Ethio Telecom Could Be Cash Cow, But Needs to Compete Fairly

Feb 27 , 2021.

That Ethio telecom would remain in the hands of the state was never a sure deal. A rarity in much of the world, Ethiopia’s government has maintained a statist policy that kept profitable service industries close at hand, especially the state-owned enterprises politicians fancy as cash cows. The state-owned telecommunications monopoly, Ethio telecom, has been one of the most prized possessions under the state's hold for over a century.

The question of privatising the telecom sector was presented to former Prime Minister Hailemariam Desalegn in 2013. He concurred with the Financial Times' analysis that selling telecom licenses could fetch three billion dollars directly into government coffers. But he was not swayed. He chose to echo an infamous statement by his political mentor, Kassu Ilala (PhD), a senior minister under Meles Zenawi’s administration, that the telecom sector is “a cash cow.”

Hailemariam told a British daily that his government wants to use the telecom company's profits from a captive market for infrastructure development. Ethio telecom had generated 430 million dollars in revenues at the time.

Under CEO Frehiwot Tamiru, it is a mammoth by any standard of measurement of profit-making enterprises in Ethiopia. The market remains captive, although the process of liberalisation of the industry moves at a snail's pace. Ethio telecom’s revenues stood at 640 million dollars in just the first half of this fiscal year, growing by over 12pc over the same period in the previous year. It brought in 80 million dollars in foreign currency, on top of servicing debt valued at twice as much during these six months, and paid 16.2 billion Br in taxes. If its expenses continue as moderately as they had last year, gross profit will make up half of the revenues.

Ethio telecom has been sheltered from the competition and allowed to build on an impressive economy of scale; nearly half of the country uses its services, while almost a quarter are internet users. Its authorised capital has recently been raised 10-fold to 400 billion Br, the highest capital ceiling any domestic company has reached. Although this is not necessarily the same thing, in contrast the entire banking industry, including public ones, had a combined paid-up capital of about 113 billion Br last fiscal year.

Under Ethiopia’s economic circumstances, “cash cow” does not do it justice.

It is no wonder that successive administrations have resisted the notion of putting the goose that lays the golden eggs on the auction bloc. Protected from competition, its retail prices remain prohibitively high, its infrastructure inadequate, and its services frustratingly limiting. Mobile data, by last year, was still more expensive than in Kenya, Sudan or Somalia. Last year, Somalia outranked Ethiopia in terms of broadband download speed, according to an open-source aggregator, www.cabale.co.uk.

Neither has Ethio telecom been a standard-bearer for dependable innovation of services. It has yet to launch mobile money services, light years away from neighbouring Kenya’s largest telecom provider, Safaricom, in the financial services' frontier.

The telecom industry was long hampered in the name of protecting Ethio telecom from the competition. The decision to open up the industry is thus overdue. Partial privatisation could have its benefits in giving a breather to a government perennially starved of foreign currency and to bring know-how to the firm. But liberalisation would ensure that there is competition. For end-users, this means lower prices, better quality services and more alternatives in products. The latter, in particular, goes a long way in ascertaining the sovereignty of the consumer.

The anticipation of the competition itself has incentivised reforms within the telecom monopoly under CEO Frehiwot. Earlier this month, she announced extending 4G LTE services outside of Addis Abeba to six towns in Oromia Regional State. She is also positioning the company to launch a mobile money transfer platform, which is perhaps its most critical investment since the introduction of internet services in Ethiopia.

These efforts are on top of several different package services, including airtime credit and significant tariff cuts. For an administration looking to incentivise digital services' growth, these reforms can help unpack the potential of a growing young population and economy.

Unfortunately, the administration continues to dilly-dally on how far it can open up, impeding its own initiatives. To an extent, this should not be surprising. The telecom monopoly rubs shoulders with those with state power today just as much as it used to do. Old habits die hard. None of the incentives for protecting the status quo and preserving certain economic interests have gone away.

A good example is Ethio telecom's contribution of half a billion Birr to the "Dine for Nation" campaign to raise money to develop three regional states' tourist destinations. It is hard to imagine that it could cough up as much money when it becomes a share company, even if the state retains majority voting power.

This same urge seems to be behind two policy arsenals to ensure the telecom provider’s dominant position in the telecom market. A restriction on foreign firms from providing mobile money services is a blow to the new entrants. Last year, the National Bank of Ethiopia (NBE) came up with a directive that opens up the market of mobile-money services to non-financial institutions. The caveat was that it would be restricted to firms owned by Ethiopian nationals.

This would substantially impede foreign players from competing with as strong a base given that this service has come to represent a substantial chunk of telecom players' revenues as financial services have evolved across the world. Take M-Pesa, the digital mobile payment system operated by Safaricom. Two years ago, it accounted for around a third of the Kenyan telecom giant's revenues. It is unfair to give only one player such an arsenal at others' expense, even if the others are foreign-owned.

Also, unhelpful are restrictions put on independent providers of communications infrastructure. This essentially forces companies to lease collocation services from Ethio telecom on infrastructure that is limited and has never really been as reliable even for the limited number of services Ethio telecom provides. This is a good deal for the telecom monopoly, which would collect revenues from the companies that rent its services. It is, nonetheless, not the best option for end-users that require quality services or, worse, have not been reached by telecom services yet.

The administration may retort that the industry's liberalisation should not be rushed. Ethio telecom should not be expected to compete overnight against foreign companies that will come with sophisticated services and massive resources, they could argue. But the firm should be more than compensated by the lead it already has on incoming operators: universal market share, presently, as well as tens of thousands of kilometres of fibre optic cables and thousands of cell towers.

With already millions of customers and a privatisation plan that could help it obtain fresh capital, if not enhanced managerial know-how and transfer of technology, there is little logic in continuing to protect Ethio telecom. It could still be made to be a “cash cow” for the state, but this subverts the whole notion of benefiting end-users and the constructive knock-on effects throughout the economy.

PUBLISHED ON Feb 27,2021 [ VOL 21 , NO 1087]

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