Uganda's telecommunications industry shrugged off a sharp rise in energy costs and taxes to report buoyant growth in subscriber numbers in 2005, But sources said yields are likely to take a hit from declining usage and higher operating costs.

All three telecom service providers - MTN, Celtel and Uganda Telecom - say they expect 2005 growth rates to exceed 20 per cent but energy costs, which rose by 20 per cent last year, and a 25.9 per cent rise in the overall tax burden on airtime are likely to exert considerable pressure on margins.

Finance Minister Ezra Suruma raised excise duty on airtime from 10 to 12 per cent in the current financial year while value added tax rose from 17 to 18 per cent. But subscriber numbers continued to show robust growth. MTN's subscriber base grew by 25 per cent between March and December last year.

Nevertheless, this was accompanied by erosion in revenue per user as the middle and lower ends of the market showed more sensitivity to how long they talked on their phones. Industry sources say average usage has dropped considerably from the six hours a month that was the norm seven years ago.

"We have had a drop in the average revenue per user for various reasons, such as the drop in usage resulting from tax-related tariff increases, and also the fact that the marginal earnings from the new subscribers we are connecting is lower than that of our existing base", MTN public relations officer Philip Besiimire said. However the company is grappling with the high cost of running diesel generators at the bulk of its 300-plus base stations, which either lack a connection to grid power or have unreliable supply.

Both Celtel and MTN say that with more than 40 per cent of their base stations relying exclusively on diesel generators as well as the 20 per cent rise in the price of fuel last year, energy related costs accounted for 25 per cent of operating costs for the industry during 2005. During its dialogue with the government, the industry has been trying to argue the case that the taxman is impeding further growth and thinking short term when he bases taxes on the seeming success of the industry.

Tita Okuthe, marketing manager of MTN Uganda, said, "What we are telling the government is that because telephones are not a luxury, the market will continue to experience growth. "However, compared with markets such as Kenya, this is phenomenal growth off a small base and tax policy is going to determine the pace of future growth."

The Uganda Communications Commission says the number of telephone users peaked at slightly over 1.5 million users last year reflecting a more than 30-fold increase in the decade since 1995 when the sector opened up to competition. Teledensity was 0.27 lines per hundred people compared with the current penetration of 5.8 per cent across the entire population.

But the industry is saying that the increases in the tax burden, which have now reached 30 per cent of the cost of airtime, have forced it to pass this burden to the consumer, slowing growth. The tariff revisions have had little impact on calling patterns in the upper bracket of users but the middle and lower-end users have become more conscious of how much time they spend talking on their phones.

Like his counterparts at MTN and Celtel, Mr Mpore points to the tax regime and energy costs as the major hindrances to the development of the sector.

"Imposing high taxes on mobile services is a hindrance to development and penetration. The government is shooting itself in the foot when it turns into a cashier instead of a strategist, he said. In a report it released last October, the GSM Association said it had found Uganda to have the second highest tax as a ratio of the cost of mobile ownership.

The East African

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