It is no secret that the Middle East region, and particularly the Gulf, is currently witnessing a boom in all economic sectors, primarily driven by the healthy state of oil and gas prices. Undoubtedly this is driving the heavy investment currently taking place in infrastructure and manufacturing and, the recent market corrections across the Gulf notwithstanding, the thirst among investors for equity in regional companies is almost unquenchable at the present time. However, the telecommunications sector across the entire Middle East and North Africa region is also witnessing unprecedented levels of investment and varied permutations of de-regulation and market liberalisation at the present time.

While high per capita disposable income is perhaps a factor in the investment being seen in some of the more penetrated markets such as Bahrain and the United Arab Emirates (UAE), there is nevertheless a healthy consumer appetite even in lower income countries such as Jordan and Turkey. Effective business planning on the part of regional operators (particularly as witnessed in the mobile sector) has seen respectable average revenues per user by focusing on pre-paid or post-paid business as appropriate to the market conditions in any given location.

Planned privatisation and de-regulation are the primary drivers of private sector investment in the telecoms sector. Countries such as Bahrain and Jordan, for example, have attempted to create liberalised market conditions and this has resulted in a proliferation of licence applications and the establishment of independent regulators in those markets. The latest indications are that Qatar is heading in the same direction with the creation of an independent regulator and talk of competition being introduced imminently. In Oman, a limited de-regulation through the licensing of a second Global System of Mobile Communications operator has been a great success. In the UAE, de-regulation has taken on a different form with a controlled duopoly scenario which cannot be described as full market liberalisation but which is retail-focused and will provide more choice to the consumer in the long run.

Regulate or be damned

From a legal perspective, a critical factor in the successful liberalisation of the telecoms sector in any country will be the effectiveness of the laws and regulations governing investment and competition. This is the arena where the state can set its agenda and out-look. None of this means anything, however, without a strong, neutral, experienced and effective regulatory body which must be tasked with implementing such laws and regulations. The role of the regulator first and foremost is to create a win-win scenario for investors and consumers alike. The regulator must convince investors that the playing field is level and that both existing operators and new entrants can make a return on their investments while simultaneously delivering better services at better prices to consumers.

Regulatory models

There are two widely recognised regulatory models for a liberalised telecoms sector. The first of these is the wholesale model which focuses on increasing competition at the level of inter-operator wholesale services (with operators utilising their own networks and technologies to provide services to each other) with a resultant knock-on impact on prices at the retail level due to the opportunity for both incumbents and new entrants to develop services and compete at retail level. A good example of this was the approach adopted in the liberalisation of the telecoms sectors in the European Union and the US, where the wholesale model was used to kick-start competition with remarkable success.

The second regulatory model is the retail model which has been applied with a great deal of success in Singapore and which is now being adopted in the UAE. The retail model is most common in countries where the state possesses significant financial resources to support the development of advanced services by operators which are not sufficiently developed to promote innovation and invest in new products. The idea is that the authorities 'assist' such operators by financing a common infrastructure through which operators compete with each other at the retail level to provide advanced services to their customers. In Singapore, a publicly-funded single backbone network on which the incumbent and alternate operators connect to provide services, has allowed all operators to have access to the same wholesale network and to compete exclusively in retail services. Interestingly, the development of this model is driving the incumbent UAE operator to currently transfer the property of its private network to a neutral entity which will provide capacity to all operators to allow them to provide retail services.

The role of the regulator

Once a regulatory model has been selected, the implementation of that model in a consistent and effective manner is critical to the success of the attempt at liberalisation. The role of the regulator in the wholesale model requires it to exercise its regulatory powers in the pursuit of making sure that competition develops at the wholesale level. Its powers should therefore be focused at intervention on wholesale topics and to let the market itself develop competition at retail level, intervention at the retail level in a wholesale model having the possible effect of limiting competition there (for instance, if one imposes quality of service requirements at retail level, he/she will almost by default prevent operators to increase competition by differentiating their services on quality. The wholesale model is based on the assumption that competition at wholesale level will automatically drive operators to compete at retail level. With this in mind, one would expect to see intervention by the regulator concentrating on issues such as access, interconnect and wireless spectrum and/or interconnect bypass.

If the retail model is selected, regulatory intervention should be focused on retail topics such as quality of service and retail pricing to make sure that a given quality is gradually being offered to retail customers at a given price by the operators in place. The retail model is based on the assumption that providing an equivalent infrastructure to all competitors (even if to a limited number of them) in a given market will ensure such competitors will all be able to provide sufficient quality at a reasonable price.

In practice, and in order to maximise investor confidence and promote positive results for the consumer, the regulator should select and implement its chosen model fully over a sufficiently long period of time to make sure that the main components of such a model are in place. This choice should be based on an overall plan which itself should be based on various objective macro-economic parameters. These include the willingness of the public authorities to invest; retail models appear to have very limited chances of success in the absence of public investment in infrastructure (notably because no investor will want to invest into the needed quality infrastructure required to implement a retail model if they cannot have a proper return on such investment). Conversely, where the regulatory plan is weak or not sufficiently strategic, investor confidence in that market can be severely undermined which will ultimately result in failure to deliver better services to consumers at better prices.

Competition law gap

In any telecoms market, each of the incumbents, new entrants and regulators will be concerned with common and overlapping issues such as interconnection and competition. From a legal perspective, it is not uncommon for a liberalising government to regard a telecoms law and regulator-issued regulations and codes of practice as being sufficient to lay the framework for a competitive market (whether duopolistic, oligopolistic or truly liberalised). What is frequently lacking is an effective competition law (if any at all) and the judicial experience to ensure that the decisions of regulators or the behaviour of market players is consistent with the principles of a competitive market.

What is also crucially significant from a legal perspective is not only to acknowledge the undoubted dominance of one or more incumbent operator(s) in its market but also to recognise the vast 'wealth' at the disposal of certain investors, be these local or foreign investment groups, industrial groups or former monopolies that have been able to extract substantial profit margins from their original activities. This invariably puts the incumbent operator(s) in a position to throw substantial resources at defending market share which is very often done by taking advantage of the general lack of adequate competition laws and binding jurisprudence (particularly in the Middle East) and utilising the legal means available to it to delay as much as possible the development of real competition into the market.

If an incumbent operator is the only operator in a liberalised market which invests in regulatory strategy and lobbying, the result will inevitably be that the incumbent operator will be able to steer the regulatory agenda. This seems to have been the case in Bahrain where, despite an early official opening of the market to wholesale competition some years ago and the granting of numerous licences to alternative operators, the currently very limited development of wholesale and retail competition suggests that the incumbent operator has managed to keep the focus of the regulator away from implementing the wholesale model which it has ostensibly adopted. In theory, an example of the role of the regulator in the wholesale model is to encourage operators that choose to try new technologies on the wholesale market. If the regulator fails to do this by preventing investors from competing at the wholesale level, the inevitable result is that the dominance of one or more operators is likely to remain in place.

Critical in the success of any telecoms start-up in a liberalising market will be the means by which it chooses to engage the incumbent operators and the regulator. In a true market liberalisation, the incumbent operators will inevitably throw whatever might they are able to muster into preventing competitors from encroaching on their market share. Developing an effective regulatory strategy, drawing on the lessons of other markets and recognising the indispensable need for a regulatory 'war chest' may therefore mean the difference between success and failure where the challenges faced by a new entrant assume 'David versus Goliath' dimensions.

Where an incumbent or another investor has the balance of power (through comparatively disproportionate financial resources), new-entrant lobbies and focus groups can also be an effective strategy and a co-ordinated approach by new entrants can, in some cases, reap substantial benefits in the overall development of the market in question.

Abdullah Mutawi is a partner at Trowers & Hamlins and Phillippe Vogeleer chief strategy officer at Jordan Telecom Group.