Government Initiatives

Upon realizing that telecommunications infrastructure is an important enabler and source of economic growth and social development, African governments took various initiatives in addition to market liberalization and privatization policies to strengthen the industry. Most government policies have generally aimed at increasing access and use of telecommunications services in their respective countries. These government initiatives that have been adopted can be grouped in three categories as described below:

Tax instruments to attract investment in the sector

In most African countries, the telecommunications sector has been given a preferential treatment, in that governments have used various tax instruments to attract capital to spur its development. Given the large number of countries and variance in the mandates established within each country, the type of the tax instrument used, its scope and the duration of implementation vary across countries. Mainly, tax instruments are designed to attract investment in infrastructure by lifting some tax obligation from the infrastructure companies. Two tax arrangements are most common among African countries. First, tax holiday granted to the telecommunications operators from paying corporate taxes. For example, in Nigeria and Ghana, telecommunications network operators are entitled to a seven-year holiday from paying their corporate taxes. This is assumed to assist companies in reinvesting their profits in network expansion and modernization, especially in the initial years. Second, some countries have opted to waive import tax for imported network equipment. This option was taken by, for example, Zambia where it is still implemented, and Tanzania until 2014 when it was abandoned. These tax incentives have been designed to attract investments in both greenfield and expansion projects.

Despite these favourable tax initiatives for investors, African countries have imposed high taxes on users of telecommunications services, hampering adoption and consumption of telecommunications services. The cost of the ICT basket which includes the cost of fixed phone, mobile phone and broadband services shows that Africans are paying 41 percent of their average monthly income on ICT services, which is the highest proportionally compared with other parts of the globe (ITU, 2009). At the same time, a survey made among 101 countries worldwide commissioned by the GSM Association in 2007 measuring taxes imposed in mobile services, shows that only 17 countries globally imposed additional taxes on mobile services, but 7 out of those are in Sub Saharan Africa (SSA) (GSMA and Deloitte, 2008). The final cost burden therefore, which includes Value Added Tax (VAT), customs and excise duties, as well as other lump sum taxes, turns to the same citizen the governments have tried to protect through market regulations. Figure 2.2 shows the percentage of tax imposed on mobile services by the different governments across Africa in 2007 (Moshi, 2009).

Figure 0-2 - Taxes on mobile services in African countries, 2007

Source: GSM Association & Deloitte. 2007. Global Mobile Tax Review 2006 – 2007. Taxes have been updated to reflect changes in Malawi, Ghana, Rwanda and Tanzania.

Considering the total cost of ownership of a mobile phone, the tax section of the cost has been very high among countries in SSA, where Uganda ranks 4th, Tanzania 5th, Kenya 11th and Rwanda 26th out of 101 counties with 27 percent, 27 percent, 25 percent and 21 percent of Total Cost of Ownership respectively. A study done in Uganda shows that “there has been a slowdown in uptake of mobile phone services over the recent past, suggesting that tax increases result in a significant discouraging effect on uptake and consumption of service” (Hisali, 2007). The tax burden usually affects the poorer consumers who have not yet accessed the mobile services comparatively more than wealthier users the majority of which have already acquired mobile phones. The proper calibration of taxes imposed on mobile services as part of VAT or special taxes on the services can have a positive impact by extending the reach of ICT services to the marginalized. The study showed that the elimination of mobile excise tax would result in a more than fifty percent increase in demand between 2007 and 2010, considering that poor customers are more responsive to changes in prices (ITU, 2008, Moshi, 2009).

The benefits of tax reductions, and especially excise duty, go beyond reducing the burden to the citizens and increasing penetration of mobile services to providing more revenue to the government in the long run. The GSMA study shows that a reduction of excise tax in Uganda, which is the country with highest mobile service tax, from 12 percent to 3 percent should result in an immediate drop of prices of mobile services, followed by an increase in penetration. Including the spill-over effects on other industries, in a period of 5 years the government should reach the previous level of tax revenue with an increasing trend, not to mention the general benefits of providing an important good to the marginalized population (GSMA & Deloitte, 2008).

The dilemma nonetheless exists for some governments, that is, the trading of some present tax revenue from mobile services for increased penetration of mobile services and increased tax revenue in long run (Moshi, 2009).

Government investment in telecommunications infrastructure unattractive to private sector

Although mobile technology has experienced rapid adoption in Africa, fibre network expansion has been lagging behind. As the world is moving fast towards digital switching and data communications, current trends suggest a move towards heavy data usage. The nature of fibre broadband infrastructure is that it has huge start-up costs especially for digging, cables and installation, hence huge initial investments but very low maintenance cost while supporting high volume and speed of data transfer which can be upgraded by changing technology on the nodes. Most mobile telecommunications operators in Africa are consequently faced with various business and organizational difficulties in deploying fibre network infrastructure. First, they have yet to need the high volume of data experienced in the developed world; second, it is very costly for each operator individually to deploy fibre networks not to mention this would induce the duplication of backbone infrastructure, something which is costly for the industry and society at large as well. Third, organizationally, they tend to be selective in which parts of the country they should deploy, meaning which areas would give them an infrastructure competitive advantage, hence the difficulty for operators to cooperate on joint fibre backbone projects.

Due to these reasons, most countries in Africa have made construction of national fibre network a component of their ICT policy. The rationale for governments, in addition to the reasons given above, is to provide an integrated project that will reduce capital expenditure, mobilize infrastructure access nation-wide, and serve businesses as well as social priority organizations such as schools, universities and hospitals (Mbarawa,

2012). Governmental provision is therefore the most common strategy in backbone fibre broadband deployment in Africa, currently adopted in South Africa, Tanzania, Cote d’Ivoire, Kenya, Rwanda, Burundi, Chad and Botswana⁴. For example in Uganda, the government invested USD 96.5 million to deploy its National Broadband network contracted to Huawei Technologies; the Ethiopian government invested USD 2 billion, where USD 1.5 billion is vendor-financed equipment and 500 million is implementation funded by the incumbent, which is wholly owned by the Ethiopian government. All these projects were at the time of writing either in the design or implementation phase.

Other initiatives

Given the low literacy rates of the African population, it is essential for African governments to stimulate and facilitate the use of telecommunications use, especially for advanced services such as broadband.

For example, the government of Rwanda has deployed ICT initiatives to improve its health sector and education delivery. For the former initiative, the Rwandan government has been deploying the Open Medical Record System (OpenRMS) in hospitals and clinics to facilitate nation-wide tracking of patient data and stores the data for other actors in the health sector such as researchers, doctors in hospitals and pharmacies in need of forecasting medicine needs. On the education front, by 2012, the Rwandan government had distributed 210,000 laptops to its primary schools⁵, as a continuous project to create an Internet aware citizenry.

The collective effect of these governments’ initiatives, ranging from supporting investors in competitive segments to deploying broadband infrastructure and stimulating telecommunications services demand, complements the issues that liberalization has failed in, or will take longer to

4http://afterfibre.net/ retrieved 30^thApril 2014

5http://wiki.laptop.org/go/Rwanda retrieved 2nd June 2014

address. Indeed, African governments do consider the telecommunications industry as a strategic one, and are adopting key roles in its development and growth.