Cashing in from telecoms

Governments that treat the telecoms sector as a cash cow will ultimately hinder development

Tags: EgyptIndiaOrascom Telecom HoldingTaxVimpelCom (www.vimpelcom.com)Vodafone
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Cashing in from telecoms Governments that place financial burdens on the telecoms sector could hinder economic growth.
By  Roger Field Published  November 2, 2010

While many countries in emerging markets continue to work hard to liberalise their telecoms sectors and promote growth, it is apparent that a few governments in the region still view the telecoms sector as a ready source of cash.

A prime example is Algeria, which having already levied some questionable back-taxes against the country’s most successful mobile operator, Djezzy, decided that it wanted to take ownership of the telco, which is currently owned by Egypt’s Orascom Telecom.

At a time when most developing nations see the clear benefits of privatisation, it is unusual to see a country apparently flying in the face of reason.

The Algerian government has also been accused of attempting to scupper the acquisition of Djezzy by possible acquirers. Last month, the government struck an unreasonable tone with Russian telco VimpelCom, which has agreed to acquire most of Orascom Telecom’s assets, in a move that could easily be viewed as an attempt to derail the deal.

While the facts about the tax levied on Orascom Telecom by Algeria’s government are difficult to judge, it is easy to sympathise with Orascom Telecom’s chairman, Naguib Sawiris, who stated that Algeria’s government was envious of the success Djezzy had earned in the market.

Another operator that is likely to sympathise with Sawiris is Vodafone Group.
The UK-based mobile operator is experiencing a similar problem in India, where the tax authority claims the telco owes an eye-watering $2.53 billion in back taxes relating to its $11 billion acquisition of Hutchison Whampoa’s stake in a domestic Indian operator back in 2007.

While the full facts of the case are yet to emerge, Vittorio Colao, Vodafone’s CEO, said the outcome of the dispute could be a key factor in determining the company’s future investments in India, according to a report from Reuters.

While it is not yet clear which party is at fault in Algeria or India, it is clear that both countries see their telecom sectors as a cash cow, rather than an engine that helps drive the economy.

The most likely reason that the government of Algeria wants to take ownership of Djezzy is because it sees the potential to earn additional cash that is currently going to a private operator.

In India, the recent 3G auction process demonstrated a similar line of thought. The auction raised serious doubts from analysts, who questioned just how the operators would be able to afford to deploy 3G networks after paying inflated prices for their licences, which raised a combined total of $15 billion for the Indian government.

Meanwhile, in Iraq, there are growing signs that the government intends to become directly involved in the telecoms sector. The country’s government said in May that it planned to take a stake in a proposed fourth mobile operator, and would take 35% of its revenues as part of the deal.

While stealth taxes, back taxes and lucrative auction processes might raise some short term cash for governments, it should also be remembered that the money has to come from somewhere – and much of it is cash that operators would have otherwise ploughed into their networks. Operators can only pass on the additional costs they face. The upshot is that the customer pays the price.

There is certainly no shortage of data to demonstrate the correlation between mobile and broadband penetration and economic activity, which means governments stand to benefit from a healthy telecommunications sector. There is also no shortage of evidence to demonstrate that operators benefit from being in private hands.

2512 days ago
Robert

If the Telecom sector is thriving, it is mainly thanks to mobile phones manufacturers, rather than the deployment of 3G or any other technology. Telecom operators are earning a lot of money with iPhone, iPod, and Blackberry contracts and deals. Without these deals, many telecom operators would have filed bankruptcy since ages.

2519 days ago
Raph

Sorry, but your analysis concerning Algeria is a world away from reality. Algeria is not hungry for cash, the country's Foreign Exchange Reserves amounted to more than $150 billion, as of October 2010. The problems of Orascom Telecom with the Algerian government started in 2007 when Orascom Construction (another branch of the Orascom conglomerate) sold all its Algerian assets to Lafarge (a French company that is blacklisted in the country because of its role during the Algerian war of independence) without notifying the government.

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