Liberalisation of private and foreign investment drives ICT growth in Egypt

With the government prioritising economic diversification, Egypt’s digital transformation continued apace in 2018. Guided by its ICT 2030 Strategy, which aims to transform Egypt into a telecoms and tech centre on both a regional and global scale, the government is focusing on new initiatives such as electronics design and manufacturing, as well as providing greater support to Egypt’s burgeoning start-up industry.

Though the country is a mature market for telecoms, local consumer dynamics are constantly changing. Competition is strong, with new operators entering the market in recent years, but telecoms companies have been able to boost profits through significant data-service revenue increases and by diversifying their value-added offerings. The rollout of 4G since 2017 has created opportunities for innovative service providers. Furthermore, greater willingness on the part of state-owned Telecom Egypt (TE) to loosen its monopoly on fixed-line services presents open up a new window for investment.

Performance

In 2018 there was strong growth in Egypt’s ICT sector alongside significant increases in operator revenues. According to the most recent government statistics, sector revenues grew by 16.4% in the second quarter of FY 2018/19. The sector’s contribution to GDP grew by 14% in 2018, when it accounted for 3.2%, and the minister of communications and information technology, Amr Talaat, has stated an aim for the sector’s GDP share to reach 4% in 2019.

Other metrics are also indicative of the sector’s healthy growth. For example, ICT exports – comprised of IT, business process outsourcing (BPO) and knowledge process outsourcing (KPO) services – reached $3.3bn in 2017, according to the global advisor International Data Corporation, while sector investments in the sector rose sharply between 2017 and 2018, from LE15bn ($843m) to LE21.3bn ($1.2bn). Increased revenues for telecoms operators and the expansion of the country’s BPO segment is predicted drive growth, with forecasts predicting it will rise from approximately $3.3bn in 2017 to around $4.7bn in 2020.

“Egypt has a strong ICT infrastructure, and a labour force with the technical skills to be able to compete globally in offering cloud and other digital business services. In addition to the export potential for these services, there is a growing local demand,” Mahmoud Soliman, president and CEO of Barq Systems, told OBG.

Telecoms operators also saw their revenues increase significantly in 2018. TE reported consolidated turnover of LE10.13bn ($569.3m) in the first six months of 2018, up from LE8.7bn ($488.9m) year-on-year (y-o-y). Its home and consumer business made the largest gains, with turnover rising by 45% y-o-y in the first half of 2018 to reach LE3.8bn ($213.6m). Between September 2017 and mid-2018 the company added 3.3m wireless voice subscribers and 730,000 fixed-voice subscriptions.

Meanwhile, Orange Egypt’s revenue increased by 8.3% to reach LE6.3bn ($354.1m) in the first six months of 2018; Etisalat Misr reported an 18% y-o-y increase in revenue for the second quarter of 2018, up to LE3.3bn ($185.5m); and Vodafone Egypt’s revenues reached LE5.3bn ($297.9m) in the same period, a 16.7% increase against the previous quarter.

Despite elevated revenues, the sector’s main players reported sizeable declines in net profits. TE brought in profits of LE2.1bn ($118m) in the first half of 2018, an 18.2% decline against the year prior, while Vodafone Egypt’s profits reported net profits of LE638.2m ($35.9m) in the first quarter of 2018, a 55% drop y-o-y. These declines were largely attributed to inflationary pressures and the persistence of high borrowing costs.

Oversight

Egypt’s ICT sector development policy is overseen by the Ministry of Communications and Information Technology (MCIT). Established in 1999, the MCIT’s responsibilities include planning, implementing and operating the government’s ICT strategy. Broadly speaking, its mission is to grow the size of Egypt’s digital economy; make it more competitive, transparent and inclusive; and ensure that it is a key driver of economic growth. Concrete goals are periodically defined via five-year policy strategies produced by the MCIT. The ICT 2030 Strategy, the MCIT’s overarching, long-term plan, aims to support further sector growth through new initiatives, such as electronics design and manufacturing, as well as capacity building.

The Information Technology Industry Development Agency (ITIDA) was founded in 2004 to foster the growth of local ICT companies, particularly in IT innovation, and to facilitate inflows of foreign direct investment (FDI) to increase the sector’s global competitiveness. Moreover, the ITIDA’s intellectual property rights office has been at the forefront of driving domestic legislation regarding data protection. A proposed law that complies with the EU General Data Protection Regulation was approved by the Cabinet in August 2018 and was under review in Parliament as of March 2019.

Market Structure

TE holds a monopoly over Egypt’s fixed-line telecoms market, although this is set to change in the coming year, as Vodafone trials a rollout of its own services. In the mobile market, however, there are multiple providers. Of the 97.6m mobile subscribers reported in April 2018, Vodafone accounted for 42.2m (43.2%), followed by Orange with 32.1m (32.9%), Etisalat Misr with 20.3m (20.8%) and TE’s mobile subsidiary, WE, with 3m (3.1%). WE entered the market in September 2017 and signed up over 1m customers in its first month of operation. Vodafone dominates the Egyptian telecoms segment. It accounted for 44% of the mobile revenue in 2017, followed by Etisalat with 28.4%. Orange’s market share has hovered between 33% and 35.4% since 2012, while WE’s is estimated at 2%, according to reports from local media.

Regulation

The National Telecom Regulatory Authority (NTRA), established in accordance with the 2003 Telecommunication Regulation Law, is charged with regulating and administering Egypt’s ICT sector. The NTRA’s primary responsibilities include creating an enabling environment for private sector competition, as well as ensuring the provision of quality and efficient telecoms services across the country. The awarding of concessions also falls within the scope of the NTRA’s responsibilities. In June 2017 it granted 4G spectrum licences to the country’s major mobile network operators. Apart from the NTRA, regulation of mobile phone banking, which first came onto the market in 2017, falls under the authority of the Central Bank of Egypt (CBE).

The CBE issued mobile banking regulations in late 2016 as part of a broader package of sector reforms to deter financial crimes. There were few regulatory changes in the ICT sector in 2018, apart from the CBE’s issuance in January of electronic acceptance criteria for payments through QR codes, a move which is aimed at further facilitating mobile payment systems In addition, the CBE is working with the government to create a unified citizen card for all government entitlements – such as salaries, pensions and subsidies – which would be tied to either a bank account or an Egypt Post account. It is estimated that this initiative would incorporate 20m citizens in the formal economy.

Value of Investment

Investments in infrastructure are laying the foundation for sustained ICT growth. The government is focused on developing facilities like technology parks to establish Egypt as a regional and global leader in telecoms and offshore services. “There has been real progress in the ease of bureaucratic process when it comes to serious investors. With the new investment law in place, the government has been able to build a level of efficiency that is attractive when you are looking to set up a factory or similar,” Mohamed Salem, CEO of SICO Technology, told OBG. There is also strong interest in investing in electronics manufacturing via initiatives like Egypt Makes Electronics.

TE has been investing heavily in infrastructure related to the rollout of its mobile network since it announced the launch of WE in 2016. At the time, it expected to spend around LE22bn ($1.2bn) to build its own mobile phone network, including LE7.1bn ($399m) on a 4G licence. To fund this, in May 2018 TE secured loan agreements worth a combined $400m with Chinese government institutions and the African Export-Import Bank.

These loans have already helped finance infrastructure upgrades, including a $90m acquisition of the MENA submarine cable. Private operators like Vodafone also made major investments in their own infrastructure networks. In FY 2018/19, for example, Vodafone allocated LE4.5bn ($252.9m) to upgrade infrastructure, with a focus on investing in fibre-optic cable networks.

Manufacturing and tech start-ups are also attracting increased investment in Egypt (see analysis). SICO Technology, the Egyptian firm pioneering the manufacturing of locally made tablets and mobile phones, is looking to increase its investments to LE1bn ($56.2m) by 2021, up from LE420m ($23.6m) in 2018, as it seeks to reach a sales target of 1.5m devices annually.

Lastly, several multinational firms have made significant investments to expand into the Egyptian market, including Valeo, a leader in the development of smartcar technologies; the ride-hailing app Uber, which plans to invest $100m in the country in the near term; and the software developer and quality assurance provider SQS.

Growth Strategies

Expansion into foreign markets, agreements on mobile termination and roaming rates, joint infrastructure deals and plans to modernise existing infrastructure are just some of the strategies to increase revenues for telecoms operators.

TE’s long-term domestic plans are focused on widening its transmission network and expanding its 4G infrastructure. It also wants to increase WE’s stake in the mobile services market, from its current share of 2% to 15% by 2022. In March 2018 Vodafone launched a strategy that envisions the company playing a leading role in developing Egypt through the digitalisation of its economy. According to Alaa Zaher, head of strategy and innovation at Vodafone Egypt, the company intends to use its assets and technology to lead the 4G rollout in the market, as well as increase access to high-speed broadband. “There is greater awareness of the importance of digitalisation, and there is growing demand as companies seek to reduce their capital expenditure and become more agile and adaptable. The cloud is an important aspect of this,” Fadi Jundi, CEO of Cairo-based Noor Data Network, told OBG.

Greater strategic collaboration between telecommunications companies is also set to drive growth. In June and July 2018 TE inked separate deals with Etisalat and Orange relating to mobile termination rates (MTRs), which effectively reduce customer-associated costs and improve the quality of calls between the different operators’ networks. In other important developments, in February 2018 TE signed agreements to provide transmission and infrastructure services to Orange and Vodafone for a three-year period up to 2021. Additionally, in August 2018 TE signed a memorandum of understanding with Etisalat to allow the latter to trial virtual fixed-voice services, a term used to denote all of the wired networks used for voice and data communications. The agreement, which is the first of its kind in the Egyptian market, enabled Etisalat to launch virtual, fixed-landline call services to its customers using TE’s infrastructure in November 2018.

Government Policies & Priorities

The MCIT is pulling out all the stops to boost growth and FDI inflows. Its 2014-20 strategy document sets a goal of increasing the sector’s GDP contribution to 8% by 2020, and it has made consistent progress in this respect. According to the CBE, foreign investments in ICT made up 3.4% of the total $13.2bn in FDI inflows received in FY 2017/18, in line with the sector’s GDP contribution for the year and up from a 0.3% share in FDI of FY 2016/17. Moreover, it received 9.7% of all non-petroleum investments, which placed it third in FDI value, trailing only the manufacturing and construction sectors.

The MCIT is looking to build on this success, chiefly by prioritising investment in the country’s growing number of tech parks. There are currently four tech parks in the country that offer local and foreign firms access to modern infrastructure like high-speed broadband and uninterrupted power supply. In addition, in September 2018 it was announced that the government would work to boost the parks’ appeal by offering a 50% tax exemption to companies operating in these facilities.

The MCIT envisions the tech parks as key to achieving its ambitious growth agenda for ICT exports. These parks are also likely to serve as significant drivers of employment in highly-skilled, tertiary services, and the government has set a target of creating 100,000 additional jobs in the BPO and KPO segments by 2022.

Supporting high-tech electronics design and manufacturing is another policy goal of the government’s ICT 2030 Strategy. In August 2018 the MCIT announced that it was engaging with the Ministry of Education, the Ministry of Military Production and the private sector regarding plans to manufacture, programme and develop content for an educational tablet. This project forms part of wider government efforts to provide opportunities to local manufacturers and tech companies; the tablets will be provided to first-year secondary school students. The government has set a target of 6% for high-tech exports as a percentage of total exports by 2030, up from the current level of 1%. It also wants to improve Egypt’s ranking on the information and communications technology sub-index of the Global Innovation Index, up to 30th in the world from its 2018 placing of 92nd out of 126 countries.

Mobile Penetration Rate

Egypt has one of the largest mobile telecoms markets in Africa, with a penetration rate of around 102.5% at the end of October 2018, though this represented a y-o-y decline of 7.9%. In recent years there has been a steady decline in the number of subscribers in the Egyptian mobile market, with the total subscription base shrinking by 276,000 to 94.3m in October 2018. This decrease is partly attributable to increased government regulation, combined with moves by the NTRA to close dormant and unregistered SIMs, a regulation that helped to boost the credibility of the Egyptian market globally. “More than 95% of Egyptians are on pre-paid tariffs; this is a characteristic of many developing markets,” Vodafone’s Zaher told OBG.

In October 2017, following approval by the NTRA, a price increase of 25% was implemented on airtime tariffs by all mobile operators, in response to the inflationary effect of the Egyptian pound’s devaluation. Together with growing data usage, this price increase help to drive up profits and average revenue per user (ARPU). According to the Vodafone Group’s annual report for the financial year ending on March 31, 2018, the company’s revenues in Egypt expanded by some 20.7%, on the strength of rising data use and price increases, which supported higher ARPU.

However, ARPU across Egypt’s mobile industry remains one of the lowest in the region. In the third quarter of 2017 Vodafone Egypt recorded a blended ARPU of LE35.10 ($1.97), with a significant difference between pre-paid – at LE30.30 ($1.70) – and post-paid, at LE96.70 ($5.43). This is indicative of how much more revenue contracted mobile users generate each month. Meanwhile, Orange Egypt reported a blended ARPU of some $1.58 during the same period. Although still lower than the average blended rates in countries like Kuwait and the UAE, where ARPU hovers at approximately $28, this represents growth on 2013 levels, when Vodafone Egypt’s blended ARPU was around LE22.20 ($1.25), its pre-paid average was just LE17.60 ($0.99), while postpaid averaged LE71.80 ($4.04).

Increased competition from WE and the weakness of the Egyptian pound are expected to weigh on the growth of mobile ARPU in dollar terms in the near term. However, an NTRA decision in September 2017 to slash the value of pre-paid recharge cards by 36% while maintaining their price, thus effectively increasing the profit margin on these cards for mobile operators from 2% to 5%, combined with 25% increases in prepaid tariffs, are likely to act as a counterbalance. “It is interesting to still see growth in ARPU in Egypt, because not many markets are able to achieve this. The global trend is towards a decline in ARPU for telecoms as more developed markets become saturated,” Zaher told OBG.

Mobile Internet Penetration

Over the course of the last few years Egypt has seen a consistent and significant increase in the number of smartphone users, with the total number forecast to rise by 2.2m in 2018 to reach 25.8m users, and 27.9m by the end of 2019. Increasing smartphone usage has driven consistent growth in the number of mobile internet subscribers, which rose to 33.3m users in the third quarter of 2018, a 1.8% increase from 32.8m in the same period of 2017. This translates into a mobile internet penetration rate of around 34.2% of the total number of mobile subscribers, a significant increase from 2009, when penetration stood at just 6.2%, at 4.8m users Nonetheless, there is still room for further growth. “Egypt is still in a great phase of growth for data use – which has already passed in some other markets – and has been aided by the increasing adoption of mobile internet,” Amr Morsy, corporate strategy senior manager for Vodafone Egypt, told OBG. This sentiment was echoed by Omar Maher, ICT sector analyst at Egyptian investment bank EFG Hermes, who told OBG, “2019 will see a continued focus on broadband and a related increase in data use, which will further offset the decline in traditional voice and SMS revenues.”

4G Licences

Four 15-year 4G licences were awarded to TE, Orange, Vodafone and Etisalat in 2016, through which the government made more than $1.1bn. Following the rollout of the service there has been a surge in usage and new services offered, which resulted in operators demanding more spectrum. Although no new 4G licences appear to be on offer in the near term, Egypt has officially announced that it is due to sell 5G spectra to operators by 2020.

Since the awarding of licences in 2016 and the subsequent launch of commercial services in late 2017, telecoms operators have been focused on rolling out 4G services and investing in required network and infrastructure upgrades. TE is investing heavily in network upgrades, and in May 2018 the operator secured a $200m loan to finance the roll out of 4G. Separately, Orange reported that it had received a €750m ($844.2m) loan from its parent company to finance the rollout of its 4G network. Vodafone, meanwhile, has set aside LE4.5bn ($252.9m) for network investments, with a focus on expanding the reach of 4G services.

Internet Users

Recent data published by the MCIT revealed that the number of internet users increased steadily in 2018. At the end of June 2018 the total number of internet users in the country reached 42m, up from 36.9m in October 2017. Within this group there were roughly 5.8m ADSL users, up from 5.5m in the first quarter of 2018. TE Data – which is a subsidiary of TE – accounts for the largest share of ADSL users at 75%, with the remaining customers shared between Vodafone, Orange, Etisalat and Noor.

USB modem internet users totalled 3.5m in the same period, a modest 3.4% increase from 3.4m during the previous quarter. At the end of 2017 Greater Cairo accounted for 40% of the total number of internet users, followed by the Delta region with 31%, Upper Egypt with 13%, Alexandria and Mersa Matruh with 10% each, and the Suez Canal cities and the Red Sea with 6%. According to a joint report by We Are Social and Hootsuite, two social media management and research companies, internet penetration in Egypt is expected to reach 53% by 2019, up from 50% in 2018 and 43.3% in 2015; in the rest of Africa, the average is around 35.2%.

Fixed-Line Subscriptions

Fixed-line subscriptions reached 7.4m in June 2018, while the penetration rate stood at 7.6%. This compares to 6.3m and 6.8%, respectively, in June 2017. In terms of a rural-urban disparity, there were around 5.9m urban users (79%) and 1.6m rural users (21%). TE had around 12m fixed-line customers in mid-2018, and there was a 61%-39% split between fixed-line voice and data services. According to TE’s financial results from the first half of 2017, the last period for which detailed ARPU data is available, ARPU for fixed voice lines was LE21.50 ($1.21), a slight increase from LE21.46 ($1.21) in the same period in 2016. ARPU for fixed-line data services was far higher at LE88.50 ($4.97), up from LE77.20 ($4.34) the year before. Although TE currently holds a monopoly over fixed-line subscriptions, this is expected to change in the near term, as Vodafone, Orange and Etisalat all acquired fixed-line licences in 2016. None of the trio have yet rolled out this service, though Vodafone and Etisalat are utilising TE’s networks to trial fixed-lined services and virtual fixed-voice services, respectively.

Outlook

Although the country’s mobile market appears to have already reached saturation in terms of subscribers, exponential increases in data use on the back of the 4G rollout, as well as the prospect of a sizeable fixed-line network expansion, are expected to continue to drive revenue growth for telecoms in the near future. Government support remains key to transforming the country into a regional and global tech centre through infrastructure investments, tax incentives for tech parks and manufacturing projects. Private sector support for the nascent tech start-up industry offers promising prospects for the country.