Jeffrey Sachs is a superstar. His advice contributed to the mess in post-Communist Russia, but that did not hinder him in any way from dispensing advice elsewhere (I met him when came to Sri Lanka in 2002; after I told him what we had done or were doing on telecom, he moved on to dispense advice on other topics). His opinion matters much. He has described the mobile as the single most transformative technology for development. He expands on this statement in an interview on AllAfrica.
When discussing our Telecom Regulatory Environment (TRE) indicator, we first introduce the concept of regulatory risk. I emphasize that it is not limited to the regulatory agency’s actions, but to all government actions that have a bearing on the operation of the company. The list of woes afflicting Vodafone in India is illuminating. “The combination of the capital gains tax, uncertain regulation and the very tough competitive environment has caused investors to say it wasn’t great timing” to do the deal, said Robert Grindle, an analyst with Deutsche Bank in London. Still, he said, “India is one of the fastest growing assets in Vodafone’s footprint, and without the contribution from India the company would have much lower top line growth than it does.
We expressed skepticism when the Labor Party first announced it. We are pleased it is being cancelled. The previous Labour government hummed and hawed about this rural-urban “digital divide”. Eventually, in 2009, it proposed levying a 50p tax on every fixed telephone line in the country: the proceeds were to be given to BT to allow it to connect even the remotest hamlets by 2012. The new coalition administration abandoned that plan, ditching the tax and pushing the target date back to 2015.
Services trade, especially mode 1 services trade where the buyer remains in the buyer’s country and the seller remains in the seller’s country, is critical to the development of emerging economies. India has been one of the greatest beneficiaries of liberalized trade, but the NYT article below shows that the US is also a clear winner. The full article is worth a read. For example, will Washington offer tax breaks or other export incentives? While businesses may clamor for them, these would be a setback for freer trade — after all, for years it has been America that has been hectoring other countries to end their subsidies to exporters.
The Pakistan Telecom Authority in their December 2008 quarterly review gives the reasoning behind the government’s decision to impose high taxes on mobile phone use. To reduce the high fiscal deficits, the government had increased taxes. The increase for the telecom sector was over 40 percent; for other sectors it was only seven percent. However, the end result was unexpected, though it could have been predicted from economic theory. In the two quarters after the tax increase, the tax revenue from mobile declined.
It is reported that the one million or so customers of Sri Lanka Telecom who have wireline connections can now look forward to paying the same amount in taxes as the ten million or so customers (mobile and fixed) who connect wirelessly (across GSM and CDMA platforms). We have opposed telecom specific taxes; but even more, we have opposed discrimination between different technologies. It takes some time for the people in Treasury to get it, but at least they got it after more than a year. If they got it earlier, there would have been no need to change the description in the phone bills from mobile subscriber levy to telephone subscriber levy. Hopefully this will also end the anomaly of taxing the same broadband service differently.
In its 2005-06 budget (Khaleda Zia) the Bangladesh government imposed a regressive Taka 900 tax on each SIM that was issued. We describe the tax as regressive because, if it was passed on to customers, it would hurt the low-user segment (generally the poorer segment) of the market more, because it’s a fixed tax that does not vary with use. The mobile operators did not quite understand what the government wanted to do and decided to absorb the tax. They made various pleas and protests and got the tax reduced to Taka 800. Finally, in 2008, they decided they had enough and decided to pass on most of the tax to customers.
Hutch, a pure BOP play that was making very good profits, has reported declining profits and revenue growth. One quarter does not a trend make. But seen together with Dialog’s bad results for the last quarter, it suggests things are not looking good for the telecom sector which is taking multiple hits with tripled spectrum charges, revenue-raising taxes in the name of the environment and all sorts of additional costs imposed in the name of national security. If the government keeps taking JHU advice, they are likely to make the economy slow to a crawl.