Missed call for monopoly
It has been settled. Egypt's third mobile phone operator will be entering the market after all, reports Niveen Wahish
President Hosni Mubarak has had the final word with his decision not to allow the postponement of Telecom Egypt's mobile phone company. Prior to this, negotiations had been underway between Telecom Egypt (TE) and the two existing operators -- the Egyptian Company for Mobile Services (ECMS), better known as MobiNil, and Vodafone Egypt -- whereby LE2 billion would have been given to TE for it to stay out of the market for the next five years. This would have protected the two incumbent's duopoly over the market. If these negotiations had succeeded the establishment of Egypt's third mobile operator would have been put off until 2007.
The president's decision came in the aftermath of heated debates, particularly in parliament, over how the failure of a third mobile company to materialise would lead to an unfavourable market duopoly.
To prevent such an eventuality, President Mubarak decided that postponing the launch of the third mobile operator should not even be considered.
The idea of this postponement had not been, according to Akil Beshir, chairman of TE, one of the priorities of the company.
In a meeting with the press last week, Beshir said that TE's top priority had always been to launch the company. He said that TE had been on track to establish the company and pointed out that TE was looking to form a partnership with an international operator to enable it to withstand competition in the marketplace. According to Beshir, not only is being the third entrant, "difficult in itself", but the company also has to compete with the world's top two cellular phone operators: Vodafone, which is a majority shareholder in Vodafone Egypt and Orange, which owns about a third of ECMS shares.
In their preparation to be Egypt's third operator, TE had already prepared a design for the network. They had invited tenders and received bids for the provision of equipment for the network. "The idea was to get everything ready so that once a partner was found, the company would not take long to start," Beshir said.
But TE has not been lucky in finding a partner. Although negotiations almost came to fruition more than once with a number of international operators, the deals were never concluded. Beshir attributes the failure of these attempts to the fact that telecommunications companies have not been faring well worldwide. Debt burdens and losses have made these companies unable to invest in new markets, Beshir added. Additionally, the global slowdown in the telecoms sector is one of the main reasons why a scheduled initial public offering (IPO) for TE itself has been frozen since 2000.
A partner is essential, according to Beshir, for the proper establishment of a third operator, not only for its expertise but also its ability to provide the hard currency needed for financing.
With the possibility of finding a partner fading by the day, the burden of financing the network has fallen on TE. For this reason the idea of a postponement may have been useful.
Now that it has been decided that a third company will start operations, financing will need to be sorted out. Feasibility studies will be made by the government to decide how the establishment of the third company should be tackled. This will not be an easy task. One financial analyst, who preferred to remain anonymous, told Al-Ahram Weekly that the cost of establishing a third company today is totally different from the cost of establishing the previous two companies. "Today a dollar is worth LE6," the analyst said. "When the first two companies were set up, it was around LE3.5"
He also admitted that, "establishing a third mobile company is an important move [in order] to fend against monopoly, but it will not come cheap."
Beshir is acutely aware of this. He says that feasibility studies show that a third company will only start making profits five years after starting operations. With the change in the internationally traded value of the pound, that date may be pushed back a couple of years.
Among the issues which also concern Beshir is the foreign currency needed to buy equipment and hardware.
"We will try to convince companies to take part of the price of equipment in Egyptian pounds, " Beshir said. He is hopeful that, with the slowdown in the telecoms sector, equipment makers will be willing to negotiate.
Although Beshir is not yet sure how he will tackle financing, he is against taking out a hard currency loan. "It would be like committing suicide," he said, adding that the floatation of the pound means that by the time the company needs to pay back the loan the value of the pound could have dropped, making the cost of debt repayments higher.
But, despite the cost, a third company is important not only to provide Egyptian consumers with more choice, but for Telecom Egypt's valuation. Beshir pointed out that analysts had told TE's management that the lack of a mobile licence would undermine TE's value.
Today, the battle for a third mobile company has become a subject of great national interest. Whether the market is large enough to absorb three companies or not, however, is arguable. One financial analyst said that, in a country with Egypt's population, three companies could be absorbed but the survival of a third company would depend on what it had to draw subscribers away from the incumbents. He hopes that the third company will succeed: "We do not need another loss making, debt- burdened company in the market."
