African regulators need more muscle
Telecoms regulators who watch over the market structure and the proliferation of new technology are now a fact of life around the world. In Africa, the number of countries with an ICT regulatory agency has grown from 26 in 2000, to 44 in 2007. As most investment comes from the private sector, governments should set the basic goals of telecommunications policy, the regulatory agency should implement and enforce them, and the courts should review them rather than other government branches. According to the International Telecommunication Union (ITU), 60 percent of regulatory agencies in Africa have been granted autonomy from the executive and become ‘independent’.
Some experts say Africa’s regulatory agencies should have attracted more private investment. In Latin America and the Caribbean, private investment in telecommunications rose from USD 13.7 billion in 1991 to USD 47.1 billion in 1998 and then shrunk from nine years to USD 15.1 billion in 2007. While private investment in Africa has progressively risen from USD 5.4 billion in 2000 to USD 13.5 billion in 2007, some experts say this could have been higher with more appropriate regulatory frameworks.
There are a large number of cases where private participation in telecommunications in Africa has been affected by discriminatory regulatory decisions. Some agencies which claim to the ITU to be ‘independent’ of third parties do not act this way. In Mozambique, tariff regulation is essentially set by the fixed-line traditional operator. In South Africa, under the regulatory agency’s policy, the fixed-line competitor to the established Telkom became operational only three years after Telkom’s monopoly ended, and with only a limited range of services. In Kenya, Rwanda, and Namibia, traditional fixed-line operators are protected by the agencies in line with government preferences.
On top of independence and good governance, accountability of political institutions is also needed to enhance the predictability of regulatory processes. All of this increases the incentive for investment. But political accountability is a bigger challenge in Africa than in OECD countries.
The World Bank has normally included provisions in loan conditions to provide support for regulators against political interference. However, often the political environment has not supported the development of such institutions. As soon as a World Bank loan was closed, most regulators did not get support from governments, were side-lined or fell under the control of businesses they were meant to regulate. International development partners also have to work harder to improve political accountability as well as the training of regulators.
Get to know more about the weight of political accountability on regulator decisions and about failures in regulation.
Where the muscle is needed
Research ICT Africa undertook a survey of industry leaders, regulators and civil society in 14 Sub-Saharan countries in 2006 which highlights the perceived inefficiency of the regulatory environment.
There is a high correlation between the Telecommunications Regulatory Environment (TRE) scores in Figure 7 and the extent of market reforms and performance. In countries where the TRE scores are higher, regulation encourages investment. Countries that are seen to be more inefficient, Rwanda, Namibia, Ethiopia, and Kenya, have been slow to launch market reforms. Fixed-line traditional operators were still state-owned in Namibia and Ethiopia in 2007. In all four countries, the performance of the fixed-line operator is disappointing, with a penetration rate of less than
2 percent of the population. In Ethiopia, the mobile market remained under monopoly in 2008 and less than 2 percent of the population had a cellphone. In Rwanda where a second mobile phone license was granted only in late 2008, the penetration rate is only 8.3 percent. In Kenya and Namibia, where the cellular penetration rates in 2008 were 38 percent and 62 percent respectively, the negative perceptions were associated with the strong interference of the fixed-line operator in Kenya and with stagnant reforms in Namibia.
In contrast, the most efficient countries in terms of the regulatory environment, Nigeria and Côte d’Ivoire have partially privatized fixed-line operators with penetration rates of about10 percent in 2007 and have a large number of competitors in the mobile phone segment, 7 and 4, respectively, both with penetration rates of around 40 percent in 2008. The case of Nigeria is quite exceptional since together with these mobile phone operators, two national carriers, 22 telephony operators, 52 VSAT operators, and 36 internet service providers are present.
Fixing the fixed-line operators
Governments have been good at adopting the ‘converged licensing regime’ in a bid to rescue traditional fixed-line operators who have lost telephone and other communications traffic to mobile rivals. Under the old system, a new license had to be issued each time a new service or technology was developed. The new regime gives more flexibility. Under the technologically neutral licenses, the operator chooses the technology to provide. Mobile operators can choose between GSM or CDMA wireless technologies. Under a service neutral license, operators can select services that are in greater demand or are most cost-effective. This new license helps traditional fixed-line operators since they can get out of high-cost fixed-line connections and use wireless technologies instead. Fixed-line operators in Africa are increasingly turning to CDMA wireless technology for the final ‘last mile’ connection with customers. Fixed-line operators are pursuing mobile technology more aggressively to attack the now dominant position of mobile phone operators.
This neutral technology attitude by regulators is also helping the spread of universal service schemes in rural areas. Fixed-lines are not the best choice for low density, low-income areas. In Uganda, the fixed-line operator, UTL, a technology-neutral licensee, MTN and a mobile operator, Celtel, all bid for a competitive subsidy tender for universal service provision in rural areas. ‘Neutral’ technology and services are gaining ground across Africa, including in Botswana, Egypt, Mali, Mauritius, Morocco, Nigeria, Tanzania, Uganda, and South Africa. Africa has a high share in the relatively small number of countries using converged licenses. But Australia, the European Union, Japan, Malaysia, Pakistan, and Singapore also use them.
Fixed-line operators also need regulatory help on call termination charges between fixed and mobile operators. The initially high ‘termination charges’ made from fixed-line operators to mobile networks were financing cellphone operators’ investments and are still present even though mobile phone networks are now more widespread than fixed-line networks. In addition, call termination costs in mobile networks are decreasing as traffic increases so these tariffs need to be reformed to prevent the abuse of dominance of mobile markets that are becoming mature.
Taxing the upwardly mobile
With large informal sectors which in some countries reach more than 70 percent of the population, African governments often rely on a narrow tax base, frequently businesses that are major exporters. Mobile companies get their revenues from an increasingly large mass of the population, giving fiscal authorities the opportunity to broaden their tax base. One study of 15 countries (Figure 8) showed that mobile operators provided more than 8 percent of government tax revenues in 7 of them.
Taxes represent on average 29.4 percent of operators’ revenue but are as high as 53 percent in Zambia, 45 percent in Madagascar and 43 percent in Tanzania and Gabon, and as low as 16 percent in the Democratic Republic of Congo. The GSMA association estimated that mobile operators in Africa in 2006 had contributed over USD 5 billion in taxes with about 77 percent generated by operators in Nigeria and South Africa.
An analysis of the 15 Sub-Saharan countries surveyed in 2006 shows that the average tax on handsets is 31.1 percent of their price, way above the average tax on network equipment (21.2 percent), on connection and subscription (15.3 percent) and on airtime (18.3 percent). Handsets are often treated as luxury goods in tax classifications. There are hidden differences, however. Uganda, Tanzania, and Kenya apply the highest taxes on usage, more than 25 percent of the prices charged by operators, while they are at the lower end for levies on handsets, with taxes below 20 percent.
In some countries, taxes on handsets can be avoided because the second-hand market is huge. However, airtime taxes cannot be bypassed and because mobile services expenditures represent a large percentage of average income in Africa, the sensitivity of demand to price is larger than in OECD countries. One concern is that the high price of mobile phone usage (including taxes) is slowing their penetration rates among informal small and medium enterprises (SMEs).