EGYPT: GOVT SET TO PRIVATISE TELECOM EGYPT IN THE COMING YEAR

Telecoms

Throughout the economic downturn of the past five years, Egypt’s telecoms sector has been one of the few lucky ones not to suffer. Now, with the bad times seemingly behind the country, this history of survival has positioned the sector particularly well for a number of key changes ahead. During the downturn, although telecom operators did feel a slowdown in the growth of the market as consumers tightened their belts, it was during this time that Orascom Telecom, one of the country’s most prominent companies, established itself as an important regional player in Tunisia, Algeria and Pakistan.

The two local mobile companies, Mobinil and Vodafone Egypt, also consolidated their hold on the market by buying out a third licence from Telecom Egypt (TE). This put paid to an expected increase in competition – and reduced profit margins. Legacy operator TE became a partner in Vodafone Egypt in the deal over the third licence, acquiring a 25% stake.

Elsewhere, although TE privatisation efforts continued to flounder in the face of the global telecoms and dotcom downturn, TE revamped its infrastructure and put an end to the long waiting times for new lines that had plagued the country for decades. The company also improved its technology and services and diversified by investing in data telecommunications – through its subsidiary, TEData – and in call centres – through Xceed, the country’s largest. TE also issued its first corporate bond at the beginning of February – the country’s biggest ever at LE2bn (USD346.6m). The benefits of this will be used to restructure debt and make new investments.

Perhaps most importantly, it now seems that the government of Prime Minister Ahmed Nazif is set on finally privatising TE in the coming year. The success of the bond issue seems to have convinced Minister of Communications and Information Technology Tareq Kamel that the time is ripe to find an investor. Although there has been no official pronouncement on the identity of any such source, insiders in the telecoms industry note that TE Chairman Akil Beshir has been talking to several European companies in the past two years, although no final deal has emerged.

One of the most intriguing aspects of the sale of TE is that it makes it more likely that the company will eventually enter the mobile market. It had agreed to stay out of the mobile market at the end of 2003, when it made a deal with Mobinil and Vodafone to sell back its GSM licence. That move, which had been temporarily opposed by President Hosni Mubarak, was made because it seemed to Nazif and others that the market was not ready for a third operator. Another complicating factor was that the third operator would have had to make a considerable investment in mobile infrastructure with no real guarantee of returns.

In the current, much-improved economic climate, a third mobile licence does not seem so risky, particularly with the global mobile market making the transition from 2G GSM technology to more sophisticated 3G systems, which are now taking off in Europe and elsewhere. The advantage of these technologies is that they offer not only superior voice quality, but also much faster data transmission rates that would allow fast web browsing and video calls.

However, in the Egyptian market, 2.5G technology like GPRS has thus far attracted few customers because of the costs of the service and of the phones needed to use it. But in a few years time, things could be different. According to telecoms analysts, the Egyptian market has plenty of room for further growth. Currently there are 7.5m users in the country, or about a 9% penetration rate. The National Telecommunications Regulatory Authority (NTRA) estimates that the penetration rate will be at 12% in 2007 and 20% in 2012. Even though most consumers will probably continue to use regular voice services in the main, there will be a growing need for new technologies too. Although it has been rather coy about its plans, industry observers note that in the past year and a half, TE has made massive investments in a wireless CDMA network for its fixed-telephony services. Although the network, which is still under construction, is not being used for mobile communications, it is exactly the same technology that would be used for a new-generation mobile network. Furthermore, the deal keeping TE out of the mobile market concluded between the three telecoms operators at the end of 2003 will expire in 2007 – with a new mobile licence likely to be offered by the NTRA at that point. The CDMA network covering the entire country that is currently being built might then be put to dual use.

When it first started considering privatisation in 1999, it was clear to TE executives that having a mobile branch in the company would greatly increase its value. Mobile networks have consistently proven more profitable than fixed networks. At the same time, at the end of 2005 TE will begin to face competition in a previously protected part of the market, as fixed-line services become open to competition. Investing in mobile technology today could make the company much more attractive to international investors tomorrow – and bring a lot more cash into the state’s coffers when it is sold.

Oxford Business Group