EGYPT: Mixed signals on strategy for a sell-off

04 April 1997

IT is hard to be a favourite of emerging market investors if the telephones don't work. Egypt's telephone system just about functions, and the country's improved economic performance is attracting the investors. But the service needs to be dramatically improved before Egypt will be able to boast a telecommunications infrastructure that meets the needs of international investors.

The government of Prime Minister Kamal el-Ganzouri has made it clear that it fully appreciates this reality. The telecommunications sector is being expanded, upgraded, modernised and corporatised. Optimists in the Cairo business community say they believe even privatisation is a possibility. However, opinions differ about the significance of recent changes of personnel at the top of the industry, notably the dismissal of the head of state telecommunications agency Arento, and about how fast the changes will occur.

Egypt now has about 3.5 million telephone lines, serving 60 million people. Most of the work done to bring the service up to the current level was carried out in the late 1970s and early 1980s, with finance from the US Agency for International Development (USAID) and European donors.

Arento is now studying proposals from major equipment suppliers for a 1.5-million-line expansion to the fixed network. A 500,000-line expansion programme, backed by $200 million from USAID is also under way. The first phase is under construction, involving about 105,000 lines; prequalification bids for a 180,000-line second phase were submitted at the end of March.

The USAID finance is linked to a programme of institutional reforms being carried out at the state telephone monopoly Arento, with the help of US consultants Booz, Allen & Hamilton. This has involved streamlining Arento's administration, and preparing the agency for corporate status.

The next step in the reform programme is likely to include a change in the law governing telecommunications to open the way to private sector involvement. Arento is already refurbishing its image in preparation for its forthcoming role as a corporate entity, rather than a department of the Communications Ministry.

The new approach has included the unveiling of a new logo, TelecomEgypt. Analysts say Law 153, drafted by Transport & Communications Minister Soleiman Metwali in 1981 at the start of his long period in office, allows a measure of flexibility for Arento/TelecomEgypt. But they add that a new law will eventually become necessary if private operators are to become established.

Reform of the telecommunications system has been a highly-charged political issue in most countries where it has been attempted, and Egypt is no exception. Osman Lotfi, the long-serving chairman of Arento, was replaced in early 1997 by his deputy, Abdel-Fattah Abu Saria, just as the internal debate about the reforms was reaching its climax. Lotfi had succeeded in persuading some business leaders that he was a force for progress, and there is a theory that he may have been moving ahead too fast for the taste of the minister, and could even have been manoeuvring to replace Metwali in a cabinet reshuffle which is rumoured to be imminent.

Payphone prospects

One of the projects Lotfi has initiated is for competing franchises for payphone systems. Companies following this scheme, for which bids are due by 23 April, say they were taken aback at the speed with which it has progressed. They say they are confident Lotfi's successor will follow the scheme through.

The main contenders are groups led by Egypt's two leading public sector banks, National Bank of Egypt (NBE) and Banque Misr. The former has already set up a telecommunications subsidiary, National Telecommunications Company (NTC), and has teamed up with France Telecom and the local Adcom, as operator. Local investment and construction group Orascom is also part of this group. Banque Misr has two options: one is with Nepostel and the local ETG as operators, and Saudi Arabia's Shobokshi Group as partner; the other includes Swiss equipment supplier Landis & Gyr. Other bidders include Hellenic Telecommunications Organisation (OTE) of Greece, with the local Alkan Establishment.

NTC and Alkan have been working on various projects on the margins of the main fixed telephone system, including wireless loop systems targeted at rural areas, and satellite-based network systems for voice and data mail.

However, private operators have so far been shut out of the area which often leads the way to telecommunications liberalisation: mobile phones. Alcatel of France has set up the 70,000-line first phase of a global standard for mobiles (GSM) system, in a contract valued at just $18.5 million. Bids for a second phase are expected to be invited in the next few months. However, the system is operated by Arento/TelecomEgypt, and international operators say it will be some time before the private sector will be allowed to run GSM systems.

The mobile phones have been enthusiastically received, despite the high prices charged. The connection fee is £E 2,000 ($590) and call charges are £E 60 ($0.19) a minute, 12 times higher than for a fixed line call.

Despite the government's resistance to allowing private GSM operators, Cairo business people say they are convinced that privatisation is on the agenda. This will have significance both for the service itself and for the government's finances: the sale of Arento's assets would generate at least $6,000 million, according to one industry estimate.

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