What infrastructure will aid Egypt's digital transformation?

 

Economic diversification efforts have been a boon to Egypt’s digital transformation. The government is aiming to develop the country into a telecoms and tech centre on both a regional and global scale, guided by its ICT 2030 Strategy. Efforts are being made to strengthen the regulatory framework, including by addressing cyberthreats, while the rollout of 4G since 2017 has created opportunities for innovative service providers in the highly competitive telecoms market. Additionally, the start-up ecosystem is increasingly dynamic, supported by initiatives aimed at widening access to financing. As a result of the Covid-19 pandemic the sector has become increasingly central to economic development, with the impact of the virus accelerating the digitalisation of government entities and businesses.

Oversight

The ICT sector is overseen by the Ministry of Communications and Information Technology (MCIT). Established in 1999, the MCIT plans, implements and operates ICT strategy. Broadly speaking, its mission is to increase the size of the digital economy; make it more transparent, competitive and inclusive; and ensure that it is a key driver of economic growth. The ICT 2030 Strategy is the ministry’s overarching, long-term action plan to support further sector growth through initiatives such as electronics design and manufacturing, and capacity building within the workforce.

The National Telecom Regulatory Authority (NTRA) was formed in 2003 to provide oversight of the telecoms market. The authority works to ensure that the principles of transparency, competition and user rights are enshrined in the sector. Service quality is central to the NTRA’s mission, as are national security considerations, the certification of telecoms equipment and the provision of telecom services to all regions throughout the country.

The Information Technology Industry Development Agency (ITIDA), founded in 2004, fosters the growth of local ICT companies. With a focus on IT innovation and the facilitation of foreign direct investment, the ITIDA aims to increase the global competitiveness of the local ICT sector. Moreover, the ITIDA’s intellectual property rights office has been at the forefront of driving recent domestic data protection legislation.

New Law

In mid-August 2018 Egypt enacted an anti-cybercrime law that comprehensively regulates internet activities. Under the legislation, websites or social media accounts that intentionally encourage cybercrime may be fined between LE20,000 ($1230) and LE200,000 ($12,300), while internet service providers must hold user data for 180 days and provide the authorities with information on users who are suspected of spreading extremist content. State authorities are empowered to block websites that are deemed to pose an economic or national security threat, but a court may overturn the decision. The law stipulates penalties for cyberattacks, electronic finance crimes and the improper use of data.

The E-Payments Act, drafted by the Central Bank of Egypt (CBE), was approved in early 2019 and mandates that both the public and private sector make all payments above LE500 ($30.82) to subsidiaries, suppliers and contractors electronically. The elimination of most cash transactions is expected to improve efficiency and transparency, as well as support a shift to digital finance. Under the legislation, government fees such as taxes, Customs duties and fines may also be paid via the electronic system, and civil society groups must use e-payments to receive donations or funding. Violators will be required to pay a penalty equivalent to 2-10% of the total payment, or up to LE1m ($61,600).

More recently, in February 2020 Parliament passed the Personal Data Protection Law, which is in line with the EU’s General Data Protection Regulation. The legislation created a Personal Data Protection Centre (PDPC) tasked with drafting data-protection guidance, coordinating with government and non-governmental entities, and issuing the licences and permits required for transferring personal data abroad. The Ministry of Justice, the Ministry of Foreign Affairs, the General Intelligence Service and the Administrative Control Authority will be represented in the PDPC. The centre must be alerted within 72 hours of possible data breaches, and within 24 hours for breaches that affect national security. Under the legislation, penalties for the processing of personal data without consent rage from LE100,000 ($6160) to LE1m ($61,600). If data is used for personal gain, the offender may be imprisoned for a minimum of six months and fined between LE200,000 ($12,300) and LE2m ($123,000). “Regulatory adaptability and a strong framework for data security are important for the early stages of Egypt’s digital transformation,” Khaled Hammouda, managing director of integrated solution provider Teradata, told OBG. “As more information has become available online, privacy and security issues have become increasingly pressing.”

Market Structure

State-owned Telecom Egypt (TE) holds a monopoly over the fixed-line telecoms market, but in recent years has signalled its openness to other companies entering the segment. In October 2016 Vodafone Egypt – in which Vodafone and TE have a 55% and 45% stake, respectively – and Etisalat Misr acquired licences to provide fixed-line services via TE’s infrastructure, while Orange Egypt announced in December 2017 that it, too, would begin offering such services. In July 2018 Vodafone began testing its fixed-line network; however, company officials told local press at the time that a decision on whether to offer the service had not yet been finalised as the segment was not particularly lucrative. As of June 2020 none of the three companies had rolled out fixed-line network. Of the 99.6m mobile subscribers reported in September 2019, Vodafone accounted for 40m, followed by Orange with 28m subscribers (28%), Etisalat with 27m and TE’s mobile subsidiary, WE, with 4.6m. WE entered the market in September 2017 and signed up over 1m customers within the first month of operation.

Performance

In 2019 there was significant growth in the ICT sector, reflected by increased operator revenues. In December of that year the Cabinet announced that the value of the ICT sector expanded by 16.6% in FY 2018/19, from $80.1bn to $93.4bn, aided by a series of initiatives aimed at supporting Egypt’s digital transformation. The sector’s contribution to GDP grew from 3.5% to 4% during the same year, as did the export value of IT services – which includes IT, business processing outsourcing and knowledge process outsourcing services – from $3.3bn to $3.6bn.

TE’s consolidated revenue reached LE25.6bn ($1.6bn) at the end of 2019, an increase of 13% from the year before. The company attributed its growth to higher data-related revenue from the home, enterprise and domestic wholesale segments. Earnings before interest, taxes, depreciation and amortisation measured in at LE5.8bn ($357.5m), on a par with the previous year, while net profit rose by 33% to LE4.4bn ($271.2m).

Vodafone Egypt’s revenue in 2019 reached LE24.3bn ($1.5bn), its highest to date. Etisalat Misr’s revenue rose by 22% that year, reaching LE14.5bn ($893.6m). Earnings before interest and taxes for Etisalat Misr comprised 39% of revenue, at over LE5.6bn ($345.1m). Meanwhile, Yasser Shaker, CEO of Orange Egypt, told local press in December 2019 that the company would make a profit in 2019 for the first time in several years, attributing the performance to increased revenue from data. The company has not released financial results since it delisted from the Egyptian Exchange in September 2018.

Mobile

Egypt is one of the largest mobile markets in Africa, with the number of mobile subscribers at 93.4m and a penetration rate of 95.1% in January 2020, according to the MCIT’s “ICT Indicators in Brief” report released in February of that year. Both figures were up year-on-year (y-o-y), with subscriptions growing by 2.4% and penetration by 0.5%. The market is heavily pre-paid, at around 95%.

The penetration rate has declined in recent years, from 102.5% in October 2018. The fall has been partially attributed to increased regulations, combined with efforts by the NTRA to close dormant and unregistered SIMs – a move that helped to boost the credibility of the Egyptian market. Meanwhile, the number of smartphones in the country has recovered from its 14.4% decline in 2017. According to market intelligence firm International Data Corporation (IDC), the number of smartphone shipments to Egypt increased by 16.5% in 2019 to 14.9m units, up from 3.4% growth in 2018. The firm found that Samsung gained market share due to its affordable Galaxy A series, while Chinese players such as Oppo launched new value models, putting pressure on smaller brands. In 2019 Samsung held a 29.8% market share – up from 23.7% the year before – while Oppo had a share of 22.3%, Huawei 12.1%, Xiaomi 9.7%, Infinix 8.1% and others accounting for a combined 18%. Demand for smartphones is expected to continue in 2020, although the economic impact of Covid-19 are likely to slow the pace of purchases. To that end, the IDC expects that smartphone shipments will expand by 3.7% in 2020.

Mobile Internet

More smartphones in the market have led to higher levels of mobile internet use. According to the MCIT, in January 2020 the number of mobile internet users reached 42.3m, up 23.9% y-o-y from 34.1m. Indeed, that month mobile internet subscriptions accounted for 44.2% of total mobile users, up from 36.5%. According to GSMA’s “The State of Mobile Internet Connectivity 2019”, Egypt scored 53.7 on its connectivity index of zero to 100. The index measures countries based on mobile internet adoption, infrastructure, affordability, consumer readiness, and content and services.

Across MENA as a whole, 40% of the population, or 240m people, were connected via mobile internet in 2018. This compared favourably to sub-Saharan Africa (24%) and South Asia (33%), but lagged behind other regions. Even so, mobile internet penetration in the region was up considerably from 24% in 2014. The survey found that the MENA region had a rural gap of 36%, down from 39% the year before, and below the global average of 40%.

4G

The introduction of 4G technology in 2017 has brought with it a higher quality of services. Four 15-year licences were awarded by the NTRA to TE, Orange, Vodafone and Etisalat in 2016. With the sale, Vodafone became the largest holder of spectrum in the country. According to the regulator, the licences brought in $1.1bn for the sector. In the years since services were launched there has been a surge in data usage and new services on offer. Companies have raced to provide the best 4G services, investing in required network and infrastructure upgrades. According to Cellmapper, a crowd-sourced website, in June 2020 Etisalat was the top-ranking company in terms of 4G coverage with 205 towers, followed by Vodafone (135 towers) and Orange (106 towers).

5G

Meanwhile, the country is taking its first steps towards the launch of 5G, which could open the door to the widespread use of internet of things, artificial intelligence and other next-generation technologies. The government and telecoms operators are investing in the network upgrades that are essential for widespread 5G commercial services. In 2018 the NTRA launched broadband fibre optics, a necessity for 5G technologies.

Companies are following suit, with TE signing a deal with Swedish network and telecommunications company Ericsson in February 2019 to upgrade the Egyptian provider’s cloud core network to be 5G ready. That same month TE signed a memorandum of understanding with Finnish multinational Nokia to introduce a 5G network and test use cases. In December 2019 Etisalat Misr tested 5G on a commercial network in partnership with Ericsson, reaching speeds of up to 1.4 Gbps. “5G enables the use of different spectrum bands to deliver faster speeds, more capacity and lower latency,” Ekow Nelson, vice-president for the Middle East and Africa at Ericsson, said in a press release that month.

Network Expansion & Upgrades

With an eye towards the provision of universal service, there are several projects under way. According to the “MCIT Yearbook 2019”, the regulator is working with Etisalat Misr on several telecommunications-related infrastructure development projects. These include an initiative to operate and provide mobile services in Bani Mazar in Minya, El Wahat El Bahariya Road in the west, Baranis in the Red Sea governorate and Wadi Karkar in Aswan, among other areas.

In September 2019 the government announced that TE would begin working on a project worth around LE40bn ($2.5bn) to develop the telecommunications network in the New Administrative Capital. Under the deal, TE will build and operate the city’s tech and digital security infrastructure. Featured in the new capital will be the 211-acre Knowledge City, which is envisioned to become a centre for research and innovation with a focus on advanced technologies. The first phase, set to be inaugurated in 2020, includes a specialised ICT university.

To further enhance its telecommunication and internet services, in late November 2019 Egypt successfully launched its Tiba-1 satellite. According to the government, the satellite will remain in orbit for at least 15 years and will provide “every inch” of the country with call and internet services, as well as the Nile basin and other areas of North Africa.

Mobile providers are also investing in upgrades. In July 2019 TE announced it would earmark LE17bn ($1bn) for the remainder of the year and 2020 as part of an integrated operational plan to develop its international, core, transmission and backbone networks across the country. The funds are in addition to the LE26bn ($1.6bn) the company invested between 2014 and mid-2019. Furthermore, in December 2019 Etisalat Misr released plans to invest LE4.5bn ($277.3m) in its infrastructure in 2020, with the majority of the financing going towards data transfer. The company expects this investment will outpace that of 2019, during which the company invested LE4bn ($246.5m).

Internet

According to the MCIT, the number of internet users rose to 40.9m in FY 2018/19, up from 37.9m in FY 2017/18. Internet penetration also ticked upwards, from 44.3% to 48%. This was largely attributed to an increase in mobile broadband usage. The ministry found there were 7.2m ADSL subscriptions in January 2020, up 9.4% y-o-y from 6.6m subscriptions. ADSL subscriptions were centred around Greater Cairo (38%) and the Delta (33%), followed by Upper Egypt (13%), Alexandria and Matruh (10%), and Sinai, the Red Sea and Suez Canal cities (6%). Meanwhile, international bandwidth was 2565.8 Gbps, an increase of 35.8% from 1889.8 Gbps between January 2019 and January 2020.

The government has been working to improve internet speed, with Amr Talaat, the minister of communications and information technology, telling local press in December 2019 that around $1.6bn was invested over the last year and half. As a result, average download speeds jumped from 5.7 Mbps to 20 Mbps over that period. He also cited the opening of the National Centre for ICT Services Quality Control and Monitoring under the purview of the NTRA in July 2019 as instrumental for maintaining the quality of the voice and internet services of companies operating inside Egypt.

Fixed Line

The number of fixed-line subscriptions reached 9.1m in January 2020, up 11.7% from the 8.2m subscriptions in January 2019. Local exchange capacity also rose, from 21.1m lines to 24.9m lines. Penetration rates remained relatively steady, increasingly slightly from 7.6% to 7.7%, while the number of local exchanges rose by one to 1511. Of these, around two-thirds were in rural areas. The vast majority (86%) of fixed-line subscriptions were residential, with the rest being commercial (11%) and government (3%) subscriptions.

Ecosystem

Supported by a young and techminded population, Egypt’s start-up ecosystem is thriving. According to Dubai-based investment data platform MAGNiTT, Egyptian start-ups attracted record funding in 2019, with 142 investments amounting to $95m, up 13% from 2018. More investors than ever channelled funds into Egyptian start-ups that year, with almost two-thirds of the 52 investors being international entities. The expansionary trend continued into the first quarter of 2020, when Middle East-based start-ups attracted $277m and Egyptian firms accounted for 37% of the deals. “Egypt is one of the fastest-growing ecosystems in the region,” Philip Bahoshy, founder and CEO of MAGNiTT, said in a press release in March 2020. “For the first time, the country ranks first by the number of deals in the MENA region, as funding to the country accelerates due to a large entrepreneurial population, increased private interest in the asset class and government support.”

Egyptian start-ups are supported by an increasingly dynamic funding and support ecosystem comprising a number of local accelerators, incubators, venture capitalists (VCs) and angel investors. Since its establishment in 2012, Cairo Angels has invested $2.4m in 25 start-ups in six cities. Algebra Ventures is the largest Egyptian VC firm, with $50m in capital. It invests in early-stage tech companies in Egypt and the wider MENA region. Support from these and other organisations has been vital in the early and seed-funding stages of development, and has allowed many Egyptian start-ups to get off the ground and attract larger investments from abroad.

The ecosystem has stepped in to support start-ups in light of the Covid-19 pandemic, which created significant headwinds across the economy. Falak, Egypt’s largest start-up accelerator, announced in April 2020 it would allocate LE1m ($61,600) to ensure firms are able to weather the current crisis, and are provided with technical and strategic support to leverage any business opportunities that may result from the pandemic. In particular, Falak targeted start-ups in the fields of health and insurance technology, financial technology (fintech), logistics, 3D printing, remote work solutions and e-learning. These have been identified as central services during the lockdown period. The same month Mohamed Okasha, co-founder of Egyptian fintech firm Fawry, launched a $25m fund designed to bolster finance-orientated start-ups. Although the fund was planned before the pandemic, its scope and focus were adjusted in response to the health crisis, due to the conviction that fintech will emerge from the crisis as a leading segment of the economy.

The government has also worked to create an environment that allows start-ups to grow. In January 2020 the CBE announced it would launch a Financial Technology Innovation Fund for fintech start-ups. The LE1bn ($61.6m) fund will provide finance to fintech VCs, incubators and accelerators. The CBE also runs Fintech Hub, a unified platform established in 2019 to connect fintech stakeholders including start-ups, financial institutions, regulators, service providers, mentors and investors.

Electronics Design

Building on the country’s burgeoning start-up ecosystem, Egypt is aiming to become an electronics design and manufacturing centre. In partnership with technology park developer Silicon Waha and Egyptian tech manufacturer SICO Technology, in December 2017 the MCIT inaugurated a 4500-sq-metre electronics manufacturing plant in New Assuit Technology Park, which is home to an electronics cluster. The facility manufactures mobile phones, tablets and tracking devices under the brand name Nile X. Production kicked off in 2018, creating 500 jobs. By October 2019 the facility had a production capacity of 2m devices a year, 25% of which were exported to countries in the Gulf and Europe, such as Germany. The company has plans to expand exports to African markets.

Outlook

While the Egyptian mobile market appears to be saturated, the rollout of 4G has led to an increase in data consumption. This shift has been an opportunity for telecom operators to provide new products and higher-quality services. The introduction of 5G in the coming years will continue this trend, and it will allow operators to offer commercial, next-generation technologies. These will play a central role in economic diversification plans for the country’s future, especially as it opens the New Administrative Capital, Egypt’s first smart city. Moreover, the start-up ecosystem has become one of the strongest in the region, attracting record funding and positioning local enterprises for success.

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The Report: Egypt 2020

ICT & Innovation chapter from The Report: Egypt 2020

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