ESLSCA – Group 40F Strategic Audit Report (2014 – 19) Dr. Ashraf Sheta Prepared By: Ahmed AboShady Ahmed Talaat Ahmed Tawfik Ali Al-Sheikh Nesma Hussein  2 Executive Summary The preparation of the 2014-2019 Strategic Plan was carried out in a participatory manner that brought together all departments and units as well as the entire Mobinil leadership. This was considered critical to ensure a common understanding, ownership, and commitment to sharing and implementing the strategy. While the top management is the primary custodian and driver of the strategic direction that Mobinil takes, all other members of staff must also own the strategy and implement it even as they remain alert to the changing environment and adapting the strategy as necessary. The approach adopted in the preparation of this Strategic Plan was therefore aimed at embedding this dynamism within Mobinil through comprehensive understanding and ensuring that strategic orientation is a continuous process. The key elements agreed within the strategic planning framework are briefly set out in this Executive Summary. One of the most essential elements in a strategic plan is a clear, concise and memorable statement that can help an organization to use all its energies and resources towards that purpose. Above all, it is not just the words included in the mission statement that help an organization to align and focus on its purpose, but the process of defining the statement is critical in ensuring that there is comprehensive understanding and ownership within the organization. Within this mission statement, the core and unique role played by Mobinil is “To create value for all stakeholders”. The Mission statement will serve to refocus the Mobinil staff as well as provide clarity to all stakeholders on Mobinil core function. Mobinil faces a number of challenges in its endeavour to achieve this mission. The challenges emanate from both the internal and external environments and include a rapidly evolving technological trends, new entrants, new regulatory framework, and high expectations from stakeholders. Mobinil has instituted a number of strategies to mitigate the risks posed by these challenges. Additionally, Mobinil has identified a set of values to guide its operations for the next five years. The vision of Mobinil is aligned with the mission statement and the core function of Mobinil which is creating value for all stakeholders. 3 Table of Contents ............................................................................................4 .....................................................................................6 ............................................................................................................8 ..........................................................................................................8 .....................................................................................................8 .................................................................................8 .......................................................................11 ....................................................................12 ....................12 ...................................................................12 ............................................................12 .........................................................13 ...............................................................14 ......................................................14 .................................................................................16 ......................................................................................17 .......................................................................17 ................................................ ..........................................17 .........................................17 ...........................................17 ........................................17 .............................................................................17 ...............................................................................18 ...............................................................18 ..............................................................................18 ..........................................................................................................18  4 Company profile The Egyptian Company for Mobile Services (Mobinil) is the first mobile phone operator in Egypt; it was initially established in November 1997 by the state-owned Arab Republic of Egypt National Telecommunication Organization (ARENTO) which was succeeded by Telecom Egypt. The company commenced its operations in May 1998, when all the mobile related assets of TE were sold off to Mobinil Telecommunications, a consortium comprised of one local and two international telecom giants, Orascom Telecom Holding (OTH), France Telecom (FT) and Motorola. Now the company is majority owned and fully consolidated by France Telecom (Orange), which owns 93.92% of the shares, 5% of the shares owned by Orascom Telecom which was founded by the Egyptian billionaire Naguib Sawiris & 1.08% free float. Mobile is honouring the trust of more than 34 million customers in Egypt, providing the best quality service for customers, the best working environment for employees, top value for shareholders & proudly contributing to the development of the community. Mobinil was the first telecom company to receive ISO 14001 certificate in Egypt and the Middle East; It has also obtained official renewal of the ISO 14001 for the fifth consecutive year. Over the past 15 years, Mobinil has delivered on its promise to millions of customers, whose confidence in the reliability of our services has reinforced this solid leadership position. This confidence was reaffirmed in a recent nationwide survey by the National Telecommunications Regulatory Authority [NTRA], where Mobinil customers reported over 97% satisfaction rate in the products, services, and customer service levels offered during 2007. 4.2 Mobinil Subsidiaries: Mobinil for Importing (S.A.E): Company Activity: Importing all kind of equipment used in building and operating the mobile business and IT; handsets, computers, laptops and all their respective accessories and spare parts. Ownership structure 98% The Egyptian Company for mobile Services S.A.E. 1% Mobinil Telecommunications S.A.E. 1% Mobinil Services S.A.E. Mobinil Services: Company Activity: Selling mobile handsets, its accessories, and requisites. Ownership structure 96% The Egyptian Company for mobile Services S.A.E. 2% Mobinil Telecommunications S.A.E. 2% Orascom Telecom Holding S.A.E.  5 Current performance 5.1 Details of listing: Listing Date 10/5/1998 Instrument Type Nominal Shares Shares Condition Registered Par/Nominal Value 10 L.E Number of Issuances Two issuances Issuances Details The first issuance is worth 600 MEGP distributed over 60 million shares with par value of 10 EGP. The second issuance is worth 400 MEGP distributed over 40 million shares with par value of 10 EGP. Listed Shares 100 million shares. Paid-up Capital One billion Egyptian pounds. Authorized Capital Three billion Egyptian pounds. Financial Year Begins on the first of January and ends on 31 December of each year. 5.2 Shareholders breakdown: Name % Nationality MT Telecom SCRL 93.90% France OTMT 5.00% Egypt Others 1.10% Different As at December 31, 2012, the company directly owns the following consolidated subsidiaries: Company Name Ownership Mobinil Services (Egyptian Joint Stock Company) 96% Mobinil for Importing (Egyptian Joint Stock Company) 98% LINKdotNET (Egyptian Joint Stock Company) 99.99% Link Egypt for Trading and Services (Egyptian Joint Stock Company) 99.99% Link One for Telecommunication Services (Egyptian Joint Stock Company) 99.75 % Employees share plan (Trust) Controlled Mobinil for Telecommunication owns 2% in Mobinil Services and 1% in Mobinil for Importing. Mobinil Services owns 1% in Mobinil for Importing. The Trust established for the employees share plan of the company. 5.3 Financial Performance: The following table compare between 2011 performance and 2012: (Figures in MEGP) Item 2011 2012 -/+ (%) Revenues 10,182 10,340 + 1.6 % Gross Margin 7,639 7,620 (0.2) % EBITDA 3,258 3,285 + 0.8 % Net Profit/Loss (253) (231) + 8.6 % CAPEX 1,935 2,136 + 10.4 % Net debt 7,156 7,090 (0.9) % 5.4 Comments on the financial performance: Total revenues for the year ended 31 December 2012 reached 10,340 MEGP, compared to 10,182 MEGP over the same period (2011), with an increase of 1.6%. Gross profit margin witness a slight decrease in 2012 as it decrease from 7,639 MEGP to 7,620 MEGP (0.2) %. EBITDA (earnings before interest, tax, depreciation and amortization) for the year ended 31 December 2012 were 3,285 MEGP compared to 3,258 MEGP during 2011 with an increase of 0.8%. CAPEX increased from 1,935 MEGP in 2011 to reach 2,136 MEGP in 2012 representing about 10.4% Net debts as of December 31, 2012 reached 7,090 MEGP compared to net debts of 7,156 MEGP at December 31, 2011, with a decrease of 0.9%. The company still in the loss field as it has a Net loss of 231 MEGP compared to 2011 net loss of 253 MEGP, that is refer mainly to the high operating expenses which represent about 90% of the total revenues. 6 Vision “Become the preferred communication services provider in Egypt." 7 Mission “Providing the best customer experience, being a desired employer, creating value for our shareholders and proudly contributing to the development of our country is our mission." 8 Objectives Maintaining & increase subscribers’ base Enhance customer experience Improving quality of products & services provided to our customers. Data Evolution and Availability Aggressive rollout Cost Optimization 9 Corporate Governance Review of the & Social responsibility: About Corporate governance: The ECMS Corporate Governance intends to promote a high performance of governance practices, to attain the highest level of transparency, accountability, and integrity and to consequently ensure that the interests of the Board/management are aligned with those of the company and the shareholders. Its purpose: Promote and strengthen transparency, accuracy and efficiency as the governing control point of ECMS, consistent with the rule of law. Protect and facilitate the exercise of shareholders' rights. Ensure the equitable treatment of all shareholders. Ensure that timely and accurate disclosure is made on all material matters regarding ECMS, including the financial situation, performance, ownership, and governance. Main communication channel between the company and all its stakeholders. Provide cohesive governance policies to maintain best work environment for all stakeholders and to ensure that they are well understood and implemented. Extend its roles to meet with statutory requirements and goes well beyond law, by effecting procedures and systems which are in accordance with governance best practices. According to the mandate given by the shareholders and in light of the standard governance practices and procedures, ECMS shall have a frame and methodology through which the BOD will agree on reviewing, approving, or ratifying any Related Parties Transactions where the amount included exceeds EGP 1 million. The BOD is bound by an absolute obligation of confidentiality with respect to the discussions and resolutions of the Board and its Committees. The Chairman shall inform the BOD of the information to be disclosed to the markets as well as the proposed text of statements and releases. The corporate governance is the responsibility of: The Board of Directors (BoD) must remain, a collegial body representing all shareholders collectively. It is required to act at all times in the best interests of ECMS. Corporate Secretary Responsible to advise the Board, the Chairman, and the CEO on all governance matters in addition to being a source for any requested information, organize shareholders and/or BoD meetings in accordance with procedures established through governance framework Board Committees the BoD shall set up Committees to assist the Directors in carrying out their role Audit Committee ECMS Audit Committee assists the Board in the oversight of both the internal and external audit functions AC Annual Report Is a committee that issue annual report about ECMS achievements, results & Objectives Compensation Committee the Compensation Committee benchmarks ECMS as an employer against other companies in the Egyptian market 9.1 Board of Directors The BOD is, and must remain, a collegial body representing all shareholders collectively. It is required to act at all times in the best interests of ECMS. Composition The BOD shall be comprised of up to 13 members at most, a majority of who shall be non-executive / independent directors and shall meet the requirements of the Egyptian Exchange rules and shall comply with Egypt Code of Corporate Governance. The BOD is composed of representatives nominated from various shareholders. Whenever a member of the Board is designated, he/she must consider him/herself as a representative of all shareholders and is obliged to act in the best interests of ECMS and all its shareholders. Roles and Responsibilities of the Board Manage its affairs based upon authorization delegated by ECMS General Assembly; the final responsibility for ECMS remains under the Board. Provide entrepreneurial leadership of ECMS within a framework of prudent and effective controls, which enables risk to be assessed and managed. Reserve to itself major strategic and financial decisions. Ensure through appointed Committees that the necessary financial and human resources are in place to fulfil objectives. Oversee and assess ECMS performance. Approve ECMS annual compensation plan. Ensure the integrity of ECMS accounting and financial reporting systems. Define the ECMS values and standards and ensure that its obligations to its stakeholders are understood and met. Responsible towards the environment, the community, employees, customers, government authorities, media bodies, and suppliers. Board of directors members: Top management Vice presidents members: 1.7 Social responsibility Mobinil is one of the most active and leading corporate citizens in Egypt. As the leading mobile operator in Egypt, Mobinil believes that it has duties and responsibilities towards the society. Mobinil philosophy has, and continues to be, that success is not merely measured in financial terms, but in commitment to serving community and investing in its welfare. So, Mobinil has many initiatives: Mobinil initiative to train and employee 200,00 hands: While Mobinil initiated the program with its partners, its ongoing role will be to provide funding as well as publicity for the whole initiative in various media in order to maximize exposure and impact of the program. The NGO’s will train the candidates, execute the projects and provide regular project progress reports. Education support: Funding post & under-graduate studies in different majors related to CIT field. Providing university students with telecom related topics & data for graduation projects/thesis. Sponsoring universities' competitions tackling business & telecom related projects. Hiring Opportunities Summer Training. Temporary Staffing. Contracted Staffing. Environmental Impacts Mobinil has rolled out the international environmental standard ISO 14001 to all its businesses. Mobinil measures all activities carefully and set targets for each of the areas in which business affects the environment. 10 scan of external environment 10.1 Natural physical environment: sustainability issues Steering Egypt’s much-needed development in a more sustainable direction is not only the right thing to do for the environment, but is also an economic necessity. Energy: Egypt’s recent demographic and economic growth patterns make it a near certainty that its energy use and emissions will continue to grow rapidly if there is no change in course. In fact, the United Nations Development Program forecasts that, based on current trends, energy demand in Egypt will increase threefold by 2030. Conservation measures are thus required, not only to reduce emissions, but also to avert potential energy shortages that may hinder economic development. Impact on Mobinil (impact/low, occurrence/low): Mobinil stores at least three months of its needs from energy to reduce the effect of rarity. Mobinil depends on different suppliers to reduce the effect of price fluctuation. Renewable wind and solar energy: the minister of electricity and energy confirmed that 1170 mega watt from solar and wind energy will be added to the network in 2014. He also confirmed that Egypt is going to build 10 solar energy stations, 20 mega watt each. Impact on Mobinil (impact/low, occurrence/low): it would reduce the demand on the fuel Mobinil uses in its stations. 10.2 Societal environment 10.2.1 Political - Legal analysis Transition to democracy: The 4-day people's uprising in Egypt that began on June 30, 2013 led to the ousting of President Morsi. The uprising resulted in victory for people's democracy. In January 2014, millions of Egyptians voted in a referendum for the constitution. The country is taking the necessary steps for the complete transition to democracy, which is expected to ensure people’s voices are heard and collective decisions are taken for the development of Egypt. Impact on Mobinil (impact/high, occurrence/high): the stability of the political system affects the stock market positively, it would attract investors to one of the biggest companies in the stock market, Mobinil. Tension with the islamist groups: Tension exists between the military and Islamist groups, including the popular Muslim Brotherhood. Impact on Mobinil (impact/high, occurrence/high): due to Mr. Naguib Sawerus point of view in the politics, the islamist groups and their followers still perceive the Mobinil image as “Naguib Sawerus” representative in the telecom market, this perception has affected mobinil negatively due to Mr. Naguib’s political point of view, and it is expected to continue International gateway license: recently, NTRA approved to issue license for the existing mobile operators to deliver international gateway services instead of using the Telecom Egypt gateway to deliver international calls. Impact on Mobinil (impact/high, occurrence/high): Mobinil pays a percentage (x%) of its revenue from international calls to Telecom Egypt for using its international gateway. The new license would increase revenues from international calls by (x%). New mobile license: recently, NTRA approved the new license of Telecom Egypt to provide mobile services. the new competitor will affect the market share of Mobinil Impact on Mobinil (impact/high, occurrence/high): regarding to the below table, Etisalat affected the market share of Mobinil badly. It is expected that TE will affect the market share of Mobinil too. Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Market share (%) 39.4 39.6 35.5 35.0 35.0 34.9 35.0 Tourism in Sinai: The reported presence of Hammas and Elqaeda in Sinai, apparently planning to attack military sites in Egypt, has added to the security risks in the area. Impact on Mobinil (impact/low, occurrence/high): the revenue from Sinai region has decreased by around 60% due to military operations in Sinai. 10.2.2 Economic analysis Wages: Low wages are advantages for foreign investors, particularly for those wishing to use Egypt as a base for export-oriented manufacturing. cross national comparable living wages were estimated in the below table. Living wage estimates for the year 2000, range from US $1.7 PPP per hour in low-income examples to approximately US$11.6 PPP per hour in high-income examples. Egypt 1.96 China 2.08 USA 13.1 Switzerland 16.4 South Africa 3.1 Impact on Mobinil (impact/medium, occurrence/high): regarding to Mobinil financial statement wages item compared to European operator Market Size: With a population of 84 million, Egypt is the largest market in the Arab world. Impact on Mobinil (impact/high, occurrence/high): Mobinil has more than 30 million customers. Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Subscriber Numbers ('000) 31,576 32,914 32,624 32,392 32,768 33,841 32,939 Unemployment: is high, which subdues demand. Impact on Mobinil (impact/low, occurrence/high): although it can’t be measured exactly, but it affected the ARPU (Average Revenue Per User) badly. 2010 2011 2012 Mobinil blended ARPU (EGP) 38.8 24 23 Corruption: There are relatively high levels of corruption and bureaucracy. Egypt ranks 114th on corruption scale. Impact on Mobinil (impact/medium, occurrence/high): Mobinil suffers from bribes issue when dealing with installing the communication towers. Strong banking sector: The banking sector of Egypt is strong and is gradually being opened up for private participation. In accordance with the privatization plan, a number of voluntary mergers were made among banks. There were also some cases of involuntary mergers aimed at creating strong entities and increasing the capital of banks. The country aims to apply Basel II standards to enhance risk management practices and apply international banking governance rules among Egyptian banks. The aggregate financial position of registered banks operating in Egypt (39 banks) totaled EGP1.22tn ($214.8bn) as of the end of June 2010, increasing by EGP128.7bn ($22.7bn) or 11.8% compared to FY2008. Total deposits increased by EGP82.8bn ($14.6bn) or 10.2% to EGP892.5bn ($157.2bn), accounting for 73.1% of the aggregate financial position of the banks as of the end of June 2010. Impact on Mobinil (impact/medium, occurrence/medium): it is expected for the telecom sector to grow in the next 3 years. This growth needs financing, and the strong banking sector would help in a special interest rate. 10.2.3 Social analysis Poverty: However, the country performs poorly on the UNDP's HDI. According to the UNDP Human Development Report 2011, Egypt's HDI value was 0.644, which gave the country a rank of 113 out of 187 countries. The report stated that 4.7 million people in the country were living in poverty while another 7.2% of the population were vulnerable to poverty as of 2008. Impact on Mobinil (impact/low, occurrence/high): although it can’t be measured exactly, but it affected the ARPU (Average Revenue Per User) badly. 2010 2011 2012 Mobinil blended ARPU (EGP) 38.8 24 23 Increasing communal violence: There is increasing communal violence in the country, as Salafists (radical Islamists) have continued to gain a foothold. In March 2011, 13 people were killed in communal violence in the Helwan governorate. In May 2011 tensions between Salafists and Coptic Christians left 12 dead and around 200 injured; since then, similar incidents have also been reported in other parts of the country. Impact on Mobinil (impact/medium, occurrence/medium): due to Mr. Naguib Sawerus point of view in the politics, the islamist groups and their followers still perceive the Mobinil image as “Naguib Sawerus” representative in the telecom market, this perception has affected mobinil negatively due to Mr. Naguib’s political point of view, and it is expected to continue 10.2.4 Technology analysis Mobile is replacing fixed line: the fixed line is a dying technology, customers are replacing the usage of fixed line by mobile, especially after reducing the price/minute. Impact on Mobinil (impact/high, occurrence/high): regarding to the below table, number of minutes/customer increases with time, this is an indicator of increasing the sales and revenue. Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Monthly minutes of use/ subscriber 180 185 194 196 na Mobile Number Portability (MNP): Mobile number portability (MNP) enables mobile telephone users to retain their mobile telephone numbers when changing from one mobile network operator to another. Impact on Mobinil (impact/high, occurrence/medium): Mobinil has lost more than 100,000 customers from 2008 till 2012 to the other 2 operators. for the same period, Mobinil has gained around 360,000 customers from the 2 operators. Cost of technology revolution:  In recent years there have been many triumphs in technology. Now more than ever, people are able to communicate over thousands of miles with the greatest of ease. Wireless communication is much to thank for the ease of communication. transmission, switching, and software in the telecom sector requires planned investments from operators. Impact on Mobinil (impact/high, occurrence/high): regarding to the below table, Mobinil investment in network infrastructure is increasing annually. Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Capital expenditure (EGPmn) 199 396 476 686 304 The triple-play services: In July 2010, it was reported that the Egyptian telecoms regulator had authorised two consortia to start providing triple-play services to residential compounds in Cairo. Impact on Mobinil (impact/medium, occurrence/medium): One of the two consortia led by LINKdotNET Egypt, which was recently sold to mobile network operator Mobinil, includes affiliates of local telecoms group Orascom Telecom. The other licence-winning group was Vodafone Egypt. it is a good opportunity for Mobinil to be the first to deliver these type of services. Increase in internet users: The regulator's data also showed there were 2.31mn ADSL connections in Egypt at the end of March 2013, up by 28.3% from 1.8mn a year earlier. The regulator's data show there is strong demand for ADSL services in Egypt, a development that bodes well for the overall fixed network sector in the country. In 2011 the number of ADSL subscribers rose by 28.4% to reach 1.798mn, up from 1.402mn in 2010 and 1.027mn at the end of 2009. Impact on Mobinil (impact/medium, occurrence/medium): although the number of internet customers increases, around 70% of them are TEDATA customers, the remaining are for both Mobinil and Vodafone. 11 Issues Priority Matrix Probable impact on corporation High Medium Low Probability of occurrence High 1- Rapid evolving of switching technology 2- Corruption 3- Market Size 4- Transition to democracy 5- Tension with the islamists groups 6- New mobile license 7-Mobile is replacing fixed line 8-International gateway license 1-Corruption 2- Unemployment 3- poverty Medium 1-Mobile Number Portability 1- Wages 2-Strong Banking sector 3-Increasing communal violence 4-Incresing internet users 5-Triple play services Low 1-Tourism in Sinai 1- Energy 2-Renewable energy 12 Task environment 12.1 Porter’s five forces 12.1.1 Threat of new entrants: TE (Telecom Egypt) is about to launch the new mobile operator in Egypt. this would threaten Mobinil in 2 ways: attracting Mobinil customers to the new network through MNP (Mobile Number Portability). bundling the mobile, data, fixed line services by TE may attract customers by the discounted price and the single point of accounting. 12.1.2 Rivalry among existing firms: Number of competitors: the number of competitors are relatively small, so they watch each other carefully to match any move by another firm. Rate of industry growth: the market tends to saturate, so the price war has begun, each operator is trying to offer better prices, increase its profit by taking the sales away from competitor. service characteristics: service characteristics are almost the same between the three operators, so customers deal with it as a commodity. Amount of fixed costs: high fixed costs Capacity: Mobinil can increase capacity only in large increments, especially in the country, so Mobinil has some offers for these areas only. 12.1.3 Threat of substitute products: there is no such threat. 12.1.4 Bargaining power of buyers: the high bargaining power of buyers affects around 35% of the prepaid market, theses customers keep switching between the three mobile operators. 12.1.5 Bargaining power of suppliers: the bargaining power of suppliers is getting lower because of the new supplier entrant, Huawei. 12.2 Strategic group High Service Quality Low Low Number of services High 12.3 Strategic type Mobinil is using a mix strategy Defenders: Mobinil is focusing on improving network quality, network coverage, customer service, and the cost structure. Prospectors: the new market opportunity is the virtual fixed license, Mobinil is preparing an offer to bundle the 3 services mobile, data, and fixed. Analyzers: Mobinil offers 2 different products to the market, voice, and data. 12.4 Competitive intelligence (four corner exercise or value discipline triad) 12.5 Industry matrix Key Success Factors Weight Mobinil Rating Mobinil weighted score Vodafone Rating Vodafone weighted score Etisalat Rating Etisalat weighted score Network Coverage 0.25 4 1 3 0.75 2 0.5 Customer Care 0.25 2 0.5 3 0.75 1 0.25 Service Quality 0.25 3 0.75 5 1.25 2 0.5 Promotions 0.25 3 0.75 2 0.5 4 1 Total 1 3 3.25 2.25 13 EFAS External Factors Weight Rating Weighted Score Comments Opportunities 1-Transition to democracy 2-Wages 3-Market size 4-Strong banking sector 5-Mobile is replacing fixed line 6-Mobile number portability 7-Triple play services 8-Increase in internet users 9-International gateway license 10-Renewable energy Threats 1-Cost of technology revolution 2-Increasing communal violence 3-Poverity 4-Corruption 5-Unemployment 6-Tourism in Sinai 7-New mobile license 8-Tension with islamist groups 9-Energy 2 16 Strategic Audit Report 2014 - 19 | Mobinil