Pricing Services in Telecom Egypt – The Case of Wholesale Resellers Ahmed K. Omar Manager of Economic Department for Regulatory Affairs and Interconnect Telecom Egypt Algeria – 18 : 19 December 2004

Content  Overview  Pricing Basic Services  Pricing Interconnection for Wholesale Resellers

Overview ► The Arab Republic of Egypt Telecommunications Organisation (ARETO) was established in 1957 as a state owned organisation responsible for providing all telecommunications infrastructure and services in Egypt ► In 1980 the company was re-named Arab Republic of Egypt National Telecommunications Organisation (ARENTO). ► In 1998 the Company was prepared to be transformed in to a joint stock company ( not yet declared ) and renamed Telecom Egypt (TE). ► In 1998 the telecommunications regulatory function was separated with the establishment of the Telecommunications Regulatory Authority (TRA). ► Telecommunications services in Egypt are currently regulated by the National Telecommunications Regulatory Authority (NTRA) as specified under Law 10 issued in 2003 and Presidential Decree 101 enacted in 1998 Corporate Context

Overview ► The National Telecommunication Regulatory Authority main responsibilities include:  To carry out tariff reviews and approve applications for tariff changes  To set interconnect charges in the case where two telecom operators fail to reach an agreement  The establishment of a Universal Service Fund ► Pool Collection ( License Fees, government Funds, etc) ► Pool Disbursement ( The difference between the economic price and actual price)  The issue of telecommunications licenses  The issue of permits for the importation or manufacturing of telecoms equipment  Frequency management  To oversee technical standards  Penalising any violation of the law Regulatory Context

Overview ► Telecom Egypt (TE) is the principal provider of telecommunications services in Egypt (fixed line voice, leased lines, Internet/data transmission services, interconnection services, value added services.) ► The company recorded total revenues in excess of LE 6.7 billion for the twelve month period ending 31 December 2003 with net profits of approximately LE 1.2 billion ► TE reduced the basic services waiting list from approximately 1.3 million lines in 2000 to less than 100k by the end of ► Between 2000 and 2003, the company increased the teledensity from 8.3% to 12.7% with a target of around 17% by Current Outlook

Pricing Basic Services Current Outlook Internet Tariff ► Free ISP services (Jan 2002) : Subscribers pay only the price of local calls for dialup connection. ► Broadband initiative (May 2004) : Monthly subscription were reduced from L.E 240 (USD 39) to 150 (USD 24 Long distance call Tariff ► low when compared with international standards due to the competitive nature of the market with mobile ooperators ► Telecom Egypt has revised its charging policy to per minute billing and has cut the number of long-distance zones from eleven to two (less than 60km and greater than 60km) Local call Tariff ► Changed from a fixed price ‘ six minute unit ’ to a ‘ single minute unit ► Reduced the number of free minutes available in the monthly subscription agreement Pricing

Pricing Basic Services Current Outlook ► Balancing between equity and financing objectives ► Monitoring the impact of new technologies ► Monitoring existing and upcoming competition Views on Pricing  Price Cap regime rather than Rate of Return regime  Price Cap Flexibility (Banded Price Cap vs. Fixed Cap)  Basket Price Caps as opposed to individual Service Caps Pricing

Pricing Basic Services Current Outlook ► Standard application for data collection and reporting ► Automation and links across all points of information ► Coordination between Technical and Financial sectors Views on Costing  Top Down Model  Historical Data  Fully Distributed Cost Method Costing

Pricing Basic Services  PCI (Price Cap Index) = Starting Price + (I – X) Where, I = Inflation --- X = Efficiency  General Rule API < or = PCI Where, API = Average Price Index Where, API = Average Price Index  In Theory Average Consumer Price Index = 3 % (EGYPT) Efficiency Index = 4 % ( International Benchmark) TE PCI = Starting Price + (3 – 4) = -1 % About Price Cap

Pricing Basic Services  In reality Exchange Rate Depreciation Change %Per Year Change USD/EGP %17 % EURO/EGP %62 % Average Depreciation in EGP39 % Total Expenditure = 100 % Local Factor Net Foreign Factor = ( Foreign Expenditure – Foreign Revenue) 49 %51 % Adjusted Inflation Index = Change in Local Factor + Change in Foreign Factor = 21 % (49 % x 3 %) + (39 % x 51 %) TE PCI = Adjusted Inflation Index - Efficiency Factor 21 % - 4 % = 16 % About Price Cap

Pricing Basic Services Alternatives for the Inflation Index ► Argentina : Producer Price Index (USA) After Adjusting For Currency changes ► Chile : Imported Good Index ► Colombia : Exchange Rate and Average Custom Duties ► Global Inflation Measures : Produced by the United Nation organizations ( i.e. World Bank, IMF, etc..) Probable Implication TE – Key Ratios ► Gross Profit %41 %42 %38% ► Operating Profit %28 %29 %22 % ► Net Profit Ratio %27 %22 %15 % Price Cap Practices

Pricing Interconnection for Wholesale Resellers Price Oriented Interconnection  Revenue sharing  Sender keeps all  Retail – minus wholesale Cost oriented  Fully Distributed  Long Run Incremental Cost Alternatives

Pricing Interconnection for Wholesale Resellers  Long Term contracts (10 years )  Revenue sharing Scheme  Revenue sharing Plan that varies with very low ratios ( incumbent share) in the initial years  Minimum Guarantee For the Incumbent  Product Neutrality Current Context

Pricing Interconnection for Wholesale Resellers Telephone Lines Telephone Lines Annual Growth  OPERATOR %  OPERATOR % Revenue and Location Breakdown CAI/ALEXREVOTHERSREV OPERATOR 155 %57 %45%43% OPERATOR 262 %65 %38 %35 % POPULATION16 %84 % FIXED LINES 32 %68 % Observations

Pricing Interconnection for Wholesale Resellers Unexpected Results ► Mobile diffusion ► Exchange Rate shocks ( Increased Capital Investment by the operating resellers ) ► Prepaid Trend and Price squeeze ► VOIP Lessons ( Moving Ahead ) ► Short Term Contracts ( 1 year ) based on a price discount X from TE tariff ► Removing minimum Guarantee imposed on operators ► Volume discount on high margin products (i.e. international calls) ► Unified contracts with other resellers New Context

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