World Bank
Measuring foreign direct investment in the area of information and communication technology
Deliverable 1 -
Definition of the ICT Sector
Prepared for the Ministry of Communications and Information Technology, InformationCenter
Revised, 9 February 2009
Table of Contents
Table of Contents
Acknowledgements
1.Introduction
2.The role of FDI in the ICT sector
2.1FDI in Egypt
2.2FDI in Egyptian Telecommunication
2.3FDI in Telecommunications worldwide
3.FDI in Egyptian ICT statistics: What’s the problem?
4.Towards a definition of the ICT Sector
4.1Definitional difficulties
4.2Why ICT?
4.3Formal definitions of ICT
4.4Defining ICT from first principles
4.5Statistical definitions of the ICT Sector
5.Conclusions: Key issues for defining the ICT sector in Egypt
5.1Proposed definition of the ICT Sector
5.2Worked example for Egypt
Annex A: Research meetings and interviews conducted
Annex B: Terms of reference for FDI module
Acknowledgements
This report was carried out by a World Bank team including Dr Tim Kelly (Lead ICT Policy Specialist), Ms AnatLewin (Operations Officer) and Ms Isabelle Huynh (Operations Officer), under the guidance of Mr. Carlo Rossotto (Senior ICT Policy Specialist and MNA Regional Coordinator). The World Bank Team would like to thank the Director of the MCIT-IC, Dr.Nagwa el-Shenawy, and her staff for their inputs and time, as well as the International Relations Department of MCIT and its staff. In addition, invaluable inputs have been received from several other departments and units, including the Central Bank of Egypt, ITIDA and GAFI.
A first draft of this report was submitted on 2 January 2009 and a revised draft, incorporating comments from MCIT-IC was submitted on 8 January. This version includes comments also from the two peer reviewers: Ms Sheridan Roberts, Australian Bureau of Statistics, and Ms Ada Karina Izaguirre, Finance, Economics and Sustainable Development Unit, World Bank. The authors would like to offer their sincere thanks to the reviewers and all contributors.
1.Introduction
As part of the second amendment to the Reimbursable Technical Assistance activity provided by a World Bank team to the Government of Egypt, this module deals with “Measuring Foreign Direct Investment in the field of Information and Communication Technologies”. A fact-finding mission to Egypt was carried out in October 2008, during which a number of meetings and interviews were conducted to better understand the problem (see Annex A for a full list of relevant interviews conducted). As a result, the terms of reference for this module were drawn up (see Annex B) and subsequently revised following inputs from staff of the Ministry of Communication and Information Technology (MCIT). The revised terms of reference were delivered to MCIT as part of an Aide-Memoire, dated 5 November 2008.
The terms of reference for this project foresee two deliverables:
- A definition of the ICT sector for the purposes of measuring FDI in ICT
- A proposed approach for data collection and sharing among agencies on FDI in ICT
This document provides a revised draft of the first deliverable. It should be noted that this module is one of four being delivered by the World Bank team under the second RTA assignment and has close linkages with some of the other modules, principally that which deals with “Capacity building in Statistical and Economic Analysis for the ICT Sector”.
2.The role of FDI in the ICT sector
2.1FDI in Egypt
Inflows of FDI have traditionally played an important part in the development of the Egyptian economy. According to the UNCTAD World Investment Report (2008), the total value of inward FDI into Egypt in 2007 was US$12 billion, a 15 per cent increase over the previous year. This brought Egypt’s total stock of FDI in 2007 above the US$50 billion mark for the first time, equivalent to around 40 per cent of total GDP. For reference, inward FDI in Africa as a whole contributes just 31 per cent of GDP and the global average is 28 per cent. FDI is particularly high in the textiles, oil, chemicals and pharmaceuticals sector.
Indeed, the increasing openness of the Egyptian economy has propelled it up the league table of countries, as measured in UNCTAD’s Inward FDI Performance Index (see Figure 1). This is a composite index of the level of FDI relative to the size of national economies. In 2007, for the first time, Egypt broke into the top 20, and has the highest ranking in Africa, having been ranked 31st in 2006 and as low as 67th in 2005. Egypt’s outward FDI is also rising, helping it to rank 76th in 2007.Orascom is the main outward FDI investor from Egypt.
2.2FDI in Egyptian Telecommunication
Historically, Foreign Direct Investment (FDI) has played an important part in the development of telecommunicationsin Egypt, and more broadly its ICT sector:
FDI was involved from the very earliest origins of telegraph services in Egypt when a telegraph line from Cairo to Alexandria was established in 1854. The company that is now Telecom Egypt was nationalized in 1918.
FDI was also important in getting mobile communications off the ground in Egypt. Although a mobile phone service had been established as long ago as the mid 1980s under the aegis of Telecom Egypt, by 1998 this still numbered only 90’000 subscribers. In that year, the GSM operations of Telecom Egypt were purchased by MobiNil, in which Orange, owned by France Telecom, had a majority stake. Within the two years, the number of mobile phones in use had grown to almost 1.4 million by the end of 2000 (ITU World Telecommunication Indicators Database)..
The subsequent market entrants and restructuring of the mobile phone market in Egypt has similarly involved substantial FDI investment with both Vodafone and EtisalatMisr benefitting from foreign investment. In 2007, the number of mobile phone subscribers in the country rose to over 30 million and the estimated figure for mid-2008 was 38.6 million. On a proportionate subscriber basis, just under two-thirds of this user base was foreign-owned and one-third Egyptian owned (see Figure 2). Furthermore, the percentage of foreign ownership has been increasing over time due to new market entry and changes in the ownership structure of existing operators.
The early origins of the internet in Egypt also show the importance of international connectivity. Although it was the Egyptian government – specifically, the Information and Decision Support Centre (IDSC) -- that established the first internet connectivity in the early 1990s, part of the incentive for this came from responsibilities of hosting the UN International Conference on Population and Development, held in Cairo from 5-13 September 1994. One of the obligations placed on Egypt was to provide international connectivity and a 64 kbit/s leased line was purchased from France Telecom toMontpellier. The purchase of the line for nine days cost UD$450’000![1]
Finally, as well as inward investment into Egypt, there is now considerable outgoing FDI. For instance, Egyptian-owned Orascom Telecom, which is a part-owner of MobiNil, now has foreign subsidiaries in Algeria, Tunisia, Zimbabwe, Pakistan andBangladeshas well as a newly-opened operation inNorth Korea. Orascom Telecom as a whole had some 79 million subscribers as of September 2008. Of these, on a proportional basis, only 5.4 million are in Egypt through Orascom’s holding in MobiNil.[2]
Figure 2: Foreign ownership in the Egyptian mobile market, June 2008
Based on a proportionate subscribers analysis
Source: World Bank, adapted from BMI.
Raw data, available in Excel format: In Powerpoint:
A summary of the current state of ownership of the major players in the Egyptian market is given in Figure 3. Although the fixed-line market and the ISP market are both dominantly Egyptian owned, the mobile market is characterized by majority foreign ownership. In particular, on a proportionate ownership basis, around 64 per cent of the Egyptian mobile subscriber base was foreign-owned as of June 2008. MobiNil has the highest level of foreign ownership at just over 71 per cent while Vodafone Egypt has the highest level of local ownership at around 45 per cent (see Figure 3). Proportionate ownership is calculated by multiplying the level of ownership (foreign or local) by the total number of subscribers for a particular company and then multiplying through for all operators active in the market.
Figure 3: Major players in the Egyptian Telecom market, by ownership and market
Source: BMI (2008) “Egypt Telecommunication Report Q4 2008”
The Egyptian government has placed a strategy for promoting FDI and ICT investment at the heart of its ICT strategy 2007-2010. The government has taken a number of measures to liberalize the investment climate and to promote the attractions of Egypt as a location for international investment, including:
Signing up to the WTO general agreement on trade in services (GATS), and its fourth protocol, better known as the basic telecommunications agreement (Feb 1998);
Introducing a new investment regime that allows for the full repatriation of profits, unrestricted ownership of investment capital, elimination of price controls and tax cuts;
Planning for the partial privatization of Telecom Egypt and other state-owned enterprises;
Offering free zones and other special economic zones.
It is vital, therefore to be able to measure the success of these different measures so as to inform future policy reforms and initiatives.
2.3FDI in Telecommunications worldwide
The picture of increasing FDI in the telecommunications sector in Egypt is a small sub-set of what is happening worldwide, with similar trends being demonstrated elsewhere. The World Bank, through its Private Participation in Infrastructure (PPI) database, tracks major investment projects in different sectors worldwide. As indicated in Figure 4, private sector investment in telecommunications, much of which involves FDI, was on the increase, at least until the start of 2008. Indeed, the PPI data indicates that in 2007, this investment reached an all-time high of US$75.0 billion of which only a small proportion is due to payments to governments (i.e. from privatizations, license fees etc). Furthermore, looking specifically at the Middle East and North Africa region (MENA), it is observable that private investment is quite recent, with the upsurge dating from 1998 (the date of the MobiNil sale) and a recent increase starting in 2004 (Figure 5).
However, it is noticeable that the number of new projects declined in 2007, both globally and in the region, and it is expected that this fall in new investment initiatives has become even more pronounced in 2008 as a result of the global credit crisis.
Figure 4: Private Participation in Infrastructure (PPI) in developing countries in telecommunications, 1990-2007
Figure 5: Private Participation in Infrastructure (PPI) in Middle East and North Africa in telecommunications, 1990-2007
Source: World Bank and PPIAF, PPI Project Database.
Research from the Latin America region shows a link between the level of FDI and risingteledensity (of both fixed lines and mobile phones combined). For the Latin America region, there is a statistical correlation between rising FDI and rising teledensity thus that, in the period between 1990 and 2005, a US$100 rise in the level of FDI per capita equates to a rise of around nine percentage points in total teledensity (Figure 6). Those countries that have benefited from the highest levels of inward FDI, such as Argentina and Chile, also benefited from some of the fastest rises in teledensity, despite having relatively high levels at the start of the period. Of course, this relationship works both ways (i.e., rising teledensity attracts FDI in telecoms as well as being caused by it). Furthermore, it is a complex relationship and there are many other factors at work. For instance, those countries that have benefited from FDI are also generally the same countries that made an early start of the telecommunication liberalization process, and market competition is probably the major factor underlying growth. Nevertheless, it does indicate the positive impact that FDI can have on a nation’s telecommunication infrastructure.
Egypt provides an excellent example of how this works in practice with three major foreign investors – Orange, Vodafone and Etisalat – present in the mobile market, which has experienced phenomenal growth. By contrast, the fixed-line market has not yet benefitted from substantial FDI. It is not coincidental that the rate of fixed-line growth has begun to decline and the fixed-line teledensity may fall in future years.
Figure 6: Rising FDI associated with rising total teledensity, in Latin America 1990-2005
Source: Juan de Laiglesia “Innovation, Investment and Access to Telecommunications”, presentation at OECD/World Bank Joint Conference on Innovation and Sustainable Growth, Paris, 18-19 November 2008, available at:
Raw data available here:
Beyond telecommunications, Egypt is an attractive location for FDI in the other sub-sectors of the ICT industry. It has attracted considerable private investment in the software and IT services industry for example. Many foreign companies in this sector have established an important presence within the facilities of the SmartVillage in Giza.Another ICT subsector of strategic importance for Egypt is advanced media services and digital content creation in particular. Egypt’s local skills and international recognition as the most important media hub in the Middle East and North Africa make it a favorable business location for investment in media-related ventures.
Telecommunications is the subsector of the ICT industry with perhaps the most reliable FDI statistics. By contrast, other vital subsectors of the ICT industry, such as software, IT services, digital content creation and others, do not rely on the same depth of available statistics, and present peculiar challenges.
3.FDI in Egyptian ICT statistics: What’s the problem?
The need for this study arises from the concern that current measures of FDI in the ICT Sector in Egyptmay under-report its true level because they do not cover the whole ICT sector or because of reporting inconsistencies between agencies. This project will help to address that problem by first proposing a harmonized definition of the ICT sector (this deliverable) and second by proposing a system for information sharing between agencies (the second deliverable).
Currently, at least three different agencies are involved in data collection in addition to MCIT-IC:
General Authority for Investment and Free Zones (GAFI), an affiliate of the Ministry of Investment.
The Central Bank of Egypt, where data is collected by the Balance of Payments department.
The Information Technology Industry Development Agency (ITIDA), one of the affiliated bodies of the MCIT.
In addition, there are many different users of the data, including the MCIT and other parts of the Egyptian administration, such as the IDSC. However, these different agencies are each using different definitions of the sector and none of them has a complete data set. There are also no established mechanisms for electronic data exchange and data estimates from the different sources vary by an order of magnitude. For instance, in 2006, the year of Etisalat’s market entry, the Central Bank’s estimate of investment (just under US$2billion) is 65 per cent higher than that reported by GAFI. But in the following year, although the total figures are much lower, GAFI’s estimate is nevertheless 90 per cent higher than that for the Central Bank (see Figure 7).
Figure 7: Discrepancies in the recording and reporting of FDI data in the ICT sector between different agencies, 2006-07, in US$m
Central Bank of Egypt / GAFI / FDI in ICT sector1’921 / 1’164 / 2006
10.1 / 19.3 / 2007
Source: Nagwa El Shenawy “Measuring FDI in the ICT Sector in Egypt”, presentation, October 2008.
Nevertheless, as shown above, promoting ICTs lies at the heart of Egypt’s ICT sector strategy, 2007-2010 and it is critical to develop a harmonized methodology that will generate a time series for FDI in the ICT sector that will be accepted by all the various agencies. Such a strategy must begin with a harmonized definition of the ICT sector.
4.Towards a definition of the ICT Sector
4.1Definitional difficulties
In order to arrive at a stable and broadly accepted estimate for the level of foreign direct investment in the Egyptian ICT sector, it is necessary first to come up with a definition for the scope of the sector itself. As shown later in the report (see section 4.5), there is now an emerging consensus around a definition originally developed by the OECD. However, the task of defining the sector was not as easy as it may seem because:
The term “information and communication technologies” is, itself, relatively new and was introduced by academics to describe broader socio-economic and technical trends towards convergence rather than for statistical measurement purposes;
Of all industrial sectors, the ICT sector is one of the most volatile, being subject to high rates of technological change as well as globally shifting investment patterns. This implies the need for a cycle of classification updates that is more frequent than in other sectors;
ICT is a pervasive technology. That means, for instance, that a computer chip is just as likely to crop up these days in a fridge as in a computer. From a statistical point of view, this means it is important to distinguish between intermediate and end-products. As an example, a modern Formula 1 car has a transmission bandwidth of over 500 Mbit/s and more than 100 different sensors. This is equivalent to a high-performance computer, but an F1 stable would probably not be classified within the ICT sector.
The ICT sector is one which cuts across both hardware and software or, to put it a different way, covers both products and services. Again this can make definitions more complicated.
As indicated above, the term “Information and Communication Technologies” (ICTs) originally stems from the academic world. In the 1980s and early 1990s, the term “Information Technology” (IT) was widely used, especially in North America, and is often used synonymously with ICT. Indeed, this is reflected in the name of “MCIT”. However, ICT is the more accepted term today and reflects both the ability to process information (the “IT” part) and to communicate it (the “C”). It was the development of the internet, which is both an information processing and a communication service, which gave rise to the term “ICT”.