Rebuilding and expanding Iraq’s telecommunications networks

Following the end of three years of conflict, reconstruction of Iraq’s infrastructure and economy is now beginning: $30bn has been pledged by the international community, with the Iraqi government aiming for total funding of $88.2bn. Rebuilding and expanding telecommunications infrastructure will form a central part of the work ahead. TowerXchange examines the telecoms and tower landscape in the country and the roadmap ahead to restore and improve connectivity.

Iraq is a nation beginning its recovery after more than three years of conflict in the country. In December 2017, the Iraqi government announced that its war against Islamic State was over, having liberated all territories formerly held by militants and regained control of its border with Syria. Examining the impact of the war, Iraq’s Planning Ministry have forecast the cost of rebuilding the country’s infrastructure to reach $88.2bn, with widespread devastation having destroyed homes, schools, hospitals, power stations and highways as well as caused extensive damage to telecommunications infrastructure.

On 14 February, international governments, investors and donors gathered in Kuwait for a conference on reconstructing Iraq’s economy. Stability and a healthy economy in Iraq is of global concern, with the United Nations warning that a failure to help rebuild Iraq could further breed sectarian conflict and give rise and strength to terrorist groups such as ISIS. $30bn in investment and credit lines were pledged at the summit with a follow up summit to further discuss use of the funding scheduled for March.

Over 200 projects from power stations, highways and a train line to schools, hospitals and homes are expected to receive support, with telecoms companies heavily involved in ensuring connectivity is brought to the country. Whilst the $30bn fell short of the $88.2bn the Iraqi government is aiming for, they remain hopeful that further funding will be received and the $30bn pledged to date will enable key projects to get off the ground. 

Iraq has three nationwide MNOs; Zain, Asiacell (owned by Ooredoo) and Korek Telecom (in which Orange has a stake). Zain has the largest mobile market share, with Asiacell close behind, whilst Korek Telecom is the country’s fastest growing operator which is dominant in the Kurdistan region. In addition to the three nationwide operators, there are a host of 4G LTE players in the Kurdistan region, Fastlink being the largest of these with Tishknet, Goran-Net and Mobitel amongst the other players. The government had proposed the introduction of a fourth national operator (in which the ruling government would have a stake) although further details are yet to emerge with political issues thought to be holding the process up.

Zain, Asiacell and Korek Telecom hold only 2G and 3G licenses (the latter having been obtained in 2016) and it is thought that 4G licenses will only become available once the fourth MNO has been introduced. The MNOs’ 3G networks require a large amount of investment with poor coverage even in urban areas in Kurdistan and data prices remain high; Kurdistan’s 4G LTE players are offering comparably better coverage and speed leading to their growing popularity. Zain, Asiacell and Korek Telecom remain dependent on voice revenues, with revenues continuing to decline.

Each of Iraq’s MNOs’ networks sustained heavy damage from the years of conflict in the country. Korek Telecom state that in the regions surveyed, 100 of their towers were completely destroyed with a further 800 sustaining significant damage. Areas considered too dangerous still to enter are yet to be surveyed and further damage is expected there. Estimates suggest approximately 10-15% of the country’s total stock of towers were destroyed during the war meaning that major repair works are required. Additionally, there has been significant under-investment in expanding networks throughout the conflict so the rolling out of new sites is desperately required in conjunction with the reparatory works. Korek Telecom forecast that their current portfolio of 3,600 sites needs to be extended to 6,000 sites, with similar growth understood to be required for the other MNOs. In June 2018, the IFC pledged US$269mn in Zain Iraq to help it rebuild and expand its networks over a seven year period. Local factories have the capacity to produce some of the steel required for tower strengthening and one local tower manufacturer has emerged, otherwise new towers are generally sourced from Turkey and, to a lesser extent, India. 

As it stands today there are approximately 14,000 towers in Iraq (figure two) with the vast majority of towers only having the structural capacity for a single tenant. This fact, coupled with the intense competition between operators in the market, means that there has been little infrastructure sharing to date.

Some infrastructure sharing has begun between the 4G LTE players and the three nationwide MNOs, with Zain and Fastlink sharing an estimated 200 sites and Asiacell sharing an estimated 200-300 towers with their sister 4G LTE company. In order to add the 4G equipment to their sites, Asiacell has been strengthening their towers on an almost daily basis to improve the structural capacity and wind load. 

There have been early stage discussions within the government surrounding infrastructure  sharing, with the introduction of a government owned MNO and its infrastructure requirements a motivating factor in discussions.

Iraq’s MNOs are struggling with high OPEX, attributable in large part to security and logistics issues across the country. Power remains a major challenge and whilst figures for power availability vary by region and by time of year (ranging from zero grid to 16-18 hours in Kurdistan in summer), the vast majority of sites are reliant on two diesel generators. Hybrid solutions are yet to have any large scale trials in the country, and whilst fuel is not expensive by a global comparison, the costly and difficult logistics associated with fuel delivery and generator maintenance means that a switch to hybrid solutions is attractive. 

Managed services in the country have generally been split between the big OEMs and in-house management. Korek Telecom uses Ericsson in central regions of Iraq and Nokia in the south whilst managing their Kurdistan network in-house; Zain are understood to have a managed services agreement in place with Ericsson and TowerXchange are yet to confirm Asiacell’s partner. Each of Kurdistan’s 4G LTE players have shied away from managed service agreements, with the exception of Goran-Net who has some limited managed service contracts in place.  Power is generally managed by separate companies, often subsidiaries of larger corporations with investments in the MNOs.

The ingredients are there to entice towercos to the Iraqi market; three nationwide MNOs either fully or part owned by tier one operators, the potential entrance of a fourth operator, a host of growing LTE only players to provide incremental revenue, major expansion of 3G networks required, significant new tower build activity on the cards plus talk of infrastructure sharing being pushed by the government.  

For operators, ridding themselves of the complexities of operating towers in one of the most challenging markets is attractive. What’s more, significant investment is required to rebuild and expand their networks, and a towerco taking on new site build and sharing sites between multiple operators offers a much more cost effective solution. Operators continue to face increasing financial pressure with taxes having been raised and competition between different players intensifying; which again could further motivate MNOs to sell or consider towerco contracts. Plus if the government were to make infrastructure sharing mandatory with the award of a fourth countrywide mobile license, perhaps now could be a good time to sell?

Zain Group has shown their appetite to divest towers, agreeing the sale of their Kuwaiti and Saudi Arabian portfolios to IHS Towers. Whilst the operator may want to first take stock of their first tower deals before proceeding with another transaction, the appetite to sell in Iraq may well be there. Ooredoo has experience of doing a tower deal, having sold 2,500 Indonesian towers to Tower Bersama back in 2012 and has further experience of working with towercos in Myanmar. Korek Telecom’s shareholder, Orange has experience of doing tower deals and working with towercos across Sub-Saharan Africa

Yet would a towerco consider entering the Iraqi market? A politically unstable country exiting three years of conflict is not for the faint hearted. Many (if not most) investors lured by the stable returns promised by towercos will likely see Iraq as too “frontiersy” and shy away from the country. What’s more, with the vast majority of towers unsuitable for sharing, the need for either significant upgrade work or replacement will significantly impact economics.

But fortune favours the bold and significant opportunity exists for those willing to take on the risks and find a business model that works. A significant portion of the $30bn pledged by the international community in February will channel its way into the telecommunications sector and separate direct discussions have been initiated between MNOs and development finance institutions regarding investment in rebuilding networks, thus showing that sources of finance are there. 

One could argue that the market is better suited to a local player with knowledge and on the ground experience of operating in Iraq, a company which has honed relationships with operators and developed a local supply base already. TowerXchange has been made aware of at least one local tower builder which had expressed an interest in owning and leasing space on sites and anticipate further players to emerge as Iraq’s network continues to see fresh investment.

All Iraq’s MNOs complain of high operating costs and severe power challenges creating a strong case for an ESCO willing to take on power management across sites. TowerXchange has been following the emergence of the telecom ESCO market closely, with the business model gaining momentum as the first wave of contracts are signed and an increasing number of players enter the market. 

One of Iraq’s MNOs has entered into early stage discussions with ESCOs in the market, and whilst some ESCOs have been deterred by the country’s macroeconomic environment others have a strong appetite to take advantage of the opportunities arising.

The Iraqi telecoms sector is on the cusp of a major transformation and whilst political and operational challenges remain significant, the level of new business opportunities for those with an appetite to work in the country is high.