Telcos face lower revenues, higher cost

Put on your television. Your radio or open a newspaper. Chances are you will be inundated with adverts from at least a couple of the six mobile telephone network operators in Ghana before you are finished.

Actually this is to be expected. Like, say, Coca Cola products virtually everyone uses mobile telephony. But unlike Cocoa Cola, no company has clear market dominance and all six mobile network operators - including Glo which is only now about to start up - are in the thick of intense competition for customers.

By the end of July this year, there were more than 19.53m mobile phone lines in Ghana, and even as the market moves from growth towards maturity, more lines are still being subscribed to. As at the end of July, MTN had a leading 48.75% market share followed by Tigo with 20.94%, Vodafone with 18.06%, Airtel with 9.75% and Expresso, the only CDMA network, with 1.15%.

The intense competition among the five companies already operating networks, and the specter of the very price competitive Glo launching its Ghana network imminently have seen an unbridled price war which is benefiting mobile telephony subscribers but which is curbing industry profitability. The struggle for market share has persuaded all the networks to progressive lower their tariffs and this has meant that revenues are being driven by market expansion rather than rising revenues per subscriber. Indeed average revenue per user (ARPU) has declined dramatically in Ghana from U5D9.7 in 2008 to U5D6.0 in 2010. However mobile telephony penetration in Ghana is still increasing from 50% in 2008 to 61'1'0 in 2009 and 67% in 2010. By mid-2011 it has risen to 79.1 %.

But while the mobile telephony networks step up their advertising and promotions budgets, to remain in the faces of subscribers, profit margins are being squeezed in part by the frenzied competition. Even Ghana's Vice President, John Mahama, who was Communications Minister during part of the 1990’s admits that six mobile telephone networks may be too many for the size of Ghana's market. That competition is unlikely to go away. All the mobile telephone networks in Ghana are now owned by foreign multinationals and so any merger or acquisition would have to originate from the parent firms abroad.

But from the efforts of the recently formed Ghana Chamber of Telecommunications so far, it is sharply rising costs rather than sharply falling revenues per user that are worrying the network operators the most or more specifically, rapidly escalating taxes, duties and other charges imposed by the central government, various local governments, and the industry regulator, the National Communications authority, NCA, as well.

To be sure, the mobile telephony sector is one of the biggest and most important industries in Ghana, with regards to cash flows, consumer spending, capital expenditure, taxes and levels accruing to the public treasury and contribution to gross domestic product, GOP, Over the three years up to 2010, the industry has generated revenues of roughly GHcl.8bn a year. In 2010, the six telecom companies together made capital expenditure of GHc700m out of the country's gross capital formation of GH¢l0bn.

The taxes and levies paid by those companies, at GH¢600m added up to 10% of government's income of GHc6bn for 2009, AU together, the industry contributed GHc900m out of Ghana's COP of GHc44.8bn. The mobile telephony industry now employs about 1.5 million people in Ghana either directly or indirectly. All together the industry has some USD5.6bn in investments in Ghana today.

The large cash flows and the sheer visibility of the mobile telephone companies have encouraged the public sector to see it as a major source of revenues and have therefore piled up various forms of taxes. Currently the companies pay corporate income tax, withholding taxes on dividends, 15% Value Added Tax (VAT) and National Health Insurance Levy (NHIL), additional VAT on management fees and royalties, a six per cent Communications Levy tax on customer charges and interconnectivity, incoming international call tax of USD0,06 cents per minute and a NFSL/CIT tax. Add to this; annual regulatory fees paid to the NCA, Indeed government captures 37% of operators' revenue.

The various local governments in Ghana are getting in on the act too as they also increasingly see the mobile telephone firms as the panacea to their own fiscal problems, laments Kwaku Sakyi¬ Addo, chief executive of the telecoms chamber.

“One of the longest running problems that is hurting telecom companies are the costs and hurdles in deploying infrastructure and the complete absence of predictability' in how government ministries, departments, and local authorities determine the cost of business operating permits, (BOP) when it comes to mobile phone operators.” He gives examples: in one district the annual BOP for insurance companies is GHc200; commercial banks GHc700; Electricity Company of Ghana, ECG, GHc1, 000; but for mobile phone companies, it is GH¢9, 000.

Another example: in one district, the BOP levy for a large industry and for mobile operators was GHc2 000 in 2009. The following year, whilst the others remained the same, that of mobile operators was increased to a total of GH¢22, 500.

“Just a couple of weeks ago, one operator paid nearly USD400,000 to the Ghana Highways Authority, GHA, for a permit to lay a fibre optic cable” Sakyi-Addo reveals.

“The cable runs for about 400km. Each district assembly is levying an additional charge for the cable running through their towns. One district has now ordered the operator to pay an extra GH¢420,000 and has stopped the operator from carrying out the job.”

The NCA has got in on the act too with support from the Ministry of Communications itself. The authority is now about to start building a GH¢30m 12-storey head office. Instructively the NCA is funded largely from fees derived from mobile operators. Also GIFEC which is funded by mobile operators, who each contribute one percent of their revenues, is helping to finance the GHc36m National data Centre.

Now the NCA has commenced enforcement of its mandatory “first world quality of service standards” which the mobile operators are expected to meet. The chamber argues that the penalties imposed for failing to meet those standards are not proportionate to the infractions.

Government is not impressed by those complaints. Indeed the Minister of Communications, Haruna lddrissu only last week