Telecoms & IT

Huge potential for investors in telecoms sector

Published in MEED, 24 August 2016

Iran’s telecoms sector is growing quickly, with several potential investors already linked to deals in the Islamic Republic

Iran’s telecoms sector is dominated by Telecommunication Company of Iran (TCI), a 45-year old business that is majority owned by Etemad-e Mobin, an affiliate of the Islamic Revolutionary Guard Corps (IRGC). TCI has a virtual monopoly on the fixed-line phone system. As of October, it had 29.8 million fixed-line subscribers for its Ashenaye Avval branded service, which it says is 99.3 per cent of the total market.

TCI also owns 90 per cent of Iran’s largest mobile operator, Mobile Telecommunication Company of Iran (MCI), which operates via its Hamrahe Avval brand (meaning ‘first operator’ in Farsi).

Both companies’ shares are traded on the Tehran Stock Exchange, where TCI had a market capitalisation of about IR131 trillion ($4.2bn), equivalent to about 4.8 per cent of the total market, as of late July. That is only slightly ahead of MCI, which had a market value of about IR125 trillion.

The main challenger in the mobile space is MTN Irancell, which is 49 per cent owned by South Africa’s MTN Group. MTN Irancell says it has 46.1 million subscribers, a figure that rose by 5 per cent in 2015 alone, and which gives it a market share of 46.7 per cent. Alongside this virtual duopoly, there are several smaller operators such as Tamim Telecom (which operates under the RighTel brand) and Taliya Mobile.

Iran’s mobile market has been slow to adopt new technologies, with 3G and 4G services only becoming widely available within the past two years. However, there have been some notable recent changes. Last year the Communications Regulatory Authority (CRA), which oversees the telecoms sector, invited bids for virtual mobile network operator licences. These allow companies to offer mobile services to the public while using an existing operator’s network, rather than having to build up their own infrastructure. According to Teyf Group, an Iranian telecoms consultancy, of the 51 firms that applied for a licence six have been approved so far, although up to 12 more may yet be approved.

The country is also about to introduce number portability, allowing customers to keep their existing mobile phone number if they switch from one service provider to another. Together, these measures should encourage far more competition between the networks. International investment and the January lifting of most sanctions on the Islamic Republic – which will make importing telecoms equipment and attracting external investment easier – should shake up the market even more.

Such developments will no doubt be welcomed by consumers, given the quality of the service currently available.

“The sector is ripe for more investment in infrastructure and the delivery of services and ancillary technologies and capabilities,” says Ali Nassersaeid, co-founder of the American Iranian Business Council. “Not all current providers have good coverage in all parts of the country and many people carry phones from two or three providers when they travel to ensure they can stay in touch.”

Promising signs

Some deals have emerged this year, offering a sign of what the future might hold in terms of international investment. In April, Italy’s ItalTel signed a memorandum of understanding (MoU) with TCI to modernise and develop its network. Details of what the deal will involve remain scant, however, and it is notable that for now it is simply an MoU rather than anything more definitive.

International telecoms firms, like companies in other sectors, still find it difficult to move money in and out of the country as most foreign banks are still refusing to deal with Iran. For as long as that remains the case, their ability to engage in the country will be limited. Nonetheless, several other potential investors, predominantly from Europe and Asia, have also been linked with deals in the Iranian telecoms sector, from France, Slovenia, Kazakhstan and South Korea.

For those already involved in the market, there should also be opportunities. In its most recent annual report, MTN Group says the easing of sanctions and the expected economic boost it will give to the country “offers significant opportunities to expand our services in the country”. In time it should also make it easier for MTN Group to repatriate some of its dividends and outstanding loans that have been stuck inside Iran. The firm says it currently holds some ZAR15.86bn ($1.1bn) in cash inside the country and is planning to invest ZAR3.5bn this year, as its share of MTN Irancell’s capital expenditure plans.

Even if no other large investments materialise in the near future, there should be other benefits for the local telecoms operators. In February, Davoud Zareian, a spokesman for TCI, said the cost of importing telecoms equipment could fall by 20-30 per cent in the wake of sanctions being lifted, as companies will no longer have to buy the equipment they need using brokers and other middle men. The process of procuring the equipment should also be far quicker.

Iran could certainly do with some improvements to its telecoms systems. The Switzerland-based World Economic Forum ranks the country’s electricity and telephony infrastructure 56th in the world (out of 140 countries), which puts it behind all the GCC states. In terms of fixed-line network it does fairly well, ranked 22nd in the world, but in terms of mobile phone subscriptions it is only 110th.

Those figures are further borne out by data from the Washington-based World Bank. Iran does better than its neighbours when it comes to the proportion of broadband subscriptions and far better in terms of fixed-line connections. However, it trails the rest of the Middle East and North Africa (Mena) region, and indeed the world in general, when it comes to its mobile phone penetration rate; this stands at just under 88 per cent, compared with a world average of 97 per cent and almost 110 per cent among Mena countries.

The potential for growth and development is something that local investors are well aware of, particularly given the country’s young population. According to the World Bank, nearly 24 per cent of the population is under 15 years old. That represents a lot of consumers who will be buying phones and getting online in the coming years. Tehran-based Turquoise Partners, which runs an equity fund investing in the TSE, says telecoms stocks are one of the main areas of investment it has identified as holding promise.

Shervin Shahriari, chief investment officer of Turquoise Partners, says telecoms accounts for the fifth-largest sector allocation of its fund. “The majority of the portfolio is invested in equities and companies that we believe will benefit from economic growth over the coming year,” he says.

IRGC exit

Shares in TCI and MCI have been off-limits to most international investors in recent years, due to the holding that the IRGC has in the two companies. That could change, with speculation that the body plans to offload its shares in TCI, and thus in its mobile subsidiary too. Daniel Riahi, managing partner of UK-based DRST Consulting, has described that as an “encouraging piece of news for foreign investors”, but not everyone is convinced it will happen. “[The IRGC have] said they might sell, but I doubt they will because it’s too important to them,” says one international investor.

Another point of strength for the industry is its profitability. MTN Group reported earnings before interest, tax and other charges from its Iran venture of ZAR5.7bn last year. Dividend payouts to local investors this year have also been good. According to Firouzeh Asia Brokerage, part of Turquoise Partners, telecoms firms have paid $685m in dividends this year and the sector had the highest dividend yield of any industry, at 16 per cent.

If international investors can find a way to tap into the market, there should be profitable pickings for them in the years ahead.

Is this the future of banking in the UAE?

Published in Gulf News, 28 February 2016

The rapid growth of mobile apps raises questions about what banking might look like in the UAE in the future

Just like cash or a debit card, the future of banking can fit into the palm of your hand. Smartphone banking apps are reaching an ever wider audience and creating novel pressures for the country’s banks. Not only do they have to compete with each other to continually improve their digital services but they are also faced with tricky questions such as what to do with their branch networks. The answers they come up with will shape the UAE’s banking landscape for years to come.

Not all banks in the country have launched a smartphone app but the number is growing all the time. Those that have range from giants such as Emirates NBD and National Bank of Abu Dhabi (NBAD) to smaller players like RAK Bank. Typically, their apps allow customers to transfer money between accounts, pay utility and other bills, and locate nearby ATMs and branches. 

Simply launching an app is not enough though. Once out there it needs to be regularly improved. Mashreq, for example, launched its first mobile app in 2008 and earlier this year released its fourth major upgrade. “The biggest change we have done is to the user experience,” says Aref Al Ramli, Head of Electronic Business and Innovation at Mashreq. “We have taken a bold step in animating the design. We’ve looked at it from the customer experience, making it easier to access with fewer clicks.”

While banks are investing in their digital services, they still have to make up ground. According to a November survey of 2,000 GCC bank customers by EY, 34 per cent of UAE respondents use a mobile banking service but only 45 per cent are happy with it. When asked why they don’t use mobile banking more, 51 per cent said they found it difficult to access. Other common gripes included slow transaction speeds and a non-intuitive user experience.

“Mobile banking has been a spectacular failure so far in the GCC,” says Ashar Nazim, Financial Services Customer Leader for the Middle East at EY. “The journey is still starting. There is a long way to go.”

While there is room for improvement, the direction of travel seems clear enough, with more and more customers using digital channels instead of visiting a branch. And banks are discovering that consumers have clear preferences for using different platforms for different things.

“While internet banking remains the platform of choice for service requests such as statements, applications for new products and information requests, mobile banking is becoming the platform of choice for transactions,” explains Sagheer Mufti, Chief Operating Officer at Abu Dhabi Islamic Bank. “We [saw] an increase of 71 per cent in the number of transactions conducted on the mobile app in 2015.”

In addition to straightforward banking apps, a few institutions have been experimenting with other services delivered via apps. Emirates Islamic Bank, for example, has developed the EI World app where, in return for carrying out transactions such as paying utility bills, users can accumulate points that can be redeemed for vouchers. Abu Dhabi Commercial Bank and Emirates NBD offer similar offerings.

Potentially more interesting are the moves to develop services via other online platforms and apps, including social media networks like Facebook and Twitter. In October 2014, Commercial Bank of Dubai opened a branch on Facebook that offers many of the same functions as a dedicated banking app. Last year, Emirates NBD started offering balance enquiries and other services on Twitter.

There are security concerns that tend to limit the scope of such initiatives, but all banks need to keep an eye on such developments lest they lose ground to their rivals, particularly among the next generation of customers. However, not everyone is convinced there is enough demand.

“We’re not hearing any strong signals from our customer base that they need us to facilitate their banking on their social media channels,” says Suvrat Saigal, Managing Director and Head of Global Retail at NBAD. “We’re focusing our resources on where we know our customers want us to improve, rather than take a me-too approach to channel investment.”

However, what seems inevitable is that digital channels will become ever more important for banks and, as smartphone technology becomes increasingly sophisticated, more people will want to bank via their phones. This, in turn, raises a question about the role of traditional physical branches and whether banks even need them. Most executives insist there is still a role for branches, particularly when it comes to dealing with more complex services such as investment advice, but at the very least the expansion of branch networks is likely to slow down.

“Branches will continue to be important,” says Mosabah Al Qaizi, Head of Electronic Banking Services at Dubai Islamic Bank.  “We envision that they will be leaner in size with a focus on performing more complex transactions. 

“Our aim will also be to continue opening more technologically advanced express banking centres and expanding our full function ATM network, while we see a slowdown in opening large brick-and-mortar branches.”

Through the longer term, the need for branches could be even further eroded. The EY survey found that 60 per cent of customers in the UAE would willingly switch to a digital-only bank.

Dubai pursues smart grids

Published in MEED, 24 August 2015

Some smart city ideas can seem futuristic and improbable, but the first steps are already being taken around the region in the prosaic world of electricity networks.

US consultancy Northeast Group reckons $17bn will be invested in ‘smart grid’ systems around the region in the next 10 years, in areas such as smart metering, home energy management and battery storage. “Most of the near-term investment will be in GCC countries,” says Chris Testa, research director at the firm. “Countries such as Egypt will make up a larger share of investment, beginning in the early-to-mid-2020s”

Among those pushing ahead is Dubai Water & Electricity Authority (Dewa). In 2014, it announced a three-pronged effort to modernise its network and promote energy efficiency.

The first initiative is to install solar panels on buildings around the emirate. The electricity generated will be used onsite, with any surplus exported to the network. The second element involves the installation of smart meters, which allow customers to easily monitor their consumption and, it is hoped, reduce their electricity use and cut their bills. The third element is to install electric vehicle charging stations around Dubai.

Of the three, it is smart metering that will affect most people first. Dewa plans to install 200,000 devices by January 2016. More than 1 million should be in place by 2020. That could, in turn, open the way for other smart city services down the line.

“Most smart grid investment begins with smart metering. It allows utilities to gain the real-time data that is necessary for many other functions of a smart grid,” says Testa.

“A communications network implemented for smart electricity metering or distribution automation can in some cases also be used for other smart city applications such as smart street lighting, smart traffic controls, or smart water and gas metering. Smart grids also create millions of data points that cities can analyse to improve operations citywide.”

The challenges to becoming a smart city

Published in MEED, 24 August 2015

In the Spanish city of Barcelona, the traffic lights turn green as the red lights of fire engines approach. In Amsterdam, the authorities are testing a system that lets people transfer energy generated from solar panels on their homes to their electric cars’ batteries. On the other side of the world, in the new Songdo business district near Seoul in South Korea, a centralised pneumatic waste collection system is being installed to eliminate the need for garbage trucks.

Such is the world of the ‘smart city’, where previously standalone devices talk ever more frequently to other machines. The definition of a smart city can be hard to pin down. As well as the examples above, it could contain car park monitors to alert drivers of free spaces or sensors to detect leaks in a water network. But a common thread is the collection and sharing of data.

This era of the ‘internet of things’ and machine-to-machine communication should, claim its advocates, make our lives easier, make us less wasteful and make cities more sustainable. But making that a reality is not straightforward. It requires heavy investment in information technology (IT) networks, monitors, ‘smart meters’ and the like. It also requires government bodies to collaborate and be more open to the public, in ways they may find uncomfortable.

The amount of money being spent is already starting to add up. US consultancy Deloitte predicts that 1 billion wireless internet-of-things devices will be sold around the world this year, worth a total of some $10bn. The value of the associated services that go with these devices could be $70bn. The Middle East will account for about 25 million of those devices, worth a total of $250m, along with $1.7bn in services.

Most of the regional activity is in the Gulf, which has the money and the inclination to adopt the technology. “A necessary requirement for smart cities is the availability of a highly developed infrastructure,” says Mohammad al-Shawwa, research manager for Arab Advisors Group, a Jordanian research firm. “In our region, the GCC countries remain ahead of the pack when it comes to both the level of deployment and the adoption of high-tech infrastructure, so they are in a better position.”

One of the earliest projects was Masdar City in Abu Dhabi, which was launched in March 2006 with the aim of creating a zero-carbon city. Construction began in 2008, using 90 per cent recycled aluminium, low-carbon cement and other sustainable materials. Masdar is really a suburb of Abu Dhabi rather than a city in its own right, but such greenfield sites represent a relatively easy way to test new technologies and create more sustainable developments. Authorities elsewhere have taken a similar view.

Saudi Arabia, for example, has launched several developments in and around the capital, such as the King Abdullah Financial Centre and the Information Technology & Communications Complex, where technology infrastructure can be up to date. At the same time, the government has also been pushing forward with entire new cities such as the King Abdullah Economic City on the west coast, where public transport, cycling and walking will be prioritised over cars.

But if a country is to make the most of the opportunities, it also has to modernise its existing infrastructure. That is what is happening at the kingdom’s Yanbu Smart City Project, under a 20-year deal between the Royal Commission for Jubail & Yanbu and local telecoms firm Mobily, signed in September 2013. The first phase covers the development of the telecoms infrastructure. Subsequent phases will include smart electricity grids and solar panels.

In Qatar, the authorities are also pushing ahead with new developments such as Lusail to the north of Doha and the remodelling of existing areas. The local Msheireb Properties is redeveloping the old centre of Doha in what it labels the world’s first sustainable downtown regeneration project. Under the Msheireb Downtown Doha scheme, heavy goods vehicles will be pushed underground to make the area pedestrian-friendly, and buildings are designed to use less energy and water.

On a nationwide basis, the Qatari authorities are rolling out a new high-speed broadband network, under a five-year programme that began in March 2011. It is being implemented by the local Ooredoo, using technology from China’s Huawei.

However, among all the Gulf cities, it is probably Dubai that is best placed to develop as a smart city, according to analysts.

“Dubai presents the most likely candidate for developing a smart city, given the government’s current focus on digitising services and fostering entrepreneurship and innovation, as well as its relatively developed IT infrastructure,” says Michael Romkey, director of Deloitte Middle East.

Smart Dubai

The push is coming from the top. In 2013, Sheikh Mohammed bin Rashid al-Maktoum, the ruler of Dubai, launched the Smart Dubai initiative, based around areas such as transport, communications and urban planning. It aims to deliver higher-speed internet access and put more government services online, ranging from traffic information to emergency services.

Several developments in Dubai already encompass some of the principles of a smart city, including Dubai Design District and Silicon Park at Dubai Silicon Oasis.

The latter is due to be completed by the end of 2017. It will include electric cars and bikes, street-side charging docks for phones and smart lighting systems that respond to traffic and pedestrians.

Expo 2020 offers another opportunity. “I believe the best opportunity within the Middle East to achieve a smart city is in Dubai, and Expo 2020 is the great opportunity for Dubai,” says Sameer Daoud, managing director for the UAE at Arcadis, a Dutch design consultancy. “A lot of things are linked to the Expo, including the extension of metro lines, the expansion of the airport, utilities, and commercial and residential buildings.”

More projects are bound to emerge in the future. Deloitte reckons the number of new smart city developments in the GCC will double within the next two to three years.

The cost of all this is hard to quantify, but the IT requirements are substantial. Alex Chau, the Hong Kong-based research director for UK-based Machina Research, says cities need to lay down a fibre-optic backbone and link that with wi-fi and low power wide area (LPWA) networks, the latter for use with smart metering systems.

The networks will also need enough capacity to deal with the ever-growing amount of data. The Middle East and Africa region generated more than 30 exabytes (30 billion gigabytes) of cloud data traffic in 2013, according to Deloitte, and it could reach more than 260 exabytes by 2018.

Ultimately, the price will come down to how ambitious a city chooses to be. “The cost of developing a smart city depends entirely on the depth and breadth of the projects,” says Romkey. “Songdo is estimated to have cost $40bn. On the other hand, Citizens Connect, an iPhone application used in Boston that allows citizens to place complaints about problems around the city, had an initial development cost of only $25,000.”

As the demand for services proliferates, so have deals between telecoms companies and technology firms. In December 2013, for example, Vodafone Qatar and Australia’s NetComm Wireless signed a strategic partnership to work on smart city applications such as intelligent transport and smart medical devices.

In March this year, Ooredoo announced it was working with Sweden’s Ericsson to launch a cloud-based machine-to-machine platform in Indonesia, with Qatar, Algeria and other markets to follow in the future. Meanwhile, Saudi Telecom Company is working with the likes of the US’ Cisco and SK Telecom of South Korea to develop cloud, mobility and security services. Etisalat is working with Ericsson and Huawei among others, and Du is working with Hong Kong-based PCCW Global.

It is not simply a matter of telecoms firms and equipment manufacturers teaming up. Utility firms are also exploring the potential of smart metering systems to reduce energy and water use. Among the most active is Dubai Water & Electricity Authority (Dewa).

There are plenty of other possible applications that have yet to be fully exploited, from insurance companies using sensors to monitor driving standards and reward better drivers, to logistics firms using enhanced vehicle tracking systems, and remote patient monitoring by health services.

Privacy issues

If it is done well, all this could lead to more economic growth, with new business sectors emerging and existing sectors being more efficient. But hardware and software can be installed without a city really becoming smart. To make the most of the potential, different systems and service providers will need to interact. Convincing bureaucrats used to working in discreet silos that they must collaborate will not be easy. The process will also throw up security and privacy issues.

“The biggest challenge is having to connect multiple systems into one system,” says Daoud. “It creates risks for the government because there are security aspects. If someone can hack into the system, they can control the infrastructure of the city. For individuals, the most worrying aspect is privacy.”

Some other cultural differences will have to be overcome. Governments will need to be more open with their data, which may not come easily to authoritarian rulers in the region. Also, consumers need to be convinced to use the technology. In some instances, that may be harder in the Gulf than in other parts of the world. Utility bills are heavily subsidised in the region so there is not the same incentive for consumers to use smart meters to keep bills down.

“One of the challenges faced by smart cities is changing the mindset of the people,” says Al-Shawwa. “The normal citizen will not adopt new services unless they are more efficient and easier to use than their alternative.”

And when it comes to technology, there is of course always the risk of obsolescence. Whatever systems are put in place today will probably have to be replaced in 10 or 15 years. If a city opts for technology that is superseded more quickly, or if a developer goes out of business, that time frame could be far shorter.

“If a city chooses wrongly and the technology provider goes bust then in a few years they’ll need to purchase a new solution. That’s why there is a lot of caution right now,” says Chau.

It is one thing to become smart. Staying smart will require just as much effort.