-standing dispute with the existing operators LibanCell and Cellis. Bidders have until 10 February to respond. Elsewhere, Telecom Egypt is looking for a strategic partner for its GSM services.
Not every liberalisation programme is moving so quickly. In Saudi Arabia there is expected to be a new data licence issued for tender this year, but the more lucrative second GSM licence will not be tendered until the end of 2004 and then probably not to international companies. There are also fresh opportunities for Oman to reinject some momentum to its search for a strategic partner for Oman Telecommunications Company (OmanTel), which have been previously stymied by the poor condition of the international market.
'There is good advancement in liberalising some markets, but it is still slower than in other parts of the world, such as southeast Asia or Eastern Europe,' says the ITU's Kadi. 'If the current - rather cautious - pace of reforms continue, I am not hopeful that we will catch up with other markets.'
Liberalisation throws up difficult issues for the Middle East - particularly the danger of job losses as companies cut back to fight off competition. Saudi Telecom in 2002 reduced staff significantly through early retirement programmes. In some countries where privatisation has preceded actual competition, some analysts say little is really changing in the way that companies operate. There are also some questions as to how far competition is necessary in some of the smaller and wealthier markets - in Bahrain, for example, there appears only limited opportunity for growth. But for all that, liberalisation is still seen as imperative for enlarging the region's economies and in bringing down end-user costs.
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