The pace of deregulation and privatization of state assets in the Middle East & North Africa (MENA) has been traditionally slow. Regional governments have shown little willingness to deregulate state monopolies on key services such as water, electricity and fuel.

But in an attempt to address the real need for the upgrade and expansion of the services they provide, governments have started opening markets for private sponsors and financiers. The telecoms sector has been at the forefront of this.

Over the last two years telecoms financing has been growing out of its niche status to become, even if still quite small, one of the most lucrative sectors for both local and foreign investors. Despite the relatively limited size of telecoms operations concluded so far in the MENA region, compared to other emerging markets such as Latin America or Eastern Europe, the prospects for the year 2000 are promising.

Slowly but surely, a number of regional governments are going ahead with plans for the privatization of formerly state-controlled telecoms utilities. The award of GSM operating licenses to private consortia has created additional interest in a market that had previously seen very few openings for either private sponsors or financiers.

The impact has been a fundamental one. Not only in terms of the improved quality of services provided to end-users, in a region characterized by huge telecoms infrastructure deficiencies, but also in the local investment community has followed the enthusiasm that a number of leading international players have shown for local telecoms transactions. Financial institutions from the MENA region have demonstrated the willingness and the capacity to play proactive roles in the deals by channeling liquidity present in the local markets into new investment ventures related to the telecoms sector.

Throughout 1999 the number of telecoms projects that achieved financial close was unprecedented both in terms of the technical challenges and the size of the financing required. Countries such as Egypt, Morocco and, outside MENA but still relevant, Turkey, have been at the forefront. Movements in other countries such as Saudi Arabia, Iran or Algeria have been painfully slow with little or no openings for private initiative in the sector.

The year 2000 will be one of consolidation and will provide the ultimate proof in terms of whether foreign and local investors have reason to believe that developments in the telecoms sectors can make a long-lasting and profitable impact in the region. Opinions are divided. Some international investors expect that developments in the telecoms sector will be limited, having signed large deals over the last 12 months. But key regional sponsors are confident they will be able to pursue their expansion both in their own countries and seek a presence abroad.

Among the most active players in what will be the most interesting country for North African project finance in 2000, is Cairo-based Orascom Telecoms. Advised by EFG Hermes, now controlled with a 25% stake by Citigroup, Orascom is playing a pivotal role in setting benchmarks for telecoms operations in the region.

It started last year with the financing of the $1 billion deal for the design, supply and installation of a digital cellular GSM system. Under a 15-year extendable license granted in 1998 by the Egyptian government, an international consortium made of Orascom, holding a 27% stake, France Telecom and Motorola will develop a system in over the next three years covering up to 85% of Egypt's national territory.

Financing for the operation was split into a $490 million 1-year bridge for the purchase of the license, $470 million of term loans and a $100 million bond issue. Lead arrangers for the bridge transaction involved a mixture of local and international banks including ABN Amro, Chase Manhattan Bank, Societe Generale, Commercial Bank of Egypt, Banque Misr and MI Bank. Chase, Dresdner Kleinwort Benson, Banque Paribas, WestLB and Commercial International Bank acted as lead arrangers for the term loans that reached financial close on June 30, 1999. All facilities were syndicated locally and internationally.

Another 15-year GSM license was awarded in 1998 to members of the Misrfone international consortium that included Air Touch Communications, Vodafone, EFG-Hermes, Banque du Caire, Alka, CG Sat and Mobile Systems International. Financing worth $1 billion was split between a $200 million bridge for the purchase of the license lead arranged by Barclays Bank and a $700 million term loan raised locally and lead arranged by Banque du Caire and Banque Misr.

Having raised capital for the GSM venture, this year Orascom Telecom has returned to the international market to help its expansion drive in the region. Sources within Orascom in Cairo told Project Finance the company is looking at opportunities in both Algeria, where it is bidding for the second GSM license, and in Sudan where Orascom is waiting to submit its bid in the privatization of Sudan Telecom.

Chase Manhattan and Citibank are joint lead arrangers for the raising of $200 million worth of financing. Pricing has not been made public but sources in Cairo expect the operation to be syndicated locally and internationally with financial close due by the end of second quarter 2000.

As a further test of the local popularity for the telecoms sector, Orascom is planning to go ahead in April this year with an initial public offering (IPO) for the raising of an additional $500 million. Orascom predicts that no additional cash resources will be needed for the mobile operator in 2000, although it is eyeing the possibility of refinancing over the next two years. State-owned Telecom Egypt is also planning the issue of two IPOs later this year for $650 million each.

Whilst the IPO market hots up, ?the year 2000 will be fairly quiet for telecoms project finance in Egypt?, admits a source at Orascom's financial adviser, EFG Hermes in Cairo. But a project financier within the London office of Chase Manhattan is bullish long term: ?Once the Egyptian government has cleared issues such as withholding tax affecting the activities of foreign banks interested in doing business in Egypt, the local environment will become more attractive. Despite their limited understanding of non- or limited recourse financing in the telecoms sectors, Egyptian banks have shown willingness to take part in benchmark deals and at the same time to dispose of high amounts of liquidity into the projects.?

The Moroccan market is similar to Egypt, being among the first countries in the MENA region to open to private sponsors and financiers for the development of telecoms schemes. Morocco's telecoms sector is becoming very attractive to sponsors mainly from southern Europe, such as those from Spain and Portugal, due to its geographical proximity and the availability of cash locally.

Spain's Telefonica International and Portugal Telecom alongside local Banque Marocaine du Commerce Exteriour and Afriquia are members of the Medi Telecom consortium in charge of the development of Morocco's second GSM license, a project worth an estimated $1.1 billion. The 15-year license was awarded to Medi in July 1999 after beating off competition from six other consortia. In August 1999 ABN Amro was mandated to arrange with Spain's Argentaria and Barclays Bank a 1-year bridge $350 million financing signed at the end of October 1999. An additional $300 million worth of financing for the project was raised among Portuguese banks. Sweden's Ericsson and Germany's Siemens are the equipment suppliers.

This year Medi Telecom returns to the market with plans for expansion requiring long-term project financing. Sources within Deutsche Bank, appointed financial adviser to Medi Telecom, in London, claim that $800 million worth of financing will be raised this year. On behalf of their client, Deutsche has contacted a number of export credit agencies including Sweden's EKN, Germany's Hermes and Italy's Sace to provide guarantees for the commercial debt. The involvement of the Washington-based International Finance Corporation has also been sought, in the form of an A loan worth an estimated $75 million and a B loan with commercial banks in the region of $500 million. Deutsche is looking at including a domestic tranche in the deal to benefit both from the high liquidity present in the Moroccan debt market and also to mitigate the project's risk by not raising the money entirely abroad.

Local state-owned Maroc Telecom is planning the sell-off a 20-35% stake to a strategic investor with the local government retaining a majority portion. An additional 10% is likely to be sold on the stock exchange by the end of 2000. Following the approval by the Moroccan parliament in February 2000, the tender is expected to be out by the beginning of April. A team of local and international banks including JP Morgan, Merrill Lynch, BNP Paribas, Banque Commerciale du Maroc and Banque Centrale Populaire are advising the government that has valued Maroc Telecom an estimated $5 billion. Other developments include the possibility of a second fixed line network license being tendered in Morocco later this year.

While waiting for more licenses in North Africa, including the second GSM network in Tunisia and Algeria, telecoms project financiers are looking at Turkey. Turkey is testing the market for some big-ticket telecoms operations to be launched this year. Heavyweight players such as Turkcell are expected to return to the debt market for the refinancing of the $575 million GSM license signed back in July 1998 and lead arranged by JP Morgan, Deutsche Morgan Grenfell and BT Alex Brown. Members of the Turkcell consortium include Telecom Finland (34%), Cukurova Holding (30%), Ericsson (15%), MV Communication (14%) and Kavala Bilka (7%).

Moreover the announcement by the Turkish government of the tendering at the end of March 2000 for an additional three GSM licenses worth $650 million each, has attracted international investor interest. France Telecom, Spain's Telefonica , the US' SBC Communications and Telecom Italia are leaders of four different consortia bidding for the licenses. All of them are teaming up with local sponsors. Out of the three, the Turkish government has announced that one license will be awarded to the state-owned fixed line monopoly Turk Telekom.

Projected for June or July 2000, the coming sale of 20% of Turk Telekom, an operation worth an estimated $2 billion, is an additional bonus of interest to international sponsors. Legislation was passed by the Turkish parliament in February 2000 in favour of the sale of a total 49% of Turk Telekom's to a strategic investor by year-end with full liberalization of the Turkish telecoms market forecasted by 2004. The legislation established that the first part of the sale includes a 14% stake for local and international offering, 5% for employees and a final 10% for the Turkish postal services, previously affiliated to Turk Telekom. Merrill Lynch, ABN Amro and Rothschild are acting as financial advisers on the sale transaction.

According to Eren Guru, senior investment officer at Citibank in Istanbul, the sell-off of Turk Telekom is the most significant event for the future of telecoms projects in the country although much will depend on how quickly it is achieved. The sale also has political implications and is a vital element for the release of $4 billion worth of financing to be supplied to Turkey over the next three years by the International Monetary Fund.

Other projects in Turkey include financing for the construction and launch of Eurasiasat for the diffusion of 32 different television channels across Asia and Central Europe. Financing worth a total $150 million has been already guaranteed and lead arranged by Chase Manhattan Bank. Sponsoring of Eurasiasat is a joint venture between local Turk Telekom and Alcatel.

If the number of projects in the pipeline for Egypt, Morocco and Turkey can be described as satisfactory, the same cannot be said of Gulf countries where movements towards liberalization of the telecoms sector have been considerably slower. Although there is little willingness to give up stakes to strategic investors, international contractors do provide state-controlled telecoms services with the equipment necessary for the upgrade and expansion of local networks.

In March 2000 state-owned Saudi Telecommunications Company awarded Sweden's Ericsson a $300 million contract for upgrading the local GSM network to expand capacity. Ericsson is also developing a presence in Iran where it won a small but significant $45 million contract for the supply of fixed and wireless telecoms facilities.

Last but not least is the destiny of the $1.1 billion Thuraya satellite project in the United Arab Emirates. A joint venture between local Emirates Telecom, Arab Satellite Telecom, Deutsche Telekom and Bahrain Telecom, the project involves the construction and launch of a satellite covering the Middle East, Europe and South Asia for the provision of services to mobile users. Lead arranged by ANZ Investment Bank, Societe Generale, Union National Bank of Abu Dhabi and Abu Dhabi Islamic Bank the transaction has been languishing at syndication level over the last nine months. The success or failure of such a high profile operation could set an important benchmark for the future of the telecoms sector in the Middle East.