09:19 08.07.2021

Author OLEKSANDR KOHUT

How to strike a balance between replenishing the budget and investing in the coverage enhancement in mobile networks

5 min read
How to strike a balance between replenishing the budget and investing in the coverage enhancement in mobile networks

Oleksandr Kohut, Kyivstar Regulatory Dirrector

 

About two years ago, the government and mobile carriers came up with a win-win solution to provide quality mobile communication and mobile web connection in villages and small towns and on public roads.

In 2019, a Memo was concluded by the Government of Ukraine and leading mobile carriers. Under the Memo, the latter undertook to provide the largest possible 3G and 4G coverage. In turn, the government undertook to support the process which is both critical to subscribers and resource-intensive to carriers.

What did the government and mobile carriers agree upon under the Memo?

  • Building a 4G network in rural areas;
  • Providing over 90% of the country's population with access to 4G networks;
  • Ensuring coverage of domestic and international highways.

Clearly determined terms & conditions and KPIs made it possible for the mobile carriers to increase investments in expanding 4G networks.  According to projections, the investments of Ukraine's three major providers in the internetization of rural areas will tot up to 15 billion hryvnias having reached over 1.2 billion hryvnias so far.  It should be mentioned that the Ukrainian "big three" have invested over 63 billion hryvnias in the development of their telecommunications networks in the last six years.

A few more words about investing. In the year 4G networks were launched, Ukraine's mobile carriers invested about 50% of their revenue which constituted 3.4% of total capital investments around Ukraine. On average, Kyivstar invests 24% of its revenue in 4G annually. As a result, Kyivstar and its main competitors managed to deploy 4G networks about two times as fast as the EU member states. To complete the initiative of the president of Ukraine to overcome the "digital divide" between urban and rural areas, Kyivstar has yet to invest about 5 billion hryvnias.

It ought to be noted that telecommunications services are quite heavily taxed in Ukraine. The average tax burden on mobile carriers is 35% of the total market turnover. The value is much higher than the European average which is 21%.

According to the official records of the State Tax Service of Ukraine, telecom companies paid a total of 10.4 billion hryvnias in taxes in 2017, 12.6 billion hryvnias in 2018, 14.8 billion hryvnias in 2019, and 15.8 billion hryvnias in 2020, the year of crisis. That is, the annual amount of fees paid within the telecommunications sector has been steadily increasing by 1–2 billion hryvnias considering the fact that the lease of frequencies has not been indexed.

Under the Memo, the Ukrainian government undertook to stop the rise of fiscal and regulatory burden on mobile carriers according to the terms & conditions of the Memo and to suspend the rise of radiofrequency rent (RFR) tax for four years.

However, these undertakings were not applied within three years of the Memo conclusion. Instead, the government sent up Bill No. 5600 stipulating the rise of the RFR tax by 5% from 1 July 2021 in violation of its own responsibilities. Thus, the government plans to win 102.5 million hryvnias per year more from mobile carriers. Sadly, most MPs approved the bill on first reading despite numerous appeals by telecom companies and warnings by the industry Regulator, the Ministry of Digital Transformation, and the dedicated committee of the parliament on the negative effect the bill may have on the nationwide internetization once it's passed.

Such unpredictable regulations constitute an additional financial burden for carriers and may slow down the development rate of mobile networks. At the same time, the government is currently demanding the carriers to speed up the fulfillment of their responsibilities under the Memo. These include providing 4G coverage of four major international highways by the end of 2021, instead of the end of 2022 as stipulated by the license.

The government's attempts to increase the inflow of funds to the state budget are quite reasonable. In these terms, workers of the telecommunications industry are amenable to a compromise that would create investment incentives for mobile carriers, increase the budget inflow, cut the expenditure for tax administration, and improve the budget inflow transparency. Instead of increasing the radio frequency lease cost, it is possible to cancel spectrum fees as they require too complex administration and cause losses to the budget income.  Mobile carriers look forward to the capacity increase in existing networks, improvement of the data transfer rate, and implementation of new generations of telecommunications technologies. Spectrum auctions may bring in up to 4 billion hryvnias to the budget. The first shot is a sale tender of the radio frequency band 2,100 MHz. It may bring in up to 1 billion hryvnias but it also may fail if spectrum fees are not canceled.

The cancellation of spectrum fees has been advocated by the State Tax Service and the National Commission for State Regulation of Communications and Informatization. Previously, the Committee on Digital Transformation of the Verkhovna Rada took a stand for spectrum fee cancellation.

Therefore, there is a possible win-win for the government and mobile carriers. Spectrum fee cancellation may bring in about 1 billion hryvnias to the government in the short term alone, as well as annual income amounting to 263 million hryvnias. This will make it possible for the government to fulfill its responsibilities under the Mariupol Memo at no cost.

On top of that, spectrum fee cancellation will mark the government's encouragement of investments in the development of the telecommunications sector. This, in turn, will accelerate the deployment of quality telecom networks in small towns and villages and on public roads. To sum up, such regulatory and fiscal scheme is the required win-win solution capable to bring profits to all sides.

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