Reforming Yemen’s telecommunications sector

Executive summary

1. Telecommunications are a vital pillar of Yemen’s economy. The sector’s contribution to economic output has been growing steadily at an average of 7% between 2015 and 2018, with a large number of jobs being directly or indirectly linked to the sector. Its impact on public finances is considerable: fiscal receipts from telecommunications (mostly fees and taxes levied from mobile carriers) make up the largest share of public revenues. While lacking official figures, multiple sources suggest that telecommunications sector revenue are likely to exceed USD 150 million, the majority of which is controlled by the Houthis de-facto Authorities (DFA). Further, in Yemen’s conflict context, a remarkable feature of the sector has been its resilience. Similar to other fragile settings such as Afghanistan, Iraq, and Somalia, mobile operators have largely continued to provide a basic level of services to the population throughout the conflict years, despite facing huge challenges. Critically, a functioning telecommunications sector has enabled and sustained economic activity over time by linking firms to markets and consumers. It has also supported and reinforced societal ties by connecting communities within Yemen and individuals inside Yemen with the diaspora. Additionally, it has enabled vital humanitarian operations. These contributions highlight the multi-dimensional value of information and telecommunications technologies (ICT).
2. Notwithstanding their economic and social importance, Yemen’s telecommunications acutely underperform regional and global trends in terms of access, quality, and costs. Access to telephone services, particularly mobile-based services, has slightly contracted since the start of the war. As of 2017, only 27% of the population had access to some form of Internet connectivity, which compares very poorly to the averages for the Middle East and Northern Africa (MENA) region (65%) and the world (49%). Not only is access limited, but quality is also among the poorest in the world, given the abysmally low speed of Internet services and the low bandwidth capacity available to users. Additionally, the costs of telecommunications services, especially Internet, are prohibitive: a data-only mobile broadband package cost 10% of monthly GNI (gross national income) per capita, well above the UN 2% affordability target for entry-level broadband services to be reached by 2025.
3. These weaknesses have not prevented the sector from gradually becoming increasingly central to conflict dynamics, with control of its resources being a key driver of the war today. Telecommunications are also actively leveraged by DFA in military operations as a target of frequent military attacks, a key source of financing for the war efforts, or as a tool to engage in spying, surveillance, censorship, and propaganda activities. The impact of the war on telecommunications has been deeply felt at the level of public institutions, assets and infrastructure, operators, the wider private sector, and citizens. At the institutional level, a process of fragmentation has been taking place between Aden and Sana’a. Most telecommunications institutions and state-owned enterprises are now duplicated and controlled by either IRG or DFA. This has resulted in separate revenue flows (with the largest share captured by DFA), regulatory gaps and inconsistencies, and the creation of new government bodies. Damage to the telecommunications infrastructure, already weak prior to the conflict, has been substantial with over 25% of it being irreversibly impaired and international connectivity being left dependent on only a few, inadequate gateways. These elements, in addition to the challenges faced by the private sector discussed next, have critically deteriorated the quality and affordability of telecommunications for Yemeni citizens and businesses.
4. A combination of long-standing issues and new, conflict-related challenges makes Yemen’s telecommunications market one of the hardest and riskiest in the world for private operators. Obstacles are multi-faceted and relate to institutional, regulatory, economic, and political economy dimensions. From a regulatory perspective, frameworks are incomplete and outdated, having failed to keep up with recent technological advancements. The institutional split has also led to duplicate sources of authority and instances of inconsistent rules or regulatory gaps, posing high legal risks and uncertainty to companies. Safeguards against anti-competitive practices are lacking. This contributes to the absence of a level playing field for market players and poor transparency in government decision-making. It is also evident in the way authorities assign, renew, and upgrade spectrum and operating licenses, with providers often operating on expired licenses or failing to get approval for applications for 4G services. A cumbersome bureaucracy and a very extractive and unpredictable fiscal regime have stifled private sector development and operators’ profitability has plummeted due to these factors, in addition to the growing energy bill, the devaluation of the Yemeni rial (YER), and high security and maintenance costs. Furthermore, private carriers, originally based in Sana’a, have either exited the market, been nationalised by DFA, or forced to relocate to Aden after facing financial looting and asset confiscation. Furthermore, private companies must also navigate the complex political economy that has traditionally characterised the sector. Due to their high financial and strategic value, telecommunications are highly politicised and exploited by political elites as a source of rent extraction. Vested interests of entrenched elite networks tend to shape decision-making by undermining, blocking, and distorting competition and forward-looking, market-based reforms and policies, thereby hindering the sector’s sustainable development.
5. Without denying the huge structural and policy-related challenges that inhibit telecommunications development, opportunities to unlock its potential do exist. Yemen has a large and growing market for telecommunications services, especially high-speed Internet connectivity. This large and underserved demand has potential to attract sizable private investments if and when key market risks and challenges are addressed. Scope for greater private sector participation is especially evident in satellite-based Internet and community networks connectivity, financial technologies such as mobile money, and through public-private partnerships for the delivery of country-wide infrastructure.
6. To realise these and future opportunities, IRG will need to commit to, develop, and implement a genuine, realistic, and long-term reform agenda that can effectively support private sector participation in the telecommunications sector and promote its development. It is paramount that future reform efforts and policy decisions are anchored on a few key grounding principles, some of which will require a considerable change in the way the government has traditionally interacted with the sector. For example, government should aim to limit its hands-on control and participation in service delivery and move towards a regulatory and policy-setting role. In turn, this will require policymakers to view telecommunications, first and foremost, as an essential service to the population and a critical enabler of economic activity and sustainable development, rather than merely as a source of revenue. This perspective shift would come from the recognition that the long-term, indirect economic benefits of a strong telecommunications sector far outweigh any short-term gains from higher revenues. Moreover, efforts to improve and uphold greater transparency and accountability in government decision-making will be essential to retain and attract investments. The strength and resilience of any national communications network depends on enhanced interconnection and open access across geographical and regulatory areas, which have deteriorated notably with the sector’s fragmentation. To this end, IRG should work in cooperation with bilateral and multilateral partners to de-politicise, de-escalate, and neutralise key sectoral issues by addressing them as technical as much as possible. Finally, policy reform should be designed and delivered in an inclusive, step-by-step fashion and should enjoy sustained, multi-party support. 
7. Sequencing of reforms will be a key element of successful implementation: 
   • In the short term (6 months to 1 year), potential government objectives to consider include restoring local and international connectivity, for example by reinstating and upgrading licenses of public providers or unlocking capacity of newly built gateways; de-politicising key issues by establishing a multi-stakeholder technical working group and by facilitating a dialogue across national private operators; mobilising external support for technical assistance, training, and infrastructure development; and strengthening the technical capacity of public institutions that were recently re-established in Aden. 
   • In the medium term (1 to 3 years), efforts should target the strengthening of regulatory oversight of telecommunications institutions, for example by empowering existing government bodies with regulatory responsibilities. Additionally, legislative and policy bottlenecks should be tackled by revising and updating current sectoral legislation and fiscal rules, country-wide access could be expanded through the negotiation of national roaming agreements with operators and by facilitating the adoption of mobile money, and international diplomacy should be leveraged to address key bottlenecks such as unfreezing TeleYemen’s funds and regaining control over international gateways from DFA.
   • As peace will hopefully materialise and the sector stabilises over the long term (3+ years), the government should focus on adopting a modern, independent regulatory framework that is conducive to private investment and healthy market competition by establishing an independent regulator, and through a comprehensive digital development strategy
8. Long-term reform outcomes will ultimately hinge on the future developments of the conflict. Notably, the failure to renew an agreement to extend a nationwide truce, as announced on October 2, 2022, risks dragging the country into yet another cycle of war, with the prospects of peace becoming significantly more distant. Yet, the ongoing UN-led negotiations of the peace process, including the recently established economic track of negotiations, offer a space to address the urgent issues faced by the telecommunications sector in Yemen and to implement a few, tangible policy changes that could deliver quick wins and kickstart sustained reform process. Telecommunications have been severely affected by the war but have also shown unique resilience. As a result, while developing the sector, especially in terms of attracting private capital, presents sizable challenges, there are also visible opportunities to be seized as telecommunications could – and should – play a central role in supporting future reconstruction efforts, bolstering economic recovery and growth, and rebuilding national cohesion.