Sound Policies Needed for the Telecoms Sector

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Livelihoods and economies across the world have been fundamentally affected by the COVID-19 pandemic. It is hard to imagine, however, how worse things might have been without information and communication technologies (ICT). Both private and public sector services have kept running thanks to the use of ICT. The magic of ICT has kept gateways open even when nation-states have raised physical barriers by closing borders in efforts to deal with the scourge. However, while it has expanded business opportunities, the surge in the use of ICT has also piled pressure on service providers.

In countries with weaker economies like Zimbabwe, both inflationary pressures and a severe shortage of foreign currency have meant that the costs of accessing ICT have risen while the quality of services is not improving and, in some instances, has declined. The problem is that ICT providers have struggled to maintain, expand, and upgrade their services. The result is that while there is a public outcry when Mobile Network Operators (MNOs) raise charges, the MNOs also plead mounting hardship in the face of inflation, high cost of borrowing, and a shortage of foreign currency. The public outcry over rising charges is echoed by the outcry among MNOs over rising operating costs. Both are casualties of a challenging economic environment.

Ebb and flow in the telecoms sector

The latest report of the Posts and Telecommunications Regulatory Authority of Zimbabwe (POTRAZ) in respect of the first quarter of 2021 shows that there has been a significant rise in mobile and data usage in the country. The internet penetration rate now stands at 61,1% with internet and data subscriptions rising to 9,029,644, up by 1,7% from the previous quarter. Whereas mobile and data usage was 6,661 Terabytes in the first quarter of 2020, it more than tripled to 21,865 Terabytes in the first quarter of 2021. The bulk of this usage (97,2%) is through in-bundle data which, the regulator says, reflects consumers’ preference for cheaper promotional data bundles considering the low levels of disposable income.

Even the fixed telephone sector has seen a significant decline in its subscriber base for fixed voice traffic, has been buoyed by the demand for internet and data services. While the contribution of fixed voice traffic declined from 31,1% in the fourth quarter of 2020 to 24,9% in the first quarter of 2021, the contribution of internet and data usage rose from 64,5% to 71,6% for the fixed telephone sector. As the regulator pointed out in its first quarterly report in 2021 “Data has become the main revenue contributor for the fixed network as demand for Internet and data continues to be on an upward trajectory.” The increasing demand is tied to the upsurge in data usage to overcome the closure of schools, businesses, and colleges because of the pandemic.

The rise in operating expenses 

While there has been a 12,3% rise in revenue for MNOs which is attributed to the growth in voice and internet and data traffic, there has also been a 32,9% increase in operating expenses. MNOs earned ZWL12,3 billion in the fourth quarter of 2020 which rose to ZWL13,8 billion in the first quarter of 2021. The operating expenses rose from ZWL5,7 billion to ZWL7,6 billion in the same period. This shows that MNOs despite an increase in revenues, MNOs are still incurring high operating expenses. This means the telecoms industry’s operating costs grew faster than the revenues in that period, which is a serious handicap.  

In the same vein, Internet Access Providers (IAPs) had an upsurge in revenues due to the high demand for services. Revenues rose by 48,9% between the fourth quarter of 2020 and the first quarter of 2021 from ZWL4,6 billion to ZWL6.8 billion. However, their operating costs rose by 26,6% from ZWL2,5 billion to ZWL3,2 billion. The nature of operating costs includes staff, depreciation, and bandwidth costs. The regulator attributes the growth in operating costs to the “inflationary operating environment”. Although the country’s inflation has come down from a high of 837.5% in July last year to 106.68% in June 2021, it is still having an impact on consumer spending, resulting in the erosion of MNOs’ revenues. 

MNOs are no different from the rest of the economic actors in the country that are affected by inconsistent currency policies and laws. When the government decided to introduce bond notes in 2016, it maintained the fallacy that the surrogate currency was equal in value to the US dollar. When it is eventually re-introduced the fully-fledged Zimbabwe dollar, it soon dropped to ZW$2.5:US$ before falling further to the current rate of ZW$85:US$1. Still, this official rate does not reflect the real market value on the parallel market. These changes have serious consequences for the telecommunications sector which is heavily borrowed in US dollar terms. The implication is that MNOs must dig deep to clear these foreign currency-denominated debts.

Highly leveraged sector

The telecommunications industry has a combined debt of over US$1 billion that was utilized for infrastructure development and the purchase of software license fees. These MNOs are not being prioritized in foreign currency allocations which means they are struggling to service this external debt. To date, only NetOne has received over US$1 million from the foreign currency auction system to pay the debts. NetOne has a total debt of US$360 million. Of this US$290 million is owed to China’s Exim bank while local banks are owed US$74 million. 

Fixed network operator TelOne, which is struggling to cope with the creative destructive effects of mobile telephony, voice over internet protocol, and other new technologies, has legacy debts amounting to US$380 million. Some of the debts are so old that they go back to the days when it was called the Posts and Telecommunications Corporation (PTC). These debts require foreign currency which is hard to come by. By the end of 2019, interest and arrears charges totaled over US$206 million, while the main balance of the loans stands at US$177.5 million. When the government says it is “warehousing” the debt, it means the taxpayer eventually pays the cost.

Forex blues

The biggest challenge for this sector is that capital expenditure is foreign currency-denominated, while the provision of services is charged in local currency. The problem is that there are severe shortages of foreign currency which affects the capacity of network expansion. The complaints regarding poor service provision reflect the dire state of the economy in which the companies are operating and the mismatch between the economic reality and expectations. When consumers complain over poor service provision, it is because the MNOs are struggling to maintain and upgrade their services because of the shortage of foreign currency. 

The anomalous situation is observable in the way telecoms are treated less favourably by comparison to their peers. Some businesses such as fuel retailers are afforded the flexibility to sell their products in foreign currency, but by comparison, telecoms businesses are restricted to local currency. The government recently issued a decree permitting the passport office to charge fees in foreign currency, a privilege that is not afforded to telecoms companies. Even supermarkets that sell basic goods can charge in foreign currency, but telecoms businesses that require foreign currency for their inputs are prohibited from charging in foreign currency because they are a regulated sector. 

Foreign currency is required not just for repayment of foreign debt but also to procure equipment and the bandwidth which is required to supply data. It is required to pay for software licenses to foreign companies such as Ericsson, Huawei, etc as well as international obligations such as termination fees. The MNOs must carry these costs but eventually, they are passed on to consumers, not just because the business must be profitable but for viability.  

The government is aware of these challenges regarding foreign currency shortages. ICT Minister Jenfan Muswere recently conceded in Parliament that “the foreign currency requirements of these companies are so huge that it cannot fully be obtained through the auction system.” According to telecoms industry reports, at present, NetOne requires US$13,8 million to roll out various capital projects earmarked to improve operational efficiency and cut costs. The proposed projects include a billing system and hybrid solar systems for substations. Econet requires US$131,7 million to settle international obligations, operational support, and core network upgrade, while Powertel is asking for over US$61,9 million for projects to invest in infrastructure projects. 

Given these challenges and the unavailability of foreign currency, it might be a better idea to consider giving MNOs the flexibility to sell their services in foreign currency. If supermarkets, government departments, and fuel retailers have the flexibility, why should telecoms businesses be treated any differently, particularly when they have a greater need for foreign currency considering the nature of the services they provide which rely heavily on foreign debt and procurement? One story claiming that citizens have been choked by rising data costs ironically quotes the new prices in US dollars but does not explicitly demonstrate that these MNOs are not permitted to charge in foreign currency. If telecoms companies could build foreign currency reserves from selling their products and services, they might be in a better position to service their foreign debts and to procure equipment that is required to upgrade their infrastructure and provide services of better quality. This is particularly important at a time when there is a greater demand for internet and data services. 

Telecel’s terminal decline

Econet is still by far the biggest MNO with 8,7 million Active subscribers while NetOne is second at 3,7 million. Telecel is a distant third with just over half a million subscribers. Telecel, which was taken over by the government a few years ago, is in serious decline. Its subscriber base fell by 20,1% from 727,094 in the fourth quarter of 2020 to 581,104 in the first quarter of 2021. It has just 1,8% of the revenues in the mobile telephony market. Econet, by far the biggest MNO has 80,2% of the revenues with NetOne, another state-owned entity at 18,0%. There has never been a convincing rationale for the government owning two MNOs both of which are underperforming. Telecel’s downward trend suggests that this is yet another state-owned entity that might join the museum of failed industries which include Ziscosteel, CSC, and Air Zimbabwe.

However, another credible theory is that Telecel is set up for a takeover by a crony. According to this theory, the smallest of the three MNOs is being deliberately stripped down to reduce its value in readiness for a buyout by one of the favoured politically exposed persons. Telecel was taken over by the government in 2016 following a US$40 million deal with the previous foreign owners. The deal was done through a small and previously obscure state entity called Zarnet Pvt Ltd. But far from improving its fortunes, the takeover has seen Telecel getting weaker and uncompetitive. It is the only one of the three MNOs that did not invest in infrastructure enhancement during the first quarter. By contrast, its competitors, Econet set up 16 base stations while NetOne set up the other 14.  

The strategy is that the more Telecel drowns in debt and viability challenges, the more it requires rescue. The godfather will swoop in like a knight in shining armour to rescue a government-owned company in distress. It will be offered to the godfather in the name of privatization when it is a fraction of its original value. It will be celebrated by enablers as a great business, but it will just be another chapter in the ever-growing book of crony capitalism in Zimbabwe. If this sounds like fiction, look around and see what happened to the mining companies that were brought by SOTIC International and later placed under the name of Kuvimba Mining House, both associated with Kuda Tagwirei, the quiet godfather of Sakunda.  

Conclusion

While consumers have a legitimate right to protest at the rising costs of accessing mobile telephony and internet and data services, the target lies beyond the MNOs that are also casualties of a tough operating environment. The pandemic has demonstrated the increasingly significant role of ICT in the socio-economic life of communities around the world. From e-commerce to e-learning, these platforms rely on a functional and efficient ICT sector in which MNOs are critical players.

However, shortages of foreign currency are a serious handicap on the MNOs which must import the bulk of their technological requirements, and yet they are restricted to charging for their services and products in local currency. The government is insistent on using the Zimbabwe dollar, but its policy is selective, exclusionary, and inconsistent across sectors. Whereas some sectors are allowed to charge in foreign currency, the telecoms industry remains restricted to local currency. They are not prioritized when it comes to forex allocations.

This impacts the ability of telecoms companies to import the technological goods and services they need to maintain and upgrade their services and consequently, it affects the quality of services. In all this, it is the consumers who are the chief casualties. The pandemic has shown that ICTs are indispensable in the modern world. A wise government would be doing more to capacitate and expand the potential of MNOs which are at the heart of the fledgling ICT sector. It would be designing policies that are deliberately designed to promote investment by the businesses. Instead, we are witnessing stagnation and decline in the sector.

WaMagaisa