Ethiopian Business Review

Monopoly’s Hang-ups: From Poor Network to No Network

The Telecom sector in Ethiopia has gone a long way from serving a few thousand mobile and Internet subscribers to the current state where the coverage of telecommunication services has expanded exponentially. Despite expanding access, the government failed to find any viable and long term solution for inconsistent quality of services characterised by poor network. Critics, however, have been suggesting that only liberalization can transform Ethiopia’s Telecom sector.

When the International Telecommunication Union (ITU), a specialized United Nations agency for Information and Communication Technologies (ICT), released Ethiopia’s ICT performance review report at the end of 2013, it clearly showed that the telecom sector was struggling to meet the demands of most Ethiopians, especially those living in urban areas like Addis Ababa. The report, the fifth of its kind, identified key ICT developments and tracked the cost and affordability of ICT services in 157 countries. It ranked Ethiopia 151st in ICT development.  It had actually dropped one rank from the previous year. 

Ethiopia’s Telecom Sector Performance, February 2014
Fixed network 748,000
Mobile subscription 27 million
Internet subscription 4.5 million

This puts Ethiopia in the company of countries like Central African Republic, Democratic Republic of the Congo, Eritrea and Niger, which are mostly suffering from conflict and maladministration. They are among the ten bottom with the lowest ICT Development Index together with Ethiopia, according to the report. On the other hand, Africa’s top performing countries including Seychelles, Mauritius, South Africa and Cape Verde continue to make impressive progress in terms of ICT development.

Surprisingly Ethiopia was one of the first in Africa to have telephone service. Yet, ironically, Ethiopia’s Telecom sector still remains underdeveloped and characterized by recurring quality issues. The first long-distance telephone line in Ethiopia was established in 1894 between Addis Ababa and Harar. The network began to expand from then on, extending to other cities and providing service to the upper class. Today 748,000 and 27 million landline and mobile subscribers, respectively, as well as 4.5 million Internet users enjoy the service. Disappointingly, however, as the size of the users’ base continues to swell, the quality of services declines with each passing day. In terms of coverage too, the progress is unsatisfactory considering the estimated 85 million people who live here. The insignificant mobile penetration rate, which stands at 31Pct and an Internet penetration rate of 5.3Pct currently, puts Ethiopia at the bottom of the global telecommunications service provision stair. 

Today, almost anyone is within reach of a mobile-cellular signal. Most of the networks have been upgraded to the latest technology, which is necessary to produce mobile broadband and provide high speed access to the Internet. Unlike the past, countries have become increasingly integrated. This means that the economies across the globe need to have fast and reliable telecommunication in order to remain competitive and most sink a lot of money into reliable telecom infrastructure. Despite its long history, however, the telecommunications sector in Ethiopia is weak and plays an insignificant role in facilitating economic growth. This is especially true if quality of service, which is the major contributing factor for the relationship between telecommunication services and the real economy. At the end of 2012/13, the telecommunication sector’s contribution to the nation’s Growth Domestic Product (GDP) stood at 2.5Pct, which is relatively lower when compared to neighbouring countries like Kenya, which contributes 12Pct to the GDP.

In contrast, Ethiopia’s investment in the telecommunication sector has seen a substantial rise since 2002. Capital investment jumped from USD29.1 million in 2002 to USD128 million in 2003. The capital budget doubled in 2004 to USD300 million and rose to about USD500 million in 2005. In 2005, the government realized that it would not be able to meet the USD500 million costs every year but it did not want to scale back its investment so it asked for soft loan tenders in mid-2006. China was interested and the government entered into a vendor financing loan agreement with China’s Zhongxing Telecom Corporation (ZTE) worth USD1.4 billion at the end of 2006. The ZTE’s monopoly, however, ended in July 2013, when its main Chinese rival, Huawei Technologies Co. was given a huge expansion contract together with ZTE, for the next phase of the network with the two pledging a total of USD1.6 billion.

Despite the huge investment spent on the telecom sector, it is still characterised by excessive poor quality of service and inefficiency as evidenced by the experience of mobile and Internet users in Addis Ababa.

Growth in mobile subscribers EthiopiaHenok Keflu, 34, is the owner of an Internet cafe located around Beklobet in Kirkos District in Addis Ababa. On the afternoon of Sunday, March 30, 2014, none of the seven desktops at his Internet cafe were in use. Henok, who started the business with 70,000 Birr in 2010, told EBR that the number of Internet users visiting his Internet café has shrunken dramatically because the high speed Internet connection he subscribed to from Ethio – telecom was not good enough to attract customers. A year ago, Henok said, it was unthinkable to get a free desktop without waiting for at least a short period of time.

Meseret Seyum, 22, a third year management student in one of the private colleges in Addis is also frustrated by the fragile Internet connection. Meseret frequents Internet cafes to keep in touch with her friends. She also uses the Internet to download education materials to help her to prepare for exams. “When there is no connection in the Internet cafe, I try to use my mobile to access Facebook and my Yahoo email account,” she told EBR. But now, it is very difficult to call to someone and talk for one minute uninterrupted, let alone to chat with my friends on my mobile through Facebook, she added.

Based on a survey among 98 medium and large Ethiopian companies, a study conducted in 2012 to assess the impact of telecommunications services on business in Ethiopia, has also confirmed that the supply of telecommunication services clearly does not meet businesses needs. Out of the total companies surveyed more than 90Pct of company managers complained about the poor mobile phone service and constant call drops. Two thirds of the companies also consider the Internet and Data services to be poorly adapted for their companies, according to the study. Their main concerns are speed (50Pct), service interruptions (30Pct) and the non-availability of the service (20Pct). The network problem has also been delaying Ethiopia’s global and regional integration. Ethiopia is poorly integrated into the regional and international economy and it has not been able to reap the benefits, despite being the host of African institutions such as the African Union Commission and the United Nations Economic Commission for Africa.

The recurrent interruption in the network, which is frustrating users according to Andualem Admassie, acting CEO of Ethio Telecom, is a minor incident compared to the total size of the telecom infrastructure in the country. He feels there are two major reasons for the problem. Andualem  told participants at a conference organized at Ghion Hotel under the theme “Integrating ICT in TVET for Effective Technology Enabled Learning’’ on March 18,2014 that:  “Power cuts and damage to the optical fibre network of the Ethio - telecom are the main problems creating havoc on the network”. To ease the problem, Ethio telecom has bought and installed 350 generators in most locations where wireless network antennas are found. In relation to damages that took place on optical fibres, last year 130 unintended damages and 134 deliberate damages have occured, according to Andualem. The other problem the acting CEO mentioned was the reluctance of building owners to develop rooftops for the erection of wireless network antennas.

For critics, however, the problem emanates from the uncompetitive nature of the telecom sector. “Excellence in telecommunications services cannot happen under a monopoly,” a telecom engineer and a private consultant, who has been working for the state telecom company for seven years, told EBR. According to the engineer, perfection in telecom service demands competition, since capital flows in the direction of a higher return on investment and reduced risk.

Growth in internet subscribers EthiopiaMonopoly is not desirable from competitiveness or financial standpoint as the government could actually earn an equal or more amount of money from taxes on the new businesses, a study conducted by ITU on Ethiopia’s telecom sector in 2012 revealed. 

Telecommunications is viewed as a strategic asset for the economy and national security in Ethiopia. Another obvious reason why the government would like to hold on to the state-owned enterprise is its interest in recouping the massive investment it made in recent years. Senior policy makers have been cautious when it comes to introducing competition to the communications sector. The main line of argument so far has been that liberalisation will not result in positive universal access for people who are poor due to the profit motives of the multinational companies that are interested in the ‘cash cow’ telecom market. The “cream skimming” argument of the government was repeated several times by policy makers, who argued that the new entrant will focus on corporate customers and urban areas. That is why Ethiopia’s telecommunications market structure continues to be state-owned despite pressures from international financial institutions. Close observation also shows that it is unlikely that liberalisation of the sector will take place in the short term. 

While the universal service arguments may have some merit, particularly with regard to the government’s role in rolling out telecom infrastructure, that underpins Ethiopia’s future economic expansion, the status quo has been detrimental to the escalation of the ICT sector in the country, according to the telecom engineer. “Global progress in competition and privatisation of the communication sector shows that most of the government arguments offered are a superficial and flawed appeal to public interest agendas”.

Monopolies also undermine government revenues and the competitiveness of enterprises, according to a comparative analysis of countries conducted by the World Bank.  Based on the analysis, by holding on to a monopoly market structure, the Ethiopian government is actually the loser. Telecom sector development in countries that have liberalised the sector, like Kenya, shows that the Ethiopian government loses tax revenues of at least USD900 million per year by not opening its communication sector for investment, which is equivalent to the revenue Ethio telecom announced last year. 

However, for the Ethiopian government, opening up telecom is not possible in the near future. Prime Minister Hailemariam Desalegn told business people attending the Public Private Partnership Forum last year that if the government privatizes the state monopoly, it will lose substantial revenue for financing major public projects like the national railway project. “The government financed 6 billion Birr a year to the national railway project from the revenue collected by Ethio – telecom”.    

In 2004, Kenya’s telecom industry saw significant changes with the incumbent operator Telkom Kenya losing its monopoly. Licences were also issued to a regional carrier, a fourth mobile operator and several new data carriers, thereby marking a significant change in the competitive landscape for telecom services across the country. By liberalizing its telecom market, Kenya now has a well developed telecom sector that provides quality communication services to consumers with two major players - Safaricom and Telkom Kenya. Within eight years, the total mobile subscribers in Kenya have increased at a rapid rate of approximately 459Pct from 3.42 million at the end of 2004 to 28 million at the end of 2013. In 2013, mobile and Internet penetration rates in Kenya stood at 61Pct and 22.1Pct, respectively.

The main action the Ethiopian government has taken to improve telecom so far has been to change management hoping it would lead to an efficient state-owned enterprise. Critics, however, argue that systemic changes are needed and that simply changing coaches is a micro solution to a macro, problem of inefficiency and ineffectiveness.

2nd Year . April 2014 . No.14

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