Sri Lanka price floor for mobile calls

July 12, 2010 (LBO) – It is not the responsibility of a regulatory agency to ensure the profitability of telecom operators. Yet, when every single operator in the country, including the incumbent who used to make profits even under inefficient government management, starts bleeding red ink, it is not possible for the government and the regulatory agency to sit on their hands.

After years of bad policy decisions and regulatory inaction that led to a crisis in the industry, finally, the government has started to act. In June, the TRC announced that the previous Sending-Network Keeps All (SKA) regime was being replaced by a mobile termination rate regime, with the termination charge being set at 50 cents a minute for a call and 15 cents for an SMS.

Then in July it announced that a floor price of 2.0 rupees will be set for all voice calls, excluding those covered by previously sold packages.

Action was needed

Sri Lanka is on the cusp of widespread Internet use. This will be driven more by mobile networks than by the fixed network or by the fading WiMAX fixed-wireless solution. Necessary preconditions are

  • Building out of 3G mobile networks that can be accessed using various mobile devices and by dongle-equipped computers (desktop or laptop) across the island, and
  • Investments in applications that people can use such as agricultural information services, m-commerce services, etc.

Both conditions require significant new investments. Especially in light of the Sri Lankan telecom sector being flagged as high regulatory risk in telecom by Fitch Ratings (“Telecom Regulatory Risk – South and South-East Asia”, December 2009: http://www.lankabusinessonline.com/sri-lanka-rated-telco-market-with-highest-regulatory-risk/), investment requires high rates of return.

Obviously, companies operating in multiple countries would not invest in a country with high regulatory risk which was pursuing policies that led to all the operators losing money. The drop in investment had started in 2009, with cuts of around 60 percent estimated.

But what action?

It was clear that the arbitrarily imposed Sending-Network Keeps All regime (SKA), whereby an assumption was made that calls being terminated on different networks were about the same in volume, had to go. Not only because the assumption was not supported by evidence, but because it led, in combination with artificially high termination rates for calls coming into Sri Lanka from foreign destinations, to an upsurge in illegal bypass, resulting in both operators and the government being deprived of legitimate revenue while enriching black-money businesses.

The best evidence of illegal bypass is the mobile screen itself. When the incoming number display shows a local number but the call is from abroad, that is an illegally terminated call. So the TRC did the right thing in June, by replacing SKA with a mobile termination regime.

Contrary to some confused reporting at the time, this should have had no impact on retail prices (except in one instance, discussed below). Mobile Termination is a wholesale payment; some operators would have had to make payments; others would have received payments. As long as it is not set excessively above costs, it is simply a cost of doing business for operators.

While no one got paid for terminating calls originated on other Sri Lankan networks under SKA, those terminating more call minutes will now get paid more; but even the large networks will have to pay the smaller networks when they terminate calls, so there is a degree of netting off. Now that illegal-bypass calls that look like they originated from local numbers can no longer be terminated for free on other networks, operators will have greater incentive to identify and cut off illegal bypass SIMs.

The one retail package that should have been affected by the end of SKA was the government-servants’ package Upahaara that gave free calls to Sri Lanka Telecom fixed phone during daytime, up to 6 PM. Under SKA, one could argue that the mobile operator was simply using off-peak capacity and not spending more money to provide these free calls.

But once SKA was removed, they had to pay 50 cents a minute to Sri Lanka Telecom in order to complete the free call.

Under fully competitive conditions, companies are free to sell certain products below cost and certain above cost, as long as they make enough money to stay in business. But telecom markets are not fully competitive. Therefore, all the licenses under which the operators provide services contain specific provisions against anti-competitive practices. Given the mobile operator offering the government-servants’ package was a subsidiary of Sri Lanka Telecom, a prima facie case existed for an investigation of whether the below-cost offering was anti-competitive and in violation of license conditions.

The free calls did not only hurt the mobile operators. They cannibalized the fixed operator, causing for the first time the return of fixed connections in favor of mobile (http://www.lankabusinessonline.com/sri-lankans-wireline-phones-drop-with-mobile-growth/). If one could call free from a mobile, why pay for calling from a fixed phone?

Instead of conducting a broad ranging investigation of anti-competitive practices in the industry, the TRC has now come up with an official floor price, becoming, in effect, the telecom industry’s cartel manager.

This is a pity. Yet, one can understand the rationale in light of the parlous state the industry had been placed in by years of bad policy and regulation combined with the extraction of excessive spectrum fees and such (the TRC contributed 9 billion rupees out of the total of 20 billion rupees contributed by government enterprises to government revenues last year: http://www.lankabusinessonline.com/sri-lanka-state-non-tax-revenues-up-in-first-quarter/).

One hopes that the TRC will step away from the cartel manager function as quickly as possible and address the underlying causes of the telecom industry’s problems, including spectrum refarming, the policing of anti-competitive practices, and the reduction of excessive taxes. The future

Voice calls will be “free” in the future. The quotation marks signify that nothing is really free. In the natural evolution of the industry, there will come a time when customers will pay for connectivity in various forms, either by data volumes or time. Voice will simply be one among many applications they can use as part of this connectivity bundle. If the government at least desists from doing wrong things, this most dynamic of Sri Lankan industries will flourish again, and we will, in due time, get to make free calls.

Rohan Samarajiva heads LirneAsia, a regional think tank. He was also a former telecoms regulator in Sri Lanka. To read previous columns go to LBOs main navigation panel and click on the ‘Choices’ category.