US embassy cable - 05CAIRO6163

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