Dynamics, international inbound traffic market - Price wars between carriers, forex inflows, case for ICH
Telecommunication has become an indispensable aspect of modern civilisation as it enhances capital flows, fosters social interactions, and connects continents seamlessly.
It is the bedrock of digital transformation that has revolutionised nations and developed economies.
Behind its drive are a complex set of global systems – organisations, machinery, technical expertise – that work in unison to support industrialisation and improve humanity.
Industrial ecosystem
The telecommunication industry of Ghana is a significant sector of Ghana’s economy as it contributes considerably towards the country’s gross domestic product by raking in millions of dollars from its local and international markets. The industry is a tapestry of participants involving the Mobile Network Operators (MNOs), International Wholesale Carriers (IWCs),
International Wholesale Carrier Licences (IWCLs), Interconnect Clearinghouse (ICH), National Communications Authority (NCA), Mast and Tower companies, and a host of others. Regrettably, in recent times, the industry has suffered a turf war, causing erosion of profit margins of market participants arising from declining forex revenues.
Market arrangement
The industry operates a mixed market system. International incoming/inbound voice calls (traffic) carried from outside the country (Ghana) and terminated within the country are either routed directly to the MNOs (MTN, Telecel, and AT) or via the ICH – a creature of law (Electronic Communications (Amendment) Act, 2016 (Act 910)) – to the MNOs. International outgoing voice traffic is conversely terminated outside the country without the involvement of the ICH.
Beyond Ghana are International Wholesale Carriers who route large volumes of traffic bound for Ghana directly to the MNOs.
The MNOs hold gateway licenses issued by the NCA which enables them to terminate international inbound traffic to Ghana.
The current setup for inbound international traffic, routed directly to the MNOs, results in settlements being done outside Ghana's jurisdiction without any foreign exchange being transferred into the country.
This setup deprives Ghana of any benefits associated with foreign exchange inflows from international traffic routed into the country.
The NCA licensed IWCLs to route international inbound traffic into Ghana via the ICH without revoking the gateway licenses of the MNOs.
This phenomenon of having two open international inbound traffic channels predisposes the IWCLs to competition in the market since traffic routed directly to the MNOs (by reason of their gateway licenses) could be [and are] marked down by the latter to obtain more volumes.
Rates in the market for international inbound traffic are largely determined by the law but have not been adhered to by the International Carriers.
Market interaction, psychology
By law [(Electronic Communications (Amendment) Act, 2009 (Act 786)], IWCLs and the MNOs are required to charge a minimum rate of 19 cents per minute. An international surcharge levy of 32 per cent of this charge (i.e., 6.08 cents) is payable by them to the NCA.
The ICH’s interconnect rate for routing traffic is currently set at 0.7 cents, whereas the MNOs’ international voice transit rate for terminating traffic routed via the ICH is 7.425 cents, totalling 8.125 cents.
This rate is further slapped with taxes [Communications Service Tax (CST), VAT, and levies] by the duo which balloons the entire cost to the IWCLs to 16.45 cents for a minute of traffic terminated in the country.
This implies that the only margin that an IWCL can earn in the market is 2.55 cents/minute, ceteris paribus.
Meanwhile, by law, the MNOs have a price ceiling of 19 cents for a minute of traffic terminated – nearly 156 per cent above their transit rate (the ICH route).
The MNOs lose when international inbound traffic is routed by IWCLs through the ICH.
Therefore, they adopt all manner of measures to ensure international inbound traffic is routed directly to them.
In furtherance of this, the MNOs enter into bilateral agreements with IWCs for both international inbound and outbound traffic.
This offers the MNOs flexibility to adjust their rates downwards, which in so doing, distorts the market equilibrium and consequently stifles the growth of IWCLs.
Considering that there is a price floor (which, in essence, is fixed) set for the IWCLs, they do not have the flexibility to review their rates below the minimum rate for international inbound traffic.
However, the MNOs have the flexibility to review price downwards, a phenomenon likened to price penetration (by the MNOs) as providers of traffic to the IWCLs find the MNOs’ route cheaper and move traffic away from the IWCLs to the MNOs.
To regain competitiveness, the IWCLs are left with no viable alternative but to reduce their rate, which diminishes their margins.
The biggest gainers under these circumstances are the IWCs, to the detriment of the IWCLs and MNOs.
The price war between the MNOs and the IWCLs continues unabated in a free-market environment, until a point where the IWCLs begin to break even – implying that the selling rate equates average cost – and begin to fizzle out of the market.
Ultimately, forex inflows from the market are negatively affected.
Specifically, transit revenue dips, regulatory fee falls, no earnings from interconnection, and consequently, taxes decline, thereby destabilising the country’s macroeconomic environment.
Determinants of price rivalry
Besides the exploitation of price controls by the MNOs, taxes and regulations are also a major cause of the price war in the market. Indirect taxes charged on international inbound traffic amount to 27.65 per cent of the rates.
The inclusion of the regulator’s surcharge levy of 6.08 cents shoots the entire statutory charges to about 102 per cent of the rates.
This is on the high side and makes the market unattractive for IWCLs.
In fact, these indirect taxes are absorbed by the IWCLs as they are unable to pass on same to their clients (the large carriers) since the market operates in a way that purchases (traffic termination) precede sales (traffic carriage/routing).
The economic incidence of these taxes, which should fall on the large carriers, consequently rests on the IWCLs – the more so because of the elastic character of traffic.
Policy proposals
The ICH provides a panacea to remedy the current setup of foreign dominance of the wholesale international inbound traffic market, enabling Ghana to participate effectively and derive benefits in the international traffic ecosystem. The NCA licensed IWCLs to introduce local content participation in the international traffic business, aiming to secure foreign exchange inflows.
For instance, in 2020, with just about 20 per cent of the international inbound traffic routed by the IWCLs through the ICH to the MNOs, $17 million direct forex was injected into the country.
There was a direct inflow of forex because settlements for roaming and international inbound traffic routed through the ICH were made in Ghana, unlike settlements between IWCs and MNOs, which typically occur outside the country.
The NCA should enhance regulatory support for IWCLs to help local entities compete with the dominance of IWCs in the international inbound traffic ecosystem, thereby achieving the objectives of establishing the ICH.
Lastly, NCA could review its surcharge levy to improve market performance.
Ghana’s macroeconomic fundamentals are presently challenged in the light of recent fiscal difficulties. Strengthening same would require radical policy shifts especially with its foreign exchange.
Correction of the current market dynamics would improve the country’s forex reserves, stabilise its economic indicators, and solidify its fiscal base.
The writers are a private legal practitioner with over 10 years of combined experience in banking/telecom regulatory compliance, and a PRO with financial expertise in tax practice, integrated reporting/strategic analysis, respectively.
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