Uganda: Airtel Uganda Faces Higher Running Costs in Policy Changes

The activities of Indian telecommunication giant Bharti Airtel's Ugandan unit could come under increasing scrutiny in the coming months as authorities move to align the telecommunications sector policy with new market realities.

This move reflects the realisation that the government could have been losing millions of dollars in potential earnings from licence fees as operators expanded the scope of their services but continued to be licensed under a classification that attracts lower fees.

Another operator that could be affected by the changes is Africell which, though smaller, has also been expanding its services.

The likely impact for Airtel Uganda could be exposure to higher operating costs and loss of idle frequencies according to the new Broadband Policy adopted by the Cabinet at the end of September 2018.

Among other changes the policy introduces a "use or lose it" approach to management of spectrum that will make it mandatory for sector regulator Uganda Communications Commission to repossess unused spectrum.

The provision aims to prevent hoarding of spectrum, which had resulted into the emergence of a blackmarket for spectrum to the detriment of prospective operators.

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According to Vincent Bagiire, the Permanent Secretary in the Ministry for Information and Communications Technology, efforts will also be made to whip into line operators that have exploited gaps in the law to operate businesses beyond the scope of their classification while skimping on licence fees.

National operators will also be required to have a national footprint as opposed to the current arrangement where they can choose where to provide services, as long as they meet the minimum rollout threshold.

All these developments put Airtel Uganda directly in the firing line. Although it held 37 per cent of the market by September 2018, Airtel controls 60 per cent of the spectrum, thanks to mergers and acquisitions over time.

Should it be reclassified as a national operator, Airtel would not only have to fork out more money in licence fees but would also be required to provide for more capital expenditure, to meet the new geographical requirements.

Airtel has enjoyed a market advantage over rivals because, while its operating licences are valued in millions of dollars, the telco has been paying just $100,000 for its public service provider licence every five years.

That translates into an annual licence cost of just $20,000, compared with $5.8 million for its nearest competitor.

Mr Bagiire said that such anomalies will be addressed and the market re-aligned under the new Broadband Policy.

Separately, The EastAfrican has learnt that in a bid to pre-empt the new policy, Airtel applied for renewal of its PSP licence and paid the requisite $100,000 in November.

Both the company and Uganda Communications Commission would not comment on these reports beyond confirming that an application for licence renewal had been submitted and was under review.

For years, Airtel's competitors have complained that its cheap licence has given it the advantage to drive aggressive pricing which has put pressure on yields across the sector.

Uganda has been the only profitable unit among Bharti Airtel's regional operations, posting a net profit of $62.12 million in 2017.

That compared with the $44.9 million profit the unit reported for 2016 as its Tanzanian and Kenyan siblings struggled with a combined loss of $135.6 million for 2017.

That pushed the two operations' cumulative loss to $1.07 billion. Although lower than the $79.4 million loss it posted in 2016, the Kenyan unit still closed 2017 at $59.5 million in the red.

Airtel Tanzania narrowed its loss to $48.06 million, down from 56.4 million the previous year.

Any exposure to higher costs in Uganda as a result of regulatory action would aggravate the situation for the parent that has kept the units afloat through borrowing.

Although revenues in Kenya have been under pressure, Airtel Uganda has been able to gain traction on account of a lower unit cost, which has attracted usage and subscribers through discounting on its voice and date.

Its rivals insist that Airtel Uganda has been able to perform so well and put them under pressure because of structural anomalies in the market.

Licensed as a "cellular operator" in 1995, when its predecessor Celtel entered the market at the dawn of the liberalisation of Uganda's telecoms sector, the initial licence restricted the operator's services to voice and messaging.

But over the course of two acquisitions starting with Zain in April 2005 followed by Bharti Airtel five years later, the company has been able to expand its product offering without changing its licence classification.

Besides two international gateways, Airtel offers virtually all the products of its competitor including data and mobile money.

According to the ICT Ministry, the current regulatory regime falls short of international norms and the new policy is designed to cure this.

The operators' licences are vertically integrated, giving them control over both infrastructure and content, which stifles growth and local participation.

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