A Business Case for Telecom Tariff Reduction – By Elvis Eromosele
The news media is inundated with reports that the prices of data and telecommunication services (telecom tariff reduction) are expected to crash 40 percent by 2025. This, according to Dr Isa Ibrahim Pantami, Minister of Communications and Digital Economy, is based on the steps taken by the Federal Government to attract huge local and foreign investments,
According to the Minister, the government has addressed two critical challenges in the telecommunications industry, particularly Right of Way (RoW) charges and infrastructural protection and development. He explained that these activities are part of the policy measures taken by the present administration to promote the digital economy and improve the living standard of the citizenry.
The goal is admirable. This explanation, however, is too simplistic. The logic is flawed, the argument untenable and the numbers won’t add up This is definitely not how markets operate.
Someone would need to explain the sort of market dynamics that will make this possible because it is not clear to the uninitiated.
Granted, the reduction of RoW charges by seven states beginning with Ekiti is commendable. It would help to increase the pace and ease the cost of rollout. It is expected to equally attract new investment in broadband connectivity, boost the creation of new businesses, jobs, and thus by implication improve access to e-healthcare, digital education, and electronic services in general.
But the major determinant of a tariff of any sort is the cost of operation. And the cost of operation for businesses in Nigeria is certainly not going down. Most businesses would attest to this.
For a case in point, consider a foreign exchange. The rates have been dropping faster than a hot knife through butter. And everyone knows that the bulk of telecom equipment is imported. So, the maintenance and expansion of growth are getting more expensive daily. This is a situation that is not likely to improve anytime soon.
In addition, the cost of power is rising in everywhere. The power distribution companies (Discos) are talking of increasing tariff, diesel and petroleum prices have gone up. As companies expend more resources on power, it is almost lunacy to expect prices to crash.
Take tax. The Nigerian government has increased Value Added Tax (VAT) from 5 percent to 7.5 percent. So, VAT has essentially gone up by 50 percent in 2020.
The average revenue per user (ARPU), defined as the total revenue divided by the number of subscribers has been dropping every year in the last decade. ARPU is a metric that helps businesses better understand the sustainability of their operations and a possible path to profitability. In the communications sector, ARPU is dropping.
Vandalism remains a big issue. Billions are lost yearly. Monthly there are countless fibre cable cuts, thousands of generators stolen and diesel siphoned from base stations.
All these are in addition to the exigencies of running a business in a highly competitive space like telecommunications. Operators are known to be cutting costs to improve sustainability.
Yet someone expects prices to crash?
The expectation of tariff reduction is not based on any known fact. It doesn’t add up. It is almost impossible to expect tariffs to drop when everything else is going up.
Yes, telecom tariff reduction is desirable. But there are things that must be done to achieve this. To provide a guide, here are five things that the government can do to actually improve the chances of sustainable tariff reduction.
First off, let the reduction in right of way charges be implemented across every state. The government at the federal and state levels must work together here. Then it would really be meaningful. Some others have suggested that there should be different tariffs for different states. This is another option worth a thought.
Then there is the issue of VAT. There is a need to reduce VAT, revert to the previous five percent status. The truth is that ‘VAT is cake’. You can’t eat it and still have it.
Furthermore, there should be special exchange rates to aid and indeed facilitate the procurement of telecom equipment. Efforts should also be made to encourage, where possible, indigenous production of some components.
The government should also provide grants to promote investments and better-quality services in underserved areas. The Universal Service Provision Fund (USPF) was established precisely for this sort of things. One can only wonder about what is going in that space right now.
Generally, there is an urgent need to improve the general ease of doing business. This covers clearance at the ports, improvement in power supply and regulatory fairness, among other. Nigeria is currently ranked 131 on the World Bank’s Doing Business 2020 index. It can be better!
Lower telecom tariffs are truly desirable. It would greatly benefit the consumers. It would also impact the economy, positively. But it should be a business decision and not by executive fiat.
The government needs to think holistically. Supply, demand and operating costs are near indispensable items in this discussion.
In reality, government fiat and regulation are not the ideal ways to strengthen market competition that would lead to price/tariff reduction. Indeed, it is always better to encourage market competition, create a platform for it to thrive and promote the progress made.
This is the way to go.
Elvis Eromosele, a Corporate Communication professional and public affairs analyst lives in Lagos.