Special Zones and Economic Cities
Special zones and economic cities are emerging as major drivers for growth in the MENA region, and their success relies on their ability to offer advanced telecommunications infrastructure and services for leading tenants.
A new study from Booz & Company addresses the key factors for enabling the right telecommunications infrastructure and service provision within these zones and cities, considering the differences between developers, existing operators, sector regulators and policymakers’ perspectives.
Dubai, UAE, 23rd April 2008 - Gulf Cooperation Council (GCC) members have recognized the need to develop their national economies beyond dependency on the oil sector. As a result, new economic zones - designated areas in which residents and companies are exempt from certain laws and taxes - are being introduced, centered on ICT, financial and other service sectors, said a new report by Booz & Company. These help build new national economic platforms based on specific concepts or industries for promoting growth, attracting new types of visitors and residents, and enabling employment opportunities.
Some countries are developing grand plans that extend zones to economic cities – which will be economic drivers for the telecom sector in the MENA region - over the next ten years.
“Developers of many of these new zones want to provide advanced information and communications technology (ICT) infrastructure and services to attract leading tenants, and some developers are considering taking a hands-on role in this regard,” said Bahjat El-Darwiche, a Principal with Booz & Company based in the Middle East.
Telecommunications in all MENA countries are subject to laws and regulations and developers in liberalized markets can no longer expect exclusivity for ICT provision in selected geographical areas. “Regulatory exemptions or special treatments for zones would be counterproductive and inverse to the purpose of the zone,” explains El-Darwiche. Zones should be vehicles to support greater competition and advancement in liberalizing markets.
The challenge at hand
While economic zones have existed for many years in the MENA region, recently some GCC member governments have developed zones that are advanced economic tools.
Some developers are considering taking control of the construction as well as service provision to tenants in these zones - facilitating advanced ICT infrastructure. Developers however, run the risk of coming up against regulatory barriers in implementing this approach.
“To overcome barriers, such as lack of authorization or clarity for non-telecommunication operators to provide services, it is necessary that national telecom authorities consider reassessing existing regulatory frameworks and obligations,” stated Jonathan Fiske, a Senior Associate with Booz Allen Hamilton.
Authorities may conclude either that the authorization regime could be further liberalized or that current practices are suf¬ficient enablers, and they should be cautious in exempting telecommunication provision in the zones from the laws outside. Instead, they should focus on whether liberalization is necessary across the sector, to benefit the zones.
Growth of Economic Zones in the Middle East
- To date, more than 55 economic cities or economic zones have been established or are under development in the GCC region.
- The United Arab Emirates was an early adopter of economic zones. It has established, or is in the process of building, at least 31 economic zones, ranging from media and entertainment, industrial to IT, to research and development.
- The Kingdom of Saudi Arabia is another example of a country with plans to develop economic zones and cities - approximately 2 million people will live and work in King Abdullah Economic City by 2020.
Other Middle Eastern countries have increasingly been adopting zones to promote diversification of the region’s economies and boost employment opportunities:
- Bahrain is developing the Bahrain Investment Wharf (BIW), in addition to its current two ports and industrial zones (Mina Sulman and North Sitra Industrial Estate).
- Oman has a zone called the Knowledge Oasis Muscat (KOM) and plans to build a multidisciplinary city called Blue City, focusing on residential and tourism facilities.
- Qatar plans to construct a development called Energy City Qatar (ECQ), which will aim to attract leaders in oil and gas production.
Delivering Advanced ICT Infrastructure and Services
Developers can face regulatory challenges in the self-provisioning of telecommunications infrastructure and services. Challenges also come from existing operators, unable to roll out networks in the zones within the necessary time frame, or to the standard demanded by developers’ plans. “It is necessary for all stakeholders—i.e., developers, operators, regulators, and policymakers—to address the barriers that affect ICT infrastructure and service development” explains El-Darwiche.
Developers. Telecommunications in all MENA countries are subject to laws and regulations and developers can no longer expect exclusivity for ICT provision. Although there are examples of such arrangements in the past, these were prior to sector liberalization and developers therefore need to consider their objectives in the context of an open and regulated ICT sector.
“Many MENA countries have restrictive regulatory practices for market entry, and most limit the allocation of fixed network licenses” explains Fiske. Developers that want to enter the market must be aware that it is common to impose conditions on the authorized operator, which might lie outside the objectives of the developer.
Operators. Some developers are stating what they want and are indicating their willingness to self-develop and deliver these needs. Operators therefore face the prospect of further competition and even run the risk of exclusion.
“Operators need to take advantage of the demand for advanced ICT infrastructure and services, but will need to work with regulators and developers to ensure they can deliver and benefit from these opportunities” clarified Fiske. Operators need to take a proactive interest in the ICT objectives of developers for these zones.
Regulators and Policymakers. Economic zones and economic cities will prompt challenges for regulatory authorities and policymakers. The first challenge might concern whether these zones and cities deserve, or could legitimately be allowed to have, special treatment. Regulatory bodies must balance the promotion of a zone’s economic activity with the development of the telecom sector – and special treatment may be effectively illegal under some countries’ telecommunications frameworks.
“Policymakers and regulators should consider the state of market liberalization, opportunities to open markets, and infrastructure sharing, as well as the status of private networks, to identify the best approaches within the existing mandates and frameworks,” Fiske said.
Rolling-out ICT: Management Models for Economic Zones
“There are four models that can be considered for the development of telecommunication infrastructure and the provision of commercial services for ICT users,” explains El-Darwiche.
Private: The developer has full operational control of infrastructure and provision of commercial services to the residents of the zone and would be responsible for constructing the telecommunications – fixed and/or wireless – and IT infrastructure; managing the operations of the telecommunications network and providing telephony and Internet services, including voice, data, and TV services. “This model would be difficult to implement in most MENA countries, as it conflicts with market liberalization practices” explains El-Darwiche.
Exclusive: In the exclusive model, infrastructure operator and commercial service providers are selected by the developer and given exclusivity rights within the zone. This has similar challenges to those of the private model, but might be possible in markets that are still closed to competition.
Managed: Under this model, infrastructure development and operations are exclusive to an operator or a consortium of operators, which oversees a single network, but commercial service provision within the zone is open to all authorized operators. “Taking into account the sector liberalization approach adopted in many countries in the MENA region, the Managed model could be the right solution for balancing between regulators, developers, and operators objectives” commented El-Darwiche
Open: The open model allows any licensed network operator and service provider to compete for service users. Distinctions are not made between economic zones nor between zoned and non-zoned areas. “The open model is in line with market liberalization and fair competition. It encourages greater economic efficiencies than models based on exclusivity,” El-Darwiche stated.
Lessons Learned for Stakeholders
“Economic zones will be a significant driver for telecom revenue growth over the next 10 years in the MENA region,” stated Karim Sabbagh, a Vice President from Booz Allen Hamilton heading the firm’s Communication & Technology practice in the Middle East. “In the GCC alone, economic zones are expected to generate more than 15 percent of telecom revenues by 2018” added Sabbagh.
Developers are instrumental in raising the expectations for ICT service standards and availability in the region. Operators should take advantage of liberalization policies to capture the new customer bases and should be aware of risk to scope and scale of their operating and service provision activities. Policymakers might have to relax restrictions on market-entry authorizations and reduce obligations such as geographical coverage requirements, while regulators should review the status of property owners in terms of access to potential new infrastructure installation, and any obligations in enabling access to a new service provision.
Economic zones or economic cities should not initially be looked at as warranting exemptions to liberalized telecommunications regulatory frameworks. Exemptions would in fact run counter to the principles of economic zones, which include creating liberalized environments. “Regulators need to engage with developers and all licensed providers, ensuring national ICT policies are successful in zones and that various opportunities are available to meet the demands by market participants for advanced ICT infrastructure and services, without obstructing other policy objectives” concluded Sabbagh.
Booz & Company’s Jonathan Fiske, Bahjat El-Darwiche, Karim Sabbagh and Chady Smayra are the authors of " The Rise of Economic Cities in the MENA Region: A Telecommunications Perspective"
This recent study examines the key factors for enabling advanced telecommunications infrastructure and service provision within special zones and economic cities in the MENA region, while taking into account the differences between developers, existing telecommunications operators, sector regulators and policymakers’ perspectives.
Booz & Company