Ovum Bangladesh Main Report1f

8/4/2019 Ovum Bangladesh Main Report1f

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LEGAL NOTICE:

Neither the GSM Association nor their Members or Associate Members are responsible or

the use that might be made o this publication. The views expressed in this publication are

the sole responsibilit o the author(s) and do not necessaril reect the views o the GSM

Association, their Members or Associate Members

Barney LaneSusan SweetDavid Lewin

Josie SephtonIoanna Petini

April 2006

The Economic and Social

Benets o Mobile Servicesin Bangladesh

A case study or the GSM Association


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The Economic and Social Benefts o Mobile Services in Bangladesh

Ovum April 2006 | GSM Association |

1 Executive Summary

The GSM Association commissioned Ovum to conduct a stud into the economic and social benefts omobile services in Bangladesh. We were asked to examine whether there were an polic barriers that maprevent the ull extent o an benefts o mobile services rom being realised. In the event that polic andlegislative barriers were ound, we were asked to identi recommendations or change.

In recent ears, the mobile industr in Bangladesh has developed at an extraordinar rate. Toda there areapproximatel ten million mobile customers and coverage extends to 90% o the population. With a populationo 44 million (2005 fgures), Bangladesh is the seventh most populous countr in the world.

Our ke fndings rom the stud are as ollows:

Almost a quarter o a million Bangladeshi depend on the mobile industr, directl and indirectl.

Mobile services contribute US$650 million to the econom ever ear.

Mobile services are good value or mone when compared with other countries.

Mobile communications allow businesses to operate with greater efcienc.

For ever additional 0 percentage points o mobile penetration, the annual GDP growth rate is increased bapproximatel 0.6%.

Higher mobile penetration will assist Foreign Direct Investment (FDI). Increasing penetration b % increases FDI asa proportion o GDP b 0.5%.

The poorest citizens beneft most rom mobile services.

Mobile services improve social cohesion, assist in reducing the digital divide, improve access to healthcare and can

help improve users qualit o lie.

However the ull realisation o these benefts is in jeopard unless frm polic and legislative action is taken.The ke concerns that need to be addressed are:

High taxes. O particular concern is the ver high burden o industr specifc taxes (taxes levied on this industr onl

but not others).

Considering all activities linked with the sector

2

, these comprise 35% o the total tax generated b theindustr. This diverts resources awa rom the mobile communications sector and towards less productive sectors.

The tax polic is likel to be counter-productive or the Government as it reduces total tax revenue. Ultimatel, theconsumer pas as the operators have no option but to pass the taxes through to their customers. Worse still, the taxregime makes mobile services much more expensive or those who need them most: the poor and those living in

rural areas.

The interconnection regime. The interconnection regime the sstem that controls paments between operatorsor connecting calls is undamentall awed and in need o reorm. Currentl, the interconnection sstemsubsidises the less productive and more expensive fxed-line services, whilst harming the more productive and cheaper

mobile industr.

Industr specifc taxes include revenue share charges, roalties on handsets, connections and supplementar dut and BTS licence ees. Generic taxes include VAT

on usage charges, income tax, import dut on capital machiner and corporation tax.

2 This includes income tax (which in Bangladesh is not actuall paid b emploers). To allow the tax burden to be compared between dierent countries, we haveincluded income tax in the denominator.


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2 | GSM Association | Ovum April 2006

Like the tax regime, the interconnection regime increases the cost o services to members o the populationwho need it most the poor and those living in rural areas.

The threat o political and regulator pressure on the operators to reduce prices aster than is sustainable, based on thealse belie that services in Bangladesh are more expensive than in similar countries. In act, our analsis shows that themobile operators in Bangladesh deliver good value or mone and do not make excessive profts. This also addresses

the argument that excessive profts are repatriated. The (limited) profts are mostl reinvested.

The artifcial restrictions on the mobile operators handling o international calls. Currentl onl BTTB is allowed to

operate an international gatewa.

We oer the ollowing recommendations to address these problems:

Industr specifc taxes should be graduall reduced and, in the medium term, removed entirel. This will encourage thedevelopment o the industr, the econom and increase government revenues.

Currentl, mobile-to-mobile interconnection is based on reciprocit. Likewise, fxed-to-mobile interconnectioncharges should be introduced on a reciprocit basis to increase mobile penetration and generate greater economicand social benefts.

Mobile-to-fxed interconnection charges should be brought down towards cost to bring an end to this inefcientsubsid rom the mobile to the fxed sector.

Competition is the best regulator: the government should allow competition between the mobile operators to

determine mobile retail prices. No action, ormal or inormal, should be taken to regulate mobile retail prices. Pricecontrols are well recognised to be a ver blunt instrument: the are costl to design and implement and preventoperators structuring their prices in was necessar to maximise customer welare. However, in the case o fxed retail

prices, the argument or retail price regulation is ver much an open debate especiall in the light o BTTBs impendingrestructuring and privatisation.

The prohibition on competitors using WLL technolog to provide mobilit should be eectivel enorced.

International gatewas should be liberalised to improve competition in the provision o outbound international calls.

Measures should be introduced to encourage local equipment assembl and manuacturing o components such as

switch boxes, batteries and raw materials to ensure a reliable and low-cost source o suppl to the industr and toensure that more o the benefts o mobile services remain within Bangladesh.


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Ovum April 2006 | GSM Association | 3

Contents

1 Executive Summary 1

2 Introduction 7

3 Economic Impact o Mobile Services in Bangladesh 9

3. Introduction 9

3.2 Contribution to the Econom

3.2. The Static Suppl Side Contribution

3.2.2 Dnamic Demand-side Eects 8

3.3 Retail Pricing and Interconnect Rates 22

3.3. CPP versus RPP 22

3.3.2 Retail Pricing 23

3.3.3 Interconnect Rates 27

3.3.4 Retail Charges and Interconnect Rates: Conclusion 30

3.4 Distributional Eects 3

4 Social Benets o Mobile Services 33

4. Introduction 33

4.2 Promoting Social Cohesion 33

4.3 Users with Low Education and Literac 34


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4.4 Local Content 34

4.5 Mobile Services in Natural Disasters 34

4.6 Promoting Social Responsibilit 35

5 Policy Issues and Recommendations 37

5. Taxation 37

5.2 Interconnection Charging 38

5.3 Retail Taris 39

5.4 Wireless Local Loop Operators 40

5.5 International Calls 40

5.6 Local Manuacturing 4

5.7 Other Polic and Legislative Proposals 4

6 Conclusion 42


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Annex 1: Retail Price BenchmarkingMethodology

The OECD Mobile Baskets 43

Limitations o the Model 49

Tpes and Distribution o Trafc 49

Promotions and other Charging Characteristics 50

Other Costs o Ownership 50

Inputs or the Benchmark 5


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Annex 2: Interconnect Rate BenchmarkingMethodology

Interconnect Benchmark Methodolog 53

Data Gathering 54

Standardisation o Interconnection Charges 54

Exchange Rates 55

Interconnect Basis, b Countr 55

Bangladesh 55

India 55

Indonesia 56

Pakistan 56

Sri Lanka 57

Thailand 57


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2 Introduction

The purpose o this stud is to evaluate the impact o mobile services on Bangladeshs econom and societ,assess the impact o government polic on the perormance o the sector and to present conclusions andrecommendations on areas in which polic can be improved.

The realit o polic making is that decisions must be based upon balancing priorities. How man jobs areat stake? Does societ beneft rom mobile services? How do the aect the economic and social lives odisadvantaged groups? Will the availabilit o mobile services improve economic growth? We address all thesequestions. We also consider whether Bangladeshi customers receive good value or mone b comparisonwith other countries and i necessar, what action can be taken to improve value or mone.

The frst cellular operator was Bangladesh Telecom (Pvt) Limited (BTL), which received permission to provideservice in 989. The permission transerred initiall to Pacifc Bangladesh Telecom Limited (PBTL) who startedtheir operation in 993. Later in 2004 most o the share was purchased b Singtel. PBTL operates underthe brand name CitCell. GrameenPhone, Aktel and Sheba were awarded licences in 997. GrameenPhonequickl established market leadership, owing to its relationship with the not-or-proft Grameen Bank. Thisenabled it to conduct the necessar credit-checks to develop the Village Phone concept whereb a creditworth village dweller would, or a small ee, loan their mobile phone to other residents. It is difcult to over-estimate the importance o the Village Phone in making mobile services more accessible to poor and ruralsocieties in Bangladesh. It also provides women with another orm o emploment and empowerment.

Ater a period o declining market share, Banglalink purchased Shebas licence in 2004. CitCell entered themarket in 2004, ollowed b Warid in December 2005. The incumbent fxed line operator, BTTB also enteredthe market via Teletalk.

Recentl, the industr has experienced explosive growth. Penetration stood at just 0.2% in 2000 but this roseto 6% b the end o 2005. Forecasters expect this to continue, bringing the subscriber base to 8 million b2007 and penetration to nearl 3%. Factors contributing to this growth are low levels o teledensit, thelimited perormance o fxed-line operators, considerable oreign direct investment (FDI), and lower pricesdriven b increased competition and economies o scale.

In 2004 the success o the industr, signalled b high rates o revenue growth attracted the attention o thegovernment, who sought to cash in b imposing a controversial tax o US$8 on each new connection. Inresponse to strong criticism, the tax was reduced to US$3.50 in August 2005. However, industr specifctaxation - taxes appling to the mobile industr and not others - remains high. An obvious example is theUS$6 roaltcharge, paid annuall per connection, which applies onl to mobile subscriptions and notfxed subscriptions. The size o the gre market or mobile handsets - in which up to 70% o all new handsetswere entering the countr inormall - orced the governments hand to reduce tax on handset imports romUS$22.50 to US$4.50. 3

3 The roalt charge was amended in March 2006


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In terms o the economic impact o mobile services in Bangladesh, Ovums analsis ocuses on the staticsuppl side contribution o mobile services on the one hand, and dnamic demand-side contributions on theother.

For the static analysis, we construct a value chain, which quantifes the contribution, or value-add o themobile sector to adjacent sectors such as dealerships, fxed operators (FNOs) and the government. We alsoestimate the emploment impact o mobile services in terms o the number o jobs resulting directl andindirectl rom the sector. The estimates are based on data obtained through publicl available sources such

as audited accounts and interviews with the operators. Collecting data is an intensive exercise and as alwas,where data are not available, we have had to make estimates and approximations. However, it is Ovums viewthat the results presented in this report provide an accurate estimate o the contribution o mobile services tothe econom.

A health communications sector has extensive knock-on benefts or the econom at large. So a static analsis,though relativel easil quantifed, does not provide a complete picture o the impact o the sector on theeconom. To address this shortcoming, we consider the dnamic demand-side impacts o the mobile sector,including its impact on productivit and economic growth. Estimating the impact o mobile communicationson economic growth is a difcult task, principall because o the difcult in establishing the direction ocausation. It is obvious that richer countries have higher levels o penetration, but which is the cause andwhich is the eect? We review the fndings o economic research to cast some light on this.

The social impact o mobile services is even harder to quanti. In assessing the (non-economic) impact omobile services, we examine some o the was in which mobile services might be expected to aect the liveso users and their associates. We also review some surve data taken rom Arica on how the use o mobilephones has aected the lives o users there.

The remainder o the paper is structured as ollows:

Section 3 examines the economic impact o mobile services in Bangladesh, taking into consideration the suppl-sidestatic impact, the dnamic impacts, the distributional impacts, and whether or not mobile services are delivering valueor mone to users.

Section 4 examines the social impact o mobile services.

Section 5 considers the ke polic issues aecting the perormance o mobile services in all the dimensions describedabove and makes polic recommendations.

Finall we draw together our conclusions in Section 6.


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3 Economic Impact o Mobile Services inBangladesh

3. Introduction

The impact o mobile services on the econom o Bangladesh, as everwhere, is potentiall ar-reaching.A high-qualit communications inrastructure is widel held to allow human capital to be deploed moreeectivel and more productivel. For these benefts to be realised in Bangladesh and distributed evenlthroughout societ, it is crucial to have a mobile telephon service that is cheap, widel available and o highqualit.

Currentl, fxed and mobile teledensit in Bangladesh is ver low, as illustrated b Figure 3.. However, inrecent ears mobile services have grown strongl.

Figure 3. Fixed and mobile teledensit in Bangladesh

Source Ovum

It is evident rom Figure 3. that, despite the best eorts o the operators to grow, the vast majorit o thepopulation does not have access to telecommunications. We estimate that the contribution GDP in 2005 wasrelativel small, owing to the industrs outh, at approximatel % o GDP4.

4 In Latin America and India mobile services also account or % o GDP. In the European Union (EU5) the account or.% o GDP.


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These fgures substantiall under-state the true contribution o mobile services to the econom. The ICTsector, o which telecommunications is a crucial component, is broadl understood to be a ke driver orproductivit and economic growth (this is explored in Section 3.2.2). In addition to comprising an importantand growing component o output, mobile services pla an important role in allowing individuals andbusinesses to improve their productivit. Mobile telephon is not, as is sometimes claimed, a rivolous luxuror a rich mans tobut an important business and social tool, allowing users to conduct their aairs withgreater efcienc and lower cost, whilst allowing amilies to sta in touch more easil.

Tpicall in developing countries, mobile services now take the role that fxed communications plaed indeveloped countries in the 950s to 970s. However, countries developing toda have the advantage thatmobile communications are ar cheaper and easier to deplo than fxed communications. The lower costo installing mobile services compared with fxed services, particularl in rural areas, allows disadvantagedgroups to gain access to communications more quickl. Mobile is thereore a more egalitarian mode ocommunications than fxed.

B improving the communications inrastructure o Bangladesh, mobile communications ma also have a roleto pla in improving the ow o oreign direct investment (FDI) as investors are ar more likel to invest in acountr with a well established communications inrastructure.

Because o the relative ease with which mobile communications networks can be deploed and the

replicabilit o the business models rom countr to countr, mobile communications is usuall one o thever frst technolog related sectors to enjo the benefts o (FDI). Potential investors in other sectors watchthe perormance o the mobile sector closel to establish whether the polic environment is riendl orhostileto oreign investment. A regime that is seen to appl taxes opportunisticall using industr as a cashcow, or one that uses successul industries to prop up less successul ones, is likel to deter FDI.

Despite its encouraging growth to date, the mobile sector in Bangladesh aces some severe challenges ahead.Chie among these concerns are:

The dramatic increase in taxation. This raises the price o mobile services, slows its development and harms the industr,its customers, emploees and all the sectors that depend on it. Paradoxicall, these taxes prevent the ver people whoneed them most rom gaining access to services.

An interconnect environment that avours the incumbent fxed operator.

The uneven treatment o mobile operators and Wireless Local Loop (WLL) operators who provide competing servicesbut enjo a much more avourable taxation/licensing ramework.

Together, these issues threaten to stall the development o the mobile industr and prevent the benefts omobile services in Bangladesh being ull realised.

The remainder o this section is structured as ollows:

Section 3.2 quantifes the suppl side contribution o the mobile industr to the econom using 2005 data. It alsoexamines the dnamic demand-side eects o mobile communications on productivit and economic growth.

Section 3.3 looks at retail and interconnect prices in Bangladesh.

FinallSection 3.4 considers how the benefts o mobile services are distributed across geo-demographic categories

(wealth and poor, urban and rural).


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Ovum April 2006 | GSM Association |

3.2 Contribution to the Econom

3.2. The static suppl side contribution

In this section, we quanti the contribution o the mobile industr to the econom, covering the industr andits adjacent sectors. O course, such analsis cannot provide a complete picture o economic impact o mobileservices. In particular:

It is a snapshot view. It does not take account o uture benefts resulting rom growth. It also ails to show thebenefts resulting rom an growth in local suppl o capital equipment such as handset assembl and componentmanuacturing that might develop as the industr progresses.

It ails to take account o the important demand-side benefts that mobile communications provides to all commercialenterprises in terms o reducing their costs and improving their efcienc. This is considered in Section 3.2.2.

Third, it takes no account o the social benefts o mobile communications, which are considered in qualitative terms

in Section 4.


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The Value Chain

Figure 3.2 shows how end user spend on mobile services and terminals ows along the value chain to thevarious plaers which make up the industr.

Figure 3.2 The mobile services industr value chain. All fgures in US$5

Source: Ovum

The fgures next to the arrows represent ows o mone rom one group to another. The fgures inside theboxes represent the value add retainedb each group. The sums retainedare used to pa wages, taxes andother costs. The government revenues o US$256 million come rom all groups identifed and covers all tpeso taxes, or example import dut, VAT, corporation tax and income tax.

Our estimates are based on:

discussions with three mobile operators.

analsis o the operators published accounts.

5 Note: the fgure or fxed to mobile interconnection paments is an approximation. Some interconnect revenue is available rom the private fxed operators but thevast majorit o fxed to mobile calls originate rom BTTB.


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Figure 3.3 presents the same data in tabular orm.

Figure 3.3 The mobile services industr value chain

Industry Role Revenues Costs Value Add

Dealers 283 226 57MNOs 599 343 256

Terminal manuacturers 227 55 72

Network equipment suppliers 76 4 62

FNOs 54 9 35

Support service suppliers 33 33

Component suppliers to network equipment suppliers 4 4

Component suppliers to terminal suppliers 55 55

Other capex suppliers 28 28

Total US$812

Source: Ovum

We fnd that the mobile industr in Bangladesh created a total value-add o US$82m in 2005. US$256m othis was retained b the mobile operators and was used to pa emploee wages and taxes. The remainder wasretained b the dealers (US$57m), terminal manuacturers (US$63m), equipment suppliers (US$62m), fxedoperators (US$35m), support services (US$33m) and a total o US$297m to equipment suppliers.

Contribution to Government Revenue

One o the major benefciaries o the mobile industr is the government. Tax revenue is generated in manwas. A large proportion o the value-add retained b the mobile operators is used to pa taxes such asVAT, import dut, handset roalt and supplementar dut. Wage income accruing to emploees is subject to

income tax.6 Value-add owing to other sectors also generates tax revenue. We fnd that the ows o undscreated total revenue o US$256m in 2005 or the government. The breakdown o tax revenue is shown inFigure 3.4. It includes tax revenue derived rom all components o the value chain.

6 We assume in our estimations that the government is successul in collecting all the income tax due.

Revenues (US$m) per year


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Figure 3.4 Government revenue

Government Revenue (US$m)

a) VAT on usage charges and handset sales 2

b) Revenue share charges 8

c) Roalt on handsets 46

d) Connections & supplementar dut 36e) BTS roalt

) BTS licence ee 0

g) Income tax 37

h) Import dut on capital machiner 5

i) Import dut on handsets (total)

TOTAL 256

Source: Ovum

We also estimate that the tax take rom the mobile operators in 2005 amounted to US$74m, or 27% o theirrevenues. Importantl, as shown in Figure 3.5, 35% o these taxes are industr specifc. These are startlingfgures, the more so because the denominator includes tax taken rom all adjacent sectors sector. One reasonthe industr is taxed so heavil is to compensate or an inefcient income tax sstem. Making emploeesresponsible or their own income tax makes it difcult to monitor whether all taxes are being paid as due. Themobile industr, however, is a ver eas tax target because the inputs (handsets and network equipment) andoutputs (connections and airtime) are easil monitored.

Figure 3.5 Split o taxes between mobile industr and generic tax

Source: Ovum


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In a previous report on the mobile industr in India, Ovum recommended the Indian government reducedtaxes on its mobile industr because the were abnormall high. However, b an measure, industr specifctaxes in Bangladesh are ar higher than in India. In India, industr specifc taxes account or 20% o theindustrs cost base, whilst in Bangladesh, industr specifc taxes account or 29% o the industrs cost base.Also, in India, industr specifc taxes account or 30% o government revenue generated b all sectors relatedto the mobile industr. In Bangladesh, the comparable fgure is 35%.

Contribution to EmploymentThe contribution o mobile services to emploment comprises our components. First, there is the directemploment o the industr or workers directl emploed b the plaers in the value chain. Second, there isthe supportemploment, which is created b outsourced work and taxes that the government subsequentlspends on emploment generating activities. Third, there is the indirectcategor, which covers other costsas well as proft generated, which is subsequentl spent on emploment generating activities. Finall, there isthe induced emplomentcategor which reers to jobs created as emploees and other benefciaries spendtheir earnings, thereb creating extra emploment.

The induced emploment is estimated using a multiplier, in this case .6.7 The association Francaise desOperateurs Mobiles8 assumes a multiplier o .7 when estimating this eect in a similar stud and the UKOfce o National Statistics estimates a multiplier o .5 or telecommunications. We have chosen a value

between these two.

As shown in Figure 3.6, we estimate that the mobile industr in Bangladesh created 237,900 jobs in Bangladeshin 2005.

7 The multiplier is intended to reect the second-order economic activit created b the sector. This reers to the spending and earnings rom the sector that aresubsequentl spent on other activities, creating more emploment and economic activit, and so on.

8 La Filiere Mobile: quel impact sur leconomie Francaise? Jul 2003


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Figure 3.6 Emploment in Bangladesh rom mobile industr

Employment rom mobile services (000) Direct Support Indirect Induced Total

Dealers 9.9 9.9 0.0 29.9 79.8

MNOs 4.4 38.2 3.8 27.9 74.3

Support services suppliers 0.0 23.0 5.8 7.3 46.0

FNOs 0.6 5.2 0.7 3.9 0.4Other capex suppliers 6.8 6.8 3.4 0.3 27.4

Terminal suppliers 0.0 0.0 0.0 0.0 0.0

Terminal component suppliers 0.0 0.0 0.0 0.0 0.0

Network equipment manuacturers 0.0 0.0 0.0 0.0 0.0

Network equipment component suppliers 0.0 0.0 0.0 0.0 0.0

TOTAL 31.8 93.2 23.6 89.2 237.9

Source: Ovum

Distribution o Value Add by Geography

As shown in Figure 3.7, approximatel hal o the value added remains within Bangladesh. The other hal isexported to the rest o the world. The proportion retained in developed regions like the EU is much higheras shown in Figure 3.8. This demonstrates the beneft o having indigenous upstream inputs (e.g. handsetsand network equipment) or retaining value-add within the region. Figure 3.9 shows the same comparison inthe case o India. The proportion o value-add retained within India is ver similar to that in Bangladesh. TheIndian government is taking steps to help the development o an indigenous component suppl industr toallow a greater proportion o the value-add to be retained.

O course, as penetration grows and demand or equipment increases, an increasing proportion o thecomponents such as batteries, switchboxes and raw materials are starting to be manuactured in Bangladesh.The growing demand or mobile services in Bangladesh represents a major opportunit or urther growthand development in the manuacturing and assembl o equipment.


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Figure 3.7 Distribution o value-add: Bangladesh

Source: Ovum

Figure 3.8 Distribution o value-add: EU5

Source: Ovum

Bangladesh

Distribution of Value Added in Region vs Rest of World

51%

49%

In region

To rest of World

EU15


21%

79%

In region

To rest of World


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Figure 3.9 Distribution o value-add: India

Source: Ovum

3.2.2 Dnamic demand-side eects

The estimates provided above signifcantl understate the ull economic impact o mobile services. Here,

we identi some o the was in which mobile services can aect productivit and growth as reported ineconomic literature, particularl:

Waverman, Meschi and Fuss (2005)9.

Ovum/Indepen: The economic impact o mobile services in Latin America.

This research indicates that increasing mobile penetration b ten percentage points in a developing countradds 0.6 percentage points to the annual GDP growth rate, approximatel double the eect on GDP growthas in a developed econom.

These results reect New Econom eects, a term used to describe the abilit o inormation andcommunications technolog to generate competition, new distribution and production methods and

ultimatel, non-inationar growth. Mobile telephon is an important part o the new economhaving thepotential to improve economic perormance through man channels, or example b:

Reducing costs b enabling companies and workers to trade without travelling. A stud rom South Arica and

Tanzania0 ound that 52% o South Arican users and 67% in Tanzania said mobile phones greatl reduce travel time.58% o users in South Arica and 65% in Tanzania said mobile phones greatl reduce travel costs.

9 Arica: The Impact o Mobile Phones. The Vodaone Polic Paper Series Number 3 March 2005

0 Arica: the impact o mobile phones: Vodaone Polic Paper Series, Number 3 March 2005

India


53%

47%

In region

To rest of World


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Mobile services can improve the dissemination o inormation to allow markets to operate more efcientl (orexample allowing armers to check agricultural prices without travelling). Farmers without telephon have difcultdiscovering commodit prices and inputs, such as ertilisers.

Mobile services raise efcienc b allowing workers to be in touch when awa.

Mobile services allow workers better access to inormation on where their services are required (or example a plumbercan act more quickl and efcientl when accessible via telephone rather than reling on word o mouth).

There is some evidence that mobile services assist countries in attracting Foreign Direct Investment (FDI).

It is eas to see that economic growth and growth in mobile penetration are positivel correlated, (Figure3.0), taken rom a sample o developing countries.

Figure 3.0 Relationship between growth in mobile penetration and GDP growth

Source: ITU and CIA World Fact Book.

See Vodaone Polic Paper Series, Number 3 March 2005 page 9 or reerences to studies showing the improvement in agricultural prices available to armers andfshermen with access to telephon in Asia, Arica and Latin America.


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Figure 3. shows the same data in tabular orm. O course, evidence o a correlation is not sufcient to establisha causal link with variables that are likel to be interdependent such as mobile penetration and economicgrowth. As people grow richer, the are more likel to purchase mobile services. 2 But the econometric workdone b Waverman and Ovum/Indepen indicate that such endogenous eects are, at best, limited and thatincreased mobile penetration does indeed lead to increased economic growth.

Figure 3. Relationship between growth in mobile penetration and GDP growth

Growth Rate in MobilePenetration 2003-2004

Real GDP Growth Rate2004-2005

Cameroon 42% 5%

Egpt 29% 4.50%

Ethiopia 79% 6.50%

Gambia 59% 7.0%

Kena 56% 5%

Senegal 44% 6.0%

Bangladesh 101% 5.20%

Bahrain 38% 5.90%

India 04% 7.0%Indonesia 54% 5.30%

Jordan 7% 5.50%

South Korea 8% 3.70%

Kuwait 37% 4.50%

Malasia 29% 5.0%

Manmar 42% 5.0%

Pakistan 04% 8.40%

Philippines 44% 4.70%

Sri Lanka 57% 4.70%

Source: ITU and CIA World Fact Book.

2 Although a correlation is not sufcient to establish causation, there is a ear time-lag between the change in mobile penetration and GDP growth. This ear time-

lag resulted rom a lack o more recent data availabilit or mobile penetration but could be interpreted as strengthening the argument that an increase in mobilepenetration is at least in part, a contributor to GDP growth.


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Research

In 2005, Waverman, Meschi and Fuss estimated the impact o mobile services on economic growth indeveloping countries.3 Amongst their fndings where that:

Mobile phones in less developed economies are plaing the same crucial role that fxed telephon plaed in the richereconomies in the 970s and 980s Man countries with under-developed fxed-line networks have achieved rapidmobile telephon growth with much less investment than fxed-line networks would have needed.

Mobile telephon has a positive and signifcant impact on economic growth and this impact ma be twice as large in

developing countries compared to developed countries In developing countries, we fnd that the growth dividend isar larger because here mobile phones provide b and large, the main communications networks; hence the supplantthe inormation-gathering role o fxed-line sstems.

A developing countr which had an average o 0 more mobile phones per 00 population between 996 and2003 would have enjoed [annual] per capita GDP growth that was 0.59 percent higher than an otherwise identical

countr.

Given the low penetration o both fxed and mobile services in Bangladesh, the pa-o rom increasingpenetration there is likel to be greater than in man other countries. Former developing countries such asSingapore, Hong Kong and Malasia prioritised investment in telecommunications as a ke part o theirdevelopment strateg, with considerable success.

There is some evidence that mobile services positivel impact Foreign Direct Investment (FDI). Mark Williamso Frontier Economics4 ound a statisticall signifcant positive relationship between mobile penetration andFDI ows. Williams notes that higher investment is central to achieving long-term sustainable economicgrowth and povert reduction in developing countries, that oreign investors are an important source o capitalfnance and that some tpes o oreign investment ma bring spill-over benefts to the recipient countr in theorm o transer o skills, tax revenues and ormal emploment.

The author examined the relationship between FDI and the characteristics o the recipient countries,ocusing particularl on the relationship between FDI ows into developing countries and the penetrationo mobile telecommunications networks in the recipient countr. Williams ound that both fxed and mobilecommunications networks, in addition to other characteristics including openness o the econom, GDP andinrastructure, are positivel linked with inward FDI.

Based on an analsis o a range o developing countries, Williams ound that a per cent increase in mobilepenetration was associated with a 0.5% to 0.6% increase in FDI as a proportion o GDP. He noted the well-recognised benefts o FDI, which include improved emploment opportunities, skills and technolog transer,and access to capital. Data presented in the same report show Bangladesh as having one o the lowest ratioso FDI to GDP in the world, indicating that improvements in this area could ield large dividends.

3 There is a signifcant bod o research suggests that attempts to identi a link between teledensit and economic growth. Hard (980) ound that the impact otelecoms investment was greatest in the least developed economies. Although this stud is old and concerned with fxed networks, it is reasonable to suggest mobilecommunications in developing countries are capable o perorming the same role as that perormed b fxed communications in developed countries in previousdecades.More recentl, a stud b Roeller and Waverman (200) suggested that in the OECD, the spread o modern fxed-line telecoms networks was responsible or onethird o GDP growth between 970 and 990.



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3.3 Retail Pricing and Interconnect Rates

Understanding whether mobile communications in Bangladesh are delivering good value or mone toconsumers is an important part o understanding their economic and social benefts. Here, we comparedretail taris and interconnect rates in a number o countries with similarities to Bangladesh.5 There are mancomplications in such comparisons. One o them is the tax regime. It is difcult to take ull account o thetaxes when comparing prices and we do not attempt to do so here. However, high taxes, which are ultimatelborne b consumers, should be taken into account when considering the comparisons shown below.

The interconnection regime should also be taken into account, given the interactions between the retailmarket and interconnection markets. In Bangladesh, the interconnection regime is characterised b highfxed-to-mobile interconnect costs and (abnormall compared with other countries) zero interconnectionrevenues rom the incumbent fxed operator. Taken together, the high taxes (which do not appl to the fxedsector) and the interconnection regime created involve a strong cross subsid to the fxed sector (mostl richand middle-class customers) rom the mobile sector (mostl poor customers).

Another actor that needs to be taken into consideration (but which the benchmarks do not reect) is thecharging period. In some o the countries considered here, India or example, the charging period is oneminute, meaning that a one second call costs the same as a one minute call. In Bangladesh the chargingperiod is ten seconds.6 The benchmarks thereore atter India relative to Bangladesh, showing the ormer tobe relativel cheaper than it actuall is.

Finall, the size o the pre-pa vouchers should be taken into account when comparing retail taris. Largevouchers require signifcant amounts o cash, which deters poorer users and ma expire ater a certain time.In Bangladesh, voucher sizes are small compared with the other countries considered.7

3.3. CPP versus RPP

In Bangladesh subscribers pa to cover the mobile operators costs in terminating some inbound as well asoutbound calls (Receiving Part Pas or RPP). The absence o interconnection revenue rom fxed-to-mobilecalls rom BTTB orces the mobile operators to charge their customers or receiving calls. Thereore, CPP hasonl been partiall implemented in Bangladesh. This complicates the benchmarking process. In India thecalling part pas ull or each call (Calling Part Pas or CPP). In our benchmarks, we exclude pamentsmobile subscribers make or inbound calls. We discuss the signifcance o this exclusion below.

India introduced CPP in 2003 to reduce the negative impact on growth o RPP. As a result, customers bumobile prepaid services or as little as Rs200 per month ($5). Some do not pa or calls at all, using the missedcall eature to let (richer) acquaintances know that the should call back.

The signifcance o RPP in Bangladesh goes ar beond its role in complicating the benchmarking process: italso gives rise to serious polic questions or the government. In 999, the ITU commented on the impact oRPP as ollows:

5 A detailed description o the construction o the tari benchmark is provided in Annex .

6 In some cases the charging period is onl second. For example, Aktels charging period or post-paid services is second.

7 The importance o small voucher sizes, or micro pre-pais discussed in Telecoms demand: measures or improving aordabilit in developing countries, LondonSchool o Economics 2006.


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RPP results in less usage, causes mobile customers to turn their phones o, causes mobile customers not to give

out their telephone numbers, and increases the cost o cellular ownership.

In a calling part pas (CPP) regime.there is no charge or calls received, so mobile phones become attractive to

more people (including those on low/fxed incomes); mobile customers leave their phones switched on, increasing

completion rates or incoming calls, thus increasing trafc.

In developing countries, the mobile phone is the communication device o the low income segments hence cost

relie should be targeted at them. E.g.: via CPP where incoming calls become ree while the mobile operator is ullcompensated or termination costs.

Figure 3.2 below shows the eect o introducing CPP in Mexico, in earl 999. In 998 the operators startedintroducing CPP tari plans in anticipation o the orthcoming changes in the interconnect regime. The fgureshows a dramatic acceleration in penetration ollowing the introduction o CPP.

Figure 3.2 : Penetration o fxed and mobile services in Mexico (Number o lines per 00 inhabitants inDecember o each ear)

Source : ITU, COFETEL, Telmex.

3.3.2 Retail Pricing

The fgures in this section summarise the average cost o ownership split into fxed and variable charges andtaxes. We have used the standard OECD basket and amodifedbasket, to reect usage patterns in developingcountries. Our view is that the modifed basket is a more accurate basis or comparison in this case.


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The overall charges or each countr have been converted into US$ using a composite o 40% exchangerate and 60% purchasing power parit (PPP)8. Using the modifed basket, we see rom Figures 3.3 and3.4 that Bangladeshs low user prices are in line with the average. Moreover, fxed charges are the lowestin Bangladesh9 and signifcantl lower than India, Pakistan and Sri Lanka. This tells us that a ke barrier toentr in owning a mobile fxed costs is small in Bangladesh. Mobile ownership is a much more attractiveprospect when users can control spending through usage rather than acing fxed charges.

The taxation identifed in the basket is the level o VAT on usage charges. It does not take account o additional

taxes, such as handset roalt, import duties and supplementar dut. These also raise the cost o ownershipo mobile services.

Figure 3.3: Average Cost o Ownership or low user baskets (OECD and modifed) US$ per ear

Source: Ovum, December 2005

8 This reects the act that approximatel 40% o costs incurred are through investment in capital equipment and 60% o costs are due to labour charges.

9 The fxed charges incorporate a portion o the connection charges and the monthl charge. We use a composite basket, in which pre-paid services do not necessarilcome out cheapest.


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Figure 3.4 Average Cost o Ownership or low user baskets (OECD and modifed) US$ per ear

Low user OECD Basket Low user Modied Basket

Country FixedCharges

VariableCharges

Taxes TotalCharges


VariableCharges

Taxes TotalCharges

India 22.35 70.25 9.28 0.88 Thailand .64 56.78 4.09 62.5Pakistan 6.90 73.48 5.82 06.2 India 22.35 34.55 5.70 62.60Thailand .64 05.40 7.49 4.53 Bangladesh 2.79 62.54 9.80 75.3

Bangladesh 2.79 04.77 6.3 23.69 Pakistan 8.74 59.62 7.09 85.45Sri Lanka 8.6 98.86 8.8 26.28 Sri Lanka 8.6 65.02 2.89 86.52Indonesia 32.29 3.23 45.52 Indonesia 0.58 87.67 8.825 97.07


Figure 3.5 shows the average cost o ownership or the medium and high user OECD baskets. We can seethat Bangladesh is still in line with the average.

Figure 3.5: Average Cost o Ownership or medium and high user baskets, US$ per ear



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Figure 3.6: Average Cost o Ownership or medium and high user OECD baskets, (US$ per ear)


VariableCharges

Taxes TotalCharges


VariableCharges

Taxes TotalCharges

India 22 95 22 239 India 66 340 4 446Thailand 58 70 23 35 Thailand 256 323 4 620Bangladesh 9 37 50 386 Pakistan 65 386 38 689

Pakistan 39 277 70 386 Bangladesh 24 544 00 768Sri Lanka 25 369 69 463 Sri Lanka 02 72 44 968Indonesia 457 46 503 Indonesia 984 98 ,083


Figures 3.7 and 3.8 show the average cost o ownership or the medium and high user modifed baskets(based on a distribution o 80% calls to mobile and 20% calls to fxed line). There is no eect in the relativeposition o Bangladesh.

Figure 3.7: Average Cost o Ownership or medium and high user OECD baskets, US$ per ear


Medium User High User


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Figure 3.8: Average Cost o Ownership or medium and high user OECD baskets, (US$ per ear)

Medium user Modied Basket High user Modied Basket


VariableCharges

Taxes TotalCharges


VariableCharges

Taxes TotalCharges

India 22.35 7.97 9.47 23.79 India 66.23 275.2 34.20 375.55Thailand 72.09 25.64 22.66 346.39 Thailand 256.37 296.89 38.73 59.99Bangladesh 2.79 308.06 44.63 357.48 Pakistan 33.76 406.6 34.98 674.90

Pakistan 44.45 246.6 72.65 363.27 Bangladesh 08.40 509.57 92.70 70.66Sri Lanka 24.85 354.97 66.47 44.29 Sri Lanka 02.07 668.6 34.79 905.02Indonesia 0.58 436.68 43.73 480.99 Indonesia 0.58 98.98 9.96 ,0.5


ITU Benchmarking Study

The ITU recentl published a report in November 2005 entitled ITU Internet Reports 2005: The Internet oThings, which inter alia, provides global comparison on mobile taris involving 206 countries. In the report,the ITU has classifed the countries according to income categories Low Income, Lower Middle Income,Upper Middle Income and High Income. Bangladesh is listed in the Low Income categor.

Among the conclusion that can be drawn rom the report are as ollows:

. In terms o mobile connection charges, Bangladesh is certainl comparable to India,with Pakistan and Sri Lanka

having the more expensive connection charges;

2. In terms o mobile service charges, Bangladesh ma be slightl more expensive than its South Asian counterparts orlocal call (peak) charges but almost the same or local call (o-peak) charges. SMS charges also appear to be almost

similar; and

3. In terms o the monthl cost o the basket o mobile services or low users, Bangladesh however appears to be

slightl higher than the rest o its South Asian counterparts.

It is worth noting that the conclusions derived from the ITU study are similar to Ovums analysis presented here.

3.3.3 Interconnect Rates

Setting interconnection charges at the right level or competition and investment is the primar role otelecommunications regulators. Setting charges too low discourages investment, whilst excessive chargesincrease retail prices. This section compares interconnect prices between Bangladesh and other countries.It is worth noting that the comparison is not entirel apples-to-apples because interconnection chargesin the countries considered are set using a variet o methodologies, including cost-orientation and senderkeeps all.20

20 The methodolog used in constructing the interconnect benchmarks is described in detail in Annex 2.


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Figure 3.9: All interconnect rates, US$ or a 2.5 minute call2


Fixed to mobile and mobile to fxed rates are tpicall reciprocal. The two exceptions to this are:

Bangladesh, where mobile operators are not paid to terminate fxed trafc on their network b BTTB22, and, at the sametime, suer the highest fxed termination rates in the stud countries

Pakistan, where mobile operators receive a higher rate than the mobile to fxed. This fxed to mobile rate will bereduced rom Jul 2006 b 22%.

Fixed to Mobile Interconnect Benchmark

As Figure 3.20 shows, the highest fxed to mobile termination rate is or Thailand, ollowed b Pakistan andIndia, and fnall, Bangladesh. These results need to be considered alongside the mobile to fxed rates, wherethe same rates appl in reverse. The one exception to this is, o course, Bangladesh, where or the reverse

situation, Bangladesh becomes the most expensive countr in the stud.

2 Note that prices reported here ma dier substantiall rom prices converted at market exchange rates because o the use oPPP

22 Although interconnect rates are paid b private fxed operators


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Figure 3.20: Fixed to mobile interconnect rates


Mobile to Fixed Interconnect Benchmark

As Figure 3.2 shows, the outstanding eature o the mobile to fxed interconnect benchmark is the price inBangladesh - particularl given that fxed to mobile termination rates are zero. Thailand is also expensive, butreciprocit applies, meaning that fxed to mobile interconnect rates are also high and mobile retail taris aregenerall amongst the lowest in our retail analsis.

Figure 3.2: Mobile to fxed interconnect rates



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Mobile to Mobile Interconnect Benchmark

Figure 3.22 shows that Bangladesh has one o the lowest mobile to mobile termination rates in our analsis,with Pakistan the highest. The rates or Pakistan are as determined b the Pakistan Regulator Authorit.However operators ma mutuall agree on lower interconnection charges, i the wish.

Figure 3.22: Mobile to mobile interconnect rates

3.3.4 Retail Charges and Interconnect Rates: Conclusion

Retail taris in Bangladesh are in line with the average or the countries considered here. What conclusionsshould we draw rom this? The main points are as ollows:

The mobile phone industr in Bangladesh is considerabl smaller than that in some o the other countries considered,particularl India. Countries with larger mobile industries will enjo stronger economies o scale. It is thereoreimpressive that Bangladesh delivers taris in line with the average considering the lack o economies o scale.

No analsis o retail charges can be conducted in isolation rom interconnect rates because o the linkages betweenthe two. This is sometimes reerred to as the waterbed eect. The waterbed eect reers to the phenomenon where

competition orces operators to pass through their interconnect revenues into retail prices. In a competitive market, itis reasonable to expect interconnect revenue to be passed through dollar-or-dollar.

Operators in Bangladesh ace ver high mobile-to-fxed interconnect rates, resulting in a high cost-base. This createsa substantial disadvantage or Bangladesh when comparing with other countries.

The retail benchmarks atter India versus Bangladesh because the charging period in India is minute, whilst inBangladesh it is onl ten seconds.


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The high industr specifc taxes appling to mobile operators in Bangladesh must also be recovered b the mobileoperators in retail charges in order to ensure an adequate return on capital.

The cost o ownership o mobile services in Bangladesh could be substantiall reduced i the countr allowed fxed tomobile interconnection charges, as India did in 2003.

The comparison used here is sensitive to the exchange rate used. In Bangladesh the market exchange rate islow compared with the PPP value. Thereore, i pure market exchange rates were used, the prices in Bangladeshwould appear much lower and possibl the lowest in the comparison.

On the basis o the above, we conclude that mobile retail prices in Bangladesh are air. There is no evidencethat the operators profteer at the expense o the consumer and thereore, there is no case or mobile retailprice regulation, ormal or inormal.

Interconnection rates are signifcantl out o line with peer countries. Fixed-to-mobile charges do not existin Bangladesh (except rom the small, private fxed operators). Most countries do allow fxed-to-mobileinterconnection ees. Meanwhile, mobile-to-fxed interconnection rates in Bangladesh are ver high inrelation to peer countries. There is a strong case or reducing mobile-to-fxed interconnectioncharges and allowing fxed-to-mobile interconnection charges. In Bangladesh the law is conusing.The Telecommunications Act 200 stipulates cost-based interconnection whilst the InterconnectionRegulation 2004 provides or several options rom sender keeps all to cost orientation. The apparent

inconsistenc between these two needs to be resolved.

3.4 Distributional Eects

Some have claimed that mobile communications increase the digital divide because the are onl accessibleto rich people. This ignores undamental dierences between rich and poor countries. In rich countries, mostusers own their phones. In poor countries, most regard their phones as amil or communal assets.

Research into use o mobile phones in South Arica and Tanzania ound that mobile users reduce costs bbeeping the call recipient.23 Not surprisingl, the same stud ound that the number o calls made andtext messages sent increases with income. Previous work b Ovum demonstrates that mobile services allowcommunications to reach poor and rural areas much more easil than fxed services. The cost o adding a fxed

line is approximatel $800, whilst the cost o an additional mobile user is that o a second-hand handset:about $20.

To obtain the ull benefts o the Internet and messaging services with a fxed network, the user requires acomputer. Most cheap mobile handsets allow SMS, email and WAP based Internet services.

The dramatic growth in mobile services can thereore pla an important role in reducing the digital divide.Mobile services pla a ke role in helping members o societ to be connected and gain access to inormationand services that improve their standard o living. The availabilit o mobile services also allows technologtranser: b improving the level o technical knowledge and understanding o digital communications. Thesefndings suggests that polic should be directed towards improving accessibilit. Taxes, or example, thatincrease the cost o suppling mobile services should as ar as possible be avoided.

23 Calling and hanging up beore the call is connected. The receiving part calls back at their own expense


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Moreover, research examining the impact o mobile communications in developing countries on the welareo the poor identifes the ollowing important eects:

Mobile communications improve the chances o the unemploed o fnding emploment. There are several means bwhich this ma occur:

Enabling users to call or opportunities rather than rel on word o mouth.

Taking advantage o the Internet or seeking job opportunities.

Improving emploabilit. Emploees with mobile phones are more productive as the are easier

to contact when awa.

Cutting out the middleman. For certain occupations such as trading in commodities and agriculture, where thecentres o suppl and demand are widel dispersed, it is tpical or middlemen to bu produce rom centres osuppl and sell it where the demand is located. The specialise in knowing where there are imbalances o suppl and

demand and oten extract most o the proft rom trade. With mobile telephon, traders can obtain inormation onprices directl, enabling them to trade more proftabl. This improves incomes o producers and helps reduce wastageand shortages.

Improving the efcienc o all workers in the econom. The eect will be elt particularl or workers with unpredictableschedules. Examples are an workers involved in repair and maintenance and collection and deliver, plumbers and

electricians. Mobile communications allows them greater accessibilit and thereore superior knowledge o demand.Mobile communications can increase the productivit o all workers who, or an reason, need to be awa rom theirmain location o work.

There is some evidence that the availabilit o telecommunications in rural communities can enablethe development o non agricultural economic activit. Studies in Thailand 24 , show that villages withtelecommunications develop small scale manuacturing businesses frst.

24 Bruns, Bran et al, Village Telephones: Socio-economic Impact and Implications or Rural Futures, paper presented at 6th International Conerence on Thai Studies,October 996. http://www.cm.ksc.co.th/~bruns/rurtel.html


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4.3 Users with Low Education and Literac

In Bangladesh, it is common or mobile phone owners to use them or the beneft o those with low levelso education and literac, or example, b relaing SMS messages. This is similar to the fndings in Tanzania,which ound that 60% oowners have secondar education or higher, whilst over 60% o users have onlprimar education. The same stud ound that owners are more likel to have higher incomes whilst users aremore likel to have lower incomes.

The operators in Bangladesh recognise the importance o broadening the accessibilit o their services. Forexample, Aktel has recentl pioneered and launched a Bengali language SMS service.

4.4 Local Content

Access to data services encourages local content, allowing users to learn about local services such as healthcare,as well as their general standard o education and knowledge in current aairs. Access to data services allowsorganisations to provide basic inormation such as protection against dangerous conditions such as avianinuenza and other diseases, surger times and how to obtain vaccinations.

Mobile communications provide these capabilities to all sectors o societ, whilst fxed services do not. Indeveloping countries, fxed services are generall onl available to wealth individuals and corporations.

Given an appropriate polic regime, mobile services can be extended to all the whole population.

4.5 Mobile Services in Natural Disasters

Mobile services dramaticall improve access to emergenc services, which would otherwise onl be availablethe wealth. It also allows amilies to sta in touch with each other in the event o natural disasters, communicatewith relie providers and obtain inormation that will allow them to obtain more rapid relie.

A recent stud The Roles o Mobiles in Disasters and Emergencies26 into the use o mobile phones indisaster relie used network data and other evidence to tr to understand how people used mobile phones inextreme circumstances. The research identifed that mobile phones are used in the ollowing situations:

Earl warnings.

Disaster impact.

Immediate atermath.

Recover and rebuilding.

26 GSM Association 2005


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One o the most consistent messages to emerge was the beneft o the timel spread o inormation in responseto a disaster. The research ound that while mobiles are onl one element o a whole arra o communications,the are especiall eective at diusing inormation rapidl to where it is most urgentl needed. Particularlimportant is the superior resilience o mobile compared with fxed networks and the abilit to install newcapacit ver quickl where needed. For example, in the atermath o the Asian Tsunami:

Within a da o the disaster, Nokia ew in crews to start the reconstruction o the mobile network. In another da it

had rerouted base stations on their wa to other destinations, and reconfgured them to ft the pre-existing network.Also on the frst da ater the tsunami struck, Nokia delivered the frst phones and technical support to relie agencies,

primaril the Red Cross/Red Crescent.

Swedens Ericsson AB was also present within a da to help rebuild the mobile network, donating 0 radio-base

stations or Banda Acehs network along with hundreds o mobile phones and technical sta. The compan donated,300 mobile phones and a team to restore communications in Sri Lanka.

Amongst the main conclusions o the stud was that using SMS (seldom available on fxed networks)rather than voice is more eective during emergencies. Text messages are more likel to get through (usingless network capacit or can be queued and sent when there is ree capacit) and ease congestion on thenetwork.

This analsis shows that, in the immediate atermath o a disaster the contribution o mobile is substantialthanks to the speed with which cellular networks can recover rom damage27. It is much easier to repair a

wireless base station than hundreds o fxed-lines. This was strikingl demonstrated in the speed o restorationo mobile services to customers in the US ater Hurricane Katrina.

4.6 Promoting Social Responsibilit

As one o the astest growing sectors o the econom, mobile operators have taken steps to promote socialresponsibilit, the education and welare o communities and emploees.

For example, GrameenPhone has developed policies with the stated intention o ensuring that the deal withcustomers, emploees, suppliers and the government in a sociall, ethicall and environmentall responsiblemanner. The highlight the particular importance o participating in education in ICT, economic empowermento women, health, saet, the environment and the preservation o heritage.

Aktel has also taken steps to promote corporate citizenship b oering scholarships to meritorious andfnanciall need Bangladeshi students to stud courses in engineering, Inormation technolog or businessadministration in Multimedia Universit, Malasia.28

27 Usuall within hours or, at most, a ew das

28 For urther details, see http://www.aktel.com/scholar.php


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The Village Phone Programme

Through the Village Phone programme, GrameenPhone continues to pla an important role in extendingcommunications to the masses. In co-operation with Grameen Bank the Village Phone programme involves asmall number o users in a particular regional communit, such as a village, in possession o a mobile phoneto loan the phone to all other members o the communit or a small charge. The Village Phone programmeallows the ver poorest members o societ to remain in contact with amil members in the cities and abroadat ver low cost. For example, it allows users with low credit-worthiness access to communications without

having to pa an up-ront ee or a scratch card that the ma not be able to aord or a post-pa service thatwould otherwise not be accessible to them. Fixed-line services are generall not available in the villages andother rural communities.

Diane Cole (2005) noted that law enorcement agencies have given GrameenPhone some credit or reducingrural crime rates in Bangladesh. 29

The Village Phone programme is an example o the steps that the mobile operators are taking to ensure thattheir services are accessible to the members o societ who need it most: - those in rural communities andthe least wealth.



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5 Policy Issues and Recommendations

As the previous chapters demonstrate, there is substantial evidence that mobile services deliver strong beneftsin terms o economic perormance and social welare. In particular, the operators in Bangladesh have beensuccessul in:

Delivering emploment to almost a quarter o a million people.

Extending telecommunications to citizens without fxed lines.

Achieving ver high levels o coverage in a short period o time.

Delivering good value or mone when compared with other markets with similar characteristics, despite the high taxburden, lack o economies o scale and the lack o interconnect revenues rom the incumbent fxed operator.

However, urther growth is in jeopard without frm polic action. Ke issues are:

The high industr specifc taxes, comprising over a third o the total.

The interconnection regime, the most important eature o which is the lack o interconnection revenue rom BTTB.

The threat o political and regulator pressure on the operators to reduce prices aster than is sustainable based on thealse belie that mobile communications are expensive in Bangladesh.

The inequalit in the taxation/licensing regime between mobile operators and competitors using Wireless Local Loop(WLL) technolog.

The artifcial restrictions on the mobile operators handling o international calls.

Each is considered in turn.

5. Taxation

Figure 3.5 showed that industr specifc taxes comprise 35% o total taxes. This ver high level o taxationgives rise to a number o problems, specifcall:

It increases the price o and reduces the demand or mobile services. The secondar eects o this are:

Damage to economic and social welare rom lower mobile take-up.

Damage to the poor who are denied the benefts o mobile communications.

It diverts unds rom more productive sectors and into less productive sectors.

High taxation on the mobile sector prevents it rom competing eectivel with fxed operators. Hence, competitivepressure on fxed operators is lower, reducing incentives to improve their efcienc, lower their prices and improve

their qualit o service.

High taxation on mobile communications reduces government revenue. There are two reasons or this: one in the

short term, the other in the long term:

In the short term, higher prices result in lower demand. Whether this reduces tax revenue depends whether

tax costs are passed on to the customer and the customers price elasticit o demand. In competitive markets,economic theor predicts that market-wide cost increases are ull passed through to the customer. Waverman,Meschi and Fuss ound that the price elasticit o demand or mobile services in developing countries is high at

-.5. The implication is that higher taxes ma reduce government revenue even in the short term.


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In the long term, high taxes reduce penetration preventing the benefts o high penetration ull being realised.As a result, productivit suers leading to lower economic perormance and ultimatel lower tax revenues.

These conclusions are confrmed b research contained in the stud Tax and the Digital Divideb the GSMAssociation. The authors concluded:

I low-cost handsets were made exempt rom import duties and sales taxes, up to 930 million additional low-cost

handsets could be sold b 200 in the 50 countries in the stud, leading to an increase in mobile phone penetrationand a rise in total tax revenues in some countries.

I a government lowered taxes on mobile usage bjust one percentage point, that could boost the number o mobileusers b more than 2% b 200.

Eliminating the special taxes could boost the numbers o mobile users in the 9 aected countries b 34 million (or8%) b 200.

The removal o all sales and customs taxes on mobile handsets and services could prompt an increase in mobilepenetration o up to 20 percentage points, according to an analsis b the London Business School.

The stud urther notes that the Indian government has shown the benefts o lower tax to be real. Ithas reduced handset import dut helping to boost mobile penetration rom less than % to more than5%. However, the stud notes that urther work is still needed as other fscal barriers to mobile usage inIndia remain.

The above does not necessaril impl that there should be no industr specifc taxes or licence ees.It is reasonable to price spectrum at a level that encourages efcient utilisation and covers the costso administration.

Recommendation: taxes specic to the mobile industry should be removed to encourage thedevelopment o the industry, the economy and to gradually increase government revenues. Theonly industry specic taxes should be spectrum ees. These should be set at a reasonable level toencourage ecient utilisation and to cover the costs o administration.

5.2 Interconnection Charging

As shown above, the interconnection regime in Bangladesh stands out in that it:

Involves no fxed-to-mobile ees rom BTTB to the mobile operators.

Involves above-cost mobile-to-fxed interconnection ees.

In combination this represents a substantial cross-subsid rom the mobile to the fxed sectors, which is bimplication a cross subsid rom the poor to the rich.

Mobile-to-fxed interconnection charges are high in Bangladesh compared with other countries.Mobile operators are orced to pass these costs to their own customers, limiting mobile penetration andeconomic growth.

Ever call that terminates on a mobile operator involves a cost that needs to be recovered. The onl means the

operators have to recover the cost is through retail prices to their own users. The operators in Bangladesh have


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to a certain extent, tried to charge or inbound calls but this has not been successul or low users because ithas been ound to deter usage.

Thereore, the operators have been orced to adopt a sophisticated price-discriminationscheme, to avoiddeterring the (poorer) low users, whilst collecting the required revenue rom the (richer) high users. Onemethod is to oer the frst minute ree o charge, knowing that poorer users will deliberatel disconnectbeore the frst minute, possibl reconnecting thereater.

Fixed operators customers beneft rom mobile users. The should be required to pa or this beneft, as thedo in most other countries. Mobile users represent a signifcant new market or BTTB as it increases their callrevenues. It also represents a beneft or BTTBs customers because it introduces new opportunities to contactcustomers, colleagues, suppliers, amil, riends, etc. It is air and reasonable or fxed operators to covermobile operators costs in connecting calls.

Ater introducing fxed-to-mobile interconnection charges, call charges would all as a result o the waterbedeect. This would allow mobile penetration to increase, improving economic and social welare and increasingtax revenue.

Recommendation: xed-to-mobile interconnection charges should be introduced to compensatemobile operators airly and to increase mobile penetration. Mobile-to-xed interconnection chargesshould be reduced to cost to end the inecient subsidy rom the mobile to the xed sector. There is

also a need to address the anomaly between the Bangladesh Telecommunications Act 2001 and theInterconnection Regulations 2004 with respect to charging mechanism.

5.3 Retail Taris

As demonstrated above, retail taris in Bangladesh are reasonable when compared with those in countrieswith similar characteristics. This is despite the:

High taxes existing in Bangladesh.

Substantial capital investment b mobile operators building their networks.

Lack o fxed-to-mobile interconnect revenue.

High mobile-to-fxed interconnect costs.Lack o economies o scale compared with countries with a larger user base.

It is thereore reasonable to conclude that competition is unctioning eectivel and consumers are receivingair value or mone. Furthermore, with the introduction o Warid in December 2005, the sector will becomeeven more competitive.

There is thereore no need or the BTRC or the government to regulate mobile retail prices either throughdirect regulation or through inormal pressure. An residual concern regarding the level o mobile retail pricescan be addressed b lowering taxes and removing the irregularities in interconnection charges.


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Retail price controls on mobile services might:

Push prices to a level where operators have no incentives to invest urther.

Prevent pricing innovations such as special packages or rural customers.

Recommendation: no action, ormal or inormal, should be taken to regulate mobile retail prices.On the other hand, the issue o xed retail price regulation should also be seriously consideredgiven the impending restructuring and privatisation o BTTB where tari rebalancing may potentiallybe and issue.

5.4 Wireless Local Loop Operators

Currentl, WLL operators oer a cellular service using CDMA that competes with the GSM mobile operators.Although such operations are small, we expect them to grow. The are prohibited rom oering mobilit underthe terms o their licence. There are good reasons or this, most important o which is that the taxation regimethe ace is substantiall more lenient than that aced b the mobile operators. Accordingl, competition isheavil distorted, providing WLL operators with an unearned and inefcient market advantage.

Because o the covert nature o their operations, the WLL operators are not activel bringing communicationsto the mass market as the GSM operators are and thereore cannot deliver comparable benefts to theeconom and societ.

Recommendation: while the tax disparity between the WLL and mobile operators remains, theprohibition on the ormer to provide mobility should be eectively enorced. It is to be noted thatthe ailure to do so will irreparably change the structure o the industry to the detriment o themobile operators.

5.5 International Calls

At present, BTTB has exclusive control o the international gatewa. This artifcial restriction has a number oadverse eects, including the ollowing:

A large part o the price o outbound international calls is controlled b a single operator, limiting price competition.

The monopol prevents the mobile operators rom obtaining revenue rom inbound international calls and reduces themobile operators benefts rom customer acquisition. B selling connections, the mobile operators create opportunitiesor the expatriate communit to call home, thereb generating revenues or Bangladesh. B dening the operators due

reward, this reduces their incentives to increase penetration.

There are serious qualit-o-service problems due to lack o capacit in BTTBs network.

Recommendation: international gateway capacity should be liberalised to improve competition ininternational calls, give operators due reward or extending mobile communications to amilieso expatriates and to alleviate capacity constraints that impact on call quality. It is to be noted thatthe source o this exclusivity is no longer refected in the current legislation. It only exists inBangladesh National Telecommunications Policy 1998. As such, such policy and legislative instrumentsshould be regularised.


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5.6 Local Manuacturing

In line with India, approximatel hal o the value added rom the mobile industr in Bangladesh is exportedas dealers and operators use scarce hard currenc to pa or imported handsets and network equipment.A nascent industr in components such as switchboxes, batteries and steel or base station equipment isdeveloping. This should be encouraged. The availabilit o cheap labour would enable Bangladesh to becomea supplier o components as well as assembling handsets and network equipment more cheapl than in othercountries. As economies o scale start to develop, this industr could gain momentum and become a major

emploer in its own right, perhaps exporting components. Equipment manuacturing involves ver strongeconomies o scale; a large market such as Bangladesh is able to exploit these economies o scale whilstsmaller ones are not. Owing to the size o the market, Bangladesh has the opportunit to achieve regionalleadership in equipment manuacturing.

To encourage this industr, the government should consider tax breaks and low-interest loans to oreigninvestors setting up operations to suppl the mobile communications industr in Bangladesh. The introductiono oreign capital and expertise would result in a diusion o technical know-how and technolog transer,equipping Bangladeshi workers with important new skills.

5.7 Other Polic and Legislative Proposals

As mentioned above, the polic and legislative ramework is conusing and in some situations apparentlinconsistent. We thereore suggest that the polic and legislative ramework be thoroughl revised andrationalised. The review should consider whether the existing ramework has delivered its objectives.I not, it should consider which aspects o the ramework need revision and the options available to thepolic makers.

In our view, the ke relevant policies and legislation that need to be analsed are as ollows:

1) Communications Sector Policies, Policy Statements, Framework

a) National Telecommunications Polic 998

2) Sector Legislation, Regulations and Directives

a) The Bangladesh Telecommunications Act 200b) Licensing Procedure Regulations 2004

c) Interconnection Regulations 2004

d) Circulars and Orders various

3) Licence (Licence Agreement), Approvals, Licence Fees or Permits

a) Licensing Agreement(s) between the MoPT and PSTN (or mobile operators) in relation to provision o PSTN

(or digital cellular mobile radio telephone) service in Bangladesh


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Annex 1: Retail Price BenchmarkingMethodology

Comparing retail taris involves man complexities. One common approach is to use the Average RevenuePer User (ARPU) as a prox. However, this indicator is not the best wa to measure the price impact to end

users. It is subject to various distortions, such as the averaging o revenue between users with ver dierentprofles, the dilution o revenue per user because o subscribers that are not active or are bad paers, and thepossible inclusion o non voice/data related revenues (e.g. insurance, merchandise, etc.). Additionall, notall operators make public inormation about their subscriber base and/or revenues, and this urther limitscomparabilit between countries.

For this analsis, we have based our approach on that used b OECD and calculate the cost o ownership ormobile users based on inormation publicl available about retail taris and pre-defned user profles. Thismethod allows us to better understand the retail price structure rom the point o view o the end user. It alsoallows us to distinguish between fxed charges, i.e. those that subscribers need to pa as one-o or monthlpaments independent o usage, variable charges that are based on the amount o trafc a user generates,and taxes. This enables us to understand what tpes o hurdles users will need to overcome to have access to

mobile services, the cost o using the services and how taxation impacts the overall cost o ownership.

Paramount to the calculation o cost o ownership is the defnition o usage profles, i.e. how the trafc otpical classes o users is distributed. For this, we use the methodolog adopted b the OECD.

The main issue with use o the OECD baskets, is the levels o assumed usage. For developing countries suchas Bangladesh even the low user basket is not representative o actual usage patterns. For this reason, we haveproduced results based on a lower usage profle than that o the OECD low user basket. In addition to themodifed low user basket, we have calculated the cost o the OECD medium user basket, as this is closer to ahigher user profle in a developing countr than the OECD high user basket.

The OECD Mobile Baskets

The OECD mobile baskets are based on the distribution o voice and SMS trafc in dierent tpical categoriesthat are usuall charged at dierent levels. The distribution tree overlea provides an overview o how voicetrafc is split and variable voice charge is calculated according to the OECD methodolog.


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Figure A: Methodolog or calculation o variable voice charges

Figure A2 provides an overview o how SMS messages are split and variable SMS charge is calculatedaccording to the OECD methodolog.

Figure A2: Methodolog or calculation o variable SMS charges

RestrictionsVariable

Voice Charge

Number

of Voice

Calls

Local

National

On-Net

Off-Net

Peak

Off-Peak

Weekend

Peak

Off-Peak

Weekend

Peak

Off-Peak

Weekend

Peak

Off-Peak

Weekend

Local/Peak

Local/Off-Peak

Local/Weekend

National/Peak

National/Off-Peak

National/Weekend

On-Net/Peak

On-Net/Off-Peak

On-Net/Weekend

Off-Net/Peak

Off-Net/Off-Peak

Off-Net/Weekend

Local/Peak

Local/Off-Peak

Local/Weekend

National/Peak

National/Off-Peak

National/Weekend

On-Net/Peak

On-Net/Off-Peak

On-Net/Weekend

Off-Net/Peak

Off-Net/Off-Peak

Off-Net/Weekend

X

X

X

X

X

X

X

X

X

X

X

X

) X

) X

) X

) X

) X

) X

) X

) X

) X

) X

) X

) X

(

(

(

(

(

(

(

(

(

(

(

(

%

%

%

%

%

%

%

%

%

%

%

%

%

%

%

%

-

-

-

-

-

-

-

-

-

-

-

-

Local/Peak

Local/Off Peak

Local/Weekend

National/Peak

National/Off Peak

National/Weekend

On-Net/Peak

On-Net/Off-Peak

On-Net/Weekend

Off-Net/Peak

Off-Net/Off-Peak

Off-Net/Weekend

Local Call

Local Call

Local Call

National Call

National Call

National Call

On-Net Call

On-Net Call

On-Net Call

Off-Net Call

Off-Net Call

Off-Net Call

Numberof calls

Averagelength (min.)

Inclusiveminutes

Call chargesper minute


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Both sets o variable charges (voice and SMS) are added together, and an existent call allowance is subtractedrom the result. The end value is the value o the variable charge. Both inclusive minutes and call allowanceshave a ceiling such that the value o the variable charge is never lower than zero. The distribution o inclusiveminutes and inclusive messages is proportional to the distribution o voice minutes and messages.

The fxed charge is calculated with connection charges (whose costs are spread through a period o 3 ears

according to OECD methodolog) plus monthl subscription charges.

The charges used in the calculation are exempt rom an taxes paid b the end-user, the value reerent tothese taxes is added at the end on top o the fxed and variable charges. All values are calculated or a periodo 2 months.

The OECD methodolog defnes three profles o user: a low user, a medium user and a high user. In ourcalculations, we have considered each o these three profles. In addition, we have constructed an additionalbasket or the low user categor, to take into account more representative usage in developing countries. Although we have considered 4 separate profles, not all o the profles are representative. For example,the OECD low user profle is not representative o a low user in a developing countr such as Bangladesh.Similarl the high user profle is also unrepresentative. For the purposes o our analsis, we have assumedthat the OECD medium user profle is more representative o a high user in developing countries.

Figure A3 provides the number o calls and messages and respective distribution in dierent tpes o trafc aswell as average length o calls or the two low user baskets, whilst Figure A4 provides the same inormationbut or the medium and high user basket.


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Figure A3: Mobile basket defnitions or low users (OECD and modifed)

LOW USER (O)ECD basket

Outgoing calls/month SMS per month

LOW USER (M)odified

25

10

30

20

CALL AND MESSAGE VOLUMES

LOW USER (O)

Fixed Local Area

LOW USER (M)

28%

Fixed National/Area

7%

14%

On-Net Mobile

55%

40%

Of

Documents

Ovum Bangladesh Main Report1f