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TELECOMMUNICATION AND DEVELOPMENT: THE CASE OF EGYPT
By

Ramsey Ali Kamel

A THESIS
Submitted to
Michigan State University
in partial ﬁilﬁllment of the requirements
for the degree of

MASTER OF ARTS

Department of Telecommunication

1998

ABSTRACT
TELECOMMUNICATION AND DEVELOPMENT: THE CASE OF EGYPT
By

Ramsey Ali Kamel

Veriﬁable proof of a causational link between telecommunications and overall economic
development in the developing world remains elusive. In large part, this is caused by
characteristics inherent to the telecommunications ﬁeld that are ﬁrndamentally at odds with
the economic and ﬁnancial environments of most developing countries. Recent large-scale
improvements in a developing country’s telecommunications infrastructure were usually
linked to its privatization. Unfortunately, the above privatization was usually part of an
overall shift in economic policy and hence, the effects of this single act were inseparable
from those of the larger effort.

In an effort to separate the economic impact of macroeconomic reform ﬁ'om
enhancements in the telecommunications ﬁeld, the telecommunications development efforts
of Egypt shall be analyzed with respect to the nation’s microeconomic, macroeconomic, and
political environments. The above analysis, conducted over a time frame containing
independent reform efforts in the micro and macroeconomic environments, shall
demonstrate that telecommunications development, alone, is a necessary, but not a
necessary and sufﬁcient condition for achieving long—term economic development. It is
the appropriate macroeconomic environment, and a nation’s political will to create such
an environment, that enable telecommunications to ﬁrlﬁll its role as a catalyst for

economic development.

To my father, Ali Abdelatif Kamel, for imparting to me a lifelong bond with Egypt.
To my mother, Mary Smith Kamel and sister, Alia Kamel, for their encouragement and
perseverance during this undertaking.

iii

ACKNOWLEDGEMENTS

The successﬁrl conclusion of this endeavor would not have been possible without the
assistance of a large number of people. I would particularly like to thank Dr. Thomas
Muth and Dr. Johannes Bauer for their time and guidance and the staff of the
Telecommunications Department for keeping everything running so smoothly throughout
the process. I would also like to mention the efforts of the original researchers that
provided the excellent reference material upon which this study relies. And ﬁnally, I
must mention my appreciation to Egypt for persevering through yet another attempt by

yet another researcher to understand its mysteries.

iv

 

 

 

 

 

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TABLE OF CONTENTS

LIST OF TABLES .............................................................................. vii
INTRODUCTION .............................................................................. 1

I. BACKGROUND .............................................................................. 3
A. Telecommunications as Development Tool ....................................................... 3
B. Telecommunications Development Conundrum ....................................... 4
C. International Telecommunications Environment ............................................... . 5

l. The Traditional Post, Telegraph and Telephone (PTT) Model ........................... 5
2. Catalyst forPTT Restructuring 8
3. Privatization Theory 1n Telecommunications ...... ............................................ 10

A. MicroeconomicFactors 11

B. MacroeconomicFactors 12
C. PoliticalFactors 12

EGYPT AS TELECOMMUNICATIONS CASE STUDY ................................. 12
Overview of Egypt ........................................................................... 14
Telecommunications - A Regional Comparison ........................................ 15

W>E

. MICROECONOMIC ANALYSIS 17
TelecommunicationsStructure 18
PTTWorkforce 20
Tarriﬁng ..................................................................................... 23
DevelopmentthroughForeignFinancing 30
1. Policy Externalities ....................................................................... 32
1.1. Domestic Inﬂuence over Foreign Aid Largesse ........................................ 32
1.2. Political Inﬂuence on Foreign Aid Largesse .......................................... 33
1.3. Development of USAH) Development Policy ........................................... 34
2. USAID’s Initial Telecommunications Involvement ...................................... . 37
2.1. Continental Telephone Study 37
2.2. InitialUSAIDProject (SIP) 38
2.3. ARENTODevelopmentResults 39
2.3.1. EconomicAnalysis 41

mpowaz

i. Base Scenario 44
ii. Scenario Variations 45
iii. MicroeconomicResults 45
3. AttemptedUSAIDPolicyReformEfforts 46

V. MACROECONOMIC ANALYSIS .................................................... 49
A. Framework for Egyptian Economic Policy . . . . . . 49
1. Integrative Economic Development Model . . . 49
l. 1. Telecommunications 1n the Integrative Model .... 51
2. Economic Restructuring and Development Policy Reorientation ............ 52
3. Critique of the Integrative Economic Development Model . . . . .. 54

VI. POLITICALANALYSIS. 55
A. Creation of Egypt 5 Political Environment ................................................. 55
B. Sadat 57
1. RetoolingtheStatuSOuo 58
2. External Fmancral Windfalls 59
2.1. Analysis ofForeignFinancing 61
2.2. EndofForeignWindfalls 64
23. ResultsofExternalFinancing 65
1. DeusexMaChina- GulfWarRepercussrons 69
2. Policy Catharsis 71
21 Causes and Inducements for Reform . ......................................................... 75
2.2. Regime’ 3 Commitment to and Implementation of the New Economic Order 78
2.2.1. Machinery of the New Economic Order .................................................. 79
2.3. USAII) Policy Reform Under New Macroeconomic Environment . . . 81
2.4. ARENTO Performance Under New Policy Environment . . . . . .. 83
2.4.1. ARENTO’S Current and Future Five Year Plans ..................................... 85

VII. CONCLUSIONS 89
A. MicroeconomicEnvironment 89
B. MacroeconomicEnvironment 89
C. PoliticalEnvironment. .93

1. Telecommunications vis a vis the Political Envrronment .............................. 96
D. Counterfactual Argument for Telecommunications Sector Reform .............. 97

VIII. Telecommunications Sector Reform — Generalized Conclusions 99

BIBLIOGRAPHY .......................................................................... 101

 

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Table 1.

Table 2.

Table 3.

Table 4.

Table 5.

Table 6.

Table 7.

Table 8.

Table 9.

LIST OF TABLES

Arab Nations’ Telephone Penetration Rates ..................................... 17

Composition of ARETO Work Force ............................................. 21
GOE Hiring Quotas Imposed on ARETO 1972-76 .............................. 22
ARETO Employees per 1000 Telephone Main Stations 1968-1977 ........... 23
Service Tariff Rates and Returns to Assets ........................................ 26
Impact of ARENTO Rate Reform on Receipts (LE Millions) .................. 27
Telephone Tariff Structure, 1983/84 — 1991/92 .................................. 29
Egyptian Line Density Improvement ............................................... 41

Internal Rates of Return for AID-ﬁnanced Telecommunications Projects .. 44

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INTRODUCTION

The issue of telecommunications’ nature as a causational or correlational variable in
economic development remains unanswered. This is due, in large part, to the ubiquitous
nature of the telecommunications’ service. It is an integral component of the ﬁnancial
services, media, transportation, and travel industries, and enhances the communications
necessary amongst manufacturers, wholesalers and retailers. As such, an expansion or
enhancement of telecommunications results in an improvement of the informational
efﬁciency of an economy. An improved ﬂow of information, in turn, promotes a more
efﬁcient mobilization of resources, this being the ﬁindamental concern of economic
development. Therefore, telecommunications is an agent of development, but is it a
proactive catalyst driving development forward or an infrastucture service that improves
the efficiency of economic activity already underway? This question is the Achilles’ heel
of nearly all empirical studies involving telecommunications — the inability to delineate
the direction of causality: the tendency for telephone use to enhance economic
performance and the tendency of improved economic performance to result in expansion
of the telephone system and greater telephone use.

In an attempt to accommodate and address the dilemmas posed by
telecommunications development in relation to economic development in the developing

world, this case study shall use a holistic theoretical framework. This framework shall

view telecommunications development from three separate, but interlinked perspectives:

microeconomic, macroeconomic and political. With respect to a study of the overall
economy, the limitations of a microeconomic cost based analysis are recognized, but such
an analysis is presented to demonstrate the impact of the latter two areas upon the
telecommunications entity. It is particularly applicable to this study because the
telecommunications entity, if the three areas are considered variables, was allowed to
vary (a massive telecommunications program was undertaken) while the latter two
variables were held constant. Thus, the individual impact of this massive upgrade could
be analyzed while the macroeconomic environment, considered non-conducive to
economic development and growth, was held constant. The macroeconomic environment
then underwent a fundamental restructuring that resulted in a far more aggressive
economic development orientation. In this new economic environment, the performance
of the upgraded telecommunications entity and the nation’s economy were analyzed.
Because a fundamental altering of a nation’s economic philosophy contains a large
political component, the political environment, as well as, the economic necessity of the
aforementioned change, were also analyzed. While this case study does not hope to
present a deﬁnitive answer to the causational or correlational nature of
telecommunications with regards to development, it will demonstrate the limitations of

telecommunications’ developmental role in a non-conducive environment.

I. BACKGROUND

A. Telecommunications as Development Tool

The concept of telecommunications infrastructure development as a catalyst for overall
national development in Lesser Developed Countries (LDCs) acquired international
prominence with the publishing of “The Missing Link.” This 1984 Independent
Commission for Worldwide Telecommunications Development report, emphasized the
social and economic importance of telecommunications and presented an eloquent case for
the allocation of resources to improve the basic telecommunications infrastructure of the
developing world. The “Missing Link,” also known as the Maitland Report, was
successﬁrl in raising awareness of the telecommunications gap between developing and
developed countries and highlighting the beneﬁts of narrowing this gap. It caught the
imagination of both the telecommunications and development communities and gave
tremendous impetus to the telecommunications for development movement.

This movement is based on the precept that telecommunications underpins an
emerging information economy and serves as a catalyst for enhanced performance across a
wide range of economic and industry sectors. Its proponents are spread across a broad
spectrum of belief as to the breadth and depth of telecommunications inﬂuence on
development. Conservative proponents see it as an enhancer and expediter of traditional
“evolutionary” development, whereas more “visionary” advocates have argued the case
for telecommunications as catalyst for an exponential leap forward into the information
age. This latter group believes that straightforward economic grth within the conﬁnes
of a LDCs’ traditional slow-moving economy is not enough. With new communications

products and strategies producing a transformation in business and trade practices, the

developed world is moving towards a global networked business infrastructure. Unless
developing countries can make the quantum leap into this new communications arena,
there is a danger that they will become increasingly and irreversibly marginalised. This
position was succinctly presented in 1987 by Ivorian President Boigny, “Africa missed the
industrial revolution; we can’t afford to stand aside and let the communications revolution
go by, too.” (Kwabena. 1)

Enthusiasm for telecommunications as an accelerator of economic development has
extended to the international regulatory and ﬁnancial community as well. The
International Telecommunications Union has put development on par with its more
traditional activities in the areas of standards and radio communications. The World Bank
has added telecommunications and information technology experts to a new central vice
presidency responsible for ﬁnancial and private sector development. The International
Finance Corporation has established a specialized unit to help mobilize capital for private

investment in telecommunications in developing countries. (Wellenius, et. a1. 1994. ix)

B. Telecommunications Development Conundrum

This mobilization of the international ﬁnancial, telecommunications and development
communities, however, has yet to conclusively prove telecommunications’ role as a
developmental catalyst in the LDCs. The reasons very few countries have been able to
test the above hypothesis are primarily, but not exclusively, economic, in that an inherent
characteristic of telecommunications equipment is its highly capital-intensive nature. In
sharp contrast to traditional development projects, the capital/labor ratio in the installation
and operation of these networks is particularly high. This fact contravenes the general

belief and policy that the limited capital resources of a developing nation should favor job-

creating, indigenous labor intensive projects, i.e. production, over capital-intensive, labor-
limited projects. Compounding this drawback is the fact that this capital-intensive activity
can only be base on foreign technology. The implications of combining the two are that a
country that wants to develop its telecommunications networks, will not only incur a
substantial drain on its gross ﬁxed capital formation, but also on its hard currency
reserves. Coupled with this high initial capital investment is the rapid rate of technological
obsolescence. The ﬁnance and resource limitations inherent in the developing world and
the inherent characteristics of telecommunications equipment would seem to be mutually
exclusive. (Gille. 41-42) The end result is that developing nations face the unenviable
choice between immediate and measurable improvements in the welfare of its populace
and the longer term economic and social beneﬁts that could hypothetically result from

providing access to global information resources.

C. International Telecommunications Environment

1. The Traditional Post, Telegraph and Telephone (PTT) Model

The PTT model represents a monopolistic postal and telecommunications enterprise owned,
operated, and regulated by the national government, a model which until recently, enjoyed near
unanimous global acceptance. Justiﬁcation for this near unanimity was based on economic,
political and social arguments. From an economic perspective, telecommunications was
considered a natural monopoly because the cost for a single producer to supply the entire
market would be lower than the cost for multiple producers to supply a divided market.
This was based in part on the large sunk capital investments inherent in the creation of a
telecommunications infrastructure. The existence of multiple telecommunications

companies was thought to entail a waste of societal resources and would make recovery

of the initial investments diﬂicult and thereby, hinder future infrastructure investments. In
addition, the difﬁculties for interconnection created by the diversity of technical standards
and protocols adopted by the competing companies and resistance to interconnection also
lent support to the natural monopoly argument. As did telecommunications’ economies of
scope - with an existing infrastructure in place, it would be less costly for the predominant
and/or monopoly carrier to move upstream to new and related systems and services than
for a third party to develop a new infrastructure to provide those services. From all of the
above points, it was easy to surmise that in order to achieve the highest possible network
expansion for the least cost, it was necessary to establish a telecommunications’
monopoly.

Unfortunately, the existence of a monopoly in the private sector oﬂ‘ers incentives for
monopoly pricing. Telecommunications, like other utilities that rely upon a ubiquitous and
interconnected inﬁ'astructure, possesses a natural monopoly’s economies of scale, in that the
cost of adding additional customers drops as the number of subscribers increase; this is
especially true of the basic local network inﬁ'astructure. Viewed ﬁ'om a universal service
perspective this decreasing cost of expansion is extremely advantageous and argues in
favor of monopoly. However, as a utility, the demand for basic telecommunications
service is extremely inelastic. Thus, at a given level of service, price increases will not
diminish demand; similarly, decreased prices are not necessary in order to attract a large
volume of new customers. In this situation, investment by the monopolist would tend to
be directed where short-run demand was capable of paying the cost of network expansion
and to set prices beyond the means of the urban and rural poor. (Wellenius, et. al. 1994.

507) Overall, prices would tend to be higher and output lower than society as a whole

would prefer - a lower average price would allow additional customers to subscribe and

would increase the consumer surplus of all customers. (Ibid. 506) This scenario serves as

the basis of the social beneﬁts argument for government monopoly of the
telecommunications ﬁeld. But beyond this altruistic social welfare concern was the belief
that a single, state-controlled national network would promote national integration and
sovereignty. This national communications network would link people and institutions
across diverse regions and thus establish tighter social, political, and commercial ties

within the nation. (Petrazinni. 12-13)

In an attempt to maximize the advantageous natural monopoly characteristics vis a vis its
possible shortcomings, the aforementioned PTT model was created with the following goals:

I Universal service or at least efforts to provide affordable basic telecommunications services
to rural areas and low-income users.

I Rate setting that prevents price gouging, except where socially desired (e. g. overpricing
outbound international telephone rates to generate a source of revenues for cross-
subsidizing local telephone and telegraph services.)

I Price averaging that blends high- and low-cost routes (urban versus rural and dense versus
sparse) and transmission technologies (cable versus satellite) into a single, composite rate;

I Rate setting that serves social goals (e.g., subsidized “lifeline” rates to low-income users);

I Long-range planning that achieves development objectives (e. g. deploying advanced
broadband digital facilities and services to the hinterland even in the absence of demand and
the likelihood of fully recouping investment). (F rieden. 28)

The end result was that in most developing countries, telecommunication services evolved
“under the auspices of government departments, run by civil servants under government rules
and procedures.” (F riederr 81) And not coincidentally, virtually all LDC communication
services suffer from a large unmet demand for telephone connections, call traﬁc congestion,
poor service quality and reliability, limited rural coverage and an absence of modern business

services. These common characteristics are the outcome of common government policies that

are often diametrically opposed to the advancement of the telecommunications sector: a lack of

ﬁnancial and administrative autonomy; no motivation to enlarge or modernize the infrastructure
or improve customer service; tariffs geared to political objectives rather than ﬁnancial
requirements and political interference in the daily operation of the telecommunications entity.
(Wellenius, 1992. 3) Ultimately, the PTT authorities have failed in fulﬁlling either their social
mandate or their economic potential as an underpinning of business sector development.

2. Catalyst for PTT Restructuring

The poor performance of the telecommunications sector under the PTT model, juxtaposed
to the numerous economic and social beneﬁts postulated through telecommunications reform
and expansion should have spurred change, even if limited by country-speciﬁc constraints.
However, poor performance was not the reason for change. As a study carried out by the ITU
shows, telecom restructuring in most LDCS began as part of a larger economic adjustment
program driven by ﬁscal crisis and economic decline. (Becher. 11) During the 1980s most
LDCS - particularly Latin American countries - suﬁ‘ered serious economic setbacks: domestic
savings and investments (mainly from public institutions) shrank or disappeared, inﬂation
spiraled to unprecedented heights, wages dropped along with domestic consumption, and the
unemployment rate grew. (Petrazzini. l4) Along with domestic economic collapse, most
countries suffered from serious external debts. A large percentage of these accumulated debts
had been used to ﬁrrther economic development, that, when compared to the debt incurred, did
not seem wholly justiﬁable. This combination forced a reevaluation of the govemment-led
development model at both the domestic and international levels. Adding ﬁrrther insult to
injury, governments began to cannibalize the few proﬁtable state owned enterprises (SOEs)
created by the model by channeling these SOE’s resources to more needy sectors of the

economy. As a result, most SOEs suﬁ’ered from very low investment rates that accelerated

infrastructure deterioration and allowed quality and quantity of services to ﬁrrther lag behind
the growing demand created by modernization and development. (Petrazzini. 14)

Having neither the ﬁnances to service the external debt or the ability to attract additional
investment capital for the discredited public sector, an economic restructuring seemed
unavoidable. With few alternatives, governments adopted policy recommendations from
international lending institutions. The economic restructuring promoted by the international
community was liberalization of the economy, and, crucial to overcoming ﬁscal deﬁcit, an
extensive privatization program. (Petrazzini. 14) World Bank debt adjustment programs from
1981 - 1991 recommended privatization in seventy percent of all structural adjustment loans
(SALS) and forty percent of all sectoral adjustment loans (SECALS) supported privatization
by developing the necessary strategies, timetables and regulatory institutions. (Kikeri. 32)
Concurrently, the LDC’s second most important sources of foreign credit, export credits and
commercial bank loans, were becoming scarce: in 1981 the LDCS as a whole were able to
secure commercial loans of $52 billion and export credits of $18 billion as compared to 1986
when commercial loans totaled $5 billion and export credits of $2 billion. (Knapp. 35) As
argued by Ellison and Gereﬂi, world system factors, in this case, the debt crisis and the
conditionality attached to debt adjustment, were critical in forcing policymakers to consider
major strategic shifts such as economic liberalization and SOE privatization. (Ellison. 376)
Virrth debt restructuring tied to market reform and privatization, commercial credit seriously
limited and unable to raise internal ﬁnancing, economic restructuring became a “situational

imperative” for many LDCS.

10

3. Privatization Theory in Telecommunications

Wrth the LDC P'I'I‘s unable to meet even basic service requirements, the Europeans
restructuring the original P'I'l' model and the orrmipresent external debt crisis, privatization was
proclaimed as the answer to all the drawbacks of government control over telecommunications
in the LDCS. Political inﬂuence over the business entity would be limited and managerial and
employee staﬂ‘s would become more efﬁcient because of the elimination of government
subsidies and their new dependence upon market forces. Since there is a decoupling of the
telecommunications workforce from the civil service and its pay scale, a more skilled and
professional talent could be attracted and kept. The privatized company would gain access to
private capital markets, both domestic and foreign, and thereby have access to a broader
ﬁnancial base. Because the privatized company is now "proﬁt motivated" these resources will
be channeled to goods and services that consumers prefer, most notably business consumers.
Privatization of the teleconrmunications infrastructure would be the catalyst by which the
promise of developmental telecommunications would be achieved. So with the motivation of a
tremendous external debt and the above rationale, most of Latin America, Mexico and
Argentina being the preeminent examples, sold their national carriers to private, usually foreign,
investors.

Since liberalization of the market is always recommended in tandem with privatization, the
creation of a governmental regulatory body was a necessity. Its purpose was to oversee the
new “for-proﬁt” enterprises and protect and foster the newly liberalized market’s new entrants.
In many cases the amount of regulatory authority given to this new agency had a direct
negative correlation with the bidding price for the PTT. The same can also be said for the

social mandate responsibilities included in the sales contract. Depending on the existing

11

political and macroeconomic environment, each nation struck its own balance between
regulation/social responsibility and bidding price. In no case was there a decoupling of the
governmental ownership/interference issue ﬁom the inherent LDC lack of ﬁnancial resources

to aggressively pursue telecommunications development.
II. THESIS RATIONALE

If given a nearly mutually exclusive environment, which of the two would result in the
largest amount of sustainable development beneﬁts - a well-ﬁnanced government FIT with its
social mandate and political encumbrances or a proﬁt-motivated, politically unencumbered,
inherently pro-business corporation? The ability to answer this question necessitates
subdivision into three separate but interlinked areas and their correlated questions:

Q]: Is the microeconomic performance of a state-owned telephone company the primary
determinant of its impact on economic development?

Q2: How does the macroeconomic condition of the country affect telecommunications impact
on economic development?

Q3: How does the political environment affect and inﬂuence both of the above?

A. Microeconomics Factors

The ﬁrst question has been referenced earlier in the paper in both the state owned and
privatization arguments. Although there were important political reasons behind the state’s
nationalization of many telephone companies, the efﬁciencies and threats theorized by natural
monopoly were the principal arguments. Another reason for looking at the microeconomic
argument is the technological changes that have occurred in the industry. Radical changes in
telecommunications technology during the 19703 and 19805 revolutionized the industry and

reduced many of the economies of scale that were present in the sector during its early years.

12

Furthermore, the use of computer technology allowed the explosion of high-margin
information services that could be provided by telephone caniers. Developing countries,
however, lacked the capital resources and management expertise to implement these crucial
changes that could revitalize the economy and eventually led to the call for privatization of the

telecommunications entity.
B. Macroeconomic Factors

The second question explores the links between country-level factors, most importantly,
choice of economic development model and the resulting economic growth, ﬁscal
performance, and the level of foreign debt, and the ability of the telecommunications

organization to aﬁ‘ect economic development.
C. Political Factors

The third asks whether the political environment has an inﬂuential impact upon both of the

above.

III. EGYPT AS TELECOMMUNICATIONS CASE STUDY

Egypt, with its extraordinary geopolitical signiﬁcance and nearly unique relationship with the
United States (U. S.), is the singular case where an intensely indebted nation acquired the ﬁrnds
for telecommunications infrastructure development, yet simultaneously, resisted the
international community’s pressure for economic reform and large scale privatization. This
was primarily due to the political fact that restored US. economic aid in 1974 was a peace
dividend for the end of Egyptian-Israeli hostilities. The US. wanted to continue the peace
process and thus had a vested interest in maintaining Egypt’s economic and political

stability. Beginning in 1979, the same year as the signing of the Camp David Peace

l3

Accords, the United States Agency for International Development (U SAID) has become
the largest donor in Egypt, having provided more than half of all ofﬁcial development
assistance. USAID’s Egyptian projects are amongst the largest AID funded in the world -
in its entirety, the Egyptian program is second in size only to that of Israel. (Lieberson,
Stallard, et. al.15)

A unique fact of US ﬁnancial assistance to Egypt is that aid levels are determined by
Congress and have to be completely obligated by the end of each ﬁscal year. (Ibid. 40)
This need to annually spend large amounts of AID money in Egypt and the perception that
Egypt’s badly deteriorated infrastructure was a major constraint to economic productivity
and new private investment were exceptionally well matched. Since 1975, approximately
forty ﬁve percent of AID’s total Egypt budget, nearly $4 billion, has been dedicated to
urban infrastructure projects. In comparison, AID’s worldwide capital projects program
represents only 5 to 6 percent of its entire portfolio. Given this and the aforementioned
scale of Egypt’s capital projects, the program in Egypt accounts for a signiﬁcant
percentage of AID’s worldwide capital project portfolio. (Ibid. 15) As of 1994, AID’s
total assistance to the telecommunications sector was $344.5 million, making the sector its
second largest investment in Egypt. In addition, the World Bank and other bilateral
donors provided over $1 billion in telecommunications assistance. (Ibid. A-4)

Egypt, therefore, offers a unique example where the capital-intensive nature of
telecommunications investment has been turned into a beneﬁt. The impact of the high
capital/labor ratio on limited domestic capital resources is negated by the use of externally
supplied AID ﬁnances. The purchase of advanced telecommunications equipment from

foreign sources is perfectly compatible with the requirement that AID funds must be spent

14

on American products and services. Since there is no direct competition for limited
domestic capital resources between immediate social welfare needs and AID-ﬁnanced
telecommunications development, Egypt was able to escape between the horns of the
telecommunications dilemma. Because AID ﬁnancing had to be spent during each ﬁscal
year, Egypt was in the enviable position of being able to accept the aid, but politely reﬁise,
or lethargically implement, the policy suggestions that accompanied the aid. Thus, Egypt

was selected for this case study.
A. Overview of £211!

Egypt’s domestic environment, both political and economic, is fundamental to the
discourse of this study, but for an overall perspective of the nation, a precursory overview
shall be attempted. For an excellent analysis of the shortcomings of such an attempt,
please refer to Tim Mitchell’s “America’s Egypt.” Beginning with European expansionism
into the region in the early 18005, Egypt has succeeded in using its historical and
geopolitical importance to enhance its bargaining position with the “Western” powers.
However, Egypt’s maneuverability was always limited by its subordinate position in the
international hierarchy - not a ﬁrlly dependent colony, but a quasi-dependent
“protectorate.” The arrival of a nationalist regime in 1951, and in particular, the 1956
nationalization of the Suez Canal, marked the end of former colonial political and
economic ties and the beginning of an ultra-nationalistic, centrally planned economic
development philosophy.

For almost a decade following the Suez Canal nationalization, the economy performed
relatively well and Egypt experienced steady, if unspectacular, growth. From the mid-

1960s through the early 19703, owing to the 1967 Arab-Israeli War and the subsequent

15

War of Attrition, as well as, the inherent limitations of a centrally planned economic
system, economic conditions began to decline. Beginning with the 1973 Arab-Israeli War,
Egypt, once again, attempted to proactively leverage its regional power status in the
competition between the two superpowers. As part of Sadat’s “Turn to the West,” and
partial “opening” of the economy to international trade, came an inﬂux of new Arab and
Western ﬁrnds. The underpinnings of the Egyptian economy were all ascending: oil
revenues, tourism, Suez Canal revenues, workers’ remittances and foreign aid.

This new ﬂow of ﬁrnds ﬁnanced the Egyptian government’s ability to continue
dispensing the largesse of a patron state without improving the efﬁciency of the public
sector or aggressively encouraging the private sector. The end result was an unwieldy
mixture of public and private economic structures unable to support the massive social
programs burden once the inﬂux of foreign funds ended. With an increasing foreign debt,
one of the largest in the developing world, and the collapse of Egypt’s external revenue
generators, the status quo became increasingly untenable and substantial economic
reforms were rapidly becoming Egypt’s only economic option. Finally convinced of the
necessity of economic structural change, the Egyptian government embarked on a

fundamental program of change that is still currently in progress.

B. Telecommunications - A Regional Comparison

To establish a comparative base for telecommunications services, Egypt is compared to
the other Arab nations of the region. Even though there are great disparities in national
wealth, population and geographical size, these nations share economic, social, cultural,
and political backgrounds. There is enough commonality to allow a meaningful

comparison to establish a realistic perspective of what has been accomplished by Egypt,

16

with respect to its peers, during the time period of this study. Beginning in 1977, the year
of Sadat’s peace initiative, there is a clearly discernable trend in Table l. The smaller
nations of the Persian Gulf, ﬂush with oil revenues, achieved impressive telephone
penetration numbers because of their smaller geographic size and population densities.
Arab nations, either with less oil wealth or greater populations and territory, achieved far
less favorable penetration numbers. (Wright. 26) Putting aside limitations speciﬁc to
Egypt that will be dealt with in detail later, Egypt’s low level of penetration indicates the
signiﬁcant inﬂuence a large population, geographic area and lack of (compared to Gulf
nations) substantial revenues can have on such an aggregate measure. The true
signiﬁcance of the table is the average grth rate between 1983 and 1992. While
impressive gains in penetration are obvious amongst the same group of Gulf nations, it is
the comparatively small increase in Egyptian penetration that is particularly signiﬁcant.
Signiﬁcant because the 2.65 increase in telephone penetration is applicable to the most
populous and less prosperous nations in the grouping — a fact borne out by the thirteen
percent average growth rate, the second highest amongst rate amongst its peers. It is the
repercussions of this impressive growth on the economic development of Egypt that are

the fundamental issue of this study. (ITU, 1994. 3)

17

Table 1. Arab Nations’ Telephone Penetration Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Country Teiedensity per 100 persons Avg. Gr. Rate GDP ' 92 Per Capital
Country 1977 1983 1992 (83-92) $US M US $
Algeria 1.46 2.18 3.65 5.90% 45196 1710
Bahrain 9.86 14.61 21.23 4.20% 3943 7580
Egypt 1 .37 1 .32 3. 97 13.00% 41 768 760
iraq 1 .69 2.23 3.5 5. 10% 48651 2570
Jordan 2. 56 3.13 6.49 8. 50% 4126 1000
Kuwait 12.8 12.99 17.54 3.40% 21701 11020
Lebanon 8.39 10.09 9.26 -0.90% 5546 1470
Libya 1.99 3.2 4.84 4.70% 21864 4970
Morocco 1.15 0.96 2.49 11.10% 28802 1100
Oman 0.25 1.87 7.93 17.40% 11489 7010
Qatar 1.39 22.37 23.24 0.40% 6673 15170
S. Arabia 1 7. 1 1 9.86 3. 70% 108640 7060
Sudan 0.29 0.25 0.24 -0.40% 7310 280
Syria 1.95 3.81 3.96 0.4 1 1489 880
Tunisia 2.26 2.2 4.46 8.20% 15749 1870
UAE 7. 29 14.99 32.36 8. 90% 35222 21 090
Arab States 2.2 4 6.5 428844 1870

 

 

IV. Microeconomic Analysis

The Arab Republic of Egypt Telecommunications Authority, ARETO, shared many of

the characteristics that are endemic to a state owned and operated telecommunications

enterprise. All of the weaknesses that restructuring would alleviate, according to

privatization proponents, were all well represented in ARETO. The following section will

discuss in detail the areas of PTT structure, workforce and tarifﬁng, both before and after

AID ﬁnancial and consulting assistance. Finally, the issue of economic impact of the

USAID effort will be discussed.

18

A. Telecommunications Structure

One of the ﬁindamental tenets of telecommunications structural change is that the
operating entities, irrespective of who owns them, perform best when run as proﬁt driven
businesses. The importance of ﬁrm restructuring can be observed when the privatization
process is broken down into its composite parts:

I Separating operation ﬁ'om government and nontelecommunications activities

I Restructuring telecom operations as an independent state enterprise charged with
being ﬁnancially self-suﬁicient and placing its ﬁnancial relationship with the
government at arm’s length

I Internally reorganizing the enterprise in ways that are suited for running it as a
business

I Reorganizing the telecommunications enterprise under private company law

I Devising a privatization strategy including decisions controlling interest, employee
stock ownership, tranching of stock sales, and residual state ownership, as well as
changing the company’s capital structure to enable implementation of this strategy;

I Carrying out the sale. (Wellenius, eta]. 1994. 45)

Noting that only the latter two items speciﬁcally refer to the actual privatization of the
telecommunications entity, the initial four items, all relating to ﬁrm restructuring, dominate
the privatization effort. Because this more limited process is an adjustment, rather than
the fundamental philosophical shift involved in ﬁrll privatization, it can be implemented
without the goal of ultimately privatizing the entity. It has therefore become a separate
process of its own for many LDCS - this more limited process is referred to as
“corporatization.” The goal of a telecommunications “corporatization” is to distance the
service provider ﬁ'om the civil service, subject it to the discipline of commercial law,
empower its management with the authority common to its private sector peers and
subject it to a competitive commercial environment. This is to be accomplished by

reorganizing governmental departments into state enterprises, state-owned joint-stock

companies, mixed state/private companies, or private companies. (Wellenius, eta]. 1994.

 

 

 

19

75) The overall intent is to fundamentally alter the public sector mindset and operational
environment associated with a government-owned and operated PTT.

AS a traditional PTT, the Arab Republic of Egypt Telecommunications Organization,
ARETO, along with a telephone equipment manufacturing facility, the ARE postal service
and the Telecommunications Research Center, reported to the Ministry of
Communications. (USAID. 1978.16) The 1978 U.S.A.I.D. Sector Study Report detailed
the usual governmental entanglements and encumbrances associated with this structure
and recommended that ARETO should be reconstituted under its own special charter as
an autonomous entity not subject to normal governmental or public sector regulations. In
addition, the entire telecommunications sector be structured as a holding company
composed of subsidiary companies individually responsible for various telecom ﬁrnctions,
and able to participate in joint venture activities with foreign and Arab capital under the
provisions of Investment Law No. 43. (Ibid. 21) The combination of these two
recommendations would theoretically have alleviated the more damaging results of
governmental ownership. Autonomy and the ability to joint venture under Law 43 would
permit: 1) the right of ARETO to establish a reasonable rate/tariff structure; 2) the
establishment of a reasonable wage structure; 3) the ability to enjoy an 8-10 year income
tax holiday; 4) the right not to accept Government of Egypt (GOE) employment quotas;
5) the ability to ﬁre unproductive workers; 6) the elimination of ARETO obligations to
turn all its proﬁts over to the Ministry of Finance and to depend upon the GOE budgetary
process to gain necessary operating and investment ﬁrnds; 7) the right to appoint top
managers without prior GOE approval; 8) the right to establish accounting, ﬁnancial

reporting, inventory disposal, etc., systems which are not dictated by the GOE but are

20

designed to serve and are in many ways unique to the industry. (Ibid. 21) The above
recommendations, while predating the sweeping privatization and restructuring of the
19905, are, in fact, the exact regime proffered by the World Bank for restructuring the
PTT model.

It was not until 1980 that the Arab Republic of Egypt National Telecommunications
Organization (ARENTO) was established by National Assembly Law No. 153 as an
autonomous public utility organization under the direct supervision of the Ministry of
Transport, Communications and Civil Aviation. Although not ﬁrlly implemented, the law
allowed for ARENTO to set its own employment quotas, establish accounting and
inventory systems, appoint top managers and ﬁre employees. (U SAID, 1982. 3) The
legislation deﬁned ARENTO’s regulatory authority and allowed it to enter into joint
ventures with other parties for the promotion of telecommunications. With the approval
of the Minister of Communications and Transportation, ARENTO can establish joint stock
corporations either alone or with other partners. As soon as such corporations are
established, shares can be bought and sold with employees of ARENTO receiving ﬁrst

priority in the purchase of shares. (Rachty. 4)
B. PTT Workforce

Critical to any effort to restructure a state owned enterprise is to end the traditional
governmental practice of dictating hiring quotas. In the above corporatization effort, four
of the eight outcomes were in reference to employment practices. As will be discussed
later in the paper, use of employment quotas has been a hallmark of the Egyptian political
system for nearly forty years and has created one of the fundamental impediments to

overall economic restructuring in Egypt. The problem is particularly acute with regard to

21

Egypt because of its young population and high birth rate -— a problem only partially
relieved by exporting labor to the Gulf States.

As a pre-revolution state owned enterprise, the Egyptian PTT, was an early and
frequent recipient of new employees. Beginning with Nasser’s 1961 socialist drive, the
size of the ARETO workforce nearly trebled from a budgeted 18,386 employees to 53,688
employees budgeted for 197 7 . (TABLE 2) This represents an average annual grth rate
of 7 . 1% over the entire period. (U SAID. 1978. 18) The government quotas were
particularly onerous during the 1972-197 7 period, when nearly half of these employees
were hired. Their ranks were swelled by more than 4000 university graduates and nearly
6000 demobilized draﬁees ﬁ'om the armed forces. This was the equivalent of twenty ﬁve
percent of its entire workforce. (Waterbury. 126) (Table 3) The end result was that by
year-end 1976, ARETO’s staff exceeded the employee/telephone ratio attained in 1973 by

some 9,426 employees, or by about two percent. (U SAID. 1978. 18)

Table 2. Composition of ARETO Work Force (USAID. 1978. 17)

 

 

 

 

 

 

 

 

 

 

 

1961 1969 1977

Occupational Category Number %age Number %ag_e Number %age
Top Management 6 0.03 13 0.04 82 0.15
Administrators 79 0.4 607 1 .7 950 1 .8
Engineers 292 1.6 734 2 1,224 1.8
Technicians 1,721 9.4 3,639 10.2 7,235 13.5
Operators 5,006 27.2 9,390 26.18 11 .484 21 .4
Clerks 1,258 6.8 2,961 8.3 5,406 10.1
Skilled Laborers 6,004 32.64 10,169 28.38 16,624 31
Unskilled Laborers 4,020 21.93 8,305 23.2 10,683 19.9

 

 

 

 

 

 

 

 

 

 

TOTOAL 1 8,386 35,81 8 53,688

 

22

Table 3. GOE Hiring Quotas Imposed on ARETO 1972-76 (U SAID. 1978. 18)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupational Categories From Manpower From Military Total
Administrators 147 147
Engineers 488 488
Technicians 1 .264 3 1 .267
Operators 1 ,645 175 1 .880
Clerks 682 471 1,153
Skilled Laborers 914 914
Unskilled Laborers 4,370 4,370
TOTAL 4,226 5,933 10,159

 

With tariff rates set at subsidy levels and increases in the number of employees far
outpacing the increase in revenue generating mainstations, ARETO’S rate of return was
negatively impacted. ARETO’s revenue per main station averaged only US$137 per
annum in the 1973-76 period, while corresponding revenues for countries at a similar
stage of development were as follows: Ghana $211; Pakistan $224; Ethiopia $236 and
India $253. (U SAID. 197 8. 34) It is estimated that the cost of the excess staff over the
1973 -76 period amounted to fourteen percent of the operating expenses and eight percent
of the operating revenues. Without this expense, International Bank for Reconstruction
and Development (IBRD) has estimated that ARETO’S ﬁnancial rate of return would have
ranged from ten to nineteen percent on the historically value assets, averaging more than
twelve percent. (Ibid. 34) The latter rate of return was still below the average rate of
eighteen percent generated by World Bank projects completed during the same time
frame. (Saunders, et.al. 13-14)

The mandated increases in workforce corresponded with a steady decline in the
workload and productivity per employee. The unit used to quantify these variables, staff

per 1000 mainstations, is particularly applicable in ARETO’s case, since the operations

23

and maintenance sector employs eighty-two percent of the workforce and is by far the
largest single ﬁrnctional group within the organization. (Ibid. 16) Since 1971, the number
of employees per 1000 mainstations increased each successive year, with a correlated
decrease in the average workload and productivity per employee. (TABLE 4)

(USAID.1978. 19)

Table 4. ARETO EMPLOYEES per 1000 Telephone Main Stations 1968-1977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Employees Main Stations Employees per 1000 Main Stations
1968 30,045 259,145 115.9
1969 30,803 269,612 114.2
1970 31.657 284,352 111.3
1971 31.764 296,686 107.1
1972 33.018 304,725 108.4

197 35.285 317,085 111.3
1974 38,504 333,388 115.5
1975 41,716 341,482 122.2
1976 44,711 352,162 126.9
1977 46,030 361,648 127.3

 

 

Compared to the subscriber/employee ratio of 1000:8 to 1000:30 that most developed
nations maintain, ARETO’S 1000: 100+ ratio shows a substantially overstaffed and

underutilized workforce. (Ibid. 20)

C. Tariffmg

Public utility regulation in developed countries focuses on tariﬂ‘ regulation with the
primary goal of balancing consumer protection ﬁom monopoly rates and an equitable
return on investment for the monopoly provider. This focus is based on the unstated
presumption that proﬁts will result from the provision of a service. In most LDCS,
however, where the telecommunications entity’s receipts are almost universally funneled

into the state’s coffers and rates are set at subsidy supporting levels, this is not the case.

24

In this environment, the focus of regulation shifts to loss minimization. At the barest
minimum, a public utility should establish tariffs at rates intended to recover operating and
maintenance (O&M) costs -- short-run marginal cost recovery. To further minimize its
losses, the utility may set tariffs at rates intended to cover both the O&M and capital
replacement costs; this is long-run average cost recovery. Without long-run average cost
recovery through tariﬂ‘s, the utility must compensate for the deﬁcit from nontariff sources.
Until recently, ARENTO’s tariffs covered neither short nor long-run cost recovery - to
compensate for these annual O&M operating deﬁcits, the GOE provided treasury
transfers, while donor aid covered much of the capital costs. The primary cause of this
shortfall was the GOE’S policy of providing substantial subsidies to utility consumers
through price controls and overvalued exchange rates that have kept utility rates
artiﬁcially low. Because of slow, but steady, tariff increases, to be detailed below,
ARENTO currently recovers ﬁrll telecommunications 0&M costs but not capital costs.
(Hanrahan. 4)

In January 1982, ARENTO succeeded in obtaining GOE permission to increase service
charges. The increase was an unenthusiastic good-faith attempt to fulﬁll the terms and
conditions agreed to under the terms of previous USAID telecommunications projects and
thereby relieve increasing USAID pressure over many of the other unimplemented
conditions. The 1982 rate schedule contained no increases for residential subscriptions or
excess calls, a small increase for within-Egypt calls and a sharp increase in installation
charges. Business and government charges for a wide range of services were increased
substantially under the new tariff schedule. During this time frame Egypt had slightly over

500,000 telephones of which seventy percent were classiﬁed as residential and under old

25

rates, revenues ﬁ'om this majority customer base for subscriptions, installations, excess
calls and within-Egypt calls amounted to only ﬁfteen percent of total ARENTO revenues
in ﬁscal year 1982. (U SAID. 1984. 45) The only area impacting a majority of network
users was the increase in intra-Egypt calls, proving that the preeminent concern of this
tariﬂ‘ increase was the fulﬁllment of contractual agreements with a minimum of user
discomfort, rather than the original USAID intent of establishing a ﬁrm ﬁnancial position
for ARENTO.

As shown in table 6 overall ARENTO revenues were expected to increase by about
40.5% after the 1982 rate increase. With the overall intent of this rate increase being to
minimize its impact on the citizenry, the highest revenue increases were limited to non-
recurring, one-time charges such as installation, reconnects and transfer charges. This was
also reﬂected in the difference between subscription fee rates for business and government
that increased by 66.7% from LE 18 to LB 80 per year, and residential fees which
remained unchanged at LE 18 per year. The less populist domestic telex rates were
projected to rise by 70.1%, while domestic telegraph fees went unchanged. (U SAID.
1982. 43) Two very relevant conclusions can be drawn: 1) The great bulk of phone
customers in Egypt experienced no increases in phone charges and 2) revenues from
international calls, telexes and telegraphs contributed heavily to the signiﬁcant increase in
ARENTO revenues in the 1983 ﬁscal year. (U SAID. 1984. 45)

With the 1982 rates resulting in an average tariff rate increase of 40.5%, it is expected
that the rate of return from its total assets will increase to about four percent. This
compares favorably to the old tariff rates, under which ARENTO barely managed to break

even with a rate of return of about 0.4% a year. However, the new rates were still

26

considered insufﬁcient to generate reasonable rates of return on the investment in

telecommunications facilities. Table 5 indicates that additional rate increases required are

on the average of 37%, 68% and 98% if ARENTO were to earn 10%, 15%, and 20%

return on its assets. (U SAID. 1982. 43)

Table 5. Service Tariff Rates and Returns to Assets (L.E. Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Old Rates New Rate Additional Rate Increases

FY 1981 FY 1982 FY 1983 Required for other Rates of R
Total Assets (Mil) 526.3 605.2 696 696 696 696
Total Revenues (Mil) 73.5 81.2 114 114 114 114
Total Expenditures 71.5 78.6 86.5 86.5 86.5 86.5
Proﬁts (Mil) 2 2.6 27.5 27.5 27.5 27.5
Return to Assets (%) 0.4 0.4 I 4 10 15 20
Rate Increase (%) 0 0 40.5 36.9 67.5 98

 

 

 

 

 

27

Table 6. Impact of ARENTO Rate Reform on Receipts (LE Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FY1982 (Old Rates) FY 1983 (New Rates) Percent Change

Domestic Revenue 44,353 67,359 53%
Domestic Telephone 8 39.557 60.020 51.70%
Trunk Lines

Subscriptions 13,314 15,530 16.70%
Automatic Telephone 7.527 9.280 23.30%
(Residential) 4.892 4.892 0%

Business) 1 .957 3.262 66.70%

Government) 667 1.126 66.70%
Manual Telephone 926 926 0%
Miscellaneous Telemone 3.006 3.008 0%
Trunk Line 1.853 2.316 25%
Excess Calls 11.853 11.857 0%
lntra-Egypt Toll 5.333 6.999 25%
Non-recurring Charges 6 200.50%
Installation 7.803 24.456 213.40%
Residential 2,964 12,476 318.10%
Business 3.580 10.741 200%
Government 1 .239 1 .239 0%
Re-oonnect Changes 250 750 200%
Transfer Charges 250 1000 300%
Miscellaneous Charges 750 1000 300%
Domestic Telex 2,568 4.369 70.10%
Subscription 1.866 3.144 66.70%
inter-Egypt Telex Usage 64 64 0%
Non-recurrim Charges 618 1,161 300%
Domestic Telegraph 2.226 4,369 70.10%
lntemational Revenue 36.626 46.184 25.40%
lntemational Telephone 1 1 .933 16,706 40%
lntemational Telex 16.726 20.071 20%
lntemational Telggram 6,202 7.442 20%
lntemational Miscellaneous 1 .965 1.965 0%
Total Domestic/Int. Revenue 81.179 113.543

 

 

 

 

28

lntemational calls were and still are the most proﬁtable source of income to ARENTO,
revenues ﬁom international and domestic long-distance calls represented approximately
eighty percent of total revenues in 1994. (Hanrahan. 39) A later study of the 1982 rate
increase found that international revenues were double expectations; 103 million LE in FY
83 versus the 46 million LE projected. The result was sixty three percent of total revenue
generated rather than the expected forty percent (U SAID. 1984. 45) - a reﬂection of the
unpredictability of international calling patterns, the resulting revenue stream and the
dangers of overeliance on this external hard currency generator. Regardless of the
ultimate percentage, international call revenues dominate the revenue stream because
ARENTO sets international call tariffs set internationally agreed upon rates and, until
recently, received hard currency valued at overvalued exchange rates while simultaneously
having to maintain local-call and installation charges well below international levels and
even those prevailing in other Middle Eastern and North Aﬁican countries. (Hanrahan. 39)
The end result is an extraordinarily, but not uncommon to LDCS, skewered rate structure.
With the majority of revenue conring from the international network and business
installations, the rate structure was to be driven by the need to ration the available supply
of telephone lines, rather than expanding the installed tariff-subsidized consumer base.
(USAID. 1988. viii)

Rates. however, slowly began to increase as the quantity and quality of services
improved. Beginning July 1,1985 ARENTO increased telephone subscription rates
between ﬁfty and sixty-six percent, while in January 1988, ARENTO limited local
telephone call duration to 6 minutes and, as a result, expected to generate a twenty ﬁve

percent increase in intracity revenues. (Lieberson, Stallard. F-4) In addition, beginning in

29

the mid-1980s, tariffs charged for the installation of new lines were signiﬁcantly increased.
(Hanrahan. 40) The following table (Table 8) details ARENTO’s rate increases from
1982 through 1992. The latter was chosen as a breakpoint because of Egypt’s
reorientation towards a market driven economy in late 1991. The basis for these tariff
increases were believed to be a combination of USAID’s belief that users would be willing
to pay increased rates for improved service and the GOE’s attempts to satisfy USAID’s

desire to implement this belief and thereby ensure the continuing ﬂow of aid.

Table 7. Telephone Tariff Structure, 1983/84 -l991/92 (Ibid. 37)

 

 

 

 

 

 

 

 

 

 

 

 

YEAR Subscription/line Local/call Installation/line Int. Tariff lcall Int. Charge/line
LE (Local Curr.) LE LE LE LE

1983/84 47 0.03 111 5.21 105.02
1984/85 47 0.03 101 4.41 82.14
1985/86 60 0.03 106 4.31 94.68
1986/87 59 0.05 137 5.13 116.64
1987/88 59 0.05 135 5.84 123.84
1988/89 56 0.05 133 8.17 240.45
1989/90 56 0.05 157 8.52 261 .28
1990/91 57 0.05 313 8.63 271.52
1991/92 57 0.05 347 9.22 320.08

 

 

 

 

 

 

 

However, in keeping with Egypt’s new market orientation and more pliable attitude

toward cost based pricing, 1992 installation charges were adjusted as follows: (Ibid. 37)

Beneﬁciary Standard LE/line Immediate LE/line
Household 750 2,400
Commercial 1,400 4,000

Governmental 600 ----

30

D. Development through Foreigp Financing

The inability of domestic tariff levels to generate acceptable returns on investment,
combined with the GOE’S appropriation of hard currency generated through international
tolls, minimizes funding for network expansion and modernization efforts. Given that
domestic investment ﬁnding is nonexistent and the equipment will be of foreign origin and
funded with foreign hard currency, one of the few alternatives available to navigate
through the horns of this dilemma is tied-aid. Essentially a subsidy for the donor nation’s
telecommunications industry, tied-aid requires the recipient to purchase a majority, if not
all, goods and services associated with the aid project ﬁom the donor country. Even
though concessionary terms are always offered as enticements, there is a negative impact
upon the recipient country. Economist have long been critical of tied-aid practices on
grounds that they signiﬁcantly reduce the real value of assistance by preventing recipients
ﬁ'om seeking out the most cost-effective source. A number of studies concerned with
estimating the cost of tied-aid to the recipient nation indicate that the excess cost margin
associated with tying typically ranges between 15 and 30 percent. (U SAID. 1992.10)

The above funding limitations and the resulting need for tied-aid programs are a
fundamental feature in the growth of ARENTO ‘s telecommunications network. The
majority of network expansion is funded by foreign donors, who supply at least seventy-
ﬁve percent of the funds needed for network expansion. (Keely. 2) In the past,
telecommunications infrastructure development has been ﬁnanced through concessional
loans or grants from various foreign governments, particularly the US, French and
Japanese. Not coincidentally, equipment suppliers from these countries, notably AT&T,

Alcatel and NEC, have beneﬁted through large equipment contracts. (Kapoor. 4)

31

Considering the magnitude of these foreign concessions to the GOE, the associated excess
costs to the GOE must also be of comparable magnitude.

Another drawback to tied-aid is that the variety of equipment suppliers limits long term
strategic planning and creates an inherent risk of incompatibility with existing systems. So
much so, foreign government donors have informally divided Egypt into different sections
so that supplied switching equipment will be compatible with the installed equipment base
at a location. In the early eighties, Japan had its switching equipment in the Canal Zone
and Ismalia; France had its equipment in the Delta; Germany and the US. provided the
majority of switching equipment for Cairo, the US. provided for Alexandria; and Sweden
provided most of the equipment for Upper Egypt. In the late eighties and early nineties,
the above held true, but with the U. S. and France sharing Alexandria and Germany
replacing Sweden in Upper Egypt. (Keely. 2) This de facto segregation of the Egyptian
telecommunications infrastructure into regions of vendor inﬂuence is evident in the current
ﬁve-year plan (1997-2002). Dubbed the “Mega-Project Approach” by ARENTO, the
plan envisages the installation of an additional ﬁve million lines by the year 2002 and result
in the doubling of the current teledensity rate of seven per cent. There was no formal
bidding procedures for the project. Siemens, Alcatel Telecom and AT&T have submitted
proposals to ARENTO deﬁning the scope of work in each of their speciﬁc geographic

regions in the Delta and Upper Egypt. (Al Ahram Weekly Jan. 16, 1997)

32

E. USAID in Egypt
1. Policy Externalities

1.1. Domestic Inﬂuence over Foreign Aid Largesse

The majority of US. aid has been, and continues to be, provided by the United States
Agency for lntemational Development (U SAID), generally in the form of tied-aid. The
“Buy America” focus of the Egypt AID program represents a major and immediate beneﬁt
for US commercial interests. “When AID ﬁnances a $50 million capital project, US
equipment suppliers and engineering ﬁrms receive contracts for $50 million. “ (Lieberson,
Stallard. 17) USAID’s Telecommunications IV Project provides a near text book
example of the importance of donor domestic political and commercial interests in the
ﬁnding of tied-aid programs:
“Both the House and Senate have also taken an interest in the project. The Senate
Foreign Operations Committee has recently indicated as follows:
“The Committee notes that the GOE (Government of Egypt) has requested assistance
ﬁ'om USAID/Cairo with the extension of the communications system in the greater Cairo
area. The latest digital technology is being sought ﬁ’om a US manufacturer having an
excellent record with past upgrading of Egypt’s telecommunications. The Committee
endorses the inclusion of telecommunications in the AID program for Egypt.”(U SAID.
1988.3)
The commercial aspect of tied-aid may even become blatantly obvious; again an example
from Telecommunications IV: “The ﬁrst three TC projects in Egypt were done by AT&T.
AT&T has been very active in promoting itself with the GOE, the Mission and the
Congress, and has pressed for a noncompetitive procurement.” (Ibid. 3)

In addition to USAID funds, a $1.8 billion program in subsidized credits was

formalized with a European consortium in 1979 but didn’t specify particular sector

33

activities. The US. response to competition in the tied-aid arena was to argue for more
concessionary loans:
“ It is understood that the European Consortium is making available upwards of $1.8
billion of European equipment at relatively low interest rates. U.S. suppliers will ﬁnd it
hard to compete in this atmosphere without US. government assistance in the form of
grants or low-interest loans ............... Once a foreign administration has had experience
with this (American) equipment and the continuing supplier support, a favorable reaction
could establish a favorable trend toward U.S. suppliers. The consultants feel that this will
not happen without U. S. government ﬁnancial assistance and therefore favor AID ﬁnanced
follow-on assistance in support of ARENTO’S anticipated telecommunications expansion
program.” (USAID. 1984. 4)
A 1994 study. however did not support this hypothesis. Non-AID ﬁnanced, follow-on
sales have been very limited, over the 1976-1991 period, total US. exports to Egypt have
barely equaled total U. S. Government assistance to Egypt. A poor economic policy
environment, a continual scarcity of foreign exchange, and an economy dominated by
government ﬁrms has made it difﬁcult for US and other foreign ﬁrms to increase their
exports to Egypt. (Lieberson, Stallard. vi)
1.2. Political Influence on Foreign Aid Largesse

As discussed earlier under case study selection, the USAID program in Egypt has a
large political component. According to a report of the US. General Accounting Office
submitted to the Congress in 1989, “If aid to Egypt were considered purely on economic
or developmental grounds, Egypt would have received annual obligations of not more
than $100-200 million. (Tscirgi, et. al. 165) The fact that USAID can support a political
emphasis, rather than a singular concern for development is underscored by USAID’s
budget systenr, which has an Economic Support Fund for countries where political

concerns are paramount and Development Assistance funding for countries where

development is the primary concern. The most glaring example of this distinction is that in

34

recent years AID development policy has speciﬁcally limited ﬁnding for capital projects,
except in several large Economic Support Fund (ESF) countries such as Egypt.
(Lieberson. 4) In theory, such a tremendous capital outlay for large capital projects could
impose an equally large burden on the recipient country because of the Foreign Assistance
Act of 1961 which requires the receiving country to share at least twenty-ﬁve percent of
the cost of a project. This, however, doesn’t apply to Egypt because Economic Support
Fund recipients are exempt. (U SAID. 1978. l)
1.3. Development of USAID Development Policy

This exceptional USAID capital projects program in Egypt demonstrates the political
nature of aid to Egypt, in that it was in extreme divergence with USAID’s development
philosophy of the time. The enunciated USAID policy toward capital projects in Egypt
was, in actuality, a regression to the classical development theories of the 19505 and early
19605. This earlier justiﬁcation for heavy emphasis on infrastructure project assistance
was threefold: (U SAID. 1992. 6-7)

1) A certain minimum of infrastructure is a precondition to the transformation of

subsistence economies to market economies:

“Although private industry is small in Egypt, it can not ﬁrnction effectively or even
expand without adequate water, sewers, electrical power, and telecommunications. AID’s
contribution to building the infrastructure necessary to support a competitive private
sector should be considered key to supporting the Agency’s private-sector-led-growth
strategy in Egypt.” ( Lieberson, Stallard. 25)

Speciﬁc to telecommunications inﬁastructure:

“A.I.D.’s country development strategy of improving Egypt’s economic productivity and
encouraging the country’s private sector is directly dependent on an expanded and
modernized telecommunications system. A modern, efﬁcient telecommunications

network, which fully meets demand, is a crucial component of the economic inﬁastructure
needed to foster rapid grth and Egyptian living standards. (Lieberson, Stallard. A-3)

35

2) Infrastructure (telecommunications) generates external economies, providing a

stimulus to production in other sectors. Speciﬁc to Egyptian telecommunications:

. .AII) recognizes the importance of the orderly expansion and modernization of TC

systems in the development of efficiency and enhancement of the proﬁtability of all sectors

in the Egyptian economy, particularly to support a growing private industrial sector.”

(U SAID. 1988. iv)

Echoing the sentiments of USAID:

“The Government of Egypt (GOE) considers rehabilitating and developing Egypt’s TC

system as playing a key role in the development of all sectors in the Egyptian economy and

in particular in tourism and private sector investment. Accordingly, the TC sector is given

substantial attention in the GOE second ﬁve-year plan (87/88 -91/92). (Ibid. iv)

3) The presence of scale economies associated with many infrastructure activities implies
that they require large-scale investments to be economically viable, and in many
developing countries, such investments are likely to require official donor assistance rather
than be mobilized entirely locally or attract sufﬁcient private foreign investment.

Speciﬁc to Egyptian telecommunications:

“There is general consensus that the present telecommunications system is
seriously deﬁcient and could not effectively absorb this magnitude of capital
investments. It is for this reason that the GOE has requested AID to assist
ARETO in strengthening its management, planning, and operating capacity. It is
ﬁrrther understood ... that professional assistance will be required if ARETO is to
begin to undertake an expansion program of the size and scope envisioned by the
Master Plan. (USAID. 1978. 36)

This “classical” approach toward the use of foreign aid in encouraging development
resulted ﬁ'om the successful restoration of Europe under the Marshall Plan. However, its
generic applicability to the developing world became increasingly untenable. In contrast

to a war-ravaged but previously industrialized Europe, the developing world’s inherently

weaker industrial underpinnings - strong economic and political institutions, an

36

appropriate policy framework and an effective utilization of human resources - limited the
overall effectiveness of foreign aid in the developing world. What limited beneﬁts were
generated by the aid were perceived as disprorpionately serving the interests of the U. S.
private sector and foreign elitist governments rather than those of the underprivileged. As
a consequence, AID shifted its emphasis to ﬁrlﬁlling basic human needs by redirecting its
resources toward smaller scale activities, rural-based projects. and projects designed to
increase agricultural productivity, nutrition, health and education. (U SAID. 1992. 4)

The third major USAID policy shift occurred in 1981 and clearly reﬂects the more
capitalist, free market inﬂuence of the Republican dominated White House. USAID
efforts were to focus on the “four pillars” of economic development: private sector
development, policy dialogue, institution building, and technology transfer. The
underlying rationale was that U. S. aid would be more effective through the encouragement
of improved internal utilization of available resources than through the introduction of
external resources into an ineﬂicient system. In order to affect such internal reforms in
other sovereign nations, greater reliance was placed on the leveraging of aid resources, in
particular cash grants were increasingly relied upon to encourage market-based reform.
(Ibid. 4)

Concomitant with the aforementioned policy changes was a shift in the emphasis of
USAID projects; large and medium-scale capital projects gave way to relatively modest-
sized undertakings designed to foster a developing country’s industrial underpinnings.
Program objectives evolved into a focus on the ability to enhance the role of the private
sector, encourage institution-building and human resource development, and promote the

maintenance of an appropriate policy framework. As a consequence, the allocation of

37

AID resources for capital project assistance gradually diminished. By 1982, capital
project assistance in such areas as industry, energy, and transportation had fallen to 6.5
percent of total US bilateral official development assistance, compared with 11 percent for
1972 and about 25 percent in the early 19605. (Ibid. 4) The only aberrations to this long-
terrn de-emphasis of capital projects are those involving Economic Support Fund

countries, Egypt being the preeminent example.
2. USAID’S Initial Telecommunications Involvement

2.1. Continental Telephone Study

A contract between the Continental Telephone Holding Corp. (CTC) and the
Telecommunications Research Center (TRC) of the Ministry of Communications was
ﬁinded by AID in 1979. The scope of the year-long study included 1) an investigation,
review, and evaluation of the performance of the existing telecom system in Egypt,
particularly Cairo; 2) the development of a Master Plan for meeting the telecom needs of
the GOE for the near-term, ﬁve year (1980-1984), and the longer twenty year period
(through 1999); 3) the perpetration of a detailed planned program of remedial actions
(“quick ﬁx”) to improve the existing telecom network; and 4) to prepare ﬁnal reports on
the above. (U SAID. 1978. 1-2)

Under the ﬁrst point. CTC reviewed the existing telecommunications equipment and
facilities under the following headings: (U SAID. 1979. 6-7)
1) Station Equipment and Wiring
ii) Exchange Cable Facilities

iii) National and International Toll Networks
iv) Sub-sector Equipment and Facilities

v) Manholes and Conduits

vi) Buildings

vii) Vehicles and Equipment

38

viii) Traffic in Long Distance Network
ix) Telex Trafﬁc
x) Network Control
USAID summed up the results, “Generally, a negative theme is threaded throughout all of
the above categories. The listing of problems is too numerous to list here.” (Ibid. 7)

Beside the above neglect and deterioration, there were other indicators of the sorry
state of Egyptian telecommunications. The average rate of growth in telephone
connections was only 3.7% per year between 1967 and 1977 as compared with a normal
ten to fourteen percent per year in most developing countries. Taken as a whole, the
above resulted in ever increasing telephone waiting lists, waiting periods of up to 14 years
and call failure rates in some areas of over seventy-ﬁve percent. (U SAID. 1978. 39) Thus,
the need for the third point, the “quick ﬁx” Service Improvement Plan.

2.2. Initial USAID Project (SIP)

Justiﬁcation for the “quick-ﬁx” or Service Improvement Plan (SIP) was based on three
considerations. First, as stated above, ARETO’s network and quality of service were
deﬁcient and in urgent need of improvement. Secondly, unless fundamental deﬁciencies
were dealt with, implementation of the Master Plan would have been endangered or could
have resulted in more serious network congestion. Finally, with proper allocation and
management of available resources, a clearly recognizable overall improvement in the
quality of ARETO service in the Cairo area was possible in a short time frame. Because
SIP was to be undertaken and implemented by ARETO personnel, it was generally limited

to predominately labor intensive items and could be performed by ARETO staff. This

included maintenance, repair, logistics, trafﬁc and commercial operations. (Ibid. 12-13)

39

2.3. ARENTO Development Results
Beyond the immediacy of the SIP program, AID’s long-term objectives were

institutional - “to improve Egypt’s telecommunications system by strengthening the
planning, management, operations, and training ﬁrnctions of ARENTO” and inﬁ'astructure
improvements - “to rehabilitate and replace components of the system in the large
population centers of Cairo and Alexandria.” (Lieberman, Stollard. A4) The institutional
component of these projects demonstrates a ﬁrm commitment to the “corporatization” of
the telecommunications entity:

“ARENTO beneﬁted from major institutional strengthening in planning, management,
accounting and ﬁnancial controls, operations and training. Program curricula were
developed and implemented. Instructors, engineers, technicians, operators, clerks, and
laborers were trained. Annual procurement plans were developed and implemented. A
service improvement plan that covered maintenance, repair, logistics, traffic, and
commercial operations was developed and implemented.” (Hanrahan. 32)

The above improvements are a virtual textbook implementation of telecommunications
recommendations offered by the World Bank:

“Organization and Management: The operating entities are often organized and managed
in ways that may be appropriate for government administration but not for running a high-
technology commercial service in a rapidly changing business environment. Common
problems include inadequate organization stmcture, ﬁnancial management, accounting and
information systems, procurement, and personnel development. These weaknesses result
in high cost of operation and expansion, poor maintenance, slow response to changing
demands and business opportunities, and limited capacity to prepare and implement
development programs and projects. Project preparation and implementation capacity are
often the ultimate constraints on telecommunications expansion and improvement in the
LDCs.” (Wellenius, et.al. 1994. 16)

Infrastructure improvements during the four projects consisted primarily of the

straightforward replacement of outdated exchanges and facilities. Telecommunications 1

resulted in the replacement of a 20,000 line rotary exchange in Zamalek and the

installation of additional private automatic branch exchanges and microwave links. Three

40

rotary exchanges in Cairo, associated cabling and other facilities were replaced with
electronic switching systems during Telecommunications 11. The number of potential
service lines was increased from 38,000 to 70,000. (U SAID. 1979. 23)
Telecommunications IH replaced more rotary exchanges and continued upgrading
facilities, with between 40,000 to 50,000 lines being installed. In total, the three projects
eventually added 263,000 new lines to the system. The rate of call completion increased
from an estimated 30 percent of calls in 1977 to more than 90 percent by 1992. From a
1981/82 level of 12 million pounds, revenues attributable to Telecommunications 1, II, and
III reached 130 million pounds by 1991/92. (Hanrahan. 33) Begun in 1981/82 and
completed in 1991/92, AID Telecommunications Projects’ 1, II, and III capital
disbursements eventually reached $240902 million. (Ibid. 32) Telecommunications IV,
begun in 1990 and completed in 1998. added 178,000 new lines. (Ibid. 41) During this
same time frame ARENTO also received $62.5 million in assistance from AID commodity
import program for a microwave system to connect all Alexandria and Cairo exchanges.
In addition, approximately 360,000 more lines and associated training and equipment for
Cairo, Alexandria, and the Delta areas were ﬁnanced through $750 million in subsidized
credits from a European consortium. (Ibid. 33) The total telephone density improvement
of the ARETO network is detailed in the following table (Table 9). It delineates between
lines resulting from AID ﬁnanced projects and those ﬁnanced by other foreign aid

programs.

41

Table 8. Egyptian Line Density Improvement (Hanrahan. 36,42) (Rachty. 4-5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Number of Lines AlDlNon-AID Lines Density per 100 persons
1981-82 650.000 1 .4
1982-83 700.000 1 .5
1983-84 875.000 40000/135.000 1 .8
1984-85 1 .150.000 153,000/122,000 2.4
1985-86 1.350.000 35000/165.000 2.7
1986-87 1 ,600.000 20000/230,000 3.1
1987-88 1,700,000 3.2
1988-89 1 .800,000 15000/85.000 3.5
1989—90 2,000,000 3.9
1990-91 2,350,000 4.3
1991-92 2,500,000 43000/107,000 4.4
1992-93 3,000,000 30000/470.000 5
1993-94 3.550.000 250001525000 6

 

 

 

 

 

 

2.3.1. Economic Analysis

The following analysis was conducted by USAID in 1994 in order to determine the
economic feasibility of expanding its capital projects budget. Because of Egypt’s ESF
status and the resulting large number, type and scope of capital projects carried out during
a speciﬁc time frame, Egypt was once again the best case study. To determine the overall
ﬁnancial and economic impact of these projects, the study measured the internal rate of
return generated by each project. Because both the inputs to and outputs from these
projects have traded at prices distorted by price controls, overvalued exchange rates, and
other market control rates, two separate analyses were conducted. The adjustment of
ﬁnancial prices necessary to correct for policy-induced distortions is the essence of the
computational differences between the analyses. The analysis based on the ﬁnancial
internal rate of return (F IRR) measured the private rate of return of an investment, based
on domestic market prices, irrespective of the distortion of those market prices. In

contrast, the second analysis measured the economic internal rate of return (EIRR); the

42

investment’s rate of return to the whole economy, calculated using shadow prices - prices

that would prevail in the presence of competition and free markets - and valuing beneﬁts

not captured by the market, such as consumer surplus and external beneﬁts. In essence,

FIRR estimates the private proﬁtability of the project to the business, whereas the more

important EIRR estimates the return to the whole society. (Hanrahan. 6-16)

Central to the overall economic analyses of Egypt’s capital projects are three speciﬁc

beneﬁt types: (Ibid. 35-3 9)

1) Revenue or tariff beneﬁts that are generated ﬁom three sources: telephone

subscriptions, call charges, and installation charges. Tariff beneﬁts are the only measure of

beneﬁt used in the ﬁnancial analysis and provide the starting point for measuring economic
beneﬁts.

2) Consumer surplus beneﬁt is the differential between the actual price and the market-
clearing price.

3) External beneﬁts are those that accrue to others outside the immediate subscriber base.
Examples of this are spillovers into the tourist and foreign investment sectors.

In contrast to the above beneﬁts were the two major expenditures associated with

these analyses: (Ibid. 10)

l) O&M costs are recurrent expenditures associated with providing services. Such costs
include salaries and wages, ﬁrel, electricity, supplies, communications, chemicals.
routine maintenance and other expenses incurred to ensure normal operations.

2) Capital costs which are associated with theactual physical plant of the project. This

can be ﬁrrther subdivided into direct capital costs, which are the actual building, land

43

and equipment, and indirect costs associated with the implementation of the physical
plant.

A number of sensitivity analyses were carried out to determine the impact of various
scenarios on the F IRR and EIRR of the telecommunications projects and tabulated in
Table 9. (Ibid. 40) The ﬁrst analysis was concerned with the resulting rates of return in
the then current beneﬁt and cost environment, while the second scenario analyzed
presumed a continuation of these conditions into the near future. The third and fourth
scenarios presumed no increase in any of the three beneﬁt categories and a twenty percent
variation, both up and down, in the indirect capital costs involved with physical plant
implementation. A twenty percent variation, both up and down, in the beneﬁts associated
with the projects was the scenario for the ﬁfth and sixth analysis, while the ﬁnal two
scenarios presumed the same variations in the operations and maintenance costs associated

with the projects. (Ibid. 40)

44

Table 9. Internal Rates of Return for AID-ﬁnanced Telecommunications Projects

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base Case FIRR 1 1
EIRR 11 18

No More Price Reform F 1 1
E 11 18

Indirect Cap Cost Up 20% F 0 0
E 9 14

Indirect Cap Cost Dn 20% F 1 3
E 15.3 24

Beneﬁts 20% Higher F 5 5
E 15.8 25
Beneﬁts 20% Lower F -4 -6
E 6.8 1 1
08M Costs 20% Higher F -2 -3
E 10 16

 

i. Base Scenario

Because tariff beneﬁts were the single revenue generator for the ﬁnancial analysis, the
1 percent FIRR of the base case was completely attributable to ARENTO’S subsidization
of service provision via low tariffs on local calls and subscriptions. This particular aspect
of ARENTO policy was detailed earlier, but its negative ﬁnancial impact on ARENTO is
clearly discernible in this analysis. ARENTO’S lackluster ﬁnancial performance, however.
resulted in very satisfactory economic returns. In general terms, a minimally acceptable
economic rate of return from a given project in a developing country is at least ten to
ﬁfteen percent. This is based on the assumption that if this given project’s funds were
invested elsewhere, could at a minimum have earned a net return of ten to ﬁfteen percent.
With a base case EIRR for Telecom I, H, 111 of 11 percent and 18 percent for Telecom IV,
the former met and the latter exceeded expectations. Economic cash ﬂows overshadow
ﬁnancial cash ﬂows because of consumer surplus beneﬁts that account for about 45

percent of total real economic beneﬁts. The primary cause of this consumer surplus is

45

ARENTO’s policy of cross subsidizing telecommunications services. International calls
and installation charges are priced near prevailing international averages, and thereby
subsidize subscription and local-call charges priced well below international averages. To
a lesser extent, tariff increases implemented since 1982 do not fully reﬂect the vast
improvement in telephone service that has occurred in the ARENTO system over the last
decade. (Hanrahan. 38)
ii. Scenario Variations
The tabled results indicate two overarching trends. First, that under the most plausible

assumptions the two telecommunications projects are not ﬁnancially viable. Although
ARENTO is no longer a draw on the state treasury, no scenario shows FIRR close to the
minimum 10 percent expected of any nonspeciﬁc project. The various scenarios indicate
that ﬁnancial performance is most sensitive to changes in tariff revenues - improvements in
the ﬁnancial performance of ARENTO are directly correlated with tariff reform. Second,
the econorrric viability of the projects exceeded the 10 percent threshold under all
scenarios examined. As is the case with ﬁnancial performance, economic performance is
more sensitive to variations in beneﬁts rather than variations in cost. With both economic
and ﬁnancial results correlated to the tariffrng issue, the PTT social mandate of subsidized
service has an observable detrimental affect at both the ﬁrm and societal levels.
iii. Microeconomic Results

While the four telecommunications projects clearly provided both economic and social
beneﬁts to Egypt as a whole, the above economic analysis demonstrated an unacceptable
rate of return at the ﬁrm level. This lack of performance can be directly correlated to the

ARENTO features inherent in the traditional PTT model. The ﬁnancial performance of

46

ARENTO as a business entity is strongly impacted by its inability to implement an
equitable, ﬁ'om ARENTO’s perspective in this case, tariff structure. The dominant cause
of this shortcoming is the GOE’s system of price controls which subsidizes domestic
service ﬁ'orn ARENTO’s coffers. Its employment practices, part of the Operations and
Maintenance category, can also be seen to have a signiﬁcant impact upon its ﬁnancial
status, which once again has a direct link to government policy. While this analysis is
limited to USAID projects, the overarching nature of these issues can be presumed to
negatively impact all projects undertaken during the telecommunications modernization
program.

The fact that capital expenditures on infrastructure, in this case, telecommunications, is
. not a “necessary and sufﬁcient” condition for economic development in and of itself,
especially in light of the above discussion of handicapped ﬁnancial performance, is not a
revolutionary ﬁnding. The World Bank’s 1991 World Development Report suggested
that projects in an adverse policy setting were not likely to make signiﬁcant contributions
to development. The report argues that inadequate inﬁ'astructure is more related to the
inefﬁcient use of existing assets rather than the need of new assets. (Lieberson, Stollard.
45) The solution in such cases is better management and economic policy reform rather
than more capital projects. The analysis of these USAID projects would seem to concur
with the report’s claim.

3. Attempted USAID Policy Reform Efforts

The importance of policy reform, at least in regard to policies directly impacting
ARENTO, was established in the CTC Master Plan in 1979 and was carried forward and

emphasized in the USAID projects that were based on its recommendations. With respect

47

to all of its public utility projects in Egypt, AID had tried to promote cost recovery and

other policy reforms by attaching policy conditions in three general areas: tariff reform;

O&M expenditures at levels adequate to protect project investments; and increased

autonomy for the utilities, with the goal of becoming self-sustaining. (Hanrahan. 4-5)

Speciﬁc ARETO policy reforms required by AID in Telecommunications I and to be

implemented one year ﬁ'om the signing date included: (Lieberson, Stollard. F3-4)

1) ARETO prepare a tariff rate structure to cover short-range costs and some level of long

range costs for the 1980-1985 period. (The anemic 1982 tariff increase was an attempt to

fulﬁll this condition and placate USAID.)

2) The GOE reorganize ARETO under its own special charter as an autonomous entity.
Details of this effort are included under the ARENTO structure section.

3) ARETO revalue its asset accounts at present market value. Accomplished as of 1994.

4) ARETO freeze its staff size and adopt a policy that the number of new hires can not
exceed the annual turnover rate. (Details of this effort are included under the
workforce section.)

5) ARETO maintain a debt-to-equity ratio of 70:30. This covenant was later deleted by
AID.

6) ARETO take all reasonable steps to implement the Service Improvement Plan. Details
of this effort are included in the USAID project section.

All of the above policy reforms reﬂected USAID’s emphasis in transforming the
telecommunications provider into a commercial entity, rather than limiting itself to
upgrading the technology used by a traditional PTT. Unfortunately, implementation left
something to be desired: The above policy conditionality of Telecom I (FY 1978) was not
achieved, so it appeared in Telecom H (FY 1979). The conditions were still not met, so
they appeared again in Telecom III (FY 1979). It was not until 4 years after Telecom I
that any progress was made on reforms. (Ibid. 42) Essentially, AII) put $200 million into

the telecommunications sector before achieving any signiﬁcant progress on policy reform

conditionality. (Ibid. 43)

48

It is in the enforcement, or lack thereof, of policy reform that the predominance of
political over developmental concerns in Egypt has been most evident. The USAID policy
reform agenda in Egypt was undercut in the early and mid 19805 as the political objectives
of the country program overrode the development goals of the capital projects. (Ibid.15)
Because of the political necessity of disbursing large amounts of funds every year, both the
GOE and the State Department had viewed the Egypt aid program as an entitlement.
Under normal conditions, disbursement of funds can normally be withheld for
noncompliance in carrying out policy reforms, but in the case of Egypt, funds continued
even when reform objectives were delayed or not met. Giving way to US geopolitical
considerations and the inability to block these annual aid disbursements, USAID’S
leverage and thus, overall effectiveness at policy reform efforts was signiﬁcantly curtailed.
(Ibid. 41)

A policy condition of particular interest but not included in the above list of covenants
with ARETO was USAID’s insistence on the disbursement of telecommunications funds
in order to simulate ARETO capital market obligations:

“. . .USAID contributions of funds for ARENTO capital expansion should be reloaned or
regranted by the GOE to ARENTO as near market terms and conditions as can be
negotiated. Funds that are regranted by USAID for use by ARENTO as equity should be
“costed” at an implicit return equal to the reloan rate in order to prepare the way for
eventual evaluation of ARENTO’s return on equity on a market basis.” (U SAID. 1984. 4)
This requirement, in combination with the above covenants with ARENTO, delineate

USAID’s tied-aid equipment provision and policy reform agenda from the purely

concessionary terms of other tied-aid equipment donor nations.

49

V. MACROECONOMIC ANALYSIS

To understand the ﬁnancial and organizational shortfalls of USAID’s
telecommunications projects and of ARENTO as a whole, it is necessary to detail the
macroeconomic environment in which both had to function. Discussion of Egypt’s
economy must by necessity, begin with the overthrow of the monarchy in 1952 and the
resulting restructuring of Egypt’s political and economic environment. The integrative
economic development model as applied by Harik shall be used to analyze Egypt’s
economic structure while the framework of the populist authoritarian state as developed
by Brumberg will be used to elaborate on Egypt’s political structure. While the
delineation between the macroeconomic and the political analysis may blur as the same
events are seen ﬁom different perspectives, it is hoped that the following analysis will
explain the telecommunications environment at the time of the nricroeconomic analysis
and the reasons for change in the macroeconomic environment to the one in which the

telecommunications entity now operates.

A. Framework for Eaptian Economic Policy
1. Integrative Economic Development Model

As detailed by Harik, the integrative economic development approach represents an
overarching centrally administered design that encompasses the entire national economy.
Based on an equilibrium model, the extensive managerial efforts of a central omniscient
agency are required to achieve and maintain the necessary economic “balance.” Lacking
the “invisible hand” of the ﬁ'ee market to perpetuate this balance, an artiﬁcial equilibrium

must be maintained between costs and prices, wages and cost of living, and societal needs

50

and government services. Microeconorrric imperatives such as increased productivity,
proﬁt maximization and continued ﬁrm growth are a decidedly secondary concern to the
macroeconomic considerations of system equilibrium. Speciﬁc economic decisions,
therefore, while rational when taken in context of the effort to maintain the grand
economic plan may be blatantly detrimental to a singular ﬁrrn’s ability to promote
economic grth or maximize proﬁts. (Harik. 10)

In this self-contained system, an enterprise’s function is to meet the needs of other
enterprises in the system. Therefore, an individual enterprise may be losing money, but the
loss remains immaterial in view of the nonﬁnancial contribution the ﬁrm is supposed to
make to other enterprises or to society. These nonﬁnancial contributions include
enhanced national economic self-sufficiency; and the generation of value added beneﬁts,
part of which means employment and social services. By extension of the deﬁnition of
social services, the products that public sector ﬁrms produce also have a role - to provide
affordable commodities for the public. In theory affordable because central planning was
the officially sanctioned strategy for most effectively reducing waste, avoiding
exploitation, increasing productivity, and introducing an equitable distribution of wealth;
but in practice because of the government’s policy of artiﬁcial (administered)
pricing.(Ibid. 10) Above and beyond fulﬁlling said responsibilities, a proﬁtable public
sector enterprise is expected to contribute even more to the maintenance of the economic
balance through the transfer of part or all of its ﬁnancial surplus. While these
contributions ﬁnance the continued operation of the entire national development project,
they simultaneously contribute to low grth levels, because of the siphoning off of

surplus capital needed for renovation, research, and expansion. Ultimately, the intent of

51

the model is to maintain a balance among the parts of the national project and amongst the
partners of the social pact, rather, than to achieve greater efficiency or productivity. (Ibid.
9)
1.1. Telecommunications in the Integrative Model

The negative characteristics of the PTT model as detailed in numerous studies and cited
earlier in this paper, are in fact, the remnants of what was once believed to be the positive
salient features of the integrative model. According to the latter model, the
telecommunications entity was functioning appropriately when contributing to the beneﬁt
of the whole system, even if this were detrimental to the individual entity. Because
telecommunications is unique amongst SOEs as a guaranteed generator of hard currency,
one of its major duties was the transfer of ﬁnancial resources to less prosperous members
of the self-sufficiency development effort. This, by deﬁnition, is a diversion of
reinvestment 'capital and a negative incentive for improving performance. The social
service mandate applicable to all business entities, resulted in an underutilized, overstaffed
workforce providing inferior service at below cost pricing. To ensure compliance with
these policies a central administrative organization became a necessity. All of the above
are anathema to the current telecommunications development perspective and were
documented as such earlier, but to the founders of Egypt’s integrative development
approach, telecommunications was functioning exactly as required by the model.

The exclusivity of the two perspectives is mutual, however. From the perspective of

telecommunications proponents, the ﬁrndamental tenets of the integrative model result in
an economic and administrative environment totally hostile to their vision of

telecommunications as an aggressive engine of development. At the same time,

52

implementation of the more enterprise-centric reforms proposed by reformers are as
equally distasteful to the proponents of the integrative model. Increased autonomy as a
privatized or even “corporatized” business, would undermine the balance essential to the
model. Hard currency and subsidized services to essential, but losing sectors would
evaporate. Social goals of ﬁrll employment and equal access to services could be ignored
by the new entity. But more importantly. once the balance has been upset and an example
set, how could the legitimacy of the holistic model be maintained and by extension, the
legitimacy of its proponents, in this case the Egyptian regime itself?

2. Economic Restructuring and Development Policy Reorientation

By deﬁnition, the new regime’s restructuring of the Egyptian economy along the lines
envisioned by the integrative model and its simultaneous implementation of a large-scale
development effort, would be a formidable undertaking. The need for capital, raw
materials, technology, and organizational capabilities would be unprecedented, and,
considering the level of development efforts at the time, in scarce supply domestically.
The availability of investment capital and technology was ﬁrrther limited by the self-
sufﬁcient nature of Egypt’s developmental effort and its inherent hostility towards
transnational corporations. Forced by default to rely upon what was domestically
available and given the discredited private sector’s lack of such resources to implement
such a large-scale program, governmental assumption of almost total responsibility for the
economy was inevitable. Thus, the adoption of the integrative economic development
model had a ﬁnancial, as well as, as philosophical underpinning.

The “Socialist Laws,” enacted in the middle of the ﬁrst Five Year Plan (1959/60-

1964/65) provided for the nationalization of all large- and medium-sized companies, the

53

limiting of private shareholding and the sequestration of assets of 150 “reactionary
capitalists.” Most private enterprises in industry, manufacturing, trade, insurance, ﬁnance
and other services were taken over by the government. Just prior to implementation, the
private sector accounted for 76.16% of output; by the following year, its share of output
did not go beyond an eighth to a quarter of the total, and the private sector share of
investment was only slightly more than 5 percent. (Tschirgi, et. al. 76) Economic
transformation, however, was not limited to nationalizing the means of production, it also
included government regulation of the remaining private enterprises. (Harik. 19) Thus,
through nationalization, sequestration, and ambitious investment policies the state had
created the public sector needed to implement the integrative development model.

In keeping with the inwardly-focused nature of Egypt’s development effort, the ﬁrst
Five Year Plan was supposed to rely on domestic sources of ﬁnance, but after the
exhaustion of the country’s pro-revolution foreign-exchange reserves, the government
resorted to heavy external borrowing at unfavorable rates. As early as 1962, Egypt was
forced to negotiate the ﬁrst of many standby agreements with the IMF in return for a
pledge to reduce internal demand, lower government spending, and devalue the pound.
Unvvilling to risk popular discontent, Nasser, as would his successors, reﬁrsed to enact the
stabilization program and instead turned to foreign loans, in this case, from the Eastern
Bloc. By 1965, the ﬁnancial resources of the government were almost depleted and the
government was unable to undertake a second national ﬁve-year plan. Egypt’s dim ﬁscal
situation was further aggravated by the 1967 war and the subsequent interim period

leading up to the 1973 War. From 1965 to the time of Nasser’s death in 1970, Egypt’s

54

external debt grew by a factor of ﬁve - Egypt’s continuing economic dependency was now

an entrenched certainty. (Barkey. 80)
3. Critique of the Integrative Economic Development Model

According to Harik’s analysis. the integrative development model ultimately failed in
two ﬁrndamental areas: it did not foster increased productivity nor did it reduce the need
for extensive resource transfer between economic enterprises. (Harik. A) A primary cause
of the model’s ﬁrst failing is its reliance on social returns doctrine. In its broadest sense,
social returns are the beneﬁts accruing to individuals from the purchase of products or
consumption of services at sub-market based prices. Also taken into consideration are the
beneﬁts of employment, whether that employment is redundant or not. (Ibid. 206)
Because social returns consume investment capital, the policy undercuts the major source
of funding, not only for economic growth but also for welfare itself - as a means of
distribution it has proven to be the least productive for welfare and growth. (Ibid. 58) The
role of the public sector as an agent of growth was, as a result, stiﬂed. Without growth,
there will be no revenue with which to support distribution. Since the public sector was
made the spearhead of the industrialization drive, the stiﬂing of its ﬁeedom to pursue
productive policies for grth can be considered the major cause behind Egypt’s failure to
become one of the newly industrialized nations. (Ibid. 207)

With respect to the second shortcoming of the model, as overall economic performance
steadily deteriorated, the more reliance was placed upon “corrective” administrative
measures and coercion. Thus, the initially rational and proactive economic model was
transformed into a powerful, but increasingly reactive and arbitrary, tool for artiﬁcial

economic manipulation. (Ibid. A) This increased economic manipulation led to an

55

increasing divergence between the administratively rational and economically rational
decision-making processes. The resulting unruly economic environment made ad hoc
measures such as subsidies the norm. Thus, the continued and increased use of subsidies
indicated an economic deﬁciency in the model and was a symptom of the complicated
economic arrangements needed to perpetuate the ﬂawed the integrative model. (Ibid. A)
The cumulative effect of this nearly thirty-year experiment on the national economy
accounts for much of Egypt’s economic stagnation.

With the fervor of the revolution and the idealism of radical policy initiatives giving way
to the complexities of the integrative economic model, the regime started to idle in place
and muddle through. The realization of how difﬁcult it was to move forward and how
costly and painﬁrl it was to stay in place, immobilized regime leadership. The patron state
found itself increasingly caught up in a game of self-entrapment: Government subsidies
created an accelerated demand for resources it did not have, while public resistance to a
lessening of the patron’s largesse increased as did the number of dependents. Low levels
of wealth generation and the inability to adequately meet the basic needs of the people
brought into question the rationality of the central planning model and government
hegemony over the economy. (Ibid. 80) This, in turn, must lead to an examination of
Egypt’s political environment.

VI. POLITICAL ANALYSIS

A. Creation of Egypt’s Political Environment
Because of the close and mutually reinforcing relationship between economic beneﬁt
and political support and this relationship’s antipathy to large-scale change, the

prerequisite of a new political coalition before initiating such a radical restructuring of the

56

Egyptian economic system was obvious. The new regime’s coalition was essentially a
composition of the forrner’s economically disenfranchised - the rural middle class (the
peasantry), labor, “productive” urban capitalist, intelligentsia, and the military. These
mostly populist groups were organized into a loose alliance that provided support for the
state to pursue both economic grth and social equity. (Barkey. et.al. 79) To achieve
these two competing goals, the regime embarked on a national development strategy that
largely conforms to the tenets of the aforementioned integrative economic development
approach and a method of governance that most closely resembles the political
authoritarian state.

Generically, the three most prominent attributes of the populist authoritarian state are:
1) they are based on a broad, popular coalition that embraces, to various degrees,
workers, peasants. professionals, and “national” capitalists; 2) they promote eclectic
economic policies designed to satisfy as many members of the coalition as possible; and 3)
they subordinate these social groups through corporatist and patron-client mechanisms
that give the latter privileged access to policy-makers in return for their political
quiescence. (Ibid. 76) The Egyptian version of this political system was to be a self-
contained hierarchy, any attempt to circumvent accepted channels was illegal - class
struggle or links of solidarity among members of this coalition were ofﬁcially prohibited.
(I-Iarik. 14)

A fourth, and arguably the most important characteristic of the populist authoritarian
state with regard to this study, is its determined resistance to economic structural reform.
This resistance is the result of the ruling elites’ continued dependence on the support of

the coopted coalition, which, by deﬁnition, has a vested interest in maintaining and

57

defending statis economic programs - it is a logical consequence of the aforementioned
attributes. (Barkey, et. a1. 74) Unwilling to antagonize and possibly alienate members of
the coalition, the ability of reformers to extract the state from its intricate web of
commitments and alliances is severely compromised. Lacking the necessary state
autonomy to embark on necessary, but uncomfortable, and therefore dangerous, economic
and political reforms, pro-reform elites often proceed down the path of least resistance and
exploit the existing institutions, coalitions, and ideologies already available to them. The
resulting “survival strategy” allows for limited economic changes without any substantial

retooling of the fundamental system. (Ibid. 74)

B. Sadat

To the extent that both the populist authoritarian state and the integrative economic
development approach were interdependent and mutually reinforcing, Sadat realized ﬁom
the beginning that genuine and effective economic reform called for the wholesale
restructuring, if not abandonment of the integrative development model. To implement
and sustain such an undertaking, would, in all probability, harm members of his political
coalition and thereby, undermine his legitimacy and ability to rule. Faced with an array of
organized ‘losers’ and lacking a coherent “winners coalition” of new economic and
political beneﬁciaries, the Sadat regime pursued a “survival strategy” of supplementing,
rather than restructuring, existing institutions. This strategy was the underlying principle of
Sadat’s policy of “Intﬁtah” or “Opening” - the crisis was to be moderated by retooling the

ﬁinges of the all-encompassing development model.

58

1. Retooling the Status Quo

The legislative cornerstone of Sadat’s survival strategy was Law 43, passed in June
1974. As such, the law’s intent was not to alter the ﬁrndamental tenets of Nasser’s
integrative development strategy, but, to graft a slightly more outward-oriented
perspective onto the existing structure. The objective of this newly adopted perspective
was to generate external ﬁnancing for the patron state’s ever-increasing ﬁnancial burden
by encouraging increased Egyptian exports and foreign investment in the domestic
economy. To take advantage of international investment capital, technology and markets,
foreign ﬁrms were actively encouraged to invest in the private sector, in which case they
could have a majority interest, or to invest in public sector ﬁrms, providing that the latter
maintained majority share of equity. Law 43 also provided for the creation of free zones,
and in-country projects, both of which were not subject to Egyptian taxation. The other
key innovation of the “Inﬁtah” was the “own-exchange” system. Its purpose was to
encourage the importation of production inputs for the private sector by permitting
importers to obtain foreign exchange without converting it in Egyptian banks at
overinﬂated exchange rates. (Barkey, et. al. 82)

The signiﬁcance of the above measures comes as much from what was onritted as from
what was delineated in the legislation. No provision was made for the devaluation of the
pound, the deregulation of interest rates and exchange rates, or a reduction in government
spending - all four being necessary components in the maintenance of the integrative
economic system and all four being hindrances to achieving the externally oriented
economy professed by the new Open Door Policy. (Ibid. 83) For example, in the absence

of any deregulation of exchange and interest rates, or the diminution of public-sector

 

59

control over joint ventures, neither domestic nor foreign investors had much incentive to
risk their capital in domestic enterprises. The end result was that, statistically, the
Egyptian economy differed little in 1990 from that of 1963. The public sector remained
responsible for 70 percent of investment, 80 percent of foreign trade, 90 percent of
banking, 95 percent of insurance, and about 65 percent of value added in 1990 as
compared to 1963 with the public sector comprising 80 percent of the means of
production, 80 percent of the export trade, 100 percent of insurance companies and banks,
100 percent of transport and communications, 50 percent of contracting companies and a
little over 25 percent of domestic trade. (Harik. 19-20)

If considered from the perspective of an economic shift toward greater reliance on
foreign capital to ﬁnance development, the Open Door Policy’s impact is questionable. As
a survival strategy it accomplished its objectives - impact on overall economic policy was
minimal: subsidies to individuals and public sector companies expanded, privatization was
avoided, price and crop controls persisted, government predominance in foreign trade
continued, foreign exchange controls remained and despite the formalities, administration
of the economy remained highly centralized . (Ibid. 20) However, in direct contradiction
to all of the aforementioned deterrents to economic growth, in terms of growth of income
and foreign exchange revenues, the last four years of Sadat’s presidency (1977-1981)

were almost unprecedented in Egypt’s modern history.
2. External Financial Windfalls
Before 1975, cotton, a very traditional colonial export, was Egypt’s largest source of

foreign exchange. Revenues ﬁom oil, tourism, and the Suez Canal had been severely

affected by the 1967 war, while workers’ remittances from aboard had not yet started to

6O

become a signiﬁcant source of foreign exchange, bringing in even less than tourism.
(Amin. 40) One year later, Egypt was getting from oil exports more than double the value
of cotton exports and more than the whole of its agricultural exports put together. (Ibid.
53) Seemingly overnight, higher oil prices resulting ﬁom the 1973 Oil Embargo had
created a ﬂourishing “rentier economy” in Egypt; an economy dependent on the
“economic rents” from oil exports, labor remittances, the Suez Canal and tourism. All four
together reached a peak of seventy-ﬁve percent of Egypt’ 5 total current receipts of foreign
exchange in 1981/82, and although this proportion has declined, as of 1996, it was still no
less than sixty percent. (Ibid. 40)

As a medium-sized oil exporter, Egypt beneﬁted directly from higher oil prices. Oil
became a principle export for Egypt, netting $2,640 million in the peak year 1983-1984 as
compared to only $135 million in 1974. (Lavy. 19) Oil, along with the increased tolls and
usage of the Suez Canal, accounted for twenty percent of Egypt's gross domestic product
in the early 80's, but less than half a percent of total employment. (Ibid. 4) As a
counterbalance to this latter fact, Egypt was able to export approximately ﬁfteen percent
of its continually growing labor force. With Egyptians comprising one third of the total
foreign work force in the major oil producing countries, expatriate workers were
providing the majority of the inﬂux of foreign capital. In the early 1980's, remittances
transferred by the roughly 2 million Egyptian workers abroad totaled about $3.5 billion a
year. In Egypt, workers' remittances in 1982-1984 reached about ten percent of GNP-
three times its merchandise exports, excluding oil. (Ibid. 17) By the early eighties,
revenues ﬁ'om oil, expatriate workers, and the Suez Canal accounted for forty percent of

GDP, as compared to ﬁfteen percent in 1975. Added to this economic boon was the fact

61

that this large inﬂux of oil and oil-related revenues into the region positively impacted
Egyptian tourism, which is half composed of Arab tourist. (Tschirgi, et. al. 166) In
addition, Egypt continued to receive its annual $1 billion in economic aid. (Barkey. 90)

The large introduction of foreign currency during the boom resulted in record
economic grth levels - annual GDP grth accelerated to almost nine percent, but
because of high population growth, per capita GDP grew only ﬁve to six percent a year.
(Lavy. 19) According to telecommunications development theory, the aforementioned
massive inﬂux of investment into the telecommunications infrastructure, along with other
equally large AID-ﬁnanced capital projects, combined with this sudden economic upsurge
should have been mutually reinforcing and created both a more robust economic boom
and an expanding telecommunications infrastructure - it is both the fundamental belief of
the theory and the crux of the telecommunications and development causal versus
correlational argument. The simultaneous nature of these two events and their impact, for
better or worse, on each other can be seen as a fundamental test of the causational
argument and the telecommunications investment over policy argument.
2.1. Analysis of Foreign Financing

Unfortunately, the above hypothesis has proven to be overly simplistic, the heavy
inﬂux of foreign currency brings its own temptations and, ultimately, drawbacks.
Research into this “Dutch Disease” phenomenom has suggested a possible causal link
between the heavy inﬂux of foreign currency and an unbalanced pattern of growth. (Lavy.
39) As applied to the Egyptian boom, the abundance of foreign currency made it possible
for the economy to expand in nontradable sectors, such as services and construction, while

neglecting and even damaging traditional export market activities. The external

62

“econorrric rents” ﬁnanced a higher standard of living and the resulting domestic
absorption rate outstripped Egypt’s GDP growth. In response to this unmet and
increasing public demand, imports, of necessity, increased rapidly. (Ibid. 19)
Traditionally, these increased imports would have been ﬁnanced through conventional
efforts to generate hard currency - expanded tourism and the export of agricultural and
industrial products. (Ibid. 20-21) However, the sudden boom was inherently hostile to
the latter: increased domestic demand for these same agricultural and industrial products
deprived the export sector of material while the government’s overvalued foreign
exchange rate, propped up by the inﬂow of foreign ﬁrnds, made what exports were
available internationally uncompetitive.

By the early 19805 exports from the traditional sectors had become a minor source of
foreign exchange as the inﬂux of huge amounts of external ﬁinds diminished the perceived
need and concomitant capability to develop export production. Egypt concentrated on
expanding services and producing goods for the domestic market, while imports bridged
the gap to meet increasing domestic demand. As predicted by “Dutch Disease” research,
the little investment that did transpire was concentrated in the ﬁnancial and service sectors;
of the 2.1 billion Egyptian pounds capitalized in joint ventures by the end of 1983, ﬁfty-
four percent went into banking and ﬁnancial services, while only twenty-three percent
went to industry. While only ﬁfteen percent of Egypt's new workers went into the
traditional tradable sectors of agriculture and industry, nearly sixty-eight percent chose
the service sector - half in government. (Ibid. 41) The end result of this investment and
employment pattern was that by 1987 services accounted for ﬁfty-four percent of

Egyptian GDP. (Ibid. 41)

63

Performance amongst the SOEs during the economic boom, as can be inferred from
above. was less than satisfactory. Over the period 1973-1987, the net rate of return on
capital invested in Egypt’s public sector fell from 5.2% in the ﬁrst year, to 1.9% in 1982,
and then to 1.7% in the last year. (Waterbury. 115) Total public enterprise exports of
goods and services grew only sixteen percent between 1974 and 1985. If oil exports and
rent-generating assets like the Suez Canal are excluded, public sector exports grew less
than three percent a year. Beginning in 1979, oil and canal revenues accounted for more
than ﬁfty-ﬁve percent of total exported goods and services - and more than seventy
percent of public enterprise exports. (Lavy. 47) To generate this minority share of
exports, the remaining Egyptian SOEs in the late 19805 required foreign exchange inputs
(capital and imports) of more than $4 billion to produce $300 million in exports.
(Waterbury. 114) This anemic export output from such large foreign exchange outlays
resulted in this group of SOEs being responsible for more than ninety percent of public
enterprise debt. (Lavy. 47) That the public sector was a huge economic burden is obvious
and indicative of the failure of the Open Door Policy as an economic reform initiative.

The outbreak of “Dutch Disease” in Egypt became an epidemic because of a catalytic
interaction between the “own-exchange” system and an overvalued pound. The former, by
oﬂ‘ering a means to circumvent the depressed exchange rates resulting from the latter, fed
an expanding black market and new commercial banks. This ability to circumvent ofﬁcial
currency controls discouraged long term investment via ofﬁcial channels while
encouraging Egyptians to seek quick return investments in the import of consumer goods.
in banking and currency, or in real estate speculation. Investment in these latter areas

beneﬁted ﬁom pent-up middle-class consumer demand which exploded in the 19705: the

64

share of the total import bill comprised by own-exchange imports rose from 3.55% in
1975 to twenty-one percent in 1979, while the share of total imports represented by
consumer goods rose from ten percent in 1969, to twenty-eight percent in 1973 and thirty-
four percent by 1977. However, not all possible investment capital was expended in the
above pursuits, the commercial-banking sector became a huge foreign-currency siphon: by
1978 an estimated ﬁfty-eight percent of all deposits in joint venture banks had been shifted
to parent banks, while only twenty-three percent of the former’s loans went to Egyptian
industry. (Barkey, et. al. 83-84) Within three years this trend exacerbated Egypt’s
economic crisis. The inﬂow of boom-generated dollars and speculative activities heated
up the economy, producing a thirty percent inﬂation rate. To compensate state employees
and other vulnerable groups, the regime raised subsidies, which cost $1.28 billion a year
by the close of 1976, thirty percent of central government expenditures. (Ibid. 84)
2.2. End of Foreign Windfalls

Each of the four external income sources responsible for Egypt’s boom contain a large
element of “economic rent”, in that earnings are largely unrelated to effort, and variations
reﬂect changes in demand conditions rather than in cost. (Amin. 40) Therefore, the
supplier’s ability to proactively respond to variations in demand is limited. In the case of
Egypt, the instability of its foreign currency ﬂow is ﬁrrther highlighted by the fact that
ﬂuctuations in demand for at least three of the four sources - tourism, remittances, and oil
- is more subject to the inﬂuence of political factors than other exports. (Ibid. 40-41)
Evidence of this political inﬂuence upon Egypt’s economic fortunes is observable from
events of the last thirty-ﬁve years. The 1967 War, far beyond its decimation of the

Egyptian military, had widespread negative repercussions throughout the Egyptian

65

economy largely because of its impact on revenues from oil, the Suez Canal and tourism.
The economic boom after 1975 was largely due to the same factors working in the
opposite direction. Egypt’s economic pendulum was about to reverse itself yet again.

As the economic situation of the oil-rich Gulf states began to deteriorate in 1982, its
repercussions were immediately felt in the second tier of service-providing nations such as
Egypt. The initial leveling and later collapse of oil prices directly and dramatically
impacted Egypt’s four sources of “economic rent”: remittances fell from $4.4 billion in
1985 to $2.2 billion in 1986; oil revenues from $2.6 billion to $1.2 billion; Suez Canal
receipts from $1 billion to $900 million; and tourism from $600 million to $300 million.
(Barkey, et al. 90) After 1982, with foreign currency receipts in decline, Egypt’s pattern
of unbalanced growth and the bias toward nontradables was maintained by heavy
government reliance on foreign aid and external loans to ﬁnance the deﬁcits. It not only
helped ﬁnance the budget gap, but, more importantly, paid for the heavy imports that
bridged the gap between heavy domestic demand and light domestic output. The budget
deﬁcit was thus translated into an ever-worsening balance of payments deﬁcit with little
effect on prices. (Lavy. 44) The integrative model and the social pact upon which the
regime rested was thus preserved, but at a continually escalating price.

2.3. Results of External Financing

Egypt had failed to take advantage of the boom to reduce its inherent vulnerability to
external shocks - it can be argued that this vulnerability was made all the more acute
through government mismanagement or more speciﬁcally, through the government’s
chosen survival strategy. Essential reforms aimed at removing distortions and

implementing structural change - conditions essential for sustained economic growth -

66

would have been easy when foreign currency was abundant. With an increase in total
exports of goods and services between 1977 and 1981 of nearly $7 billion, equivalent to
eighty-six percent of the total external civilian long and medium-term debt in 1977,
conditions were obviously favorable for an attempt not only to stop the trend of increasing
indebtedness but to bring about a signiﬁcant reduction in it. What happened, however, was
that these debts, which amounted to $4.8 billion in 1975 and $8.1 billion in 1977,
increased during the next four years by no less than seventy-six percent to reach $14.3
billion in 1981. (Anrin. 11)

Between Nasser’s death in 1970 and the assassination of Sadat in 1981, a time frame
which effectively covers one ﬁrll economic decline-to-boom-to-decline cycle, total external
civilian public debt, both long and medium-term but not including short-term debt,
increased from $1.7 billion to $14.3 billion, more than an eight fold increase. Other kinds
of external debt (short-term and military debts) increased from about $3 billion to $15
billion, so that total Egyptian external indebtedness of all kinds, civilian and military,
public and private, long, medium and short-term, multiplied six times in a decade, from
about $5 billion in 1970 to about $30 billion in 1981. These last two amounts of debt
represented respectively 43% of GDP in 1970 and 141% of GDP in 1981. To service
civilian debt alone, Egypt had to pay in 1981 no less than $2.9 billion ($1.3 in repayment
of principal and $1.6 in interest payments). The ratio of debt service to all proceeds of
foreign exchange was twenty-eight percent in 1981, about the same as it was in 1970, but
with the important difference that the total value of exports of goods and services in 1981

was more than ten times its level in 1970. (Amin. 12)

67

Egypt neither developed nor expanded its technology base or in any way promoted
conditions essential for developing new exports - the stated goal of the Open Door Policy,
or economic independence, the preeminent goal of the integrative model. Instead,
pervasive systems of price control, distorted allocations of resources, unrealistic exchange
rates, and the lack of proper incentives prevented the development of a large, diversiﬁed
export sector. While “Dutch Disease” does provide insight into the possible negative
economic aspects of large currency inﬂuxes, it is the actual governmental policies of the
country involved that either counteract or enhance these aspects. Unfortunately, in the
case of Egypt, the impact of “Dutch Disease” was magniﬁed by government policies and
allowed to ravage the economy and scuttle an exceptional opportunity for long-lasting

economic reform and enhanced development.
C. Mubarak

In 1981 Mubarak not only inherited the crucial Nasserite public sector and mass public
constituencies which considered themselves entitled, as part of a social contract, to
populist beneﬁts, but Sadat’s legacy of inﬁtah and its new rich unwilling to accept the tax
burden for the former. Throughout the 19805 reform initiatives remained in limbo as
Mubarak sought to balance the legacies of Nasser and Sadat with the ﬂow of aid and oil-
related earnings into the state’s coffers - continued external ﬁnancing of the regime’s
untenable position as patron of these conﬂicting constituencies. (I-Iinnebusch. 160) The
result was a continuing large balance of payments deﬁcit, which by the end of 1987 stood
at more than $40 billion in foreign debt - exceeding Egypt's GNP, which was an estimated
$36bil in 1987. (Lavy. 23) - making Egypt, with the exception of Iraq and its war effort,

the most indebted nation in Aﬁica and the Middle. (EIU. Country Proﬁle. 1993)

68

Cairo, almost a year behind in payments and with mounting interest and penalty
charges, was forced to negotiate a rescheduling of its debt. Despite the magnitude and
deepening severity of its ﬁnancial crisis, Egypt was able to minimize concessions by
exploiting its geopolitical leverage. In response, America interceded on Egypt’s behalf-
the terms of the 18-month stand-by agreement concluded with the IMF in March of 1987
were more generous than those granted to the vast majority of debtor nations. However
generous the agreement, it still mandated an economic reform program. (Ibid.) It included
a staged, 18-month uniﬁcation of the multiple exchange rate system; a ﬂoating of the
pound with respect to international currencies; a two percent rise in interest rates, and a
decrease in energy price subsidization. However, it left direct food subsidies untouched,
interest rates far below annual inﬂation, and energy costs at twenty percent of world
prices. (Barkey. 92-93) Two months later, the Paris Club agreed to reschedule $6.5bn
owed to 17 Organization for Economic Cooperation and Development (OECD) creditors,
while a separate arrangement was also made with Arab lenders. The agreement reduced
arrears until the end of 1986 and all interest and principal payments falling due between
January 1987 and June 1988 on government and ofﬁcially guaranteed military and civilian
debts. (EIU. Country Proﬁle. 1993) Egypt, as can by argued from the tone of the above
agreements, received favorable terms and maximum discretion from the international
community to bring order to its own economic house.

The favorable terms and the unarguably necessity of reform should have had a positive
mutually reinforcing affect upon the undertaking. Initial implementation of the reform
package went well - partial uniﬁcation of exchange rates, raising producer prices and some

pressure on the public sector to become more accountable. However, further

69

implementation of the program would have reduced regime largesse and risked alienating
members of its coalition; the program was abandoned as regime resolve faltered in the face
of possible political unrest. With the end of the Paris Club agreement in June of 1988,
Egypt was once again forced to negotiate a rescheduling of its debt payments. The IMF,
not exceedingly impressed with the results of its generosity toward Egypt in the 1987
accord, was determined to impose more stringent terms. Having expended its geopolitical
leverage in the 1987 negotiations, its Western creditors, now led by Egypt’s former ally,
the USA, now demanded more radical economic reforms. Unable to ﬁrnd or extricate itself
from its intricate political and economic alliances, Egyptian ﬁnancial and economic policy
stalled - negotiations with the Fund dragged on through 1989 and 1990. By the end of
1989, with an external debt of some $51bn (144% of GDP), Egypt was one of the
developing world's largest debtors. (EIU. Country Proﬁle. 1993) By the early 19905
Egypt had run out of options for maintaining macroeconomic balances and the viability of

existing arrangements. (Waterbury. 266)
1. Deus ex Machina - Gulf War Repercussions

Unlike Latin American debtors, Egypt had not borrowed heavily ﬁom commercial
banks. Most of its total debt was on concessionary terms, consisting of long-term
development loans ﬁom governments and international institutions or trade credits, for the
most part guaranteed by ofﬁcial export credit agencies. (EIU. Country Proﬁle. 1993)
However, an estimated $10bn of the sum--for military loan5--was borrowed on
commercial terms (12-14% but in some cases 18%). Of the $11.7bn that Egypt owed the
US. as of mid-1988, $5.7bn was for military purchases largely dating back to the late

19705 and early 19805 when Egypt embarked on the expensive process of re- equipping its

70

armed forces with US. and European equipment. By 1990 $7.1bn had accrued in military
debt, of which some $2.55bn represented interest arrears and penalty charges. Added to
the increased service burden of the military debt was the ever-present threat of the
Brookes Amendment, which would end all aid to any country falling more than a year
behind on its military loans - no exceptions. (Butter. 15) Cairo routinely delayed payment
until the twelfth month and was forced to redirect Saudi and Kuwaiti grants, as well as,
US cash aid transfers to meet minimum payments. (EIU. Country Proﬁle. 1993) Egypt’s
maneuverability was gone and the imposition of harsh sanctions seemed unavoidable - into
this dire circumstance burst the Gulf War. In recognition of Egypt's "unique contribution
in galvanizing international support against Iraqi aggression", Washington forgave the
entire military debt. (Ibid.) This was soon followed by a reduction by some Arab Gulf
states of another $6.6 billion of Egypt’s debt. As a result, Egypt’s external debt was
reduced from $47.6 billion in June 1990 to about $34 billion by Feb. 1991. The two
exemptions were expected to reduce Egypt’s interest obligations by about one billion
dollars annually. (Amin. 19-20)

The above two debt reductions were quickly followed in May 1991 by an agreement
with the Paris Club that covered an estimated $27-28bn in official and govemment-
guaranteed civilian and military debt. Although the agreement’s leniency was a reward for
Egyptian support during the war, debt relief was conditional; it was to be implemented in
stages. each triggered by speciﬁc economic reform criteria. In this manner, Egypt would
be exempted from ﬁfty percent of its external debt amounting to $20.2 billion, in three
steps. The ﬁrst, constituting an exemption of ﬁfteen percent, took place in July 1991,

which translated to a reduction of Egypt’s external debt to $31 billion. The second

71

exemption of ﬁfteen percent --or around $3bn-- was conditioned on Egypt’s successful
implementation of the 1991 IMF agreement (accomplished in March 1993) and the
adoption of a successor IMF program (September 1993). The ﬁnal twenty percent--or
about $4bn -- was to be exempted after the completion of the September IMF agreement.
(May, 1994). (Lofgren. 27) (Amin. 19) This latter thirty-ﬁve percent reduction (15% and
20% respectively) would reduce Egypt’s external debt to about $24 billion, a decline of
ﬁfty percent from its level in mid 1990. (Amin. 20) During this time there was to be a
thirty percent reduction in interest payments on non-concessionary official debt, with the
remaining ﬁfty percent of Paris Club debt to be rescheduled over 25 years. (EIU. Country
Proﬁle. 1993) A study of the debt relief effort by the World Bank revealed a signiﬁcant
positive affect upon the most debilitating part of Egypt’s debt, a substantial reduction in
payments arrears on outstanding debt--interest arrears fell from $1 .65bn in 1990 to a mere
$127m in 1991 while principal arrears on long-term debt declined from $5.36bn to $1 .6bn.
In terms of Egypt’s exports of goods and services dedicated to debt service, there was a
decline ﬁ'om 26.3% in 1990 to 16.7% in 1991. (Ibid. 1993) Thus, Egypt’s three-year
impasse with its creditors, the latest manifestation of systematic faults in its two-decade-
old economic order, was bypassed by yet another event wholly external to Egypt’s

political and economic systems.
2. Policy Catharsis

In December of 1990, President Mubarak announced a thousand day program for the
liberalization of Egypt’s economy. (Lofgren. 22) In essence, the program was meant as a
demonstration to the international community of Egypt’s willingness, albeit born of

necessity, to begin the implementation of stabilization, structural adjustment and economic

72

liberalization programs - prerequisites demanded by the IMF and World Bank before
reopening their coffers. It was successful - the aforementioned litany of international
agreements reached after this initial gesture is its result. This program could, in fact, be
construed as the beginning of the end of the integrative model as the preeminent force in
Egyptian econorrrics.

Like most IMF and World Bank debt relief/restructuring agreements, Egypt’s new
economic regimen focused on immediate macroeconomic stabilization followed by a
fundamental restructuring of the economy. Salient features of this new economic order
are an increased reliance on market forces and the private sector and stronger integration
into the global economy. (Lofgren. 22) All of the above characteristics are hallmarks of
an economic philosophy diametrically opposed to that of the integrated economic
development model. The mutual exclusive nature of these two economic philosophies can
be discerned from the requirements demanded by the IMF and World Bank in 1991, which
for all purposes, called for the dismantling of the Egyptian economic system. The
successfully implemented May 1991 IMF agreement covered much of what the abrogated
1987 agreement had addressed and the Egyptian government found unpalatable at the time
- a “traditional” package of adjustment policies, concentrated in ﬁve areas. First, ﬁscal
restraint “aiming at reducing aggregate expenditure and reducing inﬂation”; second,
exchange rate reform, to reduce the balance of payments deﬁcit and eﬂ‘ect efficient
resource allocation throughout the economy; third, adjustment of the interest rate “to
achieve a positive real rate of interest that will encourage savings, rationalize the
allocation of investment, and attract a larger inﬂow of workers’ remittances from abroa ”;

fourth, reform of the pricing structure through elimination of subsidies and price control

73

in order to reduce waste and misallocation of resources; and ﬁnally, liberalization of the
operation of public sector companies so that they can liquidate inefﬁcient units, set their
own pay rates and, “most important of all, set their own selling prices”.(Handoussa. 14)
Taken separately, each of the above reforms targeted a salient feature of the
integrative economic development approach. Before examining each individual area, it is
useﬁrl to distinguish between the earlier stabilization phase and the latter structural
adjustment phase. In the stabilization phase, the focus is on remedying the most obvious
of the immediate imbalances: balance-of-payments and/or budget deﬁcits and high inﬂation
rates; this would be the province of the ﬁrst four areas, while the last addressed an issue of
structure. (Barkey. 2) Taken as a whole, as they must since the economic system they
attempt to modify is a self-contained system, the long-term goal is the minimization and/or
elimination of the previous economic system. The goal of ﬁscal restraint, a foreign term in
the integrative model, can be interpreted as a nonspeciﬁc and generic targeting of
government subsidization of its state owned industries and ubiquitous social programs.
Exchange rate reform, in Egypt’s case three separate exchange rates, weakens the
government’s ability to provide maximum ﬁnancial and foreign intermediate inputs to the
industrial sector. The former by establishing an arbitrarily high exchange rate for normal
international business transactions, thereby extracting more hard currency out of the
transactions and the latter by having a lower (government subsidized) exchange rate for
the purchase of raw materials and intermediate inputs for state industries. By unifying the
rates and allowing the currency to ﬂoat, the public sector, engine of the integrative
approach is deprived of two important subsidies. The same deprivation occurs by

positively adjusting interest rates, in that, low rates paid to account holders subsidized the

 

74

low loan rates extended to the ever-needy public sector. Reforms four and ﬁve, however,
directly target the guiding precepts of the integrative model. The elimination of subsidies

(direct, indirect and cross) and price controls for both the public and public sector, as well
as, liberalization of the sector is in direct conﬂict with the centrally managed methodology
and balance maintenance philosophy of the integrative model.

The successor IMF agreement with Egypt, known as the Extended Fund Facility (EFF)
was not only a trigger for the second stage of the debt reduction agreement but contained
further inducements of $569 million. In the words of the IMF , the overall objective of the
EFF was “ to create a decentralized, outward-oriented market economy with sustained
growth.” To this end, the EFF was to shift emphasis away from the shorter-term ﬁscal
and monetary policy adjustments which dominated the previous agreement, towards
structural reforms such as privatization, trade liberalization, price deregulation, a new
favorable legal framework for business and investment, and promotion of the private
sector. These new latter reform initiatives were to be monitored by the World Bank in
accordance to the Structural Adjustment Monitoring Program (SAMP) signed days before
the EFF. In the case of the SAMP, the World Bank was not to provide ﬁnancial aid, only
its implementation expertise. (EIU. Fourth Quarter. 1993)

The above economic reforms are successﬁrlly disassembling the integrative model, but
only after the Egyptian regime admitted publicly that the system was untenable and
initiated economic reform - arguably, the only viable course of action available to it since
the collapse of the rentier economy in the early 19805. The ﬁrndamental issue is why
choose this moment after nearly a decade of resistance and procrastination. This

particular decision was based on the coalescence of a number of events, a majority of

 

75

those being out of Egypt’s control to inﬂuence, which made reform, in the opinion of
Egypt’s elites, the least painful of alternatives.
2.1. Causes and Inducements for Reform

Even though reform had been a continuous topic of discussion for years in government
circles and with the international community, it was never truly considered a viable option
given Egypt’s interlocking political and economic structure. It was the coalescence of a .‘.
number of extrageneous international events that reshaped and narrowed Egypt’s options.

The previous decade had seen much of Latin America accept, with varying degrees of

 

willingness, structural reform as an economic necessity. Egypt, however, was able to
persevere as it leveraged its geopolitical importance to resist an ever-increasing
momentum for economic liberalization and world economic integration. The economic
and political collapse of the Soviet Union, the preeminent example of the integrative
economic development approach, dealt Egypt two signiﬁcant blows. First, a loss of
legitimacy as not only the Soviet Union, but also Eastern Europe, abandoned, with very
little hesitation, the integrative approach for a market based economic system. Secondly,
and more importantly, with the Eastern Bloc fully engaged in internal economic and
political restructuring, under the tutelage of the Western powers no less, Egypt had lost
much of its geopolitical leverage as a signiﬁcant pawn in a formerly bipolar world. A
unipolar world, unfortunately for Egypt, directly impacted its ability to collect
unconditional “strategic rents” that, in turn, had ﬁnanced its intransigence to economic
reform - an intransigence it could no longer afford ﬁnancially or with respect to a changing
world economic philosophy. The economic conversion of the Eastern Bloc marked, at

least in perception, if not wholly in fact, the near globalization of the free market ideology

 

 

76

and its resulting world economy. In this increasingly integrated world system, a society’s
economic well being and survival depend on its ability to compete in an international
arena. An arena in which, latecomers like Egypt, could ﬁnd themselves at a disadvantage
with respect to not only their industrialized and developed counterparts but also by their
more successful newly industrialized peers.

This narrowing of Egypt’s options on the international stage coincided with two
disparate, but ultimately complimentary events in encouraging fundamental economic
reform. The ﬁrst was Egypt’s desperate need for relief from the large ﬁnancial debt
accumulated by decades of perpetuating the untenable status quo. The second was the
Persian Gulf War, at the end of which the Western powers generously rewarded their
strategic ally. The former gave the IMF and World Bank, and by extension, the Western
governments increased leverage to push Egypt into reform, while the latter provided both
a means of making the reform process palatable to Egypt and served as an immediate
positive reinforcement for the limited reforms already begun. This combination proved
powerful enough to coerce the regime and Egypt’s social elites to adopt, if not
wholeheartedly, at least pragrnatically, a new economic policy.

This sudden catharthis in response to a shift in Egypt’s position with respect to the
international order has been characteristic of Egyptian policy since the Napoleanic
expedition of the early 18005. Its geopolitical signiﬁcance has always attracted the interest
and interference of the major powers, a situation Egypt, as discussed earlier, attempts to
work to its advantage. Thus, in the interest of self-preservation and beneﬁt, Egyptian
elites have attempted to inﬂuence and have been inﬂuenced by the ﬂuid balance of

international power. Reform, in this case, was pursued on the basis of a perceived

77

unipolar world in which the American hegemon wanted economic reform. In addition to
this external inﬂuence, was a ﬁnal domestic admission that the integrative economic model
had failed and an export-oriented strategy was necessary. To this end, Egypt had to ﬁrlly
integrate into the international market and hope that the resulting class of Egyptian
industrialists and the enormous expatriate capital ready to return would make economic
reform work. Regime stability, however, was not to be jeopardized (Hinnebusch. 164) t
The Interior Minister’s repeated claim that stable order was the ﬁrst requisite of economic I

reform seems to reﬂect regime consensus. (Ibid. 168)

 

Domestically, the feasibility of real reform was enhanced by an increase in the state’s '
autonomy from its supporting coalition. By 1990, efforts at limited democratization had
reached an impasse and the government was convinced that ﬁrrther efforts would be
incompatible with the now inevitable full-scale reform effort. (Ibid. 168) As a populist
authoritarian state, concurrent democratization and reform efforts might have permitted
the mobilization of reform victims, many of which would have been drawn from the ranks
of the government’s former coalition. It was believed regime stability would be less
threatened by continuing the effort to divide and rule an opposition badly split along pro-
and anti-reform lines and by the secular opposition’s fear of the Islamic movement. (Ibid.
168) The regime seems unwilling, as has been the case in Latin America and Eastern
Europe, to trade increased political participation for public acceptance of welfare
reductions; thus, sacriﬁcing the legitimacy those reforms could be accorded if they
emerged from a democratic process. As such, public acceptance depends wholly on
whether the social pain of reform can be buffered by the rent Egypt still commands until -

and if - reform delivers the investment and grth it advocates promise. (Ibid. 170)

78

2.2. Regime’s Commitment to and Implementation of the New Economic Order

An indication as to the seriousness of commitment to the new economic order, of both
the Egyptian regime and its major patron, the United States, was the inception of the US.-
Egyptian Partnership for Economic Growth and Development. Launched in September
1994 by President Mubarak and Vice-President Gore, its primary goals are to provide a
high level forum to serve as a catalyst for economic growth in Egypt by involving the
executive branches of both governments and emphasizing the critical role of the private
sector. (U SAID. 1997. 1) The ﬁrst goal indicates a personal commitment by Mubarak to
the effort, irrespective of coalition interests, while the second indicates an acceptance of,
as compared to the earlier acquiescence to, the pro-private sector, market economy
philosophy of the World Bank, IMF, and USAID. This acceptance comes at the expense
of the formerly dominant integrative economic development model and its political and
economic beneﬁciaries. The special nature of this program, and in turn, the special
relationship between the US. and Egypt is evident ﬁom the other two nations chosen to
participate in similar programs. Russia and South Aﬁica - both regional powers and
necessary participants in any U. S.-led eﬂ‘orts in their spheres of inﬂuence. (EIU. Second
Quarter. 1995)

An indication as to Mubarak’s personal resolve with regard to this economic
transformation was the January 1996 visit of Vice-President Gore in support of the
Partnership. In a speech delivered during the visit, Mubarak announced a new vision of
Egypt’s economic future, a vision as diametrically opposed to the fundamental economic
precepts of the current regime’s forebearers as any that could be imagined: “a vibrant

private sector-led open market economy ﬁrlly integrated into the global economy.” To

 

79

ensure that his immediate subordinates were of a like mind and were free of former
coalition group/economic philosophy encumbrances, Mubarak appointed a new economic
cabinet and Prime Minister. In keeping with the new economic philosophy. the cabinet’s
mandate was to liberalize the economy by deregulating the trade sector, increasing
competition in the ﬁnancial sector and accelerating the pace of privatization of the public
sector. (USAII). 1997. 1)
2.2.1. Machinery of the New Economic Order

While the formation of the Partnership and what it represents are of interest in
understanding a ﬁrndamental shift in the political environment of Egypt, the actual
machinery charged with carrying out the grand new economic vision provides even more
insight. Just as the populist regimes before it had enunciated the integrated economic
development model and sought to build the support structure from available and/or
created interest groups, the current regime’s new economic order’s required its own
constructs. Because of the private sector focus of the economic restructuring, an integral
and prominent role, of necessity, must be assigned to the business community. Therefore,
underneath the over-arching strategic vision of the Partnership is the President’s Council,
which is composed of major business leaders from the United States and Egypt. Its
mandate, which can be discerned from the Council’s composition, is to guide Egypt’s
transition to a competitive, outward-looking, market-based economy. In keeping with this
mandate, the Council has recommended three areas for immediate examination and
improvement: trade promotion, privatization and regulatory reform. (Ibid. 3)

The aforementioned “transition to” must inherently contain a “transition from,” in this

66'

case, it is Egypt’s 1nward-looking, protected, centrally-planned, public-sector dominated”

 

80

economy. (Ibid. 3) As discussed earlier, each of the above characteristics had been an
inherent and positive feature of the integrated economic development approach as pursued
by Nasser. With the announcement of the Mubarak’s new economic vision, the oﬁicial
death knell of Nasser’s government-led import-substitution industrialization had sounded.
Instead of a domestically-focused development effort led by the state bureaucracy, the
new eﬁ‘ort would have an international orientation and emphasis, as seen by the focus on
export promotion and the private sector leadership provided from both the American and
Egyptian business communities. Taking into consideration the incompatible nature of the
current and previous economic efforts and the groups chosen to lead each, the fact that
the latter effort will proactively pursue the dismantlement of the former is to be expected.
The second area of interest to the President’s Council, privatization, is essentially the
“surrender” of the discredited state-led engines of growth. The speed at which the SOEs
are relinquished to the private sector is now a litmus test for the Mubarak regime: “The
President’s Council believes that the acceleration of privatization will be the signal to the
international business community of Egypt’s real commitment to the establishment of a
free market economy.” (Ibid. 3) The Council’s ﬁnal area of interest would naturally focus
on a fundamental restructuring of the regulatory environment that had fostered the now
discredited former economic regime. With both the strategic vision and machinery for the
new macroeconomic model’s implementation ofﬁcially sanctioned and ﬁrmly entrenched in
the fabric of Egypt’s political and economic environment, their impact upon the once
stymied policy reform efforts of USAID, an external actor in Egypt’s domestic

environment, must be reviewed.

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2.3. USAID Policy Reform Under New Macroeconomic Environment

With Egypt’s new macroeconomic environment, overall USAID development policy
as detailed in the “four pillars” approach has blossomed. Instead of encountering a
recalcitrant and obstructionist Egyptian government determined to capitalize on its
geopolitical importance to ﬁnance the preservation of the status quo, USAID now
negotiates with a government committed to development along USAID guidelines. The |
“four pillars” - private sector development, policy dialogue, institution building and

technology transfer can be found, in some form, in virtually all of the above statements on

 

Egypt’s new economic path. Operating in such an enviromnent, USAID’s gentle
persuasion of leveraging aid resources and cash grants to affect reforms will be far more
effective and therefore more prevalent in its current assistance programs.

The leveraging of USAID’s resources to actively encourage economic reform is best
exempliﬁed by the sector policy reform program (SPRP) - a policy reform, results-driven,
cash-transfer program with an annual budget of $200 million. Disbursement of these
funds is conditioned on substantive progress against a predetermined list of policy reforms.
Averaging some 20 required reforms, the ultimate goal of these criteria lists is to set the
stage for a more open economy by making headway in individual sectors. This program is
supported and complemented by technical assistance (TSSPR) to help the GOE develop,
carry out, monitor and evaluate select elements of its reform program. (Ibid. 11) In
concurrence with the Council’s aforementioned three areas of interest, the SPRP is
focused on reform in areas of trade, regulation, and privatization, the ﬁscal and ﬁnancial
sectors, and the environment. Since 1992 USAID has released $602 million in support of

the GOE’s successﬁrl implementation of major reform measures. The latest release of

82

ﬁrnds, $60m in May 1998, was positive reinforcement of GOE efforts to reform the tariff
structure on imported goods, break the monopoly of the govemment-owned maritime
companies and liberalize ports, budget deﬁcit reduction, and the rationalization of public
sector debts. (EIU. Second Quarter. 1998)

Beyond the SPRP which affects reform across a broad spectrum of sectors, USAID has
speciﬁc programs targeted at the Council’s trade promotion and privatization areas of
emphasis. USAID provides support for the Trade Development Center, a non-
governmental organization (N GO) established by the U.S.lEgypt Joint Business Council to
promote exports by networking and technical assistance at the company level. (U SAID.
1997. 3) Another USAID program of particular interest is the Growth Through
Globalization (GTG) program that provides ﬁrnding for activities to enhance the
competitiveness of Egyptian ﬁrms worldwide and increase private sector exports.
Particular assistance to the privatization drive is provided through the Privatization
Support Program that ﬁnances speciﬁc activities critical to creating a policy environment
supportive of privatization and completing sales of SOEs. These activities support
improvements in privatization policies, plans and processes; effective communications with
key stakeholder groups to build political and technical support for privatization; and
broadening the scope of privatization to include other non-manufacturing businesses and
service SOEs. (USAID. 1998. 12)

As detailed above, USAII) policy reform efforts in Egypt have had an extraordinary
change of fortune since the early 19905. This turn of events can be primarily traced to the
GOE’s decision to abandon its former survival strategies and embark upon fundamental

economic reform. With the GOE receptive to both the ESF’s largesse and the attached

 

83

policy recommendations, USAID’s role was immediately transformed from one of a
marginalized, ineffective proponent of change to that of a prominent source of funding and
expertise for a coordinated implementation of a common economic vision. This newfound
commonality has given USAID its traditional leverage to promote reform in recipient
nations, as compared to its former perceived role as the uncomfortable dispenser of
unconditional ESF largesse. The impact of the macro-economic environment’s change I
upon USAID’s fortunes as champion of policy reform should theoretically parallel an
increase in policy reform and the resulting positive impact of said reform at the ﬁrm level,

in this case, ARENTO. i

 

2.4. ARENTO Performance under New Policy Environment

The above proposition is supported, with respect to the telecommunications sector, by
over a decade of sector reform attempted in varied circumstances and environments.
Analysis of these reform efforts has shown that the political and economic environment of
a developing country determines the breadth and depth of telecommunications reform.
The degree of political commitment to broad multisector restructuring, the ability to
enhance factor mobility and supply response, and the suitability of the political process for
reaching decisions on issues with economy-wide implications are the principal parameters
that deﬁne the scope of sector reforms. Hence, the options for organizational and
structural changes in telecom can not be seen in isolation. Ultimately, the pace of reform
and the extent to which its potential beneﬁts can be harnessed will be contingent on the
capability of government to create an environment that promotes efficiency and enables

private investment and initiative. (W ellenius, et. al. 1994. 71)

84

The new macro-economic environment’s possibilities and limitations could be seen in
ARENTO’s efforts to beneﬁt from the elimination of one of its largest obstacles. Freed
from the encumbrances of being a wholly owned state enterprise since 1982, it was not
until a decade later that the environment seemed suitable for ARENTO to experiment with
its new status. In early 1992, ARENTO ﬂoated a tender inviting bids for the operation of
a cellular service in a separate joint venture company in which ARENTO would have a
stake. This project was intended to be one of Egypt’s ﬁrst privatized ventures, in which
one or more foreign cellular operators would build, operate, and earn proﬁts from a
nationwide cellular phone system. The foreign operator would have worked under the
general supervision of ARENTO and paid annual fees to ARENTO, thereby giving Egypt
a modern cellular system with no drain on ARENTO’s or the GOE’s national budget.
(Jensen. 1)

Despite its auspicious beginning and its role as a harbinger of the new economic
system, the tender was canceled by the GOE in April 1994. Reasons given for the
cancellation range from security concerns and rumors of leaked tenders beneﬁting sons of
high officials. It was also said that the private companies involved in the deal simply tried
to drive too hard a bargain. (EIU. Second Quarter. 1996) ARENTO, however, was
determined to pursue the project because of the high proﬁt margin possible from such a
new (not subject to existing subsidized tariffs) high-value service. The tenders were
reissued for a govemment-operated cellular phone system in phases, as ARENTO self-
ﬁnancing funds were available. (Jensen. 1) An $18 million contract was awarded to
Alcatel of France for the 70,000- subscriber Global System for Mobile Communications

(GSM) network in 1995. Alcatel was to provide a full turnkey mobile communication

85

network, comprising two high-capacity mobile switching systems and some 150 GSM
base stations, by March 30, 1997. However, coverage of Greater Cairo has to be
operational by mid-October, in time to iron out any faults in the system before the Middle
East and North Aﬁica Economic Summit in Cairo on November 12-14. (EIU. Country
Proﬁle. 1996)
2.4.1. ARENTO’s Current and Future Five Year Plans

During the same time frame, ARENTO submitted an ambitious ﬁve-year plan (1992 -
1997) to the GOE. It proposed a capital investment outlay of $1.5 billion, with the
intention of installing 300 to 500,000 digital lines annually during the course of this plan.
(Kapor. 4) ARENTO’s ultimate goals were to increase telephone density ﬁ'om less than
ﬁve percent of the population to seven percent, and to reduce the waiting time for
provision of service to a maximum of four years. At the end of 1996, ARENTO had an
installed base of approximately 4 million main lines, giving Egypt a telephone penetration
rate of around 6.6 percent (12 percent for Cairo and Alexandria). By the end of July
1997 , the number of main lines was expected to reach 4.5 million, achieving a phone
density of 7.25 percent. (Sandall. 1)

ARENTO’s next ﬁve year plan (1998-2002), calls for the installation of over one
million lines annually and an increase in network digitalization from approximately 45
percent to ninety-ﬁve percent. By the year 2002, it is expected that there will be a total of
8.6 million lines in service, thus achieving an overall teledensity of over 10 percent. In
keeping with ARENTO and their vendors tradition of dividing the country into spheres of
vendor inﬂuence (and ﬁnancing), ARENTO signed Memoranda of Understanding (MOUs)

for three “mega projects” with Alcatel (Nile Vision), Lucent Technologies (Golden

 

86

Pyranrid), and Siemens (Egypt 2000). All three projects and vendors will utilize
Synchronous Digital Hierarchy (SDH) technology, which will allow subscribers to use
enhanced telecom services, such as ISDN, frame relay, and ATM-based services. (Sandall.
2) This level of technological sophistication shows a concerted effort by ARENTO to
provide a telecommunications environment conducive to the new intemational-oriented
and market based economy, as well as expansion into the less regulated, and therefore.
more proﬁtable value-added services markets.

ARENTO’s expansion of its more proﬁtable market segments can also be seen in both
domestic and international long distance service provision. With domestic long distance
service to only seven cities in 1981, ARENTO has upgraded and expanded the service
coverage to 254 cities by the end of 1996. As a result, long distance is up ﬁ'om 53 million
minutes in 1981 to 2 billion rrrinutes in 1996. Simultaneously, impressive expansion has
also been achieved in ARENTO’s international long distance service - from 1981 to 1996,
international switching capacity increased from 160 lines to 8,060 lines and international
channels increased ﬁ'om 820 to 8,480. (Sandall. 1) With reference to the previously
discussed tariﬂ‘ gap between local and long distance service, the ﬂow of revenue, both in
local and hard currency, from such an extensive expansion effort would directly impact
ARENTO’S ﬁnancial standing and in turn, its ability to serve as a catalyst for Egyptian
economic development.

Although the experiment with private sector involvement in the provision of cellular
service failed in 1994, ARENTO is once again attempting a private-sector involved
project. In January 1997, ARENTO issued a pre-qualiﬁcation tender for the installation

and operation of 40,000 public pay phones. While the previous cellular attempt was an

 

87

ARENTO joint venture with the private sector, this effort will mark the ﬁrst wholly
private sector telecommunications entity to compete with ARENTO. With a requirement
that the licensee be at least 51 percent Egyptian owned, there is still a tentative nature to
private sector involvement. Regardless of the above condition, thirty-three companies
reportedly requested tender documents for this project. The eventual contract will be
divided between two companies with 20,000 lines each. Licenses will be for ten years,
subject to renewal based on performance. Decisions on the technology to be used and
pricing will be left to the discretion the bidder. (Sandall. 4)

In July 1997 ARENTO announced its intentions to once again experiment with
privatization in the cellular phone sector. As ARENTO’s most highly sought-after
service, cellular service and its underlying network’s expansion was being hindered by
ARENTO’s traditional means of project ﬁnancing - new subscriptions have not been
accepted since January 1998. To overcome this ﬁnancing limitation and experiment
ﬁrrther with the new economic order, the existing cellular phone service was to be
privatized. (N ando. 1) The February 15 offering for thirty percent of the Egyptian Mobile
Phone Services Company proved tremendously popular; it closed thirty-three percent
oversubscribed. The remaining seventy percent of joint venture stock are to be held by
ARENTO and its employees, twenty-eight and two percent, respectively, and another
forty percent to be held by Egypt’s four main banks (8% each) and two pension funds (4%
each). A further twenty-ﬁve percent stake, achieved by either reducing ARENTO’ s
holdings or through a capital increase, will be sold to a strategic investor, preferably a
large multinational operator in the near ﬁxture. The license for a second, private GSM

network was also put out to tender in early February. (EIU. First Quarter. 1998)

88

With privatization and liberalization gaining political and popular acceptance, it could
only be a matter of time before the state-owned telecommunications company became a
target - in late November 1997, President Mubarak indicated an ofﬁcial willingness to
relax the state monopoly on telecommunications. The Egyptian cabinet quickly concurred
— on December 29 they agreed to corporatize TelecomEgypt, formerly ARENTO, as a
ﬁrst step towards privatization. (EIU. First Quarter. 1998) These actions culminated in
parliament with the March 24 1998 passage of Law 19. TelecomEgypt, newly named the
Egyptian Telecommunications Company, was transformed into a joint-stock company.
Shares in the new entity could now be offered for public subscription provided that the
state retained a majority holding and a percentage of shares were sold to employees. Initial
plans were for a twenty percent tranche to be offered on the stock exchange by the end of
1998, in part to help set a market valuation on the company. (EIU. Second Quarter. 1998)
Public subscription could eventually rise to forty percent, with a further twenty-ﬁve
percent stake being sold to a strategic investor. Also included in Law 19 was the lifting of
TelecomEgypt’s monopoly status as Egypt’s sole provider of telephone services. This
liberalization of the telecommunications market necessitates the government establishing a
new national telecommunications regulatory agency. With large-scale privatization and
liberalization efforts now underway, Egypt’s telecommunications and economic
development policies now mirror those of a majority of developing countries. Any further
study into the relationship between telecommunications and economic development awaits
a consistent theoretical ﬁ'amework that properly addresses telecommunications’ role in

this new dominant macroeconomic paradigm.

89

v11. QNCLUSIQNS

A. Microeconomic Environment

ARENTO’s experience during this new macro-econonric environment is in agreement
with the telecommunications reform analysis cited at the beginning of this paper. Given
political resolve, emphasis on the executive branch in Egypt’s case, to carry out
widespread market-based economic reform and restructuring, the ability of a ﬁrm to more
effectively utilize its existing resources, as well as, expand into new areas is noticeably
enhanced. This conclusion is particularly glaring in ARENTO’s case because large
telecommunications investments made before macro-economic change were clearly not
delivering concomitantly large beneﬁts, either to ARENTO or the nation as a whole. In
comparison, the same telecommunications entity, operating under the new economic
environment, has been shown, in perspective, to be more aggressive and innovative in
addressing growing telecommunications demands and opportunities. As a result, the
larger economic environment in which the telecommunications entity operates must be
considered a crucial inﬂuence on the its performance and must be considered in any

evaluative effort.
B. Macroeconomic Environment

In order to address the inﬂuence of a country’s macroeconomic condition on
telecommunications’ ability to enhance economic development the time ﬁ'ame under
consideration must be subdivided into two distinct categories. The mutual beneﬁcial
merger of computer and communications technologies in the late 19705 and early 19805

proved to be the pivotal event in casting telecommunications’ role as a catalyst for

 

90

economic development. Prior to this convergence of technologies, telecommunications
was essentially a voice medium, with data transfer limited to governmental and large
business concerns. Its relation to economic development, given what now can be
considered technological limitations, was, even in the most conducive of macroeconomic
environments, at best, correlational. Following convergence and the resulting
improvement and addition of services, decreases in price and widespread accessibility, it
was now possible for telecommunications to assume a catalytic role in development, and
thus give rise to the correlational vs. causational argument. What this watershed event
marked was a difference in magnitude between the linear and the exponential affect of
telecommunications on economic development.

To discuss a country’s macroeconomic environment before this period is to provide
background on the environment that could, as argued in this paper, either enhance or
hinder the catalytic role afforded telecommunications by the aforementioned convergence.
Except for a few isolated cases, telecommunications was another state-owned, operated,
and regulated service provider. This near-ubiquitous PTT model went unquestioned until
the liberalization/privatization boom of the mid-19805 coalesced with the newly energized
telecommunications industry. The new telecommunications philosophy placed most of the
developing world in an uncomfortable position - the PTT model, as legitimized by its
continued use by the European industrialized nations, meshed well with the political and
macroeconomic policies pursued by many LDCs. As discussed earlier, the beneﬁts
derived from the model were both political and economic. At a minimurrr, abandonment
of the PT T model would require the government to forego these beneﬁts to achieve

hypothetical advancements in the telecommunications sector that would then positively

 

91

affect overall economic development. Even if the government were able to overcome the
inherent foreign technology and hard currency drawbacks of telecommunications, as well
as, the proponents of maintaining the status quo, the pseudo-autonomous
telecommunications entity would still interact with and be acted upon by the
macroeconomic environment in which it would still operate.

The macroeconomic environment in which ARENTO had to function during this
critical juncture was one based upon the integrative economic development approach.
ARENTO. as were most PTTs of the era, was an exemplary example of how the
integrative approach should function. As a basic utility in a self-sustaining system, it
provided service (with a high probability of no compensation) to other business entities,
employment opportunities, and of special signiﬁcance, hard currency revenues ﬁom
international service. Because its primary service was voice - even in the industrialized
nations, data communications was still in its infancy - limitations imposed on ARENTO
for the hypothetical good of the whole did not translate into a larger deprivation to
national development. Once technology imbued telecommunications with a catalytic role
in overall economic growth and development, the inherent restraints that the model
imposed on the telecommunications entity, as it did on all individual SOEs, could be seen
to hobble the ultimate goal of the model, national development.

While most LDCS were not able to embark upon large-scale inﬁastructure expansion
and upgrade because of drawbacks speciﬁc to the telecommunications ﬁeld, Egypt was
able to exploit its geopolitical advantage and the resulting extraordinary relationship with
the United States to launch such a large-scale modernization effort. Another result of this

relationship was the inability of USAID or any of the international lending institutions to

92

leverage their aid or loans to Egypt to promote any sort of substantive macroeconomic
reform. Thus, in this environment, ARENTO, as a single ﬁrm, had resources and technical
expertise lavished upon it while still ﬁrnctioning in, what in hindsight, can be considered a
less than optimal economic environment. These factors combined to create an
extraordinary test case for telecommunications as an engine of development model - the
majority of the rrricroeconomic constraints affecting the entity were either eliminated or
negated while virtually all macroeconomic variables were held constant.

Analysis of the USAID-led portion of Egypt’s massive telecommunications upgrade
efforts, demonstrate a limited positive beneﬁt to ARENTO’s ﬁnancial status; due primarily
to limitations - social responsibility goals - imposed on ARENTO by the macroeconomic
system. Taking into account additional beneﬁts delivered to other sectors of the economy
and the subscriber base, a far more positive return on investment was achieved. It is the
existence of these additional beneﬁts that provide legitimacy for state ownership of the
sector. However, these beneﬁts are derived from the traditional subsidization of one ﬁrm
or sector at the expense of another, rather than through externalities particular to the
sector, as postulated by telecommunications-for—growth advocates. When the
rehabilitation and modernization effort is evaluated with respect to its overall impact on
the Egyptian economy, the envisioned catalytic effect on national growth and development
seemed nonexistent. The telecommunications upgrade eﬁ’ort, taken in its entirety, was
proven to be a necessary, but not a necessary and sufficient condition for achieving
overarching economic goals.

ARENTO, restructured and modernized, was unable to demonstrate its ability as

econorrric catalyst until the macroeconomic restructuring of the early 19905. Not only did

 

.93

the new private-sector-led grth and international integration model guarantee
ARENTO’s strategic role, but also allowed it the opportunity to ﬁrlﬁll the role. Broad-
based economic liberalization freed ARENTO, the individual ﬁrm, of the more onerous
encumbrances of the former model as detailed earlier in the paper. Unshackled from these
restraints, ARENTO’s ability to respond to the demands of a market-driven economy have
been positively affected. Increased independence in the areas of tariffs. employment.
ﬁnancing, and provision of new services have thus far shown ARENTO to be more robust

and responsive under the new econonric model. While Egypt is beyond the ﬁrst tentative

 

steps of macroeconomic reform, it is still too early in the process to determine the ultimate
success of, or the level of telecommunications’ involvement in the effort. What can be
observed is that a ﬁrnctionally equivalent ARENTO, when granted more latitude as part of
an overall economic liberalization and restructuring effort, has been able to more
aggressively adopt and adapt to its enhanced role in economic development. As
demonstrated above, an appropriate macroeconomic environment is one of the necessary
conditions for telecommunications to fulﬁll its role as a catalyst, but to achieve a
conducive economic environment, the issue of a nation’s political environment comes to

the fore.
C. Political Environment

In response to the third question of this thesis, the political environment’s inﬂuence
over both the macro and microeconomic decisions is ubiquitous. The current Egyptian
regime’s actions, as heir to the ﬁrst coup de tat in Aﬁica, are still circumscribed by the
political choices that followed this precedent setting event. The overthrow of the

monarchy and the ultra-nationalistic tone of Egypt’s ﬁrst native born leader in over a

 

94

thousand years were inevitably contrary to the beneﬁciaries of the existing status quo.
Given the political instinct for self-preservation, the lack of a popular mandate and a large
number of opponents intent on subverting the new order, the oft observed pattern of such
a narrowly-based and tenuous LDC leadership to concentrate all existing and possible
sources of power and/or opposition in the hands of the state was evident in Egypt. This
control would in turn make the state the primary source for goods, services, prestige and
power - the major characteristic of the patron state. Able to dispense a full spectrum of
largesse, from basic necessities to blatant favoritism, the regime could then begin to build
its own loyal coalition. Having created a new coalition with a vested interest in
maintaining the new status quo, the regime gained increased legitimacy and
maneuverability to deal with its opponents - a reﬂection of the dual goals of a populist
authoritarian regime. With regime survivability as the primary goal and the consequent
subservience of any economic development plan to this priority, the impact of the political
on the macroeconomic environment and the both of these on an individual ﬁrm’s
effectiveness is clearly visible.

While the integrative economic development model can be pursued and justiﬁed for
purely economic goals, its central administrative control and attempted balancing of all the
economic actors in a closed system, make it a sound choice in fulﬁlling the objectives of
the populist authoritarian state. The regime acquires an economic rationale and
legitirnization for the arbitrary nature of its rule. Limited debate and discourse over the
economic program of the regime is acceptable because, by ﬁat, it accepts the regime and
its political environment as the unassailable status quo. Unfortunately, while the above

economic and political policies mutually reinforce each other and are therefore effective in

95

achieving the overriding goal of regime preservation, the intrinsic and mutually reinforcing
limitations of both, not only hinder, but negate economic development efforts - and as
discussed earlier are both highly resistant to overarching reform efforts attempting to
alleviate these limitations.

The limitations of the Egyptian political/economic system began to show strains within
the ﬁrst decade of its existence, not only from the enormity of the resources required,
human, ﬁnancial and physical, but from the cost of two wars and an extended border
conﬂict. This seven year perpetual conﬂict also perpetuated the system by providing
signiﬁcant popular distraction and added increased signiﬁcance to its primary goal of
regime preservation. With the ending of hostilities in 1974 forcing a reevaluation of
Egypt’s neglected economy upon the regime, Sadat implemented the its ﬁrst major
survival strategy. Buoyed by Egypt’s external rents, the political/economic system, with
minor modiﬁcation, was able to not only delay the inevitable day of reckoning, but present
an outward facade of economic grth and political stability.

It was into this environment, that the ﬁrst USAID telecommunication projects began to
provide the ﬁrst possibilities of transforming the moribund PTT into an engine of
development. A twenty-year master plan was created, new switches installed, outdated
physical plant replaced, and ARETO reorganized and restructured - everything a PTT, at
least on a nricroecononric level, required for assumption of its new responsibilities.
American assistance and advice was gratefully accepted, but not necessarily implemented
in a timely manner nor consistent with the original intent, particularly in areas concerning
alterations in the regime’s social pact with its coalition. The political/econonric system

was at its high-water mark during this period; the external rents made uncomfortable

96

changes such as subsidy elimination, employee cutbacks and autonomy, unnecessary and
Egypt’s new political relationship with the US. left USAII) unable to forcefully demand
these changes. Thus, the situation of ARETO improved, but to a far lesser extent than
was possible and much less than was needed for it to ﬁrlﬁll a development role.

The collapse of the oil market, all of its related revenue streams and the service
economy it had generated, once again brought the inherent limitations of the economic
system to the forefront. However, Egypt was still able to avoid ﬁrndamental and radical
change through an excessive accumulation of foreign debt, the continued ﬂow of foreign
aid into state coffers and the leveraging of its geopolitical relationship with the US. In
spite of an ever-worsening domestic economic situation and a concomitant increasing of
pressure from the international community, Egypt doggedly maintained the untenable.
Unswerving devotion to the tenets of the integrative economic development model aside,
the holistic, all-sectors-in-balance approach ﬁnds nricroecononric reform abhorrent
because it attacks the very foundations of its being, but more importantly the reform
promoted by the international community called for the regime to proactively deprive its
supporting coalition of the largesse upon which it was initially founded - a call to ﬂirt with
self-destruction. In choosing between the uncertainties of a painﬁrl and possibly fatal
reform program or managing and thereby prolonging the known crisis, the Egyptian

regime has always chosen the latter.
1. Telecommunications vis a vis the Political Environment
Having overcome the two largest obstacles which prevent most of its LDC peers from

positioning telecommunications as a catalyst for national development - foreign

technology with a short life cycle and its tremendous drain on hard currency reserves,

97

ARENTO was unable to maximize the beneﬁts of its new inﬁ'astructure. As detailed in
the section on American policy towards Egypt and the limitations this placed on USAID,
ARENTO was both blessed and cursed by politics, both domestic and foreign. Egypt, as
the largest of Economic Support Fund recipients was able to update its communications
infrastructure in a relatively short time frame for a minimum of Egyptian commitment,
either ﬁnancial or with regards to policy implementation. As part of a larger guaranteed
“political” package, Egypt felt little pressure to implement agreed upon reform and
organizational conditions. This newly revamped telecommunications entity may or may
not have been able to become a catalyst for heightened economic growth but the economy
was growing at its fastest rate in modern history and saw little reason to interfere with any
part of its “working” economic model or upset any members of its coalition through
subsidy reduction. The collapse of the oil boom brought the feasibility of the entire
government patronage system into question, as well as to the brink of collapse. As the
regime was forced to defend the entire system against the conditions mandated for
international debt relief, reform at the sector level, especially reform that so closely
mirrored that which was demanded for the economy as a whole, was politically untenable.
Thus the potential of telecommunications was underutilized and an opportunity
squandered in both the best and worst of macroeconomic conditions - notably, the one
constant throughout was the regime’s political methodology and its preeminence over all

else.

D. Counterfactual Ar_'gr_1ment for Telecommunications Sector Reform
Given the background information and analysis of Egypt’s economic and political

environments, it is possible to present a counterfactual case in which ARENTO was

 

98

allowed to “corporatize” and the telecommunications sector was liberalized. If, by ﬁat,
the recommendations of USAID had been implemented on agreed upon schedules in the
early 19805, the affect of an unfettered ARENTO upon the Egyptian economy can be
predicted. ARENTO’s microeconomic condition would have improved immediately.
Relieving it of forced hiring quotas, mandatory revenue treasury transfers and service
subsidization, amongst other hindrances would have immediately improved the its ﬁnancial
condition and put ARENTO in good stead on the international ﬁnancial market, both of
which would have granted it access to the ﬁnancial resources necessary to aggressively
expand both the quality and quantity of services of an already modern communications
infrastructure. The immediate beneﬁt to the tourist, ﬁnancial, trade and multinational
segments of the economy are self-evident, but all of these sectors were principal
beneﬁciaries of the oil boom service-led economy of the era and quite possibly would have
experienced only linear growth because of enhanced telecommunication service.
Considering the ultimate result of this service led grth effort, could very well negate
whatever contribution telecommunications could have made. Also negated is Egypt’s
ability to exploit its new network and freedom to serve as a regional communications hub
for Middle Eastern business because part of the initial price paid for America’s largesse
was peace with Israel and the resultant isolation of Egypt from the Arab World for the
entire boom period. Contributions to economic growth would have to come from the
efficiencies brought from the more timely and effective use of information by Egypt’s state
owned enterprises and government and new industries expedited or created from the
communications boom. Given the overriding social functions, cross subsidization and

overall bureaucratic nature of the SOEs and of the Egyptian government itself, improved

99

information access and distribution seems highly unlikely to have turned the tide of
inefficiency and red ink endemic to the public sphere of the economy. The latter
possibility of new industries does have credence, but the limitations as discussed under the
Open Door Policy would have had a negating effect and even if that were not the case, the
creation of enough new privately owned new businesses to support overall economic
deﬁciencies is doubtful. Ultimately, it can be assumed that, barring any other changes to
the economy, its collapse at the end of the boom could neither have been prevented nor

softened by the implementation of “appropriate” policies in the telecommunications ﬁeld.

VIII. TELECOMMUNICATIONS SECTOR REFORM —

GENERALIZATIZED CONCLUSIONS

While Egyptian telecommunications sector reform and its affect on national economic
development is a unique case study, the conclusions of this study are in agreement with a
number of country speciﬁc and country comparison research efforts. In Implementing
Reform in the Telecommunications Sector - Lessons ﬁom Experience. Peter Scherer
argues the range and impact of telecommunications reform are intrinsically linked to the
broader economic reform agenda. Successﬁrl restructuring toward international
competitiveness typically would include actions in the following areas:

I Macroeconomic policies geared toward providing a stable business environment based
on prudent ﬁscal, monetary, and exchange rate policies.

I Effective competition policies combining phased import liberalization, changes in
regulations to reduce barriers to entry and exit, promotion of export rivalry.

I Liberalization of factor and output prices combined with competitive deregulation of
ﬁnancial and capital markets.

I Provision of effective institutional and inﬁastructure services, including the
establishment of a credible administration, sound governance, and development of
human resources, power, transport, and telecommunications. (W ellenius, eta]. 1994.
69-70)

100

In Egypt, each of the above conditions was proved a necessary requirement - as the
government reluctantly admitted to the unfeasibility of status quo preservation and had to
opt for true reform, the above conditions were clearly a ﬁrndamental part of the reform
effort. The same research effort found that, although organization and management
improvements within the telecommunications operating enterprises of several developing
countries did result in a more efficient use of scarce resources, if sector policies did not
provide the necessary freedoms and incentives for these entities to perform better, internal
changes alone had proved to be of limited value. (W ellenius, et. al. 1994. 17) As
discussed earlier, for the corporatized ARENTO to ﬁrlly utilize its new capabilities, it had
to wait a decade for a “ﬁiendly” Egyptian macroeconomic environment. This bares out
Scherer’s hypothesis that the economywide incentive system is more important than
ownership for effective modernization of telecommunications. (W ellenius, et. al. 22)

When the World Bank summarized the lessons of the 19705 and 19805 about
development in its 1991 World Development Report, it could have served as a succinct
description of Egypt’s experience: “Sound ﬁscal and monetary policy create a hospitable
climate for private investment and thus promote productivity. . . .Macroecononric stability
certainly does not by itself lead to development - but without it all other efforts are likely
to be in vain.” (Barkey. 222) It could also be added that without the political will to
embark upon and endure the protracted macroeconomic reform process, true economic
development and grth will always be overshadowed by uninspired efforts to respond to

the symptoms of a perpetual economic crisis.

 

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