Mobile development in Africa

In the traditionally strident and forceful tones of the GSM Association, Gabriel Solomon, the Association's Director, Government and Regulatory Affairs, reviews the part played to date by mobiles in bridging the digital divide. Gabriel Solomon then demonstrates that even greater growth can be achieved by removing regulations and restrictions. This upbeat commentary on the digital divide ends with a warning to impose a realistic price structure if emerging markets are going to develop to their full potential. The GSM Association (GSMA) believes that the effect telecommunications networks have on economic and social development can be likened to the great contributions of other infrastructure, eg, roads, ports and railways, that stimulate trade, create jobs and generate wealth. Leveraging this infrastructure through export-driven growth, the developing world (probably for the first time in history) is now a net financier to the developed world.

The mobile industry can have the same profound effect for Africa as other infrastructure but governments need to promote the right market structure for this to be realised. We are close to a tipping point and it would be a great shame if this development opportunity were missed.

How far have we got?

When examining what the mobile industry has delivered to date, it is substantial. But let's not forget that excluding South Africa, Sub-Saharan Africa has a mobile penetration of 7% and a stagnant fixed penetration of 1%, while the wholesale cost to connect to the rest of the world is often 300 times more than that of a typical DSL subscription in the USA for the same bandwidth.

There are great success stories in the African telecoms market and, just as in the developed world, extending connectivity to all is still a big challenge for governments and the private sector alike.

As a starting point, it is important to look briefly at what the industry has delivered, to get a sense of the great potential that can be achieved if Government and Industry work together towards what must be a mutual goal.

First off: employment. Celtel, as an example, employs about 4,000 Africans. And yet it estimates that 10 times as many people are employed indirectly, through the supply chain and in value-added services. Add to that the 120,000 plus outlets that the company has throughout the continent and the conservative estimate of jobs created by Celtel is a number in excess of 160,000. All of these jobs are 'legitimate' with appropriate taxes being paid by the companies and the employees alike.

Secondly: GDP. As a measure, one can use Professor Waverman's widely quoted findings that a 10% increase in mobile penetration can lead to a 0.59% increase in GDP in a typical developing economy. The GSMA believes this number is extremely conservative and it is currently working with the McKinsey's Global Institute on a bottom-up approach to the GDP contribution of the industry. If one takes India as a proxy to Sub-Saharan Africa, it has similar penetration levels at 7% and a large rural population. In India the actual GDP contribution is 1.4%. Incidentally, McKinsey's estimates that the mobile industry contributes a staggering 6.5% of China's GDP, the higher number due largely to a penetration level four times that of India. So the incentives to connect the unconnected are there for all stakeholders.

Mobile operators are also the top corporate taxpayers and contribute additional funds through licence fees, spectrum fees, and number-range fees. In this regard they contribute substantial sums to the national budget that can be put to wider use. Mobile networks are being leveraged to provide data services to schools, universities and hospitals.

Who would have thought it, but mobile operators are the largest ISPs in many African countries? SMS messages are frequently used to increase the effectiveness of health programmes. Mobile customers are benefiting from access to financial services for the first time as they use their phones as virtual banks. Higher mobile penetration really does increase the governance, social capital and economic activity of nations.

So how we can achieve the great potential?

Simply put, by eliminating fiscal and regulatory bottlenecks the industry's cost structure will fall and penetration and usage will increase as services become more affordable. The elasticity of demand for telecoms services is huge.

Goldman Sachs estimates that a minimum per capita income of over US$1,000 is required to afford mobile services in the current paradigm. Given income distribution, the investment bank concludes that we will have to settle for relatively low penetration levels in Africa . However, the GSMA is working on projects to provide mobile services to a market with sub-US$100 income, and the GSMA believes that a true public-private partnership will prove the bank wrong.

There are four main policy tools available to achieve this

A quote from Ambassador Gross, the US Coordinator for ICT, illustrates the first policy tool. He said that "If you want to encourage something, don't tax it". As with other business, mobile operators pay significant amounts in corporate taxes but also pay additional fees for things such as licensing, spectrum and number ranges. Consumers are also being asked to pay specific mobile taxes on handsets and services. This renders them unaffordable for many aspiring potential customers and shrinks the addressable market for operators and also, therefore, the potential revenue for Governments.

The Ugandan regulator has done a fantastic job ensuring some 90% of the population has mobile coverage. But why then does the Ugandan Government levy some of the highest taxes on its mobile customers so that only 6% are able to benefit from the expansive network?

Secondly, in the recent GSMA study 'Regulation and the Digital Divide', data from 28 African countries was analysed. The study concluded that erratic regulation increases the cost of capital substantially, which is a major proportion of the cost base of a capital-intensive industry. The study also found that if consistent and fair regulatory practise had been in place, the costs of capital would be lower and an additional US$5 billion would have been invested in mobile capacity and infrastructure. That is equivalent to the accumulative CapEx of both MTN and Celtel. Imagine the increased coverage and penetration this would have brought about.

Thirdly, monopoly controls on international gateways must end. These are choking African businesses as they seek to compete in a global market place. And they substantially increase the cost of doing business regionally too.

Fourth, and of critical importance, is the urgent need to bring the cost of connectivity to the rest of the world down through open-access fibre-optic cables. These cables are the umbilical cords that Africa can rely on to grow, stimulating the creation of new industries and employment, increasing the continent's competitiveness, providing fast, reliable and affordable Internet connections for students and businesses, and encouraging FDI and export-led growth.

We are all familiar with the Indian BPO success story. It will come as little surprise that Indian companies own more than one third of the undersea cables around the globe, ensuring that India's umbilical cord is as wide as necessary for the local economy to grow. There is no reason why this type of success cannot be replicated in Africa.

Connectivity - do not throttle Africa at birth!

Well, actually there is. The 'club' structure of the Sat-3 cable has kept bandwidth prices artificially high. Telkom has been charging US$25,000/ Mb/month until recently, outrageously high compared to what one pays for a DSL connection in a country like the USA - about US$30 per month. No wonder a large portion of available capacity on the cable is unused; the West African umbilical cord is being throttled.

There is a real threat that the EASSy cable may go the same way. However, anecdotal evidence indicates that the East African governments do not want to repeat the mistakes of Sat-3. The work of Minister Kagwe and his East African supporters who are bringing this issue to a head is to be applauded. The cable that connects East Africa to the rest of the world must have an open access structure for the region's potential to be realised.

Less tax = more subscribers

Returning now to the role of taxation, it is evident that there is a close correlation between mobiles taxes and subscriber growth. Our GSMA tax study also found that:

  • the mobile industry pays a higher share of tax than the fixed;
  • about a third of handsets are sold on the black market in Africa as users try to avoid paying tax;
  • if low-cost handsets were exempted from import duties and sales taxes an incremental 930 million handsets would be sold over a five-year period;
  • lower taxes mean greater long-term revenue opportunities for governments; and
  • cutting taxes on handsets would attract new users who would each yield an additional US$25 in annual tax revenue.

Fair play, please, regulators

Taxes are not the only lever that can help foster growth; regulation also plays a role in the development of the mobile industry. The GSMA regulation study showed that a regulatory environment that treated mobile operators fairly and consistently, reducing uncertainty and enabling a longer-term investment horizon would:

  • increase sector investment by 25%, ie, US$5 billion - the sum of MTN and Celtel's CapEx;
  • increase penetration by 30%; and
  • boost regional GDP by US$1 billion.

The way forward

The GSMA strongly believes that the digital divide will be removed by mobile industry growth and, as the GSM technology evolution-path plays out, will bring not only voice but also affordable data communications to hundreds of millions of Africans. To achieve this goal affordability must increase and the total cost of both ownership and use of mobile services must fall, tapping the great latent demand.

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