Telecommunication Sector Reform: The Controversial Key To Ethiopia’s Economic Recovery?

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By Behailu Shiferaw Mihirete (12 May 2022)

Efforts to liberalise and digitalise Ethiopia’s economy have picked up an unprecedented pace since Prime Minister Abiy Ahmed came to power in April 2018. Reforms to the telecommunications sector, hitherto dominated by the state-owned Ethio Telecom, have been identified by Abiy’s government as the foundation of economic and digital transformation.  Much has happened over the last four years, and this blog post examines the progress of the liberalisation of the Ethiopian telecom sector in light of political, economic and security developments in the country.

The vision

Two and half months after taking office, Abiy made his first attempt to sell the idea of telecom sector liberalisation to the House of Peoples’ Representatives. He argued that this was a policy imperative to reform and revive the struggling economy. “In the 21st century,” Abiy told members of Parliament, “the role of telecom operators is no longer limited to increasing the number of mobile subscribers. We need them to automate our education, health, governance, and revenue systems.”

Photo: Behailu Shiferaw

While these digital aspirations are decades old, telecom sector liberalisation and privatisation were off limits during the previous governments of Meles Zenawi and Hailemariam Desalegn. So, when Abiy opened the door, international partners came flocking in. Oxford University’s Pathways for Prosperity Commission, MasterCard Foundation, the Tony Blair Institute, Dalberg, and the United Nations Economic Commission for Africa helped the new administration write the first National Digital Transformation Strategy for Ethiopia (Digital Ethiopia 2025).

The strategy identified agriculture, tourism, manufacturing, and IT-enabled service sectors as primary beneficiaries of Ethiopia’s digital revolution. While each uses digital technology in different ways, they all required a telecom infrastructure that neither existed nor could be assembled quickly enough by the state-owned operator alone. As a result, radical telecom sector reform – including privatisation – was put forward by Abiy’s administration as a prerequisite first step.

Obstacles and opposition

This first step proved far more complex than the government had anticipated. Existing legal frameworks weren’t supportive of a grandiose vision of digital transformation, and the country lacked a regulatory agency with the mandate and/or experience to guide the process. There was also ideological resistance from within the wider government and the general public. The first question Abiy faced as prime minister in Parliament was related to his publicised plans to privatise essential sectors and services. During the 2021 General Elections, opposition parties were relentless in criticising the partial privatisation of Ethio Telecom, the profitable public enterprise that paid a staggering eight percent of the nation’s total tax revenue in the previous fiscal year.

Even the Ethiopian Citizens for Social Justice (popularly known as EZEMA), a political party with liberal economic ideology, opposed the move on three grounds. EZEMA argued that the country had neither the legal frameworks nor the technical systems in place to execute such a complex and consequential move at the time. In one televised debate, the party’s policy chief, Amanyehun Reda argued: “If the over-a-century-old National Bank of Ethiopia cannot regulate foreign banks, what chance will the two-year-old Ethiopian Communications Authority stand regulating foreign telecom operators?… It’s still in diapers!”

Second, EZEMA argued that the unelected ruling party did not have the legitimacy or mandate to make such macroeconomically significant decisions. EZEMA’s policy paper on Ethio Telecom’s Partial Privatisation asserted that since Ethio Telecom is a public enterprise of historical, economic and political value, the decision to partially sell it must also be made by the people or its democratically elected representatives. It suggested that the decision must wait until after a new elected government took power.

Telecom sector reform in Ethiopia: an issue of national significance. Photo by Kelly L (CC License)

The third argument was that selling shares when the global stock market was being hit by the coronavirus pandemic was not a smart business decision. Therefore, EZEMA argued, the government’s move to sell a key government asset with such haste must be due to either pressure from international financial institutions to settle its debts, or a dire need for foreign exchange. Either way, EZEMA’s policy chief likened the selling of Ethio Telecom to the hungry farmer who eats the hen that lays golden eggs. When pressed as to whether Ethio Telecom was so valuable, Amanyehun pointed to the fact that the corporation was successful enough to be paying back the loan the government had taken to build new railroads. Ethio Telecom is also possibly the biggest financier of the Great Ethiopian Renaissance Dam.

EZEMA’s critique also pointed to Worku Gebeyehu’s research from 2005 that asks “has privatization promoted efficiency in Ethiopia?” Here, experiences so far do not engender much hope. The research argued that even though the Government of Ethiopia has privatised 223 public enterprises since the mid-1990s – with the hope that they would be more efficient, and the sectors’ liberalisation would attract foreign direct investment (FDI) – neither goal has been realised. More radical opponents have also argued that data is now more valuable than oil and that data extraction and data colonialism through telecom control are updated versions of Western neo-colonial control.

External support

The IMF and World Bank, advocates of economic liberalisation in Ethiopia for nearly three decades, offered financial and technical support. The International Finance Corporation, a member of the World Bank Group that supports private-sector development, assisted in hiring international law and communication firms to advise and support the government. Other international private sector actors also came in to support liberalisation. The London-based firm, Gong Communications, came to design and implement a communication strategy for the process. Coleago, another London-based consulting firm, helped with spectrum-related technical aspects. Deloitte was recruited as transaction advisor while KPMG East Africa was tasked with the asset and business valuation of Ethio Telecom.

On 12 August 2019, the Communications Service Proclamation established Ethiopian Communications Authority as a regulatory body and provided for the privatisation and liberalisation of the telecom sector.

The market opens

Three decades after Ethiopia had hesitantly adopted a market economy, the lucrative telecom market of Africa’s second-most populous country was now open for international operators. On 27 November 2020 the first global ‘request for proposal’ (RFP) was advertised via the Financial Times. Despite pressure not to do business with a government embroiled in a civil war (which had started in Tigray that same month), 12 international operators entered the fray. The Global Partnership for Ethiopia, a consortium of telecom companies consisting of Safaricom, Vodafone, Vodacom, Sumitomo Corporation, and the CDC Group, won the bid offering $850 million for the licence.

The deal was celebrated in some quarters as both a financial and a narrative victory. On 22 May 2021, triumphant Prime Minister Abiy tweeted that “our desire to take Ethiopia fully digital is on track.” Totalling more than $8 billion over the following years, the deal marked the single largest Foreign Direct Investment into Ethiopia to date. Others argued that the government could have bargained for another $500 million had it not excluded the mobile money transfer option from the license offerings.

Though widely discussed, this was only the first of three major liberalisation plans. In fact, the most controversial move yet is the partial privatisation of the state-owned Ethio Telecom, wherein the government seeks to sell 40 percent of the equity share capital of the country’s monopoly operator to an international operator.

Bumps in the road – but foundations for digital transformation

Even though the RFP for the partial privatisation was advertised in June and September 2021, the process was once again postponed. Some fear that Ethiopia is not ready for a digital economy and might have stepped into the process prematurely. After all, nearly 80 percent of the country’s population still lacks access to basic internet connection. Others disagree, pointing to the fact that the country has about 59 million mobile subscribers, and over 23 million people use data and Internet services one way or another. If it is harnessed properly, this is potentially comparable to Kenya where mobile money systems (such as Safaricom’s MPESA) have been pioneered and are now widely used. Geographically, 85.6 percent of Ethiopia is covered with 2G service while 66 percent gets 3G connection. Recently 136 cities and towns got access to 4G internet. And, on 09 May, Ethio Telecom launched pre-commercial 5G service in the capital.

Will M-Pesa style mobile money take off in Ethiopia? Photo by Ivan Small, Wikimedia.

All of this shows that the potential for at least a semi-digital economy is present in Ethiopia, and the foundations for more ambitious dreams are being laid. The digital strategy identified three areas as its enabling systems: expanding digital payment options, granting digital identification to residents, and ensuring cyber security. Encouraging starts are under way in each of these areas.

Last year, the government launched the National Digital Payments Strategy 2021–2024, which provides a roadmap to transform the payment ecosystem and help build a cash-lite and more financially inclusive economy. Nearly all Ethiopian banks have launched internet and mobile banking services. In the previous fiscal year, 62 percent of the customers of Commercial Bank of Ethiopia, the largest bank in the country with over 54 percent of the national banking market, did not go to a branch for services. They either used ATM machines or mobile banking services. On 1 April 2022, the Ministry of Innovation and Technology, Commercial Bank of Ethiopia and Mastercard signed a partnership which will allow Ethiopians to access and pay for an initial set of 45 government services digitally for the first time.

The second enabling system requires providing all legal (adult) residents of the country with a digital identification. The National ID Program is de facto operational and has thus far registered over 9,200 residents in its pilot efforts. Aiming to register over 70 million residents, the national ID program is primed to be the largest ever government endeavour – establishing contact with more citizens than thus-far-held national elections or population censuses.

Considering Ethiopia’s resource constraints, its cybersecurity apparatus is not to be underestimated either. A recent article by Wilson, Lindberg and Tronvoll (2021) noted that Ethiopia’s cybersecurity capacity, as measured by the Digital Society Project, ranks twelfth in the world. In fact, the article argued that every country with higher capacity than Ethiopia on this indicator has a minimum 75 percent Internet penetration, and at least 10 times the per capita GDP. These are all positive signs suggesting that at least a critical portion of Ethiopia might be more prepared for a digital future than many believe.

This year, Safaricom signed a five year agreement with Ethiopian Electric Power to use the latter’s network of optical ground wire cables, and another three-year lease agreement with Ethiopian Electric Utility to use its concrete poles for aerial fibre installation. And, though they have yet to sign it, Safaricom and Ethio Telecom have also reached an agreement on the tariff and the currency to be used for payments the former makes for sharing the latter’s infrastructure.

Key questions going forward

Despite all progress, there is no guarantee that foreign operators will easily win the hearts and minds of the wider Ethiopian population. Among many people, anti-western sentiment is developing following what they consider to have been unfair and heavy-handed western interference since the start of the war in northern Ethiopia. This could complicate the telecom liberalisation effort, and debates about digital neo-colonialism and data sovereignty may become increasingly relevant to the trajectory of the telecom sector in Ethiopia. On the other hand, discontented citizens might migrate to new operators to make a political statement. Or, for many, the choice might be as simple as whoever offers better value for money.

Other questions include the possibility that worsening inflation and deteriorating international relations may lead to a resurgence of support for the old, protectionist, pro-poor developmental state model, which favours a state control of strategic sectors. How would that affect foreign operators, and what might they do to deal with it? What practical steps will the Ethiopian government take to engender more hope in future market entrants? While significant changes have been under way in the Ethiopia telecommunications sector, currently, questions like these will require close attention and analysis.

Behailu Shiferaw (@behailus) is a media and communications expert based in Ethiopia. He studied politics and communication at LSE.

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