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NEW FUND TO EXPAND PHONE SERVICE

By Réhab El-Bakry

It’s getting harder to find a hamlet or remote stretch of highway that is not yet connected by some form of telephone service. As of September 2004, the total number of fixed-phone subscribers reached 9.35 million, a 10-percent increase over 2003, bringing the penetration of fixed-line telephony up to 13.5 percent. The goal of achieving maximum telephony stems from the credo adopted by the Ministry of Communications & Information Technology (MCIT) – that telephone and Internet services are the right of every citizen.

On March 1, MCIT and the National Telecommunication Regulatory Authority (NTRA) announced what they believe will be the catalyst for achieving this target. The new “Universal Service Fund” will be used to extend telephone service, expand GSM coverage and provide Internet service to the remotest areas of the country. NTRA will provide the initial £E 50 million to the fund and, in theory at least, will manage it.

Minister of Communications and IT Tarek Kamel says the new fund will help Egypt meet its WTO commitment to deregulate the telecommunications sector, while at the same time serving the needs of the people. “We made an international commitment to deregulate the sector by 2005. At the same time, there is an inherent belief within the Egyptian government that every citizen has the right to access telecommunication and IT services,” he told Business Monthly. “This is why we believe that the Universal Service Fund is an essential step. Money from this fund will be used to expand services to areas that are not considered economically viable for companies to expand into.”
Until now, state-owned Telecom Egypt (TE) has borne the full cost and responsibility of expanding fixed-line telephone service nationwide. Often, from a business standpoint, it was a loss-making venture. Many distant and sparsely populated areas will never generate enough revenue to cover the expense of laying telephone lines and maintaining them. At the same time, services such as roadside emergency telephones on remote highways are considered essential. Somebody has to provide them, says Kamel, but “TE cannot be expected to carry this costly process all by itself.”
Telecommunication and Information Technology Law 10 for 2003 outlines the creation of the Universal Service Fund, but does not specify its details. Neither MCIT nor NTRA have announced how they will operate the fund or who will contribute to it. What is known, is that the fund will spread the cost and responsibility of extending telephone and Internet services among all companies working in the telecommunication sector. Fixed-line, payphone and GSM operators and possibly ISPs are expected to receive either grants or subsidies from the fund to expand their networks. The NTRA will regulate the bulk of the approval process.

NTRA director Alaa Fahmy says a set of criteria will be developed upon which priorities will be set. At the same time, he added that private companies working in Egypt will be expected to contribute. “I believe this is one way we can even the playing field between TE and other companies in the market,” he explains. “All companies in the market, whether private or public, will have to contribute to the fund in the long term.”

Wael Ziada, a telecommunication analyst at investment bank EFG-Hermes, explains that company contributions to the Universal Service Fund could follow one of several models adopted by other countries. “In some cases, companies just pay a percentage of their revenues to the regulator as the body that manages the funds. The second option is for companies to expand their networks into low-revenue areas instead of paying cash. A third option – which is not always preferred – is for operators to subsidize their services.”

Industry observers say that as a first step towards deregulation, the creation of the Universal Service Fund is long overdue. Ziada, however, says the announcement of the fund indicates the government’s commitment to deregulation. “This is about transparency in the sector,” he stresses. “This way they are including not only the government bodies in the decision-making process, but also the public and private sector. In that sense, the announcement should boost confidence in the sector.”

The timing of the announcement coincided with rumors that TE will request initial letters of intent from international investors to advise them on the best route for privatization. The company is considering whether to issue an initial public offering (IPO), or to sell large sums of its shares to strategic investors. The fund’s creation should make TE more attractive to private investors because the company will no longer be required to cover the costs of low-revenue or loss-making telephony expansion from its own pocket.

In the end, say analysts, everyone benefits. More Egyptians get access to communication and IT services, while no particular company bears the sole responsibility of covering the cost to provide these services. And by connecting even the most rural areas, the government is opening every corner of the country to investment.

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