Econet Zimbabwe bemoans growth hurdles

Econet Zimbabwe bemoans growth hurdles

Source: Econet Zimbabwe bemoans growth hurdles | The Financial Gazette June 8, 2017

.. as forex shortages hamper investment
THE country’s largest telecommunications firm, Econet Wireless Zimbabwe (EWZ), has not been spared the vagaries of a deteriorating economy and lower voice revenues affecting the telecommunications sector. Econet has registered a sustained decline in revenue from its FY2014 peak of US$753 million, but has seen the contribution of data and mobile financial services to the top line grow from 14 percent three years ago to the current 32 percent. In an e-mail interview with the Financial Gazette (FG), Econet’s chief executive officer, Douglas Mboweni (DM) calls on government and the industry regulator to create an environment that encourages investment needed to meet growing demand for data services.

FG: Over the past two financial years, EWZ has shifted its model and now generates a third of its revenue from data and mobile financial services. Where do you see the revenue contribution from these segments in FY2018?

DM: The current contribution of data and EcoCash to total revenues is about 32 percent. This has grown from about 30 percent in the previous financial year. We see a similar growth trend into the next year.
FG: To what extent have Zimbabwe’s ongoing foreign currency shortages impacted on Econet’s ability to invest in its network, especially as the recalibration of the company’s business away from voice suggests the need for higher levels of capex, to above the five percent capex-to-revenue ratio reported in FY2017?
DM: Generally, capex to revenue ratios in our industry are between 10 percent and 15 percent and the inability to continue investing at the appropriate level may delay our ability to optimally deliver our services consistently and reliably, unless we are able to obtain access to foreign currency which is required to continuously capitalise the business.

Data businesses require a lot of capital investment because of the exponential increase in data requirements in all markets where data services have been introduced. The data traffic that we handle increased from about 15TB (terabytes) to 278TB between 2016 and 2017, and this growth is not expected to recede. If we are to continue to match the requirements of our customers, we will need to invest heavily to create the required capacity, otherwise we will experience significant constraints in delivering service quality.
FG: What is Econet’ planned capex for FY2018?

DM: The expected capital intensity of operators in our industry is 10 percent – 15 percent of revenues. Based on this benchmark, we should be investing US$60 to US$100 million annually. This year, we invested only US$31 million in the network, which reflects how the foreign currency challenges have impacted on our investment decisions.

FG: What is management’s forecast in terms of revenue performance for FY2018?
DM: The operating environment remains difficult, but we will continue to work with the regulatory authorities as well as the policy makers in pursuit of creating a conducive operating environment.
Whilst we will do everything we can to sustain — or even grow our revenues — we remain focused on managing our cost base in order to deliver sustainable return to our shareholders, create value for our customers and to contribute to the national development of our country through our statutory payments.

FG: Econet currently pays nearly a third of every dollar it collects to government or quasi-government agencies in taxes, duty, levies and other fees. How does this stack up against peer firms in the telecoms industry in the region?

DM: Our internal research shows that Zimbabwe is an outlier in the Southern African Development Community region with respect to the imposition of excise duty on airtime (airtime tax). Markets such as South Africa, Angola, Botswana and Namibia have not introduced any airtime taxes. Similarly, with respect to mobile money taxation, Zimbabwe is the only country outside of East Africa that taxes such transactions. The imposition of taxes on airtime is likely to have a negative impact on socio-economic development as it is a key contributor to the cost of mobile telephony. It is one of the factors that affects what in the industry we call the total cost of mobile ownership and total cost of mobile usage.

FG: The company contributes significantly to government finances through various taxes, levies and licence fees. Do you feel government has done enough, within the limits of fair competition, to ensure this strategic investment flourishes by creating an enabling economic and regulatory environment?

DM: Econet has indeed generated a lot of value by its fiscal contributions, which now exceed US$1,3 billion dollars since dollarisation in 2009. However, the telecommunications sector has been affected by the overall slow-down of Zimbabwe’s economy, as well as the emerging shift from voice-driven revenues to data-based revenue as the main contributor to industry revenues going forward. But as of now, this has resulted in reduced revenues in the sector as data applications provide cheaper alternative means of communication. This reduction in revenues translates to lower investments due to the reduced return on investment, and it results in a reduced contribution to economic growth. Our view is that government needs to be cognisant of future oriented pricing models that enhance investment in the sector and ensure its growth. The price reduction directives implemented in 2015 had a debilitating impact on the sector, from which we have not recovered. The corresponding reduction in fiscal revenues was also something that could have been avoided.

FG: Econet has said it is owed a substantial amount in interconnection fees by its local partners. Have you made any progress with collections?

DM: The non-payment of interconnection fees has the effect of subsidising our competitors. We presume that NetOne and TelOne do collect the interconnection charges from their subscribers, but default on passing on the charges to us as required by our interconnection agreements. In fact, NetOne has been able to offer free minutes to their subscribers partly because they are not paying the interconnection charges due to us. We believe government and the Postal and Telecommunications Regulatory Authority of Zimbabwe should do more to ensure that errant businesses do not create a systemic risk for industries operating in the country.

FG: The ongoing shortages of bank notes in the economy have created challenges and opportunities for mobile financial services. How has EcoCash been impacted?

DM: There has been an increase in cashless transactions. This has supported well government’s agenda to move the economy towards electronic transactions and to foster financial inclusion.
FG: The government is pushing for infrastructure sharing and has said Econet is resisting the initiative, what is your response to this allegation?

DM: As the last entrant in the industry, and having trailed NetOne for a long time on network coverage, we made written requests time and again to share infrastructure with NetOne on a reciprocal basis, but these were declined. This led us to seek financing to develop our own infrastructure, resulting in us surpassing the coverage of NetOne, thereby increasing the duplication of investments in the sector. The refusal by NetOne to share infrastructure on a reciprocal basis, and the insistence by the regulator on network roll out targets that required each operator to achieve a national coverage, resulted in the duplication of infrastructure. Our view is that infrastructure should be shared on a 1:1 basis. This means that if we develop one site, the other operator should develop another site, and we should share the infrastructure based on the contribution of each operator towards the sites that have been developed. We cannot have a situation where one operator develops nothing, but is entitled to share the infrastructure developed by other operators. In addition, NetOne and TelOne have always failed to pay their interconnection debts to Econet. In the circumstances, seeking to impose infrastructure sharing on Econet with parties that owe, or do not want to pay Econet, would be totally unfair.