In the midst of the global economic downturn, governments and private companies have cut costs and slashed budgets. But one look at regional information and communication technology (ICT) investment shows that that the situation is better than it seems.
In terms of ICT infrastructure, countries in the Middle East and North Africa have lagged behind developed countries for decades. Nonetheless, governments have been willing to pump millions of dollars of investment into building the appropriate infrastructure. Before the onset of the global economic downturn in the region, Gulf Cooperation Council governments alone were expected to allocate around 25 percent of their infrastructure development funds to expanding ICT frameworks. Accordingly, the market was expected to generate $70 billion in annual sales revenue by 2015. Today that figure is markedly lower and will depend on how the region weathers the global downturn.
“There hasn’t been huge growth this year because of a slowdown on the consumer side,” says Leo Psara, chairman of Minerva, the largest regional distributor for Motorola wireless broadband in the region.
Even so, governments have not backtracked on their commitment to ICT infrastructure investment, but rather have only given up on “like-to-have” projects, according to one regional ICT executive.
“I have seen some [infrastructure] projects go on a short-term hold, but on the whole business is still strong,” says Psara.
That said, regional governments still remain relatively reluctant to fully liberalize their markets and open up the ICT infrastructure sector to provide a competitive framework that translates into accessible technology for citizens.
Sami al-Morshid, director of the Telecommunications Development Bureau at the International Telecommunications Union (ITU), the United Nations agency for ICT that works with governments and the private sector to promote best practices in the market, says that there are multiple reasons for this. “In some countries it’s for security reasons and in others its competition for business,” he says. “Who gets the largest piece of the cake? Is it my internal and domestic investors [and] how much I can guarantee them this?”
The technology race
Liberalized or not, many countries in the region, especially in the GCC, have been keen to invest in and improve ICT services. In the Gulf, governments account for 20 percent of all spending on ICT services. The United Arab Emirates has been increasing their ICT spending to facilitate the expansion of services for years. In 2008, the Emirates registered a total ICT budget of $3.1 billion, a budget that is expected to reach $4.7 billion per year by 2013, according to Business Monitor International.
Much of this spending has been focused on digitalizing government functions to create a more efficient ‘e-government’ that boosts economic activity by facilitating automated, online procurement for government suppliers. “Across the government entity and the government businesses there has been a massive drive towards doing e-business, both with their customers and internally,” says Psara.
Given that the government is usually the largest consumer in a country, the advantages of an efficient e-government cannot be understated. “E-procurement of the government, which is the biggest purchaser of goods and services, fosters the whole ecosystem for ICT development [in a country],” says Raymond Khoury, a principal at Booz and Company who consults on Internet technology strategy in the public sector.
But no matter how much emphasis is placed on e-government, there is still much to be done to provide essential technologies to populations.
“One of the main bottlenecks in the region is affordable and accessible infrastructure,” says Khoury. “There is still much more work to be done in terms of reducing the costs of broadband, which today is becoming a key performance indicator for any measurement of any country.”
That affordability has been constrained by the fact that government ownership of service provision has stunted competition in the region and kept prices at levels that separate the haves from the have-nots.
“This is often something that most of these developing economies do not look at,” says Lelia Serhan, country manager at Microsoft Lebanon. “They just go and build this infrastructure, pricing it in a way that probably furthers the digital divide inside these countries.”
Selected ICT indicators for MENA countries, 2008
The MENA region overall lags behind global standards for e-government readiness
Arab World countries versus global e-governement readiness
Source: UN E-Government Survey 2008: “From E-Government to Connected Government”; CIA Factbook; Booz & Company analysis
E-government readiness in MENA countries steadily improving
Online expense
The issue of prohibitive pricing is not a new one. For decades the region has been plagued by business models that are a direct result of inadequate planning by incumbent operators, typically owned by the government and regarded as cash cows.
“This whole notion… where we don’t want to hear the word privatization is also a political phrase without any beef,” says Khoury. “There has to be… a study that will easily prove whether it is monopolies or liberalized markets that introduce broadband at affordable prices [and subsequently] increase uptake and volume of resources.”
Indeed, some regional governments have been willing to adopt a ‘big picture’ perspective and allow companies to compete for licenses to develop infrastructure and provision services to the population.
“We are trying to find the right balance in terms of a regulatory framework where you have… a balance [between government and regulator],” says Morshid.
Spurring on that realization is the connection drawn by many economists between broadband penetration and increased gross domestic product of a country. “The big potential going forward is broadband,” says Andreas Hessler, vice president of networks at Ericsson Middle East. “Broadband is a very poorly penetrated market in the region because you have low bit rates and unreasonably high pricing still.”
Every 10 percent increase in broadband penetration within a population translates into a 1.3 percent jump in total GDP, according to the World Bank. With such encouraging statistics, it is little wonder why governments are now changing tact.
“Until recent years, many developing countries, including the Arab countries, thought this [infrastructure and telecommunications] was a goldmine for the government budget,” says Morshid. “The good news is that when these governments realized [the advantage of liberalization] and partially opened their markets, they had better services, more affordable prices and more output even in terms of government budgets.”
Still, governments own around 70 to 80 percent of incumbent companies in the region, according to Morshid.
Broadband access today is heterogeneous around the region, with service providers in Saudi Arabia offering download speeds of up to 29.04 megabits per second (Mbps) to Lebanon where the speeds average around 0.5 Mbps.
ICT spending in GCC markets, actual and projected, in $millions
Source: Digital Planet 2008 (WITSA), Booz & Company analysis
As a direct result of public ownership, the ability of each individual country in the region to improve its infrastructure, facilitate affordable services and encourage ICT use by its population depends on how much money is present in government coffers. This reality has created another digital divide within the region between richer oil producing countries and poorer non-oil producing countries.
“Countries in the GCC have piled up sufficient revenue and sovereign fund cash that allows them to be more generous in their spending on ICT in general, and on infrastructure in particular,” says Khoury. “Those without oil need to be selective. They are selective in their projects and the priority is on reductions in cost.”
Due to regional conflicts and socio-economic realities, many countries in the region are forced to focus their strategies on issues like security, food and agriculture, which Morshid says often preempt ambitions for the ICT sector. He gives the example of Iraq as a country where there is enormous potential, yet the lack of stability has led to a lack of the needed “confidence to open up the system.”
A real regulator
Reluctance to open up regional ICT markets is exemplified by governments’ reluctance to establish strong, independent regulators to keep their markets competitive, and to ensure access to essential technologies like broadband for both urban and rural populations.
Unless regional governments are willing to change, it seems the population of the region will have to settle for infrastructure that is out of step with global standards and practices. According to the ITU, a total of seven countries in the Middle East do not have an independent regulator, which is seen as a precursor to development of ICT.
“This is a rich sector if you have the right transparent independent rules and regulations. [Then] the money is no problem, the money is there,” says Morshid. “But [first] you have to make sure that it is transparent, it’s open and it’s fair competition.”
Every 10% increase in broadband penetration within a population translates to a 1.3% rise in total G.D.P.
