MENA Region: Marhaba to the world - Value Partners newsletter, January 2010


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The latest Value Partners newsletter. It addresses some of the hot topics currently arising in the region and of particular relevance for a number of industrial sectors: from banking and insurance to telecommunications, media and sports, from luxury goods to energy. The articles provide also specific case studies of international collaboration models and describe the existing business opportunities across sectors.

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MENA Region: Marhaba to the world - Value Partners newsletter, January 2010

  2. 2. Value Partners Newsletter Published by Value Partners Via Vespri Siciliani 9 - 20146 Milan - Italy Editor: Tina Guiducci Editorial coordinator: Annalisa Ballabio Registered in Milan. Reg No. 84-01/31/2008 The issue has been closed in December 2009. Copyright © Value Partners S.p.A. All rights reserved This newsletter is sent by Value Partners S.p.A. If you wish a printed copy or would like to be removed from our mailing list, please write to and we will act accordingly Special thanks to Kate Aylott, Camille King and Carolyn Wileman
  3. 3. NEWSLETTER Marhaba means “welcome” in Arabic. It’s a word that perfectly reflects not only the warmth and hospitality of the Arab culture, but also its opening up to the world. This particular issue of the Value Partners newsletter is entirely dedicated, in fact, to the Middle East and North Africa (MENA) region, to the Arab world and to its business environment. Over the last few decades, economies in the region have been developing at a very rapid pace, mainly due, at least in the initial growth phase, to oil exploitation. In the last 10 years, industry and economic diversification from oil has been pursued as the primary objective, with very significant results across the region. The recent global financial crisis has been affecting the area in two main ways: the oil industry, which has seen a reduction in oil prices compared to the peak values of 2008 – although they are still running at a much higher level than the break even point – and higher risk sectors like the real estate industry. MENA Region: Marhaba to the world It is, however, expected that positive GDP growth will continue in the region, at January 2010 higher levels than in many other economies. fourth issue All of the countries in the region have followed their own path when it comes • UAE, the new global professional hub to opening up to the global economic and cultural paradigm. Now, the moment has arrived for international players to deepen their analysis and understanding • Business Parks: a success story of the MENA region and to be a part of this important development. Local for the region countries and business communities are open to this and are busy creating • Getting Private Banking basics right the proper climate for further growth. The region, at the crossroads between Asia, Europe and Africa, and with commercial relations with the Americas, is • Retail Banking in Egypt: an oasis increasingly becoming a laboratory for Western and Eastern economies, as well for growth, away from the storm as for people hoping to find the best model of co-existence. • The still unfulfilled potential for insurance in the Gulf Cooperation Value Partners has been operating in the region for many years. In 2008, we Council established our presence in the United Arab Emirates (UAE), Oman and, more recently, Saudi Arabia. In this newsletter, we address topics of relevance for the • Discussing the Saudi Arabian economy whole area and, specifically, for a number of industrial sectors: from banking • A young generation is powering and insurance to telecommunications, media and sports; from luxury goods to the new media revolution energy. The articles provide specific case studies of international collaboration models and also describe the existing business opportunities across the above- • The African mobile market is ripe mentioned sectors. for M&A • The case for customer-centricity Each country in the region is involved in ongoing activities aimed at industry liberalisation. Regulatory policies are being oriented, for instance, towards a more • Telecoms regulation: new policies to liberalised and competitive economy. New cities and business communities, stimulate competition and innovation for local and international companies, are being developed. The multinational and multicultural presence in the region is increasing, while new initiatives – • Integrating innovation, quality and value to be proposed to the global community – are being pioneered. In addition, several sectors such as education, health care and banking are growing, and • TV production: the latest opportunity knowledge-based service economies are also leveraging the extensive presence in the region of a young Arab community rapidly becoming acquainted with new global technologies. The King Abdullah Economic Cities in Saudi Arabia, Burj Khalifa, • Revolution in the football industry UAE’s multi-industry Business Parks, The Pearl-Qatar, UAE Media Cities and • A new oil for the region Masdar, the zero carbon city in UAE, are all examples of initiatives aimed both at enriching and developing local economies, and attracting global investment • Luxury goods in the Middle East: to the region. These models will soon enter the next phase of development and still in fashion? will be exported to other regions as well. 3
  4. 4. MENA Region: Marhaba to the world History provides us with many examples of the rise and fall UAE, the new global professional hub of cities, states or entire civilisations. From this perspective, the pace of the United Arab Emirates’ (UAE), and specially Riccardo Monti, executive director, Dubai office Dubai’s, expansion is unprecedented. In the span of just three decades, this particular one of the seven United Arab Emirates has transformed itself from a small, inconsequential town of fishermen and pearl merchants into a world capital. The factors underlying this incredible success are simple, starting from a strategic geographic position in the Persian Gulf and an open attitude in terms of both business and social tolerance. And also an enlightened political leadership that has deftly manoeuvred through recent events with the aim of strengthening its position in the region, since the Iranian Revolution and the subsequent embargo, during which Dubai and UAE represented a key offshore location. In more recent years, the oil boom and the growth of global finance and tourism have further accelerated the transformation of UAE into a major international hub. UAE has also used aggressive marketing strategies to its advantage, creating events and symbols of its growth out of nothing: from the annual horse race with the world’s biggest purse to the by now famous sail-shaped Burj Al Arab; from an important film festival to major trade fairs in the fields of IT, defence, construction and electronics. Burj Khalifa, the world’s tallest building recently inaugurated, will remain a global icon for UAE for long time to go. The emirate of Dubai has, of course, established a role and image as the world capital of construction, ‘a place to go’ for architects and engineers, where the only limit to creating the most fantastic structures is the creativity and skill of their creators. In the last 4-5 years, it has also ridden high on the latest wave of the real estate boom, becoming an important centre of finance and the professional and tourist hub of the entire region. The financial and economic crisis that has crippled the western world has affected these two areas in Dubai as well, revealing the core of its development as being centred upon finance and real estate. It has struck rather hard, actually: dozens of mega-projects cancelled; extreme bailouts of builders and banks; the fall of real estate values; the exodus of a significant percentage of the tens of thousands of brokers, architects and engineers who have literally built Dubai, not to mention the hundreds of thousands of blue-collar workers who once buzzed like bees around the construction sites, 24 hours a day, 7 days a week. Consequently, Dubai was emptier this past summer than it has been in many years. In the opening months of 2009, residential real estate prices dropped 42 percent and hotel occupation fell 16 percent. Nonetheless, the moment has not yet arrived when one must wonder what remains of the ‘Dubai dream’. There is still a lot left to leverage on. Dubai is one of the emirates of UAE which considers itself as one single nation as for the initial vision of Sheikh Zayed. Dubai today has a major airline, Emirates, which serves all the main international business and tourist routes; banks such as Emirates Bank International or National Bank of Dubai; huge developers like Emaar; and some of the world’s leading engineering firms, such as the Al Habtoor Group. Dubai has established itself even as an important international tourist destination, with approximately 10 million visitors in 2009 despite the downturn. As part of UAE, Dubai has carved out a niche at the forefront of the highly competitive world of Islamic finance. Abu Dhabi, in its role as capital of UAE and base for the major business and government institutions, is also very active in building its position as a regional cultural hub. Saadiyat Island (Island of Happiness) is being developed to create a cultural district including the development of a Louvre Museum and of a Guggenheim Museum dedicated to modern and contemporary art. In the third millennium, UAE will increasingly become a main hub for advanced third sector services. Alongside oil, the sheer quantity of professional expertise concentrated there represents one of UAE’s most important ‘reserves.’ Large-scale growth projects and investments for the city and the entire region continue to rely upon this concentration of 4
  5. 5. NEWSLETTER expertise. They are also increasingly oriented towards a sustainable and harmonious de- velopment with the other Gulf nations in a context where Qatar, Bahrain, Oman and the other emirates are gradually becoming more specialised and committed to making their respective economies more synergistic through the Gulf Cooperation Council (GCC), whose members are Saudi Arabia, Bahrain, Oman, the United Arab Emirates, Qatar and Kuwait. If oil reserves in the region were to dry up today (in reality this will not happen for at least 100 years), the countries of the GCC would have, according to conservative estimates, over US$ 2 trillion (expected to reach 3.8 trillion at the current oil price by 2012) in liquid financial resources to invest elsewhere. The advanced service sector that revolves around this massive amount of cash, populated by lawyers, bankers, consultants and architects, will therefore continue to gravitate largely around the Emirates. UAE is here to stay for a long time among the world global centres. Value Partners met with Dr. Amina Al Rustamani, CEO of TECOM Business Parks to talk about the success story Business Parks: a success story for the region of business parks in the region. Interview with Dr. Amina Al Rustamani, CEO, 2009 has been a tough year for the global economy and in TECOM Business Parks the last few months Dubai has quieted down, in particular with the crash of the real estate sector. To what extent has TECOM felt the impact of the crisis? It goes without saying that the economic downturn has severely impacted on nations and companies worldwide. No country that is integrated into the global economic system has been able to escape its effects completely unscathed. For its part, TECOM Investments is an inherently unique company operating 11 business parks across industries ranging from information and communication technologies and media to clean energy, biotechnology, education, healthcare and industrial. Therefore, while we are not immune to the crisis, the challenges we are currently facing are unique in nature. We are keenly aware of the fact that our growth as an organisation is strictly linked to that of our business partners, some of which have scaled down their operations to deal with the financial turmoil. This has been our most pressing issue in 2009. To combat this, we have maintained constant communication with our business partners to understand their changing requirements and determine how we can work with them to better cope with the current global situation. For example, we recently launched the Business Sustainability and Support Centre to provide free consultancy services to our business partners on overcoming the challenges that have arisen due to the economic downturn. Many hoped that things would pick up for businesses in Dubai post-Ramadan. Are you beginning to see increased business activity and companies starting to move to Dubai again? It is still too early to comprehensively gauge the changes in post-Ramadan business activity and the extent to which companies are once again moving to Dubai. Yet, over the past several months, there have been some developments that point towards an improved business sentiment and outlook for the region. The recent acquisition of one of our business partners,, by Yahoo!, as well as Intel Capital’s announcement earlier in the year to invest in three of our business partners are an indication that international companies, in spite of the current economic climate, view the region’s long- term prospects favourably. In your role as CEO of TECOM Business Parks you manage different business zones covering a broad range of industries. What is the advantage of having business zones dedicated to specific industries? Our vision is “investing, creating and realising the future of Dubai,” which aptly encapsulates our commitment to developing Dubai’s future. One of the areas of primary importance 5
  6. 6. MENA Region: Marhaba to the world that has been identified as crucial to Dubai’s development is represented by its knowledge- based industries, and it is on this area that we are primarily focused. Developing business parks devoted to specific industries empowers us to play a leading role in building the emirate’s future. For our business partners, the advantage of being located in a business park that is dedicated to their industry facilitates business-to-business synergies and networking opportunities, research and development, knowledge and best practices sharing, improved economies of scale, and better information flow and operations. For companies considering moving to the Middle East, what are the key financial and regulatory incentives to set up in one of the Free Trade Zones in Dubai? Establishing a base in a Dubai Free Zone is a straightforward process and offers a host of incentives including 100 percent tax free environment, 100 percent foreign ownership, waiver of custom duties, full currency convertibility, no restrictions on the repatriation of capital and profits, and no trade barriers or quotas. Consequently, free zones represent the best destination for foreign companies seeking to expand into the region. At TECOM Investments we do not view ourselves simply as creators and operators of free zones. Our vision is directed towards shaping business parks that offer significant value-added services beyond those expected from regular free zones. Primary among those services is the Dr. Amina Al Rustamani industry cluster benefits that offer many additional advantages to our business partners. is the Chief Executive Officer of TECOM Business Parks, the Dubai has succeeded in making itself a regional business hub, thanks in part to Free entity of TECOM Investments Trade Zones that have attracted international companies. What does the future hold in designed to function as an store as other countries in the region begin to offer similar incentives? umbrella organisation for The establishment of other free zones in the region is a strong indication that significant all the 11 Business Parks of growth opportunities do remain, and I view this as a very positive sign. It is important to TECOM Investments: Dubai remember that all the Gulf Cooperation Council (GCC) countries are interconnected, and Internet City, Dubai Media positive developments in one country will have positive ramifications on other countries. In City, Dubai Knowledge Village, spite of the increased competition, TECOM Business Parks have a unique value proposition Dubai Studio City, International that stems from their special characteristics as industry specific clusters. This important Media Production Zone, Dubai differentiator is a concept we pioneered and perfected. As a result, we feel confident that Biotechnology and Research Park, we will maintain our status as the premier developer and operator of business parks in the Dubai Outsource Zone, Dubai region, and companies will continue to prefer to call TECOM their home. International Academic City, Energy and Environment Park, Within TECOM Business Parks there seems to be a positive focus on the environment Dubai Healthcare City, and Dubai with the DuBiotech HQ being one of the largest green buildings in the world, and Enpark, Industrial City. Dr. Amina dedicated to environmental technologies. Is such a focus part of a government initiative Al Rustamani is responsible to make Dubai a greener place? for defining and executing Yes, it is. TECOM Investments is a member of Dubai Holding and follows the strategic the strategy of all the Business directives of the Dubai government. It is no secret that the UAE has the world’s Parks so that the objective of highest per capita carbon footprint and the Dubai government is spearheading several establishing a knowledge-based initiatives in its firm commitment to make the emirate a greener place. TECOM’s economy – as mandated by entities such as Enpark and the Sustainable Energy and Environment Division (SEED) the government of Dubai – are in line with this strategy. is effectively realised in the medium and long term. Dubai Media City (DMC) has successfully made a name for itself on an international level as the regional centre for media businesses. What are the key differences between DMC and Abu Dhabi’s new media zone twofour54? Dubai Media City and twofour54 are complementary to each other. The media industry in the region is growing at a significant rate, as evidenced by the growth of not only Dubai Media City but also TECOM’s other media business parks such as Dubai Studio City, the Middle East’s first dedicated film production cluster, and the International Media Production Zone, a business park dedicated to the printing, publishing and packaging (3P) industries as well as to the graphic media sector. Abu Dhabi’s recent introduction of a media zone ensures that existing demand can be met while guaranteeing further growth of the media industry in the region, through the creation of additional resources and opportunities for collaboration. Of course, the UAE as a whole stands to benefit substantially from such growth. 6
  7. 7. NEWSLETTER In your opinion, which industries covered by TECOM present the largest growth opportunities in Dubai? I believe the clean energy and healthcare sectors, represented by Enpark and Dubai Healthcare City, have a very strong growth potential in Dubai and in the region as a whole. The combination of an ageing population and an increase in the so- called lifestyle syndromes will drive the growth of the healthcare sector. Many GCC governments have responded by investing extensively in healthcare infrastructure, and by creating a regulatory environment that is attractive to private healthcare providers to enter the market. As a result, the GCC per capita spending on healthcare is expected to grow at a faster rate than the global average. According to the most recent estimates, the healthcare market is expected to swell to around US$ 50 billion by 2020. Similarly, the outlook for the renewable and sustainable energy sector is equally positive. The fact that the UAE has the highest per capita carbon footprint in the world translates into considerable opportunities for companies operating in the clean energy field. Also, by virtue of being located in a very hot environment where air conditioning requirements can consume upwards 70 percent of power during peak times, district cooling becomes an ideal alternative, and this sector is expected to grow exponentially over the next 10 years. The selection of the UAE to be the headquarters for the International Renewable Energy Agency (IRENA) will also provide the impetus to drive the clean energy sector forward. The United Arab Emirates (UAE) has one of the world’s highest con- centration of millionaires, with 6 percent of households holding Getting Private Banking basics right investible funds of more than a million dollars. Only Switzerland, Kuwait and Qatar have a comparable concentration of High Net Roland Topic, Dubai office Worth (HNW) households. Abu Dhabi has the second highest per- centage of millionaires in the world, just after New York, and leads UAE in terms of HNWs, closely followed by Dubai. GDP per capita rose to a record high US$ 53,300 in 2008, a 16 percent increase over 2007 and more than double its level in 2003. The country also provides easy access to a fast growing and large base of millionaires in South Asia and Africa, who have very limited access to investments. With these positive numbers, the largest banking sector amongst the Gulf Cooperation Council (GCC) countries, a large and influential expat population in the country, an open regime, access to GCC, Asia and Africa and clients with high propensity to invest, UAE is a very attractive private banking market. The financial crisis has dented trust in the system and also reduced wealth considerably. However, the main drivers of the private banking market remain intact and seem to emerge stronger as the economy slowly recovers. The golden goose has resulted in over 50 banks operating in the country, in fierce competition, in commoditisation, and in the lowest net interest margins amongst GCC countries (an average of 2.9 percent in 2008). This margin pressure has led to banks aggressively competing to raise cheaper deposits, especially from HNW clients. The private banking proposition in UAE is not comparable to Switzerland or other advanced European countries, as very few banks offer true private banking services such as lifestyle services, equity financing, estate planning, family offices, private equity, discretionary portfolio management, etc. The focus is mostly on commoditised financial and international investments. However, the industry is rapidly evolving. While foreign banks offer a broader and well differentiated private banking practice, local banks are trying to catch up and are making very aggressive moves to gain a larger share of this market. Interestingly, client 7
  8. 8. MENA Region: Marhaba to the world Deposit base in UAE, 2008 needs are changing dramatically with a new generation of private banking clients emerging. These clients have a different attitude to money and risk, possessing greater knowledge and demanding advise not only on financial matters but also on their Emirates NBD 16% Foreign core businesses. This new generation has developed wealth in a shorter period with banks 25% National Bank significant exposure to non-oil assets and has a much larger international investment of Abu Dhabi 12% footprint. The deposit base in UAE is dominated by domestic banks with approximately 75 percent of all deposits shared by local banks. Foreign banks, despite being quite limited in number, hold a significant share of the market. UAE enjoys the presence of 28 foreign banking institutions, but a 20 percent corporate tax rate and other branch license restrictions have resulted in international players ADCB 9% competing with domestic players on a weaker ground. However, in 2004 the govern- Other domestic ment allowed foreign banks to open branches in the Dubai International Financial banks 16% First Gulf Bank 9% Centre (DIFC) to all services with restriction-free repatriation of profits, zero taxes on UNB 6% Dubai income and 100 percent foreign ownership. This move resulted in a significant increase Islamic in the number of boutique and private banking players opening their onshore centres Bank 7% in UAE. Source: Credit Suisse, Central Bank The large local banks, such as Emirates NBD, National Bank of Abu Dhabi, ADCB and First Gulf Bank, are all rapidly expanding their private banking services, wanting to leverage their large brick and mortar presence, their strong local reputation and Islamic banking capabilities to consolidate their market share amongst UAE HNWs, even though their private banking offerings are not comparable to those of full service private banks, like Credit Suisse, UBS, Sarasin, Mirabaud and Dresdner, or large retail banks, such as ABN, RBS, Citibank and HSBC. Key offer points Citi Its private bank services include real estate, trust and fiduciary, aircraft financing, art advisory, family advisory, multiple residence, farm advisory and philanthropy. It offers a broad range of services and manages the entire balance sheet of the client. Credit Suisse It offers a large portfolio of conventional products and has a large private banking practice in UAE. It is active in structuring and distributing Shariah compliant products such as Sukuks (Islamic bonds), Shariah compliant mandates, customised investment programmes and establishment of Islamic trusts. Dresdner Bank Converted its 12 year old representative office to a subsidiary in the Dubai International Financial Centre (DIFC) to increase its private banking market share. It focuses on ultra High Net Worth (HNW) clients only. It complemented its strategy by offering Shariah compliant mutual funds managed by Allianz Global Investors. Mirabaud It extensively uses open architecture to offer an optimum product mix to clients. Partnership with Credit Suisse, Société Générale, Fortis and parent bank Mirabaud & Cie. It focuses on Ultra HNW clients only. National Bank It is developing its private banking business aggressively. On-shore, its asset of Abu Dhabi management group develops local and international funds. Structured products are designed by its investment banking division which also has capability to develop tailor made solutions for its ultra HNW clients through its Switzerland and US subsidiaries. ADCB It recently deployed an end to end wealth management system from SAGE (Swiss IT firm), to strengthen its private banking proposition and provide much needed information and support to its relationship managers and clients. Dubai Islamic Bank It launched its private banking arm in 2004 and it now positions itself as the Islamic products market leader. Through its Johara branded accounts, and with female private banking managers, it offers exclusive accounts for women only. It is also an active player in structuring innovative Islamic products for its private banking clients. In a highly competitive market, where both domestic and foreign players are moving towards improving their HNW proposition, five essential elements to build a strong private banking franchise need to be addressed. 8
  9. 9. NEWSLETTER • Client segmentation In Middle East, private banks need to choose more consciously the type of clients they pursue and to whom they can offer a superior proposition (Asian, local, GCC, African, etc.). They need to factor changes in sources of wealth (e.g. from oil and real estate to equity investments in different industries), geographic re- quirements (e.g. from predominantly offshore to a combination of GCC and interna- People tional investments) and level of expected service. Winning banks will be able to carve quality Client segmentation a niche in the market and maintain their competitive position. Essentials Premium in the UAE • Product innovation and depth Private banks need to be aware of the diminishing branding private banking product life cycles, of the increasing commoditisation – thus reduced margins – and market Product innovation of the limited product/service portfolio. Promoting open architecture and Islamic and depth products, offering the right combination of parent bank and partner products, Local market extending services beyond financial investments to lifestyle services, building know-how proposition for full balance sheet management and fiduciary planning are all critical to increase the customer investment wallet share as well as the relationship length. In particular, HNW clients appreciate having an aggregate view of their assets (real estate, financial investments, and even artwork they possess) and liabilities, regardless where these are held. Systems that give a single window of access to this information with powerful reporting tools are in high demand. Adding estate planning, family wealth management and trust management, for example, provides several benefits to the bank, including a shift from short term to long term mindset for both the client and the bank. It also cements the client’s relationship with the bank, lasting for over 20 years, instead of 6-7 years without a fiduciary solution. In addition, it allows access to next generation in the family, provides better knowledge about client assets and needs, and increases cross-selling opportunities. Last, but not least, it improves brand perception and trust. • Local market know-how Players with insufficient understanding of the GCC market will experience major growth challenges. International banks may have greater expertise in complex financial products, but they can lack local market knowledge and skills in creating Shariah compliant products. Also, it is essential to develop an onshore client servicing model rather than an offshore or a suitcase-based one. The model followed by most foreign banks is to use their UAE office as a hub for relationship managers serving Pakistan, India, China, African countries and GCC, which increases profitability significantly. • Premium branding Customers are discerning and tend to relate only to premium brands, like any of their other luxury needs. Branding and positioning therefore are critical to ensure communication of exclusivity and reliability. International banks are showing the way: with its Van Gogh Preferred Banking, ABN Amro projects an image of exclusive service by leveraging the Dutch painter’s name to associate banking with art and luxury. HSBC Premier, instead, is leveraging its unified global brand, targeting travelling expats and affluent individuals. • People quality Private banks need to restore confidence and the trust not only of the banks as a brand but also of the relationship managers who were in charge of client relationships. In the high growth period, most banks either hired junior private bankers or upgraded retail wealth managers to become private bankers and handle sensitive relationships. This resulted in many cases of mis-selling, incorrect risk profiling and lost trust. In GCC the main challenge is to find a sufficient number of top quality people with previous experience in private banking. In these days of crisis, the UAE private banking market continues to be extremely attractive. Easy access to overseas markets, a very large local base of millionaires and the early stage of private banking industry represent an opportunity to already established and new private banking players. Those who get the basics right will undoubtedly emerge as winners. 9
  10. 10. MENA Region: Marhaba to the world The recent financial crisis has not influenced Egypt’s Retail Banking in Egypt: an oasis for growth, banking sector in the same way it has affected the away from the storm European one. This is due to a limited integration with global financial markets, abundant liquidity and a Gabor David Friedenthal, principal, MENA banking practice, conservative regulatory environment. Egyptian banks Rome office, and Sara Fargion, Milan office were basically not exposed to the toxic structured assets that brought down the Western banks, and the almost non-existent mortgage market has protected the local system from a collapse in house prices. The banking sector is thus still growing fast, with assets up to 54 percent in the last four years, and it provides attractive growth opportunities, specifically in the retail segment. Egyptian banks show high levels of liquidity: liquid assets represent over 50 percent of the total and banks rely almost exclusively on customer deposits to fund their activity. Egypt has low exposure to retail During the past years, credit growth was weaker than deposit growth: 9 percent credit compared to region CAGR vs. 13 percent deposit CAGR between 2003 and 2008. US$ bln 60% Despite the liberalisation of the financial sector – and the recent entry of many global players – the country continues to be highly under-banked, with only 3,500 branches 50% 30% and networks located outside the major urban areas. Most local banks are planning to build more retail divisions. Not only the domestic banks, but also those from across the 40% Gulf Cooperation Council (GCC) region are looking to seize this opportunity. Globally they are committing funds to capture the Egyptian retail business opportunity. The Lebanese 30% Blom Bank and Bank Audi have recently set up offices in Cairo, while the National Bank 10% of Kuwait (NBK) bought Al Watany Bank of Egypt (AWB) in late 2007. 20% 10% Low utilisation rates, an under-penetrated market, strong funding, almost no exposure to toxic assets and an insignificant exposure to the troubled real estate sector might make 0% -10% the Egyptian banking sector seem too good to be true. Actually, that is not the case. Saudi Arabia UAE Qatar Oman Bahrain Kuwait Egypt The sector is in fact influenced by the country’s economic slowdown: GDP growth is expected to decrease (3.8 percent next year, down from the 7.2 percent attained in 2007- 2008). This downturn is mainly due to external factors: drop in Foreign Direct Investment Retail Loans (FDI), weaker tourism revenues, lower trade with developed countries and lower Suez Retail/Total Loans Canal revenues. There is also a risk of higher unemployment due to the return of labour Source: HC Brokerage, CBE, BMI from foreign markets. Besides that, weaker remittances from the US and the GCC could cause lower domestic consumption. This will primarily impact the corporate side, which represents the bulk of lending for Egypt’s aggregate loan the banks (72 percent), also affecting non-core operations with less trading activities breakdown and drops in exports. Should macroeconomic conditions persist, a new cycle of Non Retail 21% Performing Loans would also threaten banks balance sheets. Services 25% To react to the potential profitability slowdown, the biggest local private banks are thus Others 3% planning to capture retail potential as a consequence of reduced opportunities on the corporate side. They have noticed not only the retail sector growth potential and better Public profit margin, compared to other lending, but also the fact that it offers opportunities to sector 7% diversify operations, risk and revenues. The retail business appears in fact underdeveloped. Retail assets account only for a little 10 percent of Egypt’s total assets. Retail loans, instead, account for 20 percent of total Trade 14% loan portfolio and mortgage-related finance represents less than 1 percent of total sector loans. In addition, only 10 percent out of a population of 81 million have a bank Industry 30% account and just 4 percent own a credit card. Source: HC Brokerage, CBE This significant growth potential can be captured through two main channels: on the and Banks’ financials one side, by increasing the penetration of existing banking products, especially among 10
  11. 11. NEWSLETTER the growing middle class outside of the main urban areas; on the other, by introducing Mortgage is growing exponentially new banking products that are more customised to the needs of the local consumer. The yet still insignificant stake in loans growth in population and personal wealth, especially among middle class, which amounts to around 5 million people, is fuelling the increasing demand for credit cards and auto EGP mln loans. Nevertheless, most of the remaining population seems too poor to bank. 3500 3000 Egypt’s mortgage market is still in its infancy, with a low GDP penetration of 0.37 percent 3% in 2008, compared to 9 percent in the United Arab Emirates (UAE) and 25 percent in 2500 Eastern Europe, and less than 1 percent on total loans. 2000 Focusing on mortgages, the government is actually working to introduce better access 1500 to mortgage finance through both banks and specific mortgage lenders. Some of the 1% government’s reforms implemented so far include reducing property-registration fees 1000 to 3 percent of the transaction, down from 13 percent in 2006, and easier registration 500 procedures. More than 300,000 housing units are expected to be required annually for the next few years, and demand over the longer term is likely to soar when housing 0 -1% finance becomes more accessible. Banks have also begun introducing affordable June 06 June 07 June 08 Dec 08 Mar 09 mortgage schemes to cater to middle- and low-income borrowers, since the market for high income housing is largely saturated. Mortgage Loans Mortgage/Total Loans By the end of 2010, the government is also planning to introduce a credit bureau, Estealam, that should enhance banks’ information used in consumer lending. In a few Source: HC Brokerage, MOI, IDSC years’ time the Basel II regulation framework will also be introduced. In the retail-banking sector, Small and Medium Enterprises (SMEs) also appear currently Egypt SME sector breakdown under-banked. They would offer great potential if banks started working with the entire Wholesale and retail supply chain of their blue chip corporate. SMEs are the backbone of the Egyptian economy: trade and vehicle maintenance 61% they contribute almost 80 percent of GDP (Jordan 50 percent and Lebanon 99 percent) in different sectors, in particular wholesale and retail trade, vehicle maintenance, and Manufacturing 17% manufacturing. In addition, Egypt SMEs employ 75 percent (Jordan 60 percent and Lebanon 82 percent) of the employees. A number of banks are working towards increasing their penetration in this segment, but Community, microfinance solutions remain marginal. Financial institutions are generally reluctant to social and personal lend to SMEs because of asymmetric information: it is currently difficult and expensive services 7% to assess these firms’ risk and organisational position. The government has been supporting lending to this segment, also asking for SMEs Hotels and restaurants 5% increasing in transparency. In addition, in December 2008 the Central Bank of Egypt has Others 4% Real estate, renting announced to exempt the 14 percent cash reserve requirement for SMEs loans, in order and business Health and social services 3% to encourage local banks in lending to this critical segment.1 works 3% While controlling the cost of risk, the best way to serve SMEs effectively is to start with Source: Government ministries working capital financing, focused in particular on the supply side of the major corporate client. In this way, more than the specific risk, the bank will be able to assess the risk of the entire supply chain cycle, physiologically lower, and involve a larger number of SMEs in a reduced time frame. The best products to launch, in this case, would be factoring, payments and e-invoicing, all relying on worldwide standards and contractual agreements. Over all, Egypt is far removed from the current financial storm but local corporations 1 SMEs defined as a paid in capital may suffer from the economic slowdown. That is why more focus should be put on retail between EGP 250,000 and EGP 5 million (€30k-625k) and sales business and, in particular, on payments, mortgages and SME financing, introducing new between EGP 1-20 million innovative products and services to the market (e.g. the quoted Supply Chain Finance). (€125k-2,500k) With such premises and perspectives the oasis can only become greener. 11
  12. 12. MENA Region: Marhaba to the world The Gulf Cooperation Council (GCC) insurance markets did The still unfulfilled potential for insurance not disappoint last year: insurance premiums reached an in the Gulf Cooperation Council overall volume of US$ 10.6 billion, showing a massive 28 percent year-on-year growth rate. This compares to world- Alessandro Scarfò, director, MENA insurance practice, wide growth of 3.4 percent in nominal US$ terms, implying Milan office, and Mohamed Wahish, Dubai office stagnation in real terms. This growth rate sounds impressive; however, it is not near- ly as large as it should be. Insurance penetration – e.g. aggregate insurance premiums over GDP, a common measure to gauge development of the insurance industry – stands at 1 percent for the GCC countries. In contrast, the developed insurance markets in the US and Europe register penetration rates in the range of 5-15 percent. GCC giant Saudi Insurance penetration Arabia has a particularly low penetration of only 0.6 percent, dwarfed in absolute size Premiums/GDP, 2008 by its smaller neighbour, the United Arab Emirates (UAE). Bahrain 2% Insurance classes across the GCC must be evaluated in order to fully understand the root causes of such a low penetration. Motor is the biggest class, accounting for 31 percent UAE 2% of 2008 insurance premiums, followed by health and property. Life is particularly weak, accounting for only 15 percent of total insurance premiums (compared to around 60 Oman 1.1% percent in Europe). Qatar 0.8% GCC residents seem to buy insurance products only if they have to: it is not by coinci- dence that mandatory third party motor insurance is the leading class. All other non- Kuwait 0.6% life insurance classes, health included, are almost 100 percent corporate business. GCC nationals expect their governments to cover most risks for them: the majority of health Saudi Arabia 0.6% care is free and provided by the government; home loans are often state-guaranteed, without the need for building insurance. In addition, the weak uptake of life insurance is often attributed to potential conflicts with Islamic law: Muslims are not supposed to Source: Swiss Re. Sigma, Axco, National Regulator, Value Partners analysis speculate on life’s unfortunate events. At the same time there are some severe supply-side restrictions: only recently have markets been opened to foreign competition, and some regulatory regimes still need to be brought up to world standards. Business is still dominated by local insurers (their market share ranges from 77 percent in the UAE up to 90 percent in Qatar). Product offerings are mainly of the plain-vanilla sort, and distribution is mainly in the hands of local agents and brokers. Nevertheless some major normative and regulatory discontinuities are expected to Insurance market size provide a strong impetus for growth: Million US$, premiums, 2008 • UAE, Qatar and Bahrain have recently been pushing regulatory reform. Qatar is perhaps the most interesting case to analyse. The country’s insurance law is quite Bahrain 4.3% obsolete, dating from 1966. Five national players, led by Qatar General and Qatar Qatar 5.3% UAE 47.3% Islamic, dominate the market. Instead of embarking on a slow and painful reform of Oman 5.5% the existing insurance regime, Qatari authorities introduced a parallel regime in Qatar Kuwait Financial Centre (QFC). QFC closely resembles the UK Financial Services Authority 8.6% (FSA): rules, and insurers, incorporated at QFC, can be 100 percent foreign-owned. Most interestingly, companies in the QFC can operate onshore, creating a case of regulatory arbitrage within Qatar. Several international insurers, from AXA to Zurich, already started their operations within QFC. • Takaful, a Sharia compliant variant of insurance, is a system based on the principle of mutual assistance (ta’awun) and voluntary contributions (ta’abarru). Risk is shared Saudi Arabia 29% collectively and voluntarily by a group of participants, while insurance shareholders 100%=US$ 10.6 billion are entitled to a fixed remuneration. The management of the company is supervised Source: Swiss Re. Sigma, Axco, National by a Sharia supervisory board composed by financially knowledgeable Islamic scholars. Regulator, Value Partners analysis Although its share of the insurance market is currently low, accounting for around 12
  13. 13. NEWSLETTER 10 percent of overall premium volumes in the GCC, many insurers – even Western Insurance by line in the GCC companies – invest in this market by establishing Takaful operations. By adhering Million US$, premiums, 2008 strictly to prevailing social norms, Takaful insurance is expected to overcome the cultural bias against life insurance products. Others 10% Motor 31% • Health insurance has the best growth prospects, as governments are expanding Life 15% mandatory insurance for expatriates and, in some cases, even for nationals. GCC countries have a very significant expatriate population, ranging from around 30 percent in Saudi Arabia to 85 percent in the UAE. Saudi Arabia, for example, is progressively introducing mandatory health insurance: currently companies employing more than 50 expats need to provide health insurance. This coverage MAT is being extended to all expats (including domestic helpers) until the end of 2009. 9% Rumoured next steps are Saudi nationals working in private sector companies. If these changes get implemented, health can easily overtake motor as the biggest Property, fire 15% insurance class. Personal accident/health 20% At the same time, new approaches to distribution will provide more aggressive, capillary 100%=US$ 10.6 billion and competent sales channels for insurance products. Trends to watch out for include B2B2E models, like Worksite Marketing, where employees can buy voluntary insurance Source: Swiss Re. Sigma, Axco, National products at the worksite through payroll deduction. Banks will enter the sector as well, Regulators, Value Partners analysis bundling insurance with financial products. When these game changes begin to bite, GCC insurance markets should start to live up to their full potential, with penetration levels starting to approach those of Europe and the US. With a population of around 28 million people and a GDP of over US$ 480 billion, the Kingdom of Saudi Arabia is one of the largest Discussing the Saudi Arabian economy and richest countries in the Middle East and North Africa (MENA) region. Holding a quarter of the world’s known oil reserves and Interview with Usamah Al-Kurdi, 13 percent of global production, it is the world’s leading producer member of Saudi Arabia’s Parliament and exporter of oil. In recent years, the Kingdom’s government has been making concerted efforts to diversify its economy and minimise its reliance on oil as the sole source of government revenue, at the same time in- creasing employment opportunities for the growing Saudi population and bringing about reforms on economic, political and social levels. Value Partners met with Usamah Al-Kurdi, member of Saudi Arabia’s Parliament and notable businessman, to discuss the country’s latest changes and how they are likely to impact Saudi Arabian economy, as well as the government’s plans for the future and Saudi Arabia’s relations with the international community. How has Saudi Arabia been affected by the global financial crisis and what measures is the government taking to aid its recovery? In my opinion, Saudi Arabia has been affected very little by the economic downturn and one of the overriding reasons for this is the availability of cash within the country. The government decided that the best way to counter the effects of the crisis, in fact, was to disperse a lot of cash into the market. Through a series of contracts for major projects, the government managed to exceed its planned budget so much so that, among the G20, Saudi Arabia is number one in terms of the percentage of expenditure increased to counter the effects of the crisis. As a result, in Saudi Arabia we have not seen bank failures or escalating unemployment as has been the case in many other countries. We have been only minimally affected by the current downturn. 13
  14. 14. MENA Region: Marhaba to the world In recent years, social, economic and political reforms have all been prominent in the Saudi government’s agenda. What specific measures have been taken to diversify the economy? The process of diversifying Saudi Arabia’s economy has been ongoing since 1975, when the industrial cities of Jubail and Yanba were created. While Saudi Arabia’s exports are still mainly oil, they have diversified into other petrochemicals manufactured from natural sources, including gas and other products. More recently, the effort of diversification took a major turn when Saudi Arabia decided to bring foreign companies in, to invest in the gas sector. This led to the arrival of companies from Russia, China, Italy, the Netherlands and Spain. Aside from the economy, there has also been a lot of reforms in other areas, including social, educational and even judicial reform. I always say that reform in Saudi Arabia started in 1993 when the Shura Council or the Saudi Parliament was created. Many other steps have been taken since then, especially as a result of acquiring membership to the World Trade Organization (WTO). Aside from oil and gas, which other sectors have been opened up to private investors? Another important area that has been opened up for both local and foreign investors is mining. For many years we have not given the mining sector the attention it deserves, but now there are a lot of mining investments taking place, both by the government and the private sector in phosphates, iron ore and aluminium. Much has also been invested in infrastructure. For example, 3,500 km of new railroad routes are currently being built, as well as their associated services. Water desalination and power generation and even higher education are also areas that are being expanded and receiving private sector investments. The telecommunication sector has also opened up to competition in both Usamah Al-Kurdi has an extensive mobile and, increasingly, fixed line sectors. In the past, almost every sector was closed for record of prominent positions private investment except few. Today we are witnessing the opposite: every sector is now in the country, including serving open except for a short list of areas that are limited to Saudi investment. as Secretary General of the Saudi Council of Chambers What is the vision of the new King Abdullah Economic City? of Commerce & Industry and The economic cities are another indication of the reform that is taking place in Saudi sitting on the Board of Directors Arabia. The King Abdullah Economic City is the first and the biggest one, but it is only one of several prominent Saudi of the six economic cities that are currently being planned. Like in many other countries, so Arabian organisations. He is far development in Saudi Arabia has focused around urban centres but we are promoting currently a member of the Majlis development throughout the whole country, with the introduction of economic cities in A’Shura (Consultative Council), many different areas. The idea is that each city has its own competitive advantage – for Chairman of Alagat International example, the King Abdullah Economic City, which sits just north of Jeddah, provides the Investments Company, and advantage of a major shipping port, not only for Saudi Arabia but for all shipping passing Chairman of Saudi-Italian through the Red Sea. The Jizan City in the South is designed to service the East African Development Company. coast, while the Hail Economic City is basically a logistics centre because of its location in the centre of the country. As a result, each city has its own economic twist. How has the Saudi Arabia economic landscape changed for foreign companies and what incentives are being offered? When Saudi Arabia became a member of the WTO, it had to lower its legal regime for foreign companies doing business in Saudi Arabia. This led to a dramatic improvement in the business environment for foreign companies, including two key incentives which still exist today. Firstly, there are tax incentives, following the reduction of tax rates from 45 percent to 20 percent. Secondly, the law was changed so that foreigners can now own 100 percent of businesses in Saudi Arabia. In my opinion, these two steps have made doing business in the country much easier for foreign companies and my understanding is that further incentives are being planned for investors in the upcoming economic cities. This year marks a big event for Saudi Arabia with the first woman being appointed to a ministerial level position. How easy is it for women to do business in Saudi Arabia? The issue of women’s empowerment has become a very serious business in Saudi Ara- bia. Two signs confirm this: one is the creation of the National Committee for Women in Business and the follow-on from that, which is that every chamber in Saudi Arabia has 14
  15. 15. NEWSLETTER its own support organisation for business women. The other one is what is referred to as Resolution 120. This resolution was issued by the government about three years ago and it addresses the role of women within society. We have seen women’s roles dramatically improving in Saudi Arabia both socially and economically and many women have been appointed to significant government positions, including the first woman nominated director of a TV channel in September. Can you give us an update on whether Saudi TV will be corporatised and on any other development in the liberalisation of the media sector? There was an attempt to corporatise Saudi TV but it was then abandoned. It was chosen, instead, to expand the available network. For example, the Saudi Arabian government TV used to have just one channel whereas now we have five. Similarly, we used to have only one radio station and now there are seven or eight. One important event in the liberalisation of the sector was when licenses were awarded for two privately owned radio stations. In addition, the government announced, in September, a request for interested parties to submit their qualifications for a further six private radio stations. I also know that the Ministry of Information and Culture is looking into licensing a few additional newspapers in the country, so reform is certainly touching on the media sector. ART, the biggest regional Pay-TV satellite operator, and Rotana, leading media content providers, are also based in Saudi Arabia. What would you recommend as a first step for foreign companies who are looking to set up operations in Saudi Arabia? Companies interested in Saudi Arabia should do their homework and investigate whether or not the sector they are working in will be of interest to Saudi Arabia. The second thing they should do is visit some of the websites that talk about Saudi Arabia: a particularly useful one to check is the General Investment Authority of Saudi Arabia ( sa). What my company, Alagat, does is actually providing a ‘hand held’ service for investors who want to come to Saudi Arabia, helping them achieve their goals in the country. The media industry in the Middle East and North Africa (MENA) region has undergone the same rapid and disruptive A young generation is powering process of convergence that much of the world has been the new media revolution experiencing in recent years. In a region where 60 percent of its nearly 300 million population is under the age of 25, media Santino Saguto, managing partner, Dubai office and technology are increasingly important sectors and the new technologies – that the digital age brings with it – are as popular here as in any other part of the world. However, with one of the fastest growing broadband penetration rates in the world, the impact of convergence on local media players is heightened as they are forced to significantly review their traditional business models to keep up with changes in consumer behaviour. As the MENA media industry makes the transition from analogue to digital, there is a critical need to develop a sustainable business model to monetise digital content. As traditional platforms (including print, primarily, and TV) continue to lose their appeal to new media platforms for content delivery, there are two main business models to take into account: paid-for content (subscription driven) and advertising-driven content. It has historically been difficult to monetise subscription-led content in the MENA region, largely due to the wide availability of almost 600 Free-to-Air (FTA) TV channels. The problem in the region is further intensified by the abundance of piracy across all platforms which takes the form of illegal decoders (dream boxes), pirate DVDs and, as in many other countries, illegal downloads encouraged by the chronic absence of key legal download sites such as iTunes. Meanwhile, monetising digital content through advertising remains tough. On the traditional TV platform, advertising is thought to be severely undervalued 15
  16. 16. MENA Region: Marhaba to the world due to the lack of effective audience measurement systems in the region. However, the recently announced launch of phase one of a peoplemeter TV audience measurement initiative in the United Arab Emirates (UAE), as well as an established system in Lebanon and a much discussed similar concept in Saudi Arabia, means that TV content could be on the way to discovering its true value. In the new convergent world, consumers are increasingly moving towards new platforms for content but advertisers have yet to catch up, with most of the region’s ad spend still concentrated in traditional media. Advertisers will have to start shifting their spend online, as well as finding new innovative ways of exploiting the opportunities offered by the digital age, if content is to be monetised 2 The word ‘prosumer’ is a portmanteau formed by successfully in the new convergent world. contracting either the word ‘professional’ or ‘producer’ As in other markets, companies from adjacent industries (especially big players with the word ‘consumer’. It is meant to indicate such as Google and Apple) have been disrupting the traditional media value chain, the segment of proactive bypassing traditional intermediaries and introducing a foray of consumer and business consumers. applications directly to end-users. The rapid growth of user-generated content and social networking sites has led to further disintermediation allowing ‘prosumers’2 to distribute and exchange content directly. However, in the MENA region, the recent growth in mobile broadband, that has been brought about in part by this concept of disintermediation, represents a significant untapped opportunity for mobile operators and content players alike. The challenge for media players will be to transform themselves (e.g. new skill sets, digital marketing, superior distribution, new channels, etc.) to tap into the opportunities presented by these new media channels. Telecoms meanwhile, currently holding the lion share of the media-telco value chain, will have to strike a balance between relinquishing some control to new players and avoiding being cornered into the dumb pipe scenario. Local content across traditional and digital platforms in the MENA region remains in high demand but supply is low due to the lack of effective monetisation models. The regional independent production industry remains largely underdeveloped and too fragmented to drive successful commercial models in the industry. Although a few regional media companies have developed rich online media propositions, almost all the top websites viewed in the region are of European or US origin and, even today, less than 1 percent of web pages are in Arabic. Indeed, even the region’s most popular Arabic website, Maktoob, has recently been acquired by US giant Yahoo!. However, this is likely to lead to a dramatic increase of popular Arabic content on the web, considering that all Yahoo!’s services will be translated into Arabic and many new Arabic services will be created. Recognising the need for a concerted effort, regional governments and regulators are proactively taking steps, both at macro (media free zones) and micro levels (local regulation quotas), to help boost the production of local content in the new convergent world. Local media and telco firms have recognised that, while business models remain unclear in the evolving industry landscape, there is a need to remain flexible and work together. In recent months, there has been a flurry of collaborative activity in the form of partnerships and joint ventures between media and telco companies which have led to new convergent services (bringing content to mobile users, IPTV propositions, online VOD sites, etc.) which have enjoyed varying degrees of success. Although the products of these partnerships have not yet led to the availability of quality content on the same level as some of the more mature markets, there is no doubt that some of the local online VOD propositions have the potential to replicate the success of similar initiatives in the Western world, such as Hulu. Meanwhile, telco operators, mobile TV offerings are rapidly catching up with Western markets, with new content deals being announced nearly every week. The period of discontinuity caused by the transition from analogue to digital has created significant challenges for industry participants (such as declining revenues and margins with soaring investments) making it difficult to leave broadband infrastructure invest- ments in the hands of market forces. In contrast to the cautiousness traditionally showed by industry players regarding governments measures, media and telco operators in the 16
  17. 17. NEWSLETTER region are starting to perceive intervention in a positive light. They see governing bodies as having an increasingly important role to play in protecting and promoting the media industry, to help create a healthy environment in which sustainable business models can exist, as well as defending the interests of consumers. In particular, governments have the responsibility to ensure that adequate funding is available for the development of ubiquitous and affordable broadband connectivity in order to further stimulate content production and distribution. The MENA region is uniquely positioned to not only capitalise on these trends in media convergence, but also to take proactive measures to anticipate the future shape of the media industry. There is a great opportunity for local industry players to learn from the mistakes and success stories of TMT operators in international markets. With a concerted effort from players at all levels of the value chain, the Arab media and telecom industry could unlock a vast amount of value in the new digital age by leveraging on the accelera- tion of technology and the uptake of new media for the younger generation. Today Africa still represents one of the last pockets of growth for the mobile industry in the world. With mobile penetration still The African mobile market is ripe for M&A around 35 percent on average and broadband at just 2 percent, the enormous continent of over 1 billion people holds massive Emmanuel Durou, Dubai office potential for growth. In recent years, the introduction of more affordable handsets, as well as the liberalisation of telecoms markets and the issuing of licences to new operators, which has led to more competitive 3 Average Revenue per User pricing, have all contributed to the growth of the African mobile market. Indeed, a study by the World Resources Institute shows that spending on mobile phones is the fastest area of growth as incomes in the developing world rise – even faster than spending on energy or water. Among these markets, Africa is the region with the fastest rate of subscriber growth. Nevertheless, Africa is not only about volume, and ARPU3 levels tend to hold up when compared to other developing markets, in particular to Asia. On average, ARPU in Africa – at US$ 12 in 2008 – is low compared, for instance, to the Gulf region. However, selected countries such as Gabon and some North African markets have relatively high ARPUs – Gabon shows a monthly ARPU of over US$ 30 – and the whole of Africa is in any case high when compared to many Asian markets like India or China. Over the next few years, we believe that a few trends will shape the mobile usage and marketplace in Africa. As mobile handsets will continue to be the main source of access to communications and information for the majority of the population, mobile operators will have further opportunities to create innovative mobile services for trading, money- exchange, health, etc. In particular, mobile internet access, supported by the recent investments in infrastructure, e.g. new undersea cables on the East coast, will be the common way to access the Internet. A concerted effort of equipment vendors (affordable yet user-friendly browsing interfaces), operators (investment in 3G or 2G upgrade) and regulators (release of lower frequencies for affordable mobile broadband deployment) will be needed to tap into this opportunity. In addition, the competitive landscape in Africa will be reshaped with three to four operators dominating the market through an acceleration of the consolidation of smaller regional – e.g. Millicom or Hits – or local players. Forget Japan, South Korea or Italy, today Africa is the cradle of the rare breed of truly successful mobile value-added services, from mobile payment to mobile search or micro- blogging. African operators and end-users are known as some of the most innovative in the world, in terms of value-added services, and we believe this trend is set to last. Operators have introduced many successful schemes in countries across Africa with an impressive take-up. Probably the most touted of all, Safaricom’s M-Pesa service in Kenya, remains to this date the most successful example of mobile payment services in the world. 17
  18. 18. MENA Region: Marhaba to the world VAS offerings by African mobile Beyond innovative applications, mobile broadband is undoubtedly the next growth op- operators portunity for mobile operators in Africa. With significant investments and completion of internet infrastructure upgrades, the next step for mobile operators is to fill the gap of a limited fixed access infrastructure in the continent. Operators like MTN in South M-payment Africa have already witnessed exponential growth of their mobile data traffic in the last Safaricom (Kenya) M-Pesa service attracted 2.3m users within one year two years. For other operators in the region, we believe that a combination of selective following launch in 2007, and has investment in infrastructure upgrade, e.g. in city centres, attractive pricing and handset now attracted 7m users Used as springboard for new entrants strategy, like affordable smartphones and dongles, will yield similar results. such as Cellpay in Zambia Loyalty programs Furthermore and more practically, African mobile operators have been turning to innova- Vodacom South Africa’s ‘Talking tive methods for increasing efficiencies in low income countries. Network sharing, a con- Points’ loyalty program gives points at each top-up which can be redeemed cept which has been widely popular in Asia and above all India, is now spreading also to for rewards Africa. In Nigeria, for instance, the regulator started urging operators to take advantage MTN South Africa ‘Y’ello Fortune’ enters customers into lottery-like of the opportunity. Meanwhile, operators in Africa have developed other innovations events on purchase of top-up of their own, such as dynamic tariffs and borderless roaming. MTN’s innovative tariff Credit ‘management’ scheme, for example, offers an adjustment in the cost of calls by the hour, depending on Micro-recharge through e-transfer the level of usage. Thus, customers can check the discount available to them at different – Zain ‘Flash’ credit in Gabon Zain Kenya’s ‘Zap’ money transfer times of the day, generating calls when the network would otherwise be little used. Simi- service launched in February, with larly, Zain introduced the famous One Network, a borderless roaming concept, allowing full offering of credit/airtime transfer facilities customers in Kenya, Tanzania and Uganda to use their mobiles in all of these countries without paying roaming charges. UGC ‘Voices of Africa’ community offers sharing of amateur video content There is a long history of ties between Middle Eastern operators and investors, on the captured from a mobile phone with other members one side, and the African telecoms market, on the other. Spotting its potential, operators Micro-blogging platform Twitter like Zain and Etisalat have both entered the African market many years ago. The former offers African users the opportunity to ‘leapfrog’ PC straight to mobile via its acquisition of Celtel, the latter through a combination of new licences, individual acquisitions and Atlantique Telecom covering West Africa. Today, the number of new Social communities Advertising-based service myGamma licence opportunities has significantly decreased, creating expectations of a new wave exhibiting huge growth in emerging of consolidation as the next step. The competitive landscape in Africa is made of three markets; South Africa, Kenya among top 10 performing markets broad types of operators: single market players, usually incumbents; small regional South African Mxit service provides players, such as Hits and Millicom which have acquired licences in four to five countries instant messaging and chat services to 11m+ users in the region; large players with an extensive footprint, such as Orange and Vodafone. Within the third category of operators, a new wave of consolidation can thus be foreseen as the most likely scenario for the region. Consolidation opportunities African subs* in Africa Vodafone 80 MTN * Mobile only; market cap, exchange 70 rates taken on 27 April, except: Econet market cap estimate, Algerie Telecom and Globacom 60 not publicly listed (nonetheless Zain size of bubble is representative 50 of estimated company size) Orange 40 European player 30 Middle East player Local (African) player Globacom Etisalat 20 Orascom Market cap (2Q09E) Consolidation opportunities? Qtel 10 Millicom Algerie Source: Company websites and finan- Telecom Hits Econet cials, press reports, Informa 0 5 10 15 20 -10 Number of countries in which present 18