Uganda Radio Spectrum Policy May Force Price Hikes

Over the last five months, telecommunications companies and wireless data service providers in Uganda have been engaged in a quiet war with the Uganda Communications Commission (UCC) over a new pricing structure for radio spectrum that will see rates increase for operators and, in turn, end users.

As it stands, the industry regulator seems to have come out on top and has enacted the new policy, which operators have described as too drastic.

"Players were not really consulted. A paper was sent to stakeholders while UCC had a structure in mind," Infocom Limited CEO Hans Haerdtle said in an interview. "UCC had already made its decision. The consultation paper on the fees came out in March but was distributed to the stakeholders in June. New invoices reflecting the new fees have been distributed, so that means the decision is final."

While the players interviewed do not have a problem with UCC's review of the fee structure (the first since the liberalization of the industry 10 years ago), they do take issue with the rate hike and the implementation of the new pricing policy.

"I think the biggest thing is the drastic nature of the increase. The increases range from 15 percent to 1,000 percent in some cases," said Erik van Veen, chief commercial officer of MTN Uganda.

"The market has changed, yes, and UCC is entitled to do a review," van Veen added. "But when you are to affect such a change, surely you do it in a measured way."

The rate hike in spectrum fees took effect on July 1, according to UCC's official communication to the service providers. Operators, however, continue to hold meetings aimed at forcing UCC to rescind.

For a data services company like Infocom, which needs a minimum 20MHz broadband allocation to offer quality service and have meaningful coverage, annual fees have risen from 1.5 million Uganda shillings (US$928.79) per megahertz to 15 million shillings per megahertz.

According to Haerdtle, the hiked fees present problems to operators' existing business plans and budgets.

"If the regulator comes to you with a revised fees structure in the middle of the year, how do you accommodate that?" he wondered. "The risk of that is that the communication cost for the public will go up."

Van Veen was unable to provide an exact figure to describe the new cost of MTN's annual wireless spectrum fees.

"It is pages and pages of fees and too complex, but all I can tell you is our spectrum costs will go into billions of shillings annually -- that is what it is going to cost us," he said.

"UCC used a benchmark basis, which is fine," van Veen added. "It is just that price increases have to be done on an incremental basis. It would have worked better if the same fees were going to be slowly increased over a given time period."

When requests were made for such an incremental approach, however, the UCC responded that the pricing was outdated and that the commission was in need of funds, van Veen revealed.

"We are in an inflationary period, and the pressure of cost is high. An increase like this is going to put pressure on the industry to increase prices," van Veen warned.

The increase will affect nearly all MTN services, he said, in order for the company to recover its costs.

Haerdtle noted that very few players, especially in the data market, have a large enough margin to swallow the fees without raising their prices.

If prices do increase and the new policy scares off would-be investors, the development may undermine UCC's policy of rolling out communication services to the countryside, as operators will have to weigh the cost of investing in inviable areas.

According to sources, UCC has made the price adjustments based on the Kenyan and Tanzanian pricing structures.

Kenya, however, doesn't have a flat fee, as is the case in Uganda, and the market is 10 times the size of Uganda's, Haerdtle said. The price for spectrum in Kenya, he explained, depends on the number of base stations an operator runs.

"The new Uganda structure is such that you pay a flat fee, even when you have a few base stations," he noted. "If you compare what you pay here to what a Kenyan operator of your size will pay, then you realize the pricing policies are not the same."

Haerdtle suggested that there is need for a divided approach to determine if the proposed fee structure fits into the market. He reckoned that the UCC should have considered the size of the Ugandan market before the increases were made. While the new fees are perfect for a larger market, he argued, Uganda's communications sector is growing at a rate of 5 percent to10 percent per year.

"How do we reconcile that with the 100 percent increase in price? If the sector was growing at 100 percent, such an increase would make sense," Haerdtle said.

Radio spectrum is the cheapest mode for sound transmission globally. Alternatives include optic fiber cables or satellite transmission masts, but both options are expensive to deploy on a large scale.

Related:

Copyright © 2008 IDG Communications, Inc.

Get the best of CIO ... delivered. Sign up for our FREE email newsletters!