Telecommunications in the Middle East

Over the past several years, the telecommunications sector has made a strong showing in the Middle East region. For example, several years ago, the Internet was virtually non-existent in the Middle East. Today, it is offered throughout the region, with the exception of Iraq, Libya and Syria. Moreover, the capacity to provide telecommunications services in the region has improved significantly over the past decades with the creation of new infrastructure and fully digital systems. The Gulf Cooperation Council (GCC), a group of six Gulf states comprised of Kuwait, Bahrain, Qatar, Oman, Yemen and Saudi Arabia, has established and installed an inter-regional fiberoptic network known as FARAJ (also known as FOG) that links these states to each other. This inter-regional network is now connected to the FLAG cable system, a fiber optic link around the globe that is owned and operated by FLAG Limited.

In general, the relevant ministries of the countries in the region control and offer most of the telecommunications services available there. However, with technology advancing rapidly, most have begun to realize the importance of competition and increased development if their telecommunications sectors are ever to achieve international standards. Moreover, they are beginning to recognize that in this day and age, telecommunications development is a necessary component for continued economic growth. These issues are of increasing importance as these countries are, one by one, joining the ranks of the global community and acceding to the World Trade Organization. By doing so, they will be subjected to the requirements of the General Agreement on Trade Services, which will require them to open up their telecommunications industries. The problem in the region remains that, since telecommunications is a utility and subject to government control, those companies with contracts in this area are confronted with administrative red tape. As such, they are subject to the whims of the governmental entity controlling them. As a result, there is a recent trend in the region towards privatization and development of the telecommunications industry. It is estimated that, over the next decade, the Gulf States will spend approximately 25% of their funds devoted to infrastructure development on the expansion of the telecommunications sector. Moreover, experts in the telecommunications industry estimate that, in order for the industry to reach its full potential in the region, an investment of at least $30 billion is need. Recently, there has been a change in international call settlement charges. The FCC has imposed phased-in limits to settlement rates paid by US carriers on international calls as a way of reducing the high profits being made by the non-US government controlled telecommunications companies. Therefore, international calls are unlikely to be the primary mechanism for financing telecommunications infrastructure.

While the Middle East is clearly lagging in this area in comparison with much of the rest of the world, it is making progress. This Article provides a brief country-by-country analysis of the status of the telecommunications sector.

Kuwait: The Ministry of Communications (MOC) in Kuwait exclusively provides regular voice telecommunications services there. Notwithstanding, MOC has historically granted monopolies to various companies over other voice telecommunications and data transmission services, such as mobile telecommunications and International Record Carrier (IRC) services. To date, the following companies have been granted telecommunications licenses in Kuwait: GulfNet International for IRC services and Internet services (however, Internet services have recently been granted to other competing companies), Mobile Telecommunications Company for mobile telephone services, GulfSat for VSAT services, Wings Communication for EDI and Arab Telecom for wireless data services. It was also announced last year that MOC had contracted with a local Kuwaiti telecommunications company to provide wireless data services in certain remote areas. However, the Kuwaiti Constitution provides that no concession or monopoly may be given with respect to a public utility, such as telecommunications, except pursuant to specific legislation and for a specified period of time. As such, MOC has been steering away from its concessions policy. However, it appears that the Kuwaiti government is planning a total restructuring of its telecommunications agencies as a preliminary step towards total privatization of this sector. The government has decided to carve all telecommunications facilities and operations out of MOC jurisdiction and eventually place them under the supervision of a public company to be run in a commercial manner. This company would initially be wholly owned by the State and would later be privatized. The company would, among other things, operate and manage all telecommunications facilities in Kuwait, provide all communication services, develop and maintain telecommunication facilities and establish and own telecommunication facilities necessary for the provisions of all telecommunication services in Kuwait. In order to achieve these objects, the company may establish joint ventures, wholly owned subsidiaries and merge and buyout existing companies. Additionally, the company will own all existing telecommunication assets of the State.

Jordan: Jordan has been one of the most active countries in the region in terms of initiatives aimed at revolutionizing its telecommunications industry. It has divided its telecommunications and created a Telecommunications Regulatory Commission, which has authority to license private sector projects, allowed for service providers and established a policy-making body. In a step to privatize the telecommunications sector, Jordan corporatized Telecommunications Corporation, a government-owned entity, and created Jordan Telecommunications Company, a public shareholding company that has opened most activities to private operators. Corporatization of state enterprises in Jordan is regulated by the Companies Law, which allows the transformation of these enterprises into public shareholding companies fully owned by the government. One of the key tasks facing Jordan’s new King in the area of privatization is the development of a strategy for the privatization of Jordan Telecommunications Company. The government has also granted numerous licenses authorizing the provision of data transmission services, Internet related services, private payphone operations and private wireless equipment services. Many of the companies providing these services have attracted significant foreign investment. The fastest growing area, like most of the region, has been in the area of cellular services. In 1994, Jordan licensed Jordan Mobile Telephone Services (Fastlink) as the first cellular service provider in the country and the rate of growth has been impressive.

Lebanon: Given the state of fixed telephone lines in Lebanon after the conclusion of its civil war, it is no surprise that the area seeing the most development in Lebanon’s telecommunications sector is that of mobile telecommunications. Currently, Lebanon has two mobile telephone firms, Cellis and LibanCell, from whom the government collects a substantial amount of revenue. However, the government is contemplating setting up its own mobile telecommunications firm and renegotiating the existing contracts in order to create more revenue, a policy that has been met with heavy criticism. Lebanon has also opened to competition its data transmission and Internet service provision markets, and these markets are growing rapidly. For example, the Internet first became available in Lebanon in 1995 and, to date, there are six Internet service providers in the country – Iconet, Lynx, Intracom, Terranet, Data Management and Cyberia. Recently, the Minister of Post and Telecommunications has announced plans to carry out a four-year program aimed at reshaping the Lebanese telecommunications sector. Included in this plan is the enactment of new laws, the creation of a regulatory authority and the corporitization of the national operator. However, no definitive action has been implemented as of yet. The government has also announced plans for E-Commerce 2000, a project designed to form advanced communication networks throughout Lebanon. The project will essentially involve three components: 1) School-net, a network of universities and private schools, 2) Gov-net, a network connection of various ministries and administrative departments and 3) Lebanon-net, which will serve as the information network for the entire country. However, the project has been met with varied skepticism and, if carried out, will take years to be realized.

Egypt: Egypt’s first moves towards any semblance of privatization of its telecommunications sector started in 1997. Although the state telephone agency fought hard to preserve its monopoly, the government made the decision to allow private operators and gradually began to open its telecommunications sector. Within only a short period of time, the government had negotiated two payphone franchises, granted operating licenses for the provisions of mobile telecommunications network services and corporatized Arento, the State telephone agency, into what is now known as Telecom Egypt. Eventually, after contemplating the setting up of a private company to assume operations of the existing global standards for mobiles system from Telecom Egypt, two GSM licenses were awarded. Moreover, Telecom Egypt has signed agreements with several foreign telecommunications companies for the expansion of the fixed network in Egypt. Finally, it is said that the government is currently contemplating the sale of up to 20% of Telecom Egypt, intending on retain at least 80%. It is clear from the above that Egypt is well on its way to achieving a telecommunications system that can compete with international standards.

Saudi Arabia: In late 1997, Saudi Arabia launched an initiative to privatize all telecommunications services being provided by the Ministry of Posts, Telephones and Telegraphs. This was done through a resolution that specifically identified telephone services, information systems, paging, mobile telephones, public telephones and the public areas as among those services to be privatized. The first step in this process was the corporatization of the Ministry and its conversion into Saudi Telecommunications Company (STC), a joint stock company that will serve as the corporate vehicle for running the telecommunications sector. The intention is to ultimately sell STC and it is currently being advised on its privatization options. Under the law that created STC, any privatization process must be approved by the company, as well as the government’s privatization committee and the council of ministers. The country has also been involved in an extensive Telephone Expansion Project tasked with expanding both fixed telephone lines and global standard for mobiles lines. The down side to Saudi Arabia’s rapid development in these areas is an inability to cope with traffic. For example, much of the GSM network experiences interference from other wireless communications operating in its spectrum. This problem will most likely remain unsolved absent the establishment of a regulatory body to manage and control the different communications services. Like most of its neighbors, Saudi Arabia has recently opened Internet services to its citizens, albeit on a restricted basis.

United Arab Emirates: The United Arab Emirates is a leader in the region in terms of telecommunications. In 1976, the federation set up Emirates Telecommunications Corporation (Etisalat). One of the main projects of Etisalat is the development of the Al-Thuraya satellite system, the first communications satellite system in the region. Etisalat set up on autonomous company by the name of Thuraya Satellite Telecommunications Company in 1997 to execute the project. The company shareholders include Etisalat and numerous regional service providers and investment firms. Two satellites will be launched under the project – the first in mid 2000 and the second in 2002.

Oman: Oman’s telecommunications industry is conducted through the General Telecommunications Organization, a government-owned monopoly. The government is currently weighing its options for the sale of this entity. One of the most talked about options is that of selling separate parts of the network, such as the global standard for mobiles, phone cards and pay phones, to various private interest. However, it is rumored that privatization of the telecommunications sector there does not have strong momentum, large due to a lack of ministerial consensus on the process to be followed.

The above noted countries are those that have experienced the most activity in the telecommunications sector in recent years. In addition, in December of 1998, the Qatari government made a public offering of 45% of Qatar Telecommunication Corporation, the government-owed monopoly in this industry. Bahrain, on the other hand, already has a highly competitive telecommunications network and it boasts one of the highest percentage of telephone users in the region. In a drive to become the financial center of the region, which requires a system of advanced technology, Bahrain is continuing its efforts to expand and improve its telecommunications network, focusing on such areas as telecommunications equipment. In contrast, all areas in the telecommunications sector in Iraq remain predominantly controlled by the government.

What is clear from the above is that the region is far from developed in terms of telecommunications capabilities and developments. Services that are considered mainstream and taken for granted in the United States and Europe are only just now being considered and offered in the countries of the Middle East. These countries and their governments must take a more active approach to telecommunications in the years to come or risk being swept away in the telecommunication-geared new millennium. They will need the assistance and investment of foreign companies in order to succeed. However, foreign companies considering projects in this area should keep in mind three rules of thumb. First, since telecommunications is a utility, whether or not its privatization will succeed depends largely on the political decision by the relevant government to make it work. Second, foreign companies must view the region as a whole and have a long term plan in mind. Finally, given the administrative red tape confronted and the governmental control in this sector, foreign companies should ensure that their contracts are drafted with an eye towards incorporating the necessary protections that may be needed in the face of the high governmental latitude.
 

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