EGYPT: Legal hitch is no bar to innovation

13 March 1998
SPECIAL REPORT TELECOMS

WHEN developing countries privatise, the telephone company is usually the asset investors are most keen to buy. In Egypt, five years into the privatisation programme, parts of the telecommunications empire are finally being made available to stock market investors. The response to the offering of shares in the state-run mobile phone company has been predictably enthusiastic. However, prospective investors will have to wait a little longer before they are allowed to buy into Telecom Egypt, the newly corporatised incarnation of the state monopoly telephone operator.

The government took the decision to turn Telecom Egypt - or Arento, as it was - into a privately constituted company at the end of 1997, after a long and sometimes controversial debate. One more important hurdle still needs to be overcome before privatisation can become a reality: the existing telephone law of 1981 stipulates that the state telephone agency is the sole body authorised to operate telephone systems, although it is allowed to set up joint ventures to run some services.

However, when the time comes for private investors to take a stake in Telecom Egypt, the state will keep a controlling interest, according to the veteran Transport & Communications Minister Soliman Metwally, whose first task as minister was to draft the 1981 law. He is quoted in the local daily Al-Ahram of 26 February as saying: 'We will hand over the existing network to a joint stock company to liberate it from restrictions and government systems and give it the chance to tap into private capital. But the state will retain at least 80 per cent, with the aim of keeping the utility accountable to and entirely supervised by the state, given that it serves millions of people and cannot be left to the operations of profit and loss.'

Metwally's apparent reservations about following privatisation through to its full conclusion are not necessarily shared by other members of the government. But the debates about how far to go and the discussions about new legislation have not stopped Telecom Egypt moving ahead with a number of eye-catching new initiatives.

The first was to invite bids for two payphone franchises, in early 1997. The best offer came from a group led by France Telecom, which proposed giving Telecom Egypt up to 66 per cent of guaranteed total revenues of some $590 million over the 10 years of the franchise. This group and the second placed consortium, led by Landis & Gyr of Switzerland, were selected for negotiations. These are said to have been arduous, given that it is the first time that Telecom Egypt has had to face the reality of giving up part of its empire. There has also been the problem of the 1981 law, giving Telecom Egypt a monopoly over operations. To get round this, it is understood that the two groups are considering giving Telecom Egypt minority stakes in the respective payphone operating companies until the law is changed.

A similar mechanism has been included in the privatisation of the first global standard for mobiles (GSM) network. The system was set up by France's Alcatel in 1996, and is at present operated by Telecom Egypt. It has some 80,000 subscribers. At the end of 1997, a new company was formed to take over operation of the network, and in February there was a highly successful public subscription for 30 per cent of the £E 600 million ($177 million) capital of this venture, the Egyptian Mobile Telephone Services Company. Public sector banks and the state social security and pension funds hold 40 per cent in total, Telecom Egypt 28 per cent and staff 2 per cent. The prospectus for the offering said that Telecom Egypt's stake will eventually come down to just 3 per cent following the introduction of a strategic investor, understood to denote an international operating company.

Simultaneously, Telecom Egypt has been preparing to award a licence for a second GSM system. Two bids were opened in early February, with a group led by Vodafone International of the UK in the clear lead. Vodafone and its partners - including the rapidly expanding AirTouch of the US and CG Sat of France - have proposed to pay Telecom Egypt an up-front royalty of £E 1,750 million ($516 million) for the 15-year franchise. The other group, led by France Telecom and Motorola of the US, offered £E 1,291 million ($381 million). Vodafone said it was attracted by Egypt's good economic prospects and by the fact that the existing system has only scratched the surface of the mobile phone market.

The attention being paid to these new initiatives has not meant that the development of the fixed system has been neglected. During 1997, Telecom Egypt negotiated framework agreements with the three major suppliers of equipment - Siemens of Germany, Lucent Technologies of the US and Alcatel - to carry out major expansion programmes. The government's target is to double the number of subscriber lines to 10 million by 2002. Siemens is to install some 1.8 million lines, mainly in Cairo, Alcatel will put in some 800,000 lines in Alexandria, Giza and the Delta, and Lucent will install 260,000 switching lines and 400,000 wireless access lines countrywide.

In years gone by, projects of this scale would have needed massive aid programmes, with their attendant bureaucracy. Now, the government is in much stronger financial shape, Telecom Egypt is enjoying the fruits of moneyspinners such as the GSM and payphone franchises, and reliance on aid is much reduced. France and Germany still maintain active aid programmes, but the new projects will not depend on these funds. The US Agency for International Development (USAID) has a $200 million programme for expanding the telephone programme, but this is separate from the new Lucent project. The first phase of the programme is now under way - with Lucent doing most of the work - and bids are to be invited soon for a 400,000-line second phase (see Egypt).

Egypt's telecommunications system is now better than it used to be, but is still not adequate. By the time all the new projects are completed, it should be one of the best systems in the Middle East, as befits a country which is starting to achieve its ambition of becoming a magnet for international investment.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.