The Sub-Saharan Africa telecoms sector has reached a point where, in order to continue growing, operators must invest heavily in network upgrades and expansion. The initial boom of SSA's mobile market is largely in the past, with high levels of saturation in the mobile voice market in urban areas. In order to maintain growth, operators must extend their networks to underserved rural areas, and develop advanced mobile and fixed broadband services. Both of these areas of growth require enormous amounts of investment in network upgrades but operators have only just recovered from dramatic declines in profit margins during fierce price wars in 2011 and 2012. A greater risk is posed by some SSA governments, which are now targeting the telecoms sector with higher taxes to offset increasing budget deficits.
BMI argues that increased taxes on the telecoms sector will restrict operators from investing in their networks and have a negative impact on industry growth over the short- and long term. Moreover, we are not convinced that the decision to increase taxes will result in higher government revenues. Operators have made clear they will pass taxes onto consumers rather than absorb them, and consumers are unlikely to increase their budgets for communications enough to ensure continued growth of the telecoms sector.
| Falling ARPUs |
|ARPU By Country, 2007-2013|
SSA mobile markets are dominated by a few large international operators, including South Africa based MTN and Vodacom, Indian operator Bharti Airtel, UAE based Etisalat, France Télécom Orange and Tigo. It is difficult to assess the performance of many of these operators since they do not provide comprehensive breakdowns of financials for individual SSA markets, although local media suggest that some are operating at losses, due to slow revenue growth and rising operating expenses.
However, one exception is Kenya's most prominent operator, Safaricom. It has been one of the more successful companies in the region due to its founding of M-Pesa and holds a market share of 65% as of March 2013. In FY09/10, ending March 31, it reported net profits of US$170.35mn, down to US$147.98mn in FY10/11, down further to US$142.02mn in FY11/12 and up dramatically to US$197.23mn in FY12/13. The effects of the price wars on its profits are evident as they dropped by 13.1% annually for the year ending March 2011 and another 4% by March 2012. Kenya's other operators are believed to be operating at losses, especially as they continue to battle over the lowest tariffs, while Safaricom's monopoly over the mobile banking services has allowed it to retain subscribers while raising tariffs again.
There are few other operators in Sub-Saharan Africa that hold such a large market share and have a monopoly over such a widely used value added service. Therefore, we expect it stands out as one of the more profitable operators in the region. Where other operators do not provide such detailed financial results, ARPU levels can give some indication of their bottom lines.
Why And How Are Governments Taxing Telecoms?
The 21 st century has seen strong economic growth across the Sub-Saharan Africa region, however, the benefits of this new-found wealth have been distributed unequally among the population. L imited employ ment opportunities for the young has put significant pressure on governments to spend on social issues (such as health, education and subsidies) to placate frustrated citizens and on infrastructure to improve the economies' competitiveness. The problem is that the vast majority of African countries run structural fiscal deficits which constrain governments' capacities to spend.
An important issue for African economies' fiscal accounts stems from the fact that many countries in the region rely heavily on budgetary assistance from European nations who are facing economic and fiscal woes of their own. In 2011, 44% of Rwanda's budget was financed by foreign grants while the figure was close to 20% in Mozambique, Tanzania and Ethiopia. Several African countries including Rwanda, Uganda and Malawi have seen significant cuts in budget assistance over recent years ( see 'Budget Challenges Loom Large', July 17).
| Governments Are Short On Cash |
|Budget Surplus/Deficit For Select Countries In Sub-Saharan Africa, 2011|
As one of the fastest growing industries across Sub-Saharan Africa, governments have identified the telecoms industry as a good source of extra tax revenue to fill the holes in their budgets. The way governments see it, the large majority of those working in the informal sector are not paying taxes, but more likely than not they use mobile services to conduct their business. Therefore, taxing telecoms services allows governments to indirectly tax the informal sector of the economy. From a country risk perspective, it is a logical step to redirect some of the profits from growth in telecoms to building better infrastructure and subsidising healthcare and educational services in rural areas. However, without taking into account subscribers' income levels, telecoms taxes are often regressive, and fair redistribution of telecoms taxes is not a guarantee. BMI estimates that Tanzania receives grants equivalent to 30% of its budgeting requirements each year, which, interestingly, is equal to the amount the government calculates it loses to corruption every year.
In 2011, telecoms taxes in Sub-Saharan Africa were already above the global average. However, since the beginning of 2013, and especially during budget season in June and July, governments have been in a frenzy to introduce new special telecoms taxes. In June 2013, shortly after Uganda lost US$214mn in grants from European donors due to allegations of corruption, finance minister Maria Kiwanuka announced new special taxes on the telecoms industry, including a 10% tax on mobile money transfers and a levy on incoming international phone calls. The move was inspired by Kenya's decision to boost government revenues with a 10% tax on mobile money transfers in January 2013, which may be extended to all electronic money transfers later in 2013.
| Africa Ahead of Global Average |
|Tax As Total Cost of Mobile Ownership, 2011|
In Tanzania, telecoms was the fastest growing industry in 2012. The government followed suit and imposed a 10% tax on mobile money transactions, as well as a 14.5% excise duty on all services in the telecoms sector in June 2013, only a year after increasing mobile airtime tax from 10% to 12%. The government also proposed a TZS1,000 (US$0.62) monthly SIM card tax, which has been widely criticised by operators and Tanzanian consumers. According to the Mobile Operators Association of Tanzania, 8mn out of 22mn mobile users in the country spend less than US$0.62 a month on mobile services, meaning the tax would effectively double their mobile expenditures. Taken together, telecoms operators' gross revenue was taxed at a rate of 36.5% in Tanzania, at the time of writing.
In 2012, 10% of Ghana's total tax revenues came from the telecoms sector. In that year, the government's budget deficit also rose by 12%. In order to plug a GHS49.8mn (US$23.6mn) hole in its budget, the government, in July 2013, proposed imposing a 20% import duty on mobile handsets and a tax on incoming international calls, text messages and emails of 6%, or US$0.06 per call or message. This was on top of the existing 15% VAT and National Health Insurance Levy (NHIL) on international traffic. Although the tax on incoming calls and messages was scrapped, Ghanaians have been highly critical of the 20% import duty. The Circle Tip Toe Lane Traders' Association, which represents mobile phone traders, said the tax will have to be shifted to consumers, which will freeze demand for devices and ultimately endanger the employment of over 3,000 importers and 100,000 traders.
Newly Implemented And Proposed Telecoms Taxes, 2012-2013
| Implemented Taxes || |
|Source: BMI |
| Date || Country || Description |
|Jul-13 ||Ghana ||20% import duty on mobile handsets |
|Jul-13 ||Kenya ||0.5% tax on revenues for the Universal Service Fund |
|Jan-13 ||Kenya ||10% tax on mobile money transfers |
|Jul-13 ||Malawi ||Reintroduction of a 16.5% VAT on internet services (which was previously removed in June 2012) |
|Jun-12 ||Malawi ||Corporate tax increase from 30% to 33% |
|Jul-13 ||Tanzania ||10% tax on mobile money transfers |
|Jul-13 ||Tanzania ||14.5% tax on all services in the telecoms sector (as opposed to just on mobile airtime) |
|Jun-12 ||Tanzania ||Increase from 10% to 12% on mobile airtime tax |
|Jun-13 ||Rwanda ||25% import duty on mobile network equipment |
|Jun-13 ||Zimbabwe ||Increase of mobile telecoms licence fees by37% to US$137mn (exclusive of additional spectrum fees and other taxes) |
|Jun-13 ||Sudan ||Replacement of 30% profit tax, with 2.5% tax on operator revenues |
|Jun-13 ||Uganda ||10% tax on mobile money transfers |
|Feb-13 ||Nigeria ||2.5% operating tax on operator revenues |
|Jun-12 ||Cameroon ||Tax increase from 2% to 3% on operator revenues |
|Jan-12 ||Cote d'Ivoire ||Replacement of tax on inbound international calls with a 3% tax on operator revenues |
| || || |
| Proposed Taxes || |
| Date || Country || Description |
|Aug-13 ||Kenya ||10% tax on all money transfers, including electronic bank transfers and a further tax on mobile money transfers |
|Jul-13 ||Ghana ||US$0.06 per minute on inbound international calls |
|Jul-13 ||Tanzania ||TZS1,000 (US$0.62) monthly SIM card tax |
|Jun-13 ||Uganda ||US$0.2-US$0.25 per minute tax on inbound international calls |
The Government Pays...Ultimately
Given their depleted profit margins, operators have collectively refused to absorb any of the new taxes and passed them on to consumers instead. In some cases, such as with mobile money, BMI believes the impact on consumer usage will be minimal. Although mobile money users are likely to become more cautious and avoid unnecessary transactions over the short term, ultimately people will continue using and signing up to the service because they have no other option. According to Charles Abuka, director for financial stability at the Bank of Uganda, there were 4.9mn bank accounts in Uganda in December 2012, a penetration rate of just 13.7%. In contrast, the number of mobile money users tripled from 2.9mn to 8.9mn during the year ended December 2012. In the same year, the volume of transactions increased from 87.5mn to 242mn and the total value of transactions rose from UGX3.8trn (US$1.44bn) to UGX11tr (US$4.17bn).
With other services, including voice calls, SMS and entertainment-based VAS, we expect higher cost of telecoms services to discourage growth. Based on Sub-Saharan African consumers demonstrated shrewdness during the price wars in 2011 and 2012, we believe that as operators increase tariffs to take new taxes into account, consumers will not be willing to proportionally increase their communications budgets. As a result, usage will decrease and operators' net profits will suffer.
While governments may still see an absolute increase in revenue from telecoms taxes over the short term, with neither profit growth nor government support, operators will have little incentive to reinvest in their networks. As operators make little effort to reach new subscribers in rural areas or push more advanced data services, governments will see growth in the telecoms sector, and therefore in tax revenues from mobile services, slow over the long term.
| Still A Way To Go |
|Sub-Saharan Africa Mobile And Broadband Penetration Forecasts, 2010-2017|
The Impa ct O f Telecoms On The Broad er Economy
Numerous studies by the World Bank, De loitte, GSM Association (GSMA) and other organisations, have demonstrated that the development of the telecoms industry has a significant impact on economic growth. Based on World Bank research of 120 countries , on average a 10% increase in broadband pe netration boosts GDP by 1.3%. In one report specifically on Sub-Saharan Africa telecoms by Deloitte and GSMA, they calculated that a 10% increase in mobile penetration boosts GDP by an average of 1.2%. Beyond directly creating employment in various sectors, including sales, engineering and marketing, improved communications systems allow for improved productivity in agriculture, govern ment services and job searching through the rapid transmission of knowledge and information. For example, in July 2013 the Nigerian Minister of Communications and Technology , Omobola Johnson , said e -g overnment had transformed government operations by improving document management, citizen interaction and budget and fraud management. The government electronic payroll system alone reportedly saved the government approximately NGN119bn (US$736.1mn) in two years.
With regional penetration mobile penetration rat es of 63.6% and broadband penetration r ates barely taking off at 3.8% in 2012, there is still a significant amount of growth potential in the telecoms sector, provided governments create a friendly business environment for operators.
Risks To Outlook
The amount of investment needed to extend infrastructure to rural areas and build next generation broadband networks cannot be underestimated. Although MTN directed 45.6% of group capex, or ZAR13.7mn (US$1.38mn), towards its Nigeria unit in 2012, the operator regularly falls short of Quality of Service (QoS) tests conducted by Nigeria's telecoms regulator. Nigeria has the region's most vibrant telecoms industry, due to its large population and strong economy, forcing operators to secure huge loans to invest in network expansion. Since April 2013, MTN took out US$3bn in loans: Globacom US$1.25bn, Etisalat US$1.2bn, while Airtel has invested US$1.5bn since entering the market in 2010. While this bodes well for telecoms in Nigeria, operators in other Sub-Saharan Africa markets with smaller populations and weaker economies, arguably the ones most in need of the benefits of improved communications services, will have far more difficulty securing financing. This is especially true if increased taxation is threatening to dim operators' revenues.
In an extreme situation, operators may even consider abandoning markets where they see no opportunity to become profitable. In the only example of a market where a change in taxation will benefit a mobile operator, Sudan replaced a 30% corporate tax rate with a 2.5% levy on total revenues. While this increased expenses for the country's smallest operator, MTN, it led to a significant decrease in taxes for market leader Zain. The change in taxation measures was implemented by the Sudanese regulator, allegedly, in order to dissuade Zain from abandoning the Sudanese market, where it has suffered steep profit losses due to the depreciation of the Sudanese pound. While BMI believes this is an unlikely situation in other countries, Sudan's experience with Zain demonstrates it is not outside the realm of possibility.
In response to their financial circumstances, Sub-Saharan Africa operators have begun taking measures to reduce their operational costs through network sharing or mergers, and by handing infrastructure management over to towers companies. Mergers and acquisitions in the region kicked off in earnest in May 2013 with Airtel's acquisition of Warid in Uganda. In the latest developments in the towers industry, which has been a hot topic in the region over the last year, Vodacom sold 1,149 towers in Tanzania to Helios Towers and IHS secured a US$522mn loan to build over 1,000 towers in Nigeria, Cameroon and Cote d'Ivoire.
However, these solutions are not enough to offset the negative effects of increased taxation of the telecoms sector. BMI believes operators are at a critical junction now, where growth depends on reaching new subscribers in underserved areas and adding value by encouraging uptake of more advanced data services. With increased taxes and tariffs expected to dampen consumer demand and harm operator revenues, governments' taxation policies will be the determining factor in operators' future investment plans. Over the next quarter, BMI plans to revise down its Risk/Reward Ratings for countries that raise taxes. Furthermore, if governments continue to view telecoms sectors as cash cows, then we expect the negative impact on industry growth to be reflected in our mobile and broadband penetration forecasts too.