www.IFC.org/ThoughtLeadership Note 19 | September 2016 CREATING MOBILE TELECOM MARKETS IN AFRICA Mobile telecommunications has many benefits, from linking communities and citizens to mobile applications that bring financial services to the unbanked and help farmers improve crop yields. Yet at one time it looked as though Africa’s mobile sector might fare as poorly as its fixed line system did. Instead, an appropriate mix of regulation and competition, investment, and affordability allowed mobile phones and broadband access to flourish. Just two decades ago only one person in a hundred owned a and populations gained network access, the majority of the newly- telephone in Sub-Saharan Africa. It was this state of affairs in the covered became subscribers. Mobile broadband penetration has region and other developing economies that gave the oft-repeated grown to about 20 percent in 2015. 1995 statement that “half the world’s population has never made a phone call” such galvanizing power.1 Figure 1 shows that the difference in the evolution of fixed and mobile penetration rates in the region has been dramatic: While Historically the region had performed poorly in the provision of fixed penetration has remained relatively stable at around 1 public infrastructure in general, and that was particularly the case percent, mobile penetration surpassed fixed penetration by 2000 with regard to telecommunications infrastructure, with demand and reached 75 percent in 2015.2 For most people in the region, far outstripping supply. Many fixed operators were slow to the first phone they ever used was a mobile phone. expand service and households and businesses were often forced to join waiting lists to receive service; many had to wait for Fig. 1: Mobile/fixed penetration & fixed waiting list 100% 2.0 several years to be connected. The waiting list in 1995 was about 1.5 million, or about a quarter of the six million lines in service. 90% Fixed wating list Population covered (millions, right by mobile network 80% axis) (%, left axis) 1.5 Mobile telephony, then burgeoning in advanced economies, could 70% have taken the same sluggish path in Africa as had fixed 60% telephony. In 1990 only two countries in Sub-Saharan Africa had introduced mobile cellular service, with fewer than ten thousand 50% 1.0 subscribers between them. 40% 30% Mobile penetration Instead, a very different story unfolded. By 1995 half the countries (%, left axis) 0.5 20% in the region had introduced mobile service, with a total of about half a million subscribers. By 2000, virtually all countries in Sub- 10% Fixed penetration (%, left axis) Saharan Africa had mobile service, with total subscribers 0% 0.0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 surpassing ten million. Within five years subscribers had increased to 90 million, expanding to almost 400 million subscribers by 2010 and about 750 million by 2015. Liberalization, Competition, and Regulation Coverage and penetration statistics are equally impressive. The The initial liberalization process in Africa’s mobile sector was percentage of the population covered by mobile networks climbed relatively more straightforward than reform efforts in the fixed from almost zero in 1995 to more than 80 percent in 2015. Mobile sector. Mobile service was new, so initial reform efforts generally penetration has tracked mobile coverage—as networks expanded were not constrained by the need to deal with competition and privatization issues relative to existing, state-owned fixed allocated spectrum, tariffs and interconnection matters, and roll- operators. Furthermore, the demonstration effect was important— out obligations. Based on an evaluation of the submitted bids, the by the mid-1990s mobile competition was the norm in advanced government agency awards the license to the selected bidder. This economies. process is repeated every time a new mobile operator is licensed. While there was significant variation across the region relative to And third, government establishes mechanisms to finance the the timing and sequencing of the liberalization process, as well as expansion of access and infrastructure. In spite of impressive important differences between the initial phases of the process coverage gains by the mobile industry, many governments in Sub- (for example, the licensing of the first and second mobile Saharan Africa established universal service funds and promoted operators) and later phases (when third and subsequent mobile public-private partnerships to finance the expansion of access to operators were licensed), there were typically a number of unserved and underserved locations and to provide for other forms common elements in each process. of infrastructure. First, liberalization generally takes place in the presence of enabling telecommunications legislation. Appropriate legislation Improving Mobile Coverage in Madagascar is required to provide certainty to the government and investors that the liberalization process is legally sound. The development With the objective of providing service in remote geographic areas of Madagascar that had remained unserved or under- of the corresponding regulatory framework is generally an served, the World Bank provided technical and financial ongoing process that is developed over time; it is often relatively assistance over the 2007-2015 period. It has provided more “thin” in the initial phases while more developed in the later than two million Malagasy in 660 rural communities with phases. access to new technologies. In the covered regions, Internet Key among these measures is the establishment of a separate service penetration has improved from near zero in 2007, to national regulatory agency, or NRA, which tends to promote 13.4 percent in 2015. This project is an example of the confidence that the competitive process will be administered in a World Bank assisting the Government of Madagascar to finance a specific mechanism to expand access to close the fair and transparent manner. The first such institutions had been digital divide. established in the region in the early 1990’s, but by 1995 only a handful were operating. By the early 2000’s, however, more than Via this assistance a total of 68 telecommunication towers half the countries in the region had established NRAs, and by were installed by private sector independent tower operators 2015 all but a few countries had established them. selected via a competitive selection process that allocated Fig. 2: Number of Mobile Operators/Country, Number of NRAs subsidy financing. The project fostered economic activity in 48 these often difficult-to-reach regions and facilitated Number of countries 44 with NRAs commercial activity by improving access to information and 40 creating new opportunities. 36 32 28 24 Figure 2 shows the evolution of the mobile competitive landscape 20 in the region. In 1995, only half the countries had any mobile 16 service; most that did had one operator, with only a handful 12 having some competition with two or three operators. By 2000, 8 almost all Sub-Saharan Africa countries had introduced mobile 4 service, and fully half had established a competitive market with 0 two or more operators. By 2005, about three-quarters of the 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 countries in the region had two or more operators, and a handful 5+ Operators 4 Operators 3 Operators 2 Operators 1 Operator No Operators NRAs of countries had introduced four or more operators. By 2010 the vast majority of countries had three or four operators. Figure 2 Second, governments decide to license one or more new mobile also shows that the growth in the region of separate NRAs closely operators. One of the first steps in this process is the government coincided with the introduction of mobile (two or more operators) preparing and issuing a bid or tender document for the process. competition. Based on strategic considerations and legal, economic, and other research, this document establishes the rules and procedures, the While some of the first mobile operators in countries were selection criteria, and the operating environment, including the subsidiaries of the existing state-owned fixed operators, most This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. were private sector operators. Virtually all second and subsequent for about 5.7 percent of regional GDP,4 or about 2.5 times greater mobile operators were private sector. This ownership pattern than mobile revenues. reflects the prevailing trend around the world. Africa is also Figure 4: Investment in Mobile Networks similar to other regions in that most mobile operators are $10 100% subsidiaries or otherwise related to a large regional mobile group. $9 90% Investment (USD billion, left axis) $8 80% Affordable, Pre-Paid Phones Two other innovations made mobile service more accessible. $7 70% First, certain device manufacturers focused their attention on $6 Investment as 60% making basic affordable mobile handsets for the African market. % Revenues (right axis) $5 50% And second, mobile service was offered under “pre-paid” terms (as well as the traditional “contract” terms). As a result, in Sub- $4 40% Saharan Africa pre-paid service has accounted for 85 percent to $3 30% 95 percent of all mobile subscriptions. $2 20% $1 10% Mobile Revenues and Investment $0 0% Mobile service revenues have increased along with subscriptions. 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Revenues in the region totaled $100 million in 1995, accounting for only about 0.02 percent of gross national income for the region Investment in mobile networks has increased commensurately. (Figure 3). Revenues continued to grow much faster than national Figure 4 shows that investment reached $1 billion in 2000, economies, so that relative to GNI, they peaked in 2009 at 2.8 jumped to $4 billion by 2005, and plateaued at the $7-$9 billion percent. Mobile revenues continued to increase, reaching $40 range during the 2007-2015 period. Relative to mobile revenues, billion in 2015, with the voice/data ratio approximately 85 percent investment was highest in the 1995-2000 period, as first and to 15 percent. second mobile operators entered the market and built networks. Relative to revenues, investment in the 2001-2006 period Figure 3: Mobile Revenues declined, as operators “filled their networks” and increased their $40 3.0% revenues. For 2007-2015 investment relative to revenues declined $35 to the 20 percent to 30 percent range, consistent with mature 2.5% networks in other parts of the world. Most of the investment over $30 Revenues (USD billion, left axis) this period has come from outside the respective countries, often 2.0% $25 in the form of foreign direct investment sponsored by one of the large Pan-African mobile groups.5Indeed, Figure 5 shows that the $20 1.5% five largest of such groups accounted for 60 percent of all Revenues as % $15 GNI (right axis) subscriptions in the region, the next five largest groups accounted 1.0% for 15 percent, and the smaller groups and independent operators $10 accounting for the remaining 25 percent. Figure 5 also shows the 0.5% diversified geographical provenance of these groups, from within $5 and outside the region. $0 0.0% 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Mobile revenues are only one component of the direct and indirect contribution that the mobile “ecosystem” makes to the region’s economies. Other direct contributions include content/apps,3 distribution and retailers, infrastructure providers, and handset manufacturers. Indirect contributions result from the “multipliers” associated with the effect that the direct expenditures have on related industries. And the use of mobile technology results in increased efficiency for workers and firms. In 2014 it was estimated that the direct, indirect and efficiency effects accounted This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Figure 5: Market Shares & Countries of Operations of infrastructure related, including subsidies and other types of five largest Regional Mobile Groups, 2015 financing to increase coverage and improve access. Airtel (India) (22 countries) All Other Operators IFC has provided more than $1.4 billion in financing to companies MTN (South in the technology, media, and telecommunications (TMT) Africa) industries in the region since 1995. The bulk of these operations 15% (16 countries) 25% (44 of 58) were to mobile telecommunications operators and independent tower operators.9 Across its entire portfolio, IFC 22% provides financing under four broad categories: loans, equity, Next 5 15% guarantees and risk-management products. Over 90 percent of the Largest Regional financing to mobile telecom operators was in the form of loans. Groups However, for independent tower operators, which have been a 8% 10% Orange (France) more recent financing segment, the portfolio is approximately 6% (15 countries) Vodacom balanced between loans and equity. IFC has provided financing to (South Africa) Etisalat (UAE) mobile telecommunications operators during the launch, (7 countries) (9 countries) expansion and rollout of new technologies. Conclusion World Bank and IFC Roles The World Bank has provided extensive financing and technical Fixed line telephony never quite took off in Sub-Saharan Africa. assistance to the telecommunications sector in the region. Via its Mobile telephony could have gone the same way. Instead, because financing instruments,6 the Bank has approved over two dozen of the right mix of regulation and competition, investment and telecommunications-related projects in thirty countries since 1995 affordability—and assistance from development institutions like with total financing of $1.2 billion.7 the World Bank and IFC—over three quarters of the region’s inhabitants now have direct access to telecommunications and all Broadly speaking, these lending projects included both regulatory the benefits it can bring. and infrastructure components.8 About 20 percent of total financing went toward strengthening telecommunications Author Edgardo Sepulveda has more than 20 years of telecommunications consulting experience and has advised clients in more than a dozen regulatory frameworks. In seven specific projects this regulatory countries in Sub-Saharan Africa and over 40 countries around the world, strengthening included assistance in the licensing of mobile including in projects financed by the World Bank, IFC and other multilateral operators. Most of the remaining 80 percent of the financing was and bilateral organizations. (es@esepulveda.com) 1 For more information: http://www.worldbank.org/en/projects-operations/products-and- Frances Cairncross. “The death of distance, a survey of telecommunications.” The Economist, September 30, 1995. services#2 7 2 The WB also provides financing projects related to the broader ICT portfolio, beyond the Sources Figure 1: International Telecommunication Union (ITU) and author’s telecommunications sector, including the development of the IT industry, eGovernment, calculations; Figure 2,3,4: ITU, GSM Association (GSMA), World Bank and author’s content promotion, etc. calculations; Figure 5: GSMA and author’s calculations. 8 WB has mechanisms other than “lending projects” by which it provides regulatory 3 These include mobile money transfer system, because much of the population remains assistance in the region. A first set of mechanisms are financed “internally” by the WB outside of the formal financial system, as well as mobile apps that allows farmers to access through various “Bank Budget” projects, including those funded by one of the six information about the weather, real-time market prices, etc. Geographic Regions in the WB or directly by the Country Management Unit (“CMU”). A 4 See: http://gsmamobileeconomy.com/ssafrica/ second set of mechanism are funded “externally”. For example, over the 2003 -2010 period, 5 See “Africa’s ICT Infrastructure: Building on the Mobile Revolution” by Mark D. J. the WB executed 23 projects totaling $5.6 million via the Public-Private Infrastructure Williams et al. World Bank (2011). Advisory Facility (“PPIAF”) (see http://www.ppiaf.org/), and 6 projects totaling $1.3 million 6 The WB offers three types of financing instruments, 1) Investment Project Financing via the ICT for Development (“IC4D”) Korea Trust Fund (“KTF”) (see (“IPF”) provides IBRD loan, IDA credit/grant and guarantee financing to governments for http://www.worldbank.org/content/dam/Worldbank/document/EAP/Korea/KTF%20Booklet- activities that create the physical/social infrastructure necessary to reduce poverty and create web.pdf) sustainable development; 2) Development Policy Financing (“DPF”) provides IBRD loan, 9 The establishment of independent tower operators is a worldwide trend; many mobile IDA credit/grant and guarantee budget support to governments for a program of policy and operators sell off tower assets with the objective of focusing on providing mobile service and institutional actions to help achieve sustainable, shared growth and poverty reduction; 3) leasing the necessary tower space. This also promotes infrastructure sharing in that multiple Program-for-Results links disbursement of funds directly to the delivery of defined results. mobile operators are more likely to lease tower space from an independent tower operator. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group.