Telecom license auction in Ethiopia
For the last three years, Ethiopia has been talking about its ambition to liberalise its telecommunications market. This has been a part of a wider programme to liberalise the ‘commanding heights’ and ‘address binding constraints’ across the economy, announced by the country’s Nobel Peace Prize winning Prime Minister Abiy Ahmed in 2018. But the auction of a telecoms licence to a consortium intended to compete with state-owned monopoly Ethio Telecom was far from the big bang potential investors had been hoping for. In fact, the Financial Times described the auction as a ‘flop‘.
Only one of the anticipated two licenses was actually awarded on 22 May 2021. It went to a consortium called the Global Partnership for Ethiopia, made up Vodaphone, South Africa’s Vodacom, Kenya’s Safaricom (partly owned by Vodacom) and Japan’s Sumitomo Corporation with financial backing from US and UK government agencies. But the award has as much to do with geopolitics as it does with market deepening.
The winning consortium’s US financial backer, the International Development Finance Corporation (DFC) was created in December 2019 with the specific mandate to offer an alternative to cheap Chinese financing for infrastructure projects. But the money comes with conditions. The DFC will only put up a loan if Chinese equipment manufacturers are excluded. This restricts infrastructure choices to the likes of Ericksen, Nokia and Samsung, alongside Sumitomo.
The losing consortium, headed by South Africa’s MTN, was backed by Chinese capital in the form of the Silk Road Fund. The consortium is far from transparent with MTN stating that it would only reveal who its partners are if it won the bid. However, the South African telecommunications giant has worked for years with Chinese suppliers (including Huawei and ZTE Corporation) in other markets. The Silk Road Fund is a classic Chinese development consortium, capitalised by the People’s Bank of China, the Chinese Investment Corporation, the Chinese Development Bank and the Export-Import Bank of China.
Ethiopia has previously managed to be non-aligned in the growing rivalry between the US and China. Washington regards the country as a key ally in its campaign against Islamic radicalism in East Africa and China has played a significant role in infrastructure in the recent past. Chinese firms built the critical Djibouti-Addis Ababa railway, opened in 2015. But the US government believes that Huawei and ZTE Corporation pose an espionage threat. It is thus possible, perhaps even likely, that only one licence has been awarded at this point because the Ethiopian government was required to choose between the two superpowers.
While geopolitics may have restricted Ethiopia’s choices, other limitations around the auction were self-inflicted. It is notoriously difficult to open previously state monopolised markets in developing countries. As the World Bank pointed out earlier this year: ‘.. vested interests may prefer to preserve the status quo. Ethio Telecom has the most to gain from the expansion of the digital economy but it is also at risk (of) losing market share if it fails to compete’.
The temptation for the Ethiopian government was always to shelter its long-time ‘cash cow’ from competition and it seems that this is what happened in setting up the auction. The conditions of the licence awarded preclude the winner from offering digital financial services which are restricted to Ethiopian firms and nationals. Similarly, the bid winner is required to use the tower infrastructure provided by Ethio Telecom which is likely to slow down network roll out particularly in rural areas.
These licensing restrictions are one of the reasons so many international telecoms showed initial interest but then failed to bid. There were initially 12 bidders including France’s Orange, a leading player in mobile money elsewhere in Africa. Other interest came from Saudi Telecom Company, Axian, Etisalat and Telkom SA but none of these companies followed through. The USD850 million paid by the winning bidder is probably a reflection of this lack of competition. Prime Minister Ahmed told Bloomberg that the decision to exclude mobile money cost the government about USD500 million.
Until the license auction results were announced on 22 May, Ethiopia was one of the last countries in the world – and probably the biggest potential market (its population is 110 million) – to have retained a state-owned monopoly provider of telecom network and service. While Ethio Telecom could once be described as a ‘cash cow‘ for the Ethiopian government, it has for some time been a hurdle to the country’s further development.
Ethiopia’s mobile penetration rate is only 38.5 percent and less than a quarter of the population have internet access. Mobile money applications were only introduced earlier this year (Telebirr, owned by the state monopoly) even though the Kenyan pioneer of digital wallets, Safaricom, had been lobbying for entry to the market for several years. There is no stock exchange in Ethiopia and the banking sector is technologically far behind more open peer economies such as Kenya, Nigeria and South Africa. The government also has a history of controlling dissent by switching off the internet and using Ethio Telecom to monitor its citizens.
The liberalisation process is however far from over. Aside from the issue of the second license and whether it will be re-auctioned, Ethio Telecom is due for partial (40 percent) privatisation in the near future. The government intends to sell 40 percent of the monopoly company to foreign investors and has said it will do so very soon. The names of potential purchasers have not been made public although it has been reported that Orange, among others, is more interested in this process than the license auction.
Ethio Telkom has the potential to become a regional giant. But there are many outstanding issues at present. Can the Global Partnership for Ethiopia compete with a future part-privatised Ethio Telecom, given the restrictions on its license? Can government-linked insiders surrender sufficient privilege to allow a functioning competitive market to develop? It is in the interests of Ethiopia generally that they do so.
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