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Syria: Three's Company

Syria is set to unveil a long-awaited new telecommunications law that could see the creation of an independent regulator and the creation of a new licensing regime for mobile operators.

Due to be introduced by early next year, the new law will also see state-owned Syrian Telecommunications Establishment ( STE ) restructured to become a commercially driven player, as well as pave the way for the possible arrival of a third mobile operator that should lead to increased competition and ultimately result in lower tariffs and increased penetration.

The STE is currently set-up as a public enterprise and holds a monopoly over the provision of fixed-line services and infrastructure. The STE also serves as the sector's regulator, a function which, according to its general manager, Nazim Bahsas, is becoming increasingly burdensome. "Fulfilling the regulatory role is not our core business and consumes more than 30% of our management time, detracting from our ability to focus on and dedicate resources to the operational side of our business," he told OBG.

The new law will remove the regulatory function from the STE , allowing the company to focus on boosting its commercial operations. The subsequent, more competitive and independently regulated market should provide a boost to the industry. According to Bahsas, "Looking at global trends, in nearly every market where a separate regulator was established, tremendous progress was achieved for the sector as a whole, so the new telecoms law is a must for the country."

Eventually, the government will also consider ending the STE 's monopoly over fixed-line services, but this will not take place for a few years. Bahsas justified the delay to OBG, explaining, "If we all of a sudden open the market and issue new fixed-line licences, we will be unable to compete under our current public sector structure, which does not afford us the flexibility to move with the pace of new technologies. So we need a grace period to restructure ourselves and build the necessary commercial and financial competencies to compete with any new arrivals."

Pressure to end the STE 's monopoly over infrastructure is coming from abroad as well. A stipulation in the pending EU-Syria Association Agreement, which is likely to be signed next year, states that infrastructure ownership will be opened up six years after the agreement takes effect.

Some of the biggest changes will come about in the mobile sector, where the country's two current private providers - Syria-owned SyriaTel and South Africa-owned MTN - operate under a somewhat restrictive BOT that has been in place since 2002.

While the two operators enjoy a consolidated market, both have expressed concerns over the restrictions the BOT model places on competitive behaviour, especially in the area of tariff flexibility and promotions. They also argue that the BOT model places significant pressure on margins, as they each have to pay out substantial royalties (50%), as well as a 20% charge to cover the costs of infrastructure. This, they argue, reduces the funds available for investments in further capacity and service upgrades.

For a population of 20m, two mobile operators is considered inadequate and the country has been considering a third participant for a number of years. Some of the region's largest players, including the UAE's Etisalat , Kuwait's Zain , Qatar's Q-Tel and Turkey's Turkcell, have all been rumoured to have expressed an active interest in joining the market at one point in time.

Most agree that if a third entrant were to join the field, it would have to be under a licensing format. Having the new arrival operating under a licensing system while the incumbents competed under a BOT model would lead to an uneven playing field, which indicates that the new telecom law will see the entire system changed to a licensing regime for all participants.

When factoring in the average spending power of the population (the average monthly salary is around $200), most agree that having some of the highest tariffs in the region makes mobile services disproportionately expensive. And in May of this year, a group of subscribers organised themselves to carry out a one day boycott to express their discontent against what they perceive as unaffordable services.

Both MTN and SyriaTel have told OBG that they would welcome a new competitor, and are preparing themselves to become leaner and more efficient in anticipation. With present tariff rates in the country nearing their saturation point, there remains a substantial portion of the population that cannot afford services at existing prices. Should a licensing regime emerge, competitors would have more flexibility to compete and lower costs.

Ismail Jaroudi, the CEO of MTN , told OBG, "While we have accomplished a lot over the past few years within the boundaries of the BOT, we have now reached a point where we are stuck, and growth is not what it should be without the ability to lower tariffs. Overall, a new telecoms law that can formalise the sector and define the scope of the operators will have a great impact on mobile growth and the economy at large."

Overall, while Syria's telecommunication's sector remains one of the most heavily regulated in the world, changes are afoot as the country sets to open up the competitive landscape and provide further opportunities for private sector participation. While year-over-year growth for 2009 has so far been impressive at around 30%, overall penetration, around 38% according to the Mobile World Database, is still substantially lagging behind the Middle East and North African countries' average of 75.6%, with Syria ranking 15th out of the 20 countries surveyed. However, with a young and growing population (2.4% annual growth rate and 60% of the population below the age 65) and an expanding economy (the projected GDP growth rate for 2009 is 3%, according by the IMF), the country's low penetration rates point to a sector poised to experience significant growth for many years to come.

© Oxford Business Group 2009