EGYPT'S TELECOMMUNICATIONS SECTOR FACING MAJOR

UNCLAS SECTION 01 OF 02 CAIRO 006163

SIPDIS

SENSITIVE

STATE FOR NEA/ELA AND EB/CIP
USTR FOR SAUMS/AUGEROT/MCHALE/NEUREITER
USAID FOR ANE/MEA MCCLOUD
COMMERCE FOR 4520/ITA/MAC/ANESA/TALAAT

E.O. 12958: N/A
TAGS: ECON ECPS EINT EINV ETRD PREL KGIT EG
SUBJECT: EGYPT'S TELECOMMUNICATIONS SECTOR FACING MAJOR
STRUCTURAL CHANGE

Sensitive but Unclassified. Please protect accordingly.

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Summary
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1. (SBU) The Egyptian telecommunications sector is poised to
undergo two major structural changes in the coming months:
liberalization of the fixed-line market and the possible
awarding of a third mobile phone operator license. Minister
of Communications and Information Technology Tarek Kamel is
pushing to open the telecommunications market and end Telecom
Egypt's (TE) long-running monopoly. The introduction of
Voice over Internet Protocol (VoIP) will present the main
avenue of competition in the telecom market, but an expected
Request for Proposals this month for a third mobile phone
operator could also bring significant change. Liberalization
of Egypt's telecommunications market will make TE less
profitable, and potentially less attractive to investors when
the company is eventually privatized. While market
liberalization presents opportunities for U.S. investors, the
GOE has yet to address significant obstacles, such as the
lack of transparent licensing and clear market-entry rules.
End summary.

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Market liberalization and VoIP: Telecom Egypt on the ropes
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2. (U) Minister of Communication and Information Technology
Tarek Kamel appears determined to meet the GOE's obligations
under the World Trade Organization's Basic Telecommunications
Agreement. The commitments include liberalization of Egypt's
telecommunications services and full autonomy for
telecommunications regulatory authorities by January 2006.
Under the terms of Egypt's Telecommunications Law 10 of 2003,
this will mean an end to TE's legal monopoly over fixed-lined
communications and a market open to sectoral newcomers.


3. (U) TE is attempting to shore up its position prior to
market liberalization. It is investing outside the country,
working toward an agreement with mobile phone companies to
keep using TE's international gateway infrastructure for a
set time period, and offering a version of VoIP - the use of
internet data lines for voice transmission. Its VoIP service
is currently competing with a number of legal, i.e.,
licensed, private VoIP networks set up inside corporations
and with unlicensed low-cost VoIP services provided by some
ISPs to the public. TE may face even greater VoIP
competition if the complex, seven-category licensing scheme
for VoIP services is simplified. This may be in the offing,
as Minister Kamel has called for a re-evaluation of the
scheme after seeing a lack of investor interest in
establishing VoIP services.


4. (SBU) Liberalization of the telecommunications market
will not necessarily spell doom for TE on the domestic front.
After liberalization, the company will still own all of its
current infrastructure. However, competition will surely
reduce TE's profits, some 28% of which come from overpriced
international telephone voice and data services. Embassy
contacts and industry experts agree that TE will be
immediately vulnerable to competition on these services.
Specifically, once TE no longer has sole access to
international telecommunications gateways, internet service
providers will be able to offer VoIP services at less than
half the cost of TE's current rates on international calls.
A TE contact told Econoff that despite increased competition,
TE would likely retain its market prominence due to superior
service and name recognition. Cost-conscious Egyptians,
however, will likely go with the provider that offers the
lowest price.

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Third mobile license on the horizon, but closer
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5. (SBU) The Egyptian mobile phone market has long consisted
of a duopoly shared by Vodafone and Mobinil. Over the last
seven years there have been numerous rumors that the GOE
would offer a third mobile license, as the market appeared
ripe for an additional service provider to operate
profitably. The rumors were finally confirmed in May when
Kamel announced that the GOE would solicit proposals for a
third operator. The Request for Proposals is expected this
month and will be 2G/3G-technology neutral, meaning that both
GSM and CDMA mobile technologies will be considered.
Currently, both Vodafone and Mobinil operate on GSM
technology. Some telecom experts believe that a new entrant
in the market will face stiff competition from the
Vodafone/Mobinil duopoly, as both operators have already
begun to lower their prices to shore up market share.

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Comment: Setting the tone by addressing challenges
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6. (SBU) While liberalization of the telecom sector is
welcome, its immediate effects and success are far from
certain. The likely short-term impact on TE will be a
noticeable decline in profitability, making the company less
attractive for investors when eventually privatized. Whether
lower profitability will also precipitate downsizing is
uncertain, as the government may intervene for political
reasons to prevent mass layoffs at TE. More broadly, how the
GOE addresses the critical issues now will set the tone and
affect the success of further liberalization. Minister
Kamel's recent call for a re-evaluation of the licensing
scheme is a rare admission of uncertainty, showing that with
respect to some reforms, the GOE is still grappling to find
workable solutions that will attract foreign investors.
While these new reforms and developments in the telecom
sector may create new investment and business opportunities
for U.S. investors in fixed-line and mobile networks, the
current VoIP licensing scheme presents challenges. Telecom
experts also point to problems such as the lack of clear
market-entry rules and a transparent license-award mechanism
that the GOE will have to resolve to attract foreign
investment and achieve successful market liberalization. End
comment.


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JONES