Foreign investor interest in Ethiopia’s telecommunications sector is cooling, sector experts and those with knowledge of the licencing process say, pointing to a bumpy first two years operating in the country for Safaricom, the only company so far granted a licence to compete with state-owned Ethio Telecom.

Telecoms was once seen as the big prize of a drive to liberalise the economy of Ethiopia, Africa’s second most populous country with around 120 million people, launched after Prime Minister Abiy Ahmed took power in 2018.

But legislative changes, recurring security problems and concern about the government’s commitment to opening up a tightly controlled economy to true competition are deterring possible investors.

When Ethiopia solicited bids in 2020 for the country’s first private telecoms licences it touted duty-free capital goods imports and temporary income tax exemptions as incentives for new telecoms investors, according to portions of the request for proposals.

Two years later — and one year after Kenya’s Safaricom won the first licence — investment regulations enacted by the government did not include telecoms on the list of investment areas entitled to these fiscal incentives.

Safaricom declined to comment on the regulatory changes, whose implications for telecoms companies have not been previously reported. The finance ministry and a spokesman for Prime Minister Abiy did not respond to written questions about Safaricom’s challenges and the incentives.

‘Learnt fast’

Russell Southwood, the CEO of Balancing Act telecoms consultancy and author of Africa 2.0, a book about mobile and internet technology on the continent, said telecoms investors doubted the government’s commitment to true competition.

“You can never be quite clear what it is the Ethiopian government is doing,” he said. “It’s liberalising one minute and then the next minute it’s taking everything back.”

Last month, regulators said they had suspended the process to issue a third telecoms licence after potential investors said the conditions on offer needed to be improved.

Read: Vodacom interim profit hit by Ethiopia start-up losses

France’s Orange said then that it had withdrawn from the process to buy an up to 45% stake in Ethio Telecom, because “the conditions do not allow for the rapid deployment of our strategy”.

Safaricom said in response to written questions that it had “learnt fast” during its first two years in Ethiopia and there had been “an enthusiastic uptake” of its products and services.

Safaricom said last month it had signed up seven million users, including 4.1 million active customers over the past three months after launching its network in October 2022, and had 1.2 million customers for its mobile money service M-Pesa, launched in August.

The company, owned by the Kenyan government, South Africa’s Vodacom Group and Britain’s Vodafone Group, did not comment on specific challenges it faced.

It expects earnings in Ethiopia to break even in the 2026 fiscal year. Early losses in Ethiopia have dragged down the company’s overall earnings but analysts say the performance is broadly in line with expectations.

Ethio Telecom’s profit more than doubled in its latest financial year and it has more than 72 million subscribers.

Eyob Tekalign, a senior Ethiopian finance ministry official, attributed delays in awarding the third telecoms licence to difficult economic conditions globally and in Ethiopia. The country is dealing with inflation of 30% and is on the brink of a debt default after missing a coupon payment on a US$1-billion international bond.

If investors choose to come at “a different time frame, I think we’re fine with it”, Eyob said.

Mehrteab Leul, the managing partner of a law firm in the capital Addis Ababa that advises foreign investors, said the setbacks were temporary and investors would remain interested.

Cooled

But with foreign exchange shortages crippling many businesses, Ethiopia needs fresh injections of capital, said Patrick Heinisch, emerging markets economist at Helaba Bank.

The telecoms sector had initially attracted interest from a range of major operators — including Etisalat, MTN, Saudi Telecom and Telkom South Africa. Enthusiasm had, however, cooled by the time bids came due in April 2021 for the first two licences, largely due to concerns about the November 2020 outbreak of civil war in the northern Tigray region. The war ended last year, although separate fighting has continued elsewhere in the country.

Read: M-Pesa launched in Ethiopia

Only South Africa’s MTN and a consortium led by Safaricom tabled bids in 2021. The latter’s $850-million bid was accepted, while MTN’s offer of $600-million was rejected as too low.

One major struggle for Safaricom has been getting equipment through customs, according to a Western diplomat and an industry insider, who both spoke on condition of anonymity. Import duties can only be waived by the finance ministry on a case-by-case basis, which has led to repeated delays, said the industry insider. Safaricom did not respond to a request for comment on this point.

The person, who has knowledge of the telecoms licencing process, said this was one of several examples of the government favouring Ethio Telecom at Safaricom’s expense, including encouraging state-owned utilities to favour Ethio Telecom’s payments system. Eyob denied any such practices.

“These issues, which promote anti-competitive practices, have made other potential bidders for the third telecoms licence lose interest,” the person said. — Aaron Ross and Dawit Endeshaw, with Nqobile Dludla and Hadeel Al Sayegh, (c) 2023 Reuters