High Levies May Dampen Mobile Growth in Sri Lanka

Monday, September 10, 2007

High levies on mobile phones, hiked to 10 percent from 2.5 percent, could put a dampener on telecom expansion in Sri Lanka, currently growing at a rate of over 15 percent. The Lankan telecom sector is set to enter more exciting times with Sunil Mittal’s Bharti Airtel, an Indian company, being awarded licences to provide 2G and 3G mobile services in the country.

Airtel plans to invest $200 million in Sri Lanka over the next five years. Industry analysts forecast a thinning of profit margins of mobile service providers due to the anticipated intense competition. The government however is playing spoilsport by increasing taxation in the sector.

On Thursday the Sri Lankan parliament passed five financial bills, which include an increased levy on mobile phones. The bills were hotly disputed with 106 MPs voting in favour and 81 against. The levy has been increased to 10 percent, up four times from 2.5 percent.

Initially, the government proposed a monthly fixed pay of Rs.50 per mobile phone, which was later withdrawn considering the burden on low income-earners.

“The industry is giving the government an enormous amount of revenue. Twenty percent of every mobile phone rupee goes to the government. If you squeeze the goose for more eggs, it will ultimately die,” Rohan Samarajeewa, former chief of the Telecommunication Regulation Authority, told a Colombo newspaper.

Viewing the intense competition as a positive sign, Samarajeewa said that when Dialog entered the market in 1994, everybody presumed that there was no way another player could succeed as Sri Lanka was thought to be a tiny market. Over four million out of the nearly 20 million Sri Lankans use mobile phone services.

Quoting Central Bank 2004 data for consumer finance services, Samarajeewa pointed out that 25 percent Sri Lankan households had some kind of phone except in Mannar, Kilinochchi and Mullaitivu, which are conflict-affected areas.

“I am willing to stick my neck out and say it has gone up to 55 percent by now. That is an extrapolation from some data we have. So we have to understand that this is a highly saturated market,” he added.

“We have data which say people at the bottom of the pyramid are willing to spend Rs.500 per month on communication. So if the government imposes another tax, these people will be discouraged and the government will lose revenue,” Samarajeewa said.

Airtel might not find it easy to make inroads in the Lankan market. “Sri Lanka has a few very efficient mobile companies. Also, Airtel is investing too little,” said Samarajeewa.

However, comparing the area of the island nation with Mumbai and Greater Delhi, he said that he would be very concerned if he were one of Airtel’s competitors as Sri Lanka was going to get a company extremely good at managing costs and numbers.

Commenting on the competition expected with the entry of Airtel, Nushad Perera, general manager, sales and marketing, Dialog Telekom, recently told a newspaper, “They are big players in India but we are big players in Sri Lanka.” Dialog Telekom is currently number one among mobile service providers.

“We welcome competition in our country because it will expand the market. We do not feel threatened or worried by the entry of Airtel,” Perera added.

Dialog Telekom claims its network covers 90 percent of the country. Perera also commented that any new operator would try dropping tariffs as an entry strategy.

“There are already operators here who are offering much cheaper tariffs than Dialog but a majority of the consumers still prefer Dialog. Bharti will have a tough time breaking into
this market,” he added.

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Source: India Interacts (link opens in a new window)