FROM THE ECONOMIST INTELLIGENCE UNIT

Internet penetration has grown rapidly since 2000, mainly because of a number of government and private-sector incentives. Nevertheless, electronic commerce is in its infancy in Egypt. Consumer mistrust of online transactions and a lack of legal clarity have been blamed for the stunted development of e-commerce, but low overall rates of computer and Internet use also are a major barrier. The Ministry of Communications and Information Technology (MCIT) was formed in 1999 with a mandate to upgrade the country’s telecoms infrastructure and to create a vibrant information-technology industry. Under the leadership of its previous minister, Ahmed Nazif (now the prime minister), it stood out as one of Egypt’s more progressive government institutions. But since some seats on the boards of the National Telecommunications Regulatory Authority and the Information Technology Industry Development Authority are reserved for defence and intelligence officials, there is a strong degree of caution in opening these sectors to foreign participation.

Several factors will continue to hamper e-commerce: low rates of computer literacy and penetration, low spending power and low use of credit cards. According to the MCIT’s most recent data, there were only 2.85 personal computers (PCs) for every 100 persons in 2005. The MCIT cites sales of 130,000 low-cost personal computers under its “PC for every home” scheme that began in 2002, an initiative designed to give consumers easy credit based on their phone bills to buy affordable computers. The ministry’s goal is to reach 4m computers, which would be one computer for every four families. Still, this does not necessarily represent a significant pool of e-commerce customers. Internet cafés are common in Cairo and Alexandria, but access is still limited in other cities.

The overall number of Internet users is growing, but the rate of growth has slowed since 2005. MCIT estimates put the number of users at 6.78m in May 2007, up from 5.3m in May 2006. Of the users, 53% are in Cairo and 32% are in the Nile delta and on the north coast, with the balance more tilted towards Cairo for high-speed subscribers, according to the MCIT’s May 2007 newsletter. The government has encouraged Internet access via “IT clubs” throughout the country. These are government-funded IT centres, often attached to sport or youth clubs, offering Internet access and basic computer classes. The network of clubs grew from 30 in 1999 to 1,293 in 2005 and to 1,525 in May 2007.

Rapid growth has been encouraged by government-sponsored “Free Internet” services, which started in January 2002, when the country had fewer than 750,000 Internet users. Conceived as a partnership between Telecom Egypt (TE), the national fixed-line carrier, and a variety of private-sector Internet service providers (ISPs), Free Internet is available in all of Egypt’s governorates. With Free Internet, dial-up users can log on anytime for the cost of a local phone call—E£0.10 (less than US$0.02) for six minutes. TE turns over 70% of the value of each Internet call to the appropriate ISP. As a result, ISPs have engaged in aggressive advertising of their eight-digit Free Internet dial-up numbers, all of which start with “0707” or “0777”. Inevitably, the new system contributed to rapid attrition among the country’s nearly 130 ISPs, most of which have now been absorbed by the four leading local Internet companies.

Leased lines are expensive and are aimed primarily at corporate users, though ADSL lines are cheaper. Rates have fallen, however, since the announcement of a new “broadband initiative” in May 2004. This introduced low rates for ADSL subscriptions, starting at less than E£150 (US$25) per month for a 256-kbps line. The initiative aimed to boost ADSL subscriptions from a starting point of 4,000 pre-existing lines to 80,000 within three years. The National Telecom Regulatory Authority cut ADSL prices by another 40% in June 2006 in order to boost the number of broadband users from 130,000 at the end of May 2006 to 500,000 by the end of 2007 (there were about 262,000 ADSL subscribers in May 2007). As with Free Internet, the government is offering the subsidised ADSL service through a partnership with private-sector ISPs. The four major private-sector ISPs control 95% of the broadband market. The cost of higher-capacity ISDN lines are still out of reach for all but large companies.

An earlier law drafted by the MCIT, Law 10/2003, calls for liberalising the telecoms sector under the oversight of the National Telecommunications Regulatory Authority. Law 10 aims to bring Egypt into conformity with the World Trade Organisation’s Basic Telecommunications Agreement. The law called for an end to Telecom Egypt’s monopoly on fixed-line services by the end of 2005. Tarek Kamel, the communications minister, announced in May 2007 that a second fixed-telephone licence would be issued in 2009, ending state-owned Telecom Egypt’s monopoly over the voice-telephony market. Licences for WiMax, a wireless Internet technology for large areas, and voice over Internet protocol (VoIP), an Internet-telephony technology, have been discussed, but no deadline has been set for their issuance.

The government has also tried to nurture local information-technology start-ups through Ideavelopers, a business “incubator”, formed in October 2001 as a joint venture between Telecom Egypt and EFG-Hermes Private Equity, Egypt’s largest private-equity group. In 2004 the government set up the Technology Development Fund, an incubator that is Egypt’s first venture-capital fund dedicated specifically to encouraging IT start-ups. Although backed by the MCIT, the fund is a privately run, for-profit institution managed by EFG-Hermes Private Equity.

Growth of e-commerce

Egypt has both business-to-business (B2B) and business-to-consumer (B2C) e-commerce. Sherif Kamel, a professor at the American University in Cairo, estimated that only about 250 of an estimated 5,000 websites based in Egypt at the end of 2003 were dedicated to e-commerce. Of these, fewer than 20 had established strong name recognition in the consumer market. There was consolidation of dotcom start-ups in 2003–04; LinkDotNet (the market leader, owned by Orascom Telecom) acquired control of some 12 sites. A further round of consolidation was announced in May 2007.

Computer penetration is much higher within the business community than the general population, suggesting greater potential for B2B than B2C sites. Large Egyptian companies have started using in-house websites to manage inventory.

Sectors now covered by Egyptian B2C sites include stockmarket trading, real property, food delivery, lifestyle products, Egyptian handicrafts, furniture and human-resources industries. A few news portals attract a steady readership, but efforts to turn these into wide-ranging e-commerce sites have been notably unsuccessful.

One problem with e-commerce growth is trust. Although Egyptian credit-card holders are gradually becoming used to using their credit cards on international sites such as Amazon.com, they are still wary of using their credit cards on domestic sites. Otlob.com, a portal that acts as an intermediary between customers and restaurants offering food delivery, gets around the problem by adding its service charge to the bill paid by the customer when food arrives. The customer pays this bill in cash to the restaurant. The food retailer then transfers this charge to Otlob. Yallabina.com, a site dedicated to entertainment, began selling tickets online through credit cards in 2005, with some success. The target market for this kind of e-commerce is necessarily limited to a small segment of the population that has regular computer access and credit cards. Otlob.com, Yallabina.com and two other e-commerce companies announced in May 2007 that they would form an integrated ordering service.

Local banks have introduced credit and debit cards designed for online shopping. Few Egyptians have credit cards, but these new cards are designed for online shopping only. They particularly target teenagers and young adults who cannot obtain credit cards themselves.

The Central Bank of Egypt has licensed 11 banks (both local and foreign, but all in the private sector) to conduct electronic-banking. Among these are Citibank Egypt and HSBC Egypt. But the scope of transactions that can be conducted online is still relatively limited. Citibank allows customers to pay their mobile-phone bills online if they are customers of Vodafone Egypt.

The electronic-signature law, passed in 2004, should eventually help expand online banking services, although few banks were offering full-fledged online banking as at July 2007. The law gives legal force to electronic signatures and calls for the creation of a new authority, the Information Technology Industry Development Authority, to promote and regulate e-commerce. Article 3 of the law suggests that small and medium-sized enterprises will be encouraged to use e-commerce marketing methods.

The government has attempted to introduce a number of sites that let citizens deal with the government online. The Egyptian Government Services Portal is the flagship site for this, and it provides citizens with the materials necessary to begin applications for ID cards, birth and marriage certificates, and driving licences. But users generally must go to the relevant government office in person to complete the process.

In July 2006 the Information Technology Industry Development Agency issued four licences to Security and Network Services, Egypt Trust, Advanced Computer Technology, and Misr for Central Clearing and Depository and Registry (MCDR) for the launch of electronic-signature solutions on the Egyptian market. This is to be a precursor to the introduction of wider use of electronic signatures on legal documents, notably in official bureaucracy.

Foreign investment

The electronic-signature law, Law 15/2004, says that the Information Technology Industry Development Authority will be expected to “direct, encourage and develop investments in communications and information technology”. The law does not distinguish between domestic and foreign investors. In general, foreign investors can expect a co-operative attitude from the government for projects that will generate local employment and result in transfers of technology or know-how into Egypt. The telecommunications and information-technology (IT) sectors have generated much interest from foreign investors in recent years; in November 2006 Egypt secured a record US$1.9bn fee for a third mobile licence, purchased by Etisalat (Dubai).

The Ministry of Communications and Information Technology (MCIT), under Ahmed Nazif and his successor, Tarek Kamel, has aggressively pursued foreign investors and has won significant investment from a number of major IT firms. These include Equant (France) and International Business Machines (IBM), Microsoft and Oracle (all US). A number of local firms have developed long-term relationships with foreign firms, resulting in further investment. The ministry offers both formal and ad hoc incentives to encourage investments in IT and e-commerce. Foreign IT investors benefit from a moratorium on customs and sales taxes on software and IT services and a reduction of sales taxes on computers. Sales tax exemptions are unaffected. The ministry has generally shown a strong willingness to intercede with other government departments on behalf of major foreign investors.

The ministry’s Communications and Information Technology (CIT) plan envisions a series of IT-related “smart villages” around the country, which offer high-tech infrastructure, low-cost land and tax exemptions for export-related ventures. The first of the proposed high-tech free zones, the Pyramids Smart Village, opened in September 2003, with Alcatel (France) and Microsoft (US) as its first tenants. The Smart Village is home to many of Egypt’s booming call-centre businesses, some of which offer technical support to Oracle and Microsoft customers in the Middle East. The government sees the Smart Village as a competitor to similar projects, such as Internet City in Dubai, with Egypt offering lower labour costs than in the Gulf and the capability of serving both the entire Arabic-speaking world and Europe.

Intellectual property

Measures to protect intellectual-property rights (IPR) are based on Law 82/2002. Although the law explicitly mentions software and electronic data as items subject to copyright protection, software associations based in the United States continue to deem Egypt’s IPR safeguards as inadequate.

Law 15, the electronic-signature law, was issued in April 2004 and went into effect on May 26th 2005, with Ministerial Decree 109/2005. The law and its executive regulations provide legal standing for electronic signatures with the aim of stimulating e-commerce growth by providing an amenable regulatory environment and bolstering IPR protection. The law calls for the formation of a regulator, the Information Technology Industry Development Authority (ITIDA), under the aegis of the Ministry of Communications and Information Technology. The authority is to encourage the use of “electronic dealing mechanisms” by small and medium-sized enterprises and to promote exports in telecommunications and information technology.

The ITIDA began operations in 2005, and it has begun preparing to issue code keys for electronic-signature transactions. The keys will be issued to Certificate Service Providers, which the government will license. Four companies received a licence from the ITIDA in July 2006: Security and Network Services, Egypt Trust, Advanced Computer Technology, and Misr for Central Clearing, Depository and Registry. The ITIDA is also responsible for protecting electronic intellectual-property rights, and has signed a number of protocols with Egyptian IPR users, such as the Alexandria Chamber of Commerce and the E-learning and Business Solutions Union, a non-governmental organisation.

Neither the electronic-signature law nor the IPR law specifies legal protections for e-commerce brands or marketing concepts.

Consumer protection

The electronic-signature law, Law 15/2004, provides for fines of E£10,000–100,000 for faking or intentionally misusing electronic signatures or electronic documents. All entities engaged in e-commerce in Egypt will have to be licensed by the Information Technology Industry Development Authority (ITIDA), which began operations in 2005.

Under Ministerial Decree 109/2005, the ITIDA will establish the requirements for electronic-ratification certificates to validate e-commerce transactions. Article 22 permits foreign entities with ITIDA accreditation to issue such certificates.

Contract law and dispute resolution

The electronic-signature law, Law 15/2004, adds nothing to existing legislation concerning contracts or dispute resolution, although the legal acceptance of electronic signatures should mean that the same laws apply to e-commerce as to other commercial agreements. Under Article 4, the Information Technology Industry Development Authority will probably provide “technical consultation” for e-commerce or electronic-signature disputes.

Basis of taxation

E-commerce transactions taking place entirely in Egypt are taxable. Article 5 of Law 15/2004, the e-signature law, entitles the Information Technology Industry Development Authority to collect a 1% duty on revenues from communications and information-technology businesses to support the development of the industry.

There is no legislation dealing with the issue of residence from the point of view of electronic commerce, although Article 22 implies that foreign websites may need an Egyptian licence to sell to online customers in Egypt. However, in practise, no licence is required.

Classification of e-commerce transactions

The electronic-signature law, Law 15/2004, avoids defining e-commerce, concentrating instead on the nature of the electronic signature. Moreover, the law does not attempt to subdivide “electronic dealings” into particular categories.

Compliance and enforcement issues

Article 25 of the electronic-signature law, Law 15/2004, empowers staff at the Information Technology Industry Development Authority as “law officers” specifically to enforce this law. Article 13 may require companies and other entities engaging in e-commerce to submit statistical reports on their activities to the authority. However, this has not been happening on a comprehensive basis. Agencies with a national-security function, such as the armed forces, are exempt from this requirement.

SOURCE: COUNTRY COMMERCE

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