Nepal's telecom industry, once seen as a flourishing sector, is now facing turbulence. With 25-year operating licences granted to telecom companies expiring, the government remains uncertain about its next steps. It has extended the licence of Nepal Telecom (NT) and Ncell for only five years. This has left Ncell, the only private GSM operator in the country, facing uncertainty about its future. These developments suggest a phase of instability for the telecom industry, sparking important questions about its direction in Nepal.

On November 29, 2023, Malaysia’s Axiata Group dropped a bombshell by announcing its decision to exit Nepal after seven years of operation in the country. Axiata had entered Nepal by acquiring a majority stake in Ncell from Swedish telecom giant TeliaSonera. Two days later, on December 1, 2023, the company revealed that it had signed an unconditional sale and purchase agreement (SPA) with Spectrlite UK Limited for the sale of Reynolds Holding Limited which holds approximately 80% of equity in Ncell Axiata Limited.

Axiata's exit ignited widespread debate over the stability of Nepal's telecom sector, with many speculating that the low transaction value of the SPA was intended to evade paying capital gains tax (CGT) to the government. In response to the mounting controversy, the government formed a study committee, led by former Auditor General Tanka Mani Sharma, to investigate the Ncell share buyout. This follows growing concerns about foreign ownership and the long-term sustainability of Nepal's telecom ecosystem.

The situation escalated as four parliamentary committees started discussion on Axiata's exit strategy. The controversy deepened on December 20, 2023, when the parliamentary State Affairs and Good Governance Committee instructed the government to explore the possibility of bringing Ncell under state ownership by 2029, once its telecom service licence expires.

Grappling with Declining Business

In early 2010, the outlook for Nepal's telecom sector was optimistic. At that time, the country had six telecommunications service providers, with the belief that three mobile operators could sustain a profitable business. However, a decade and a half later, only two remain: Nepal Telecom and Ncell.

The rapid business expansion seen among telecom companies a decade ago has slowed in recent years with operators seemingly focusing on strategies to sustain their operations. The rise in Internet usage and the shift of customers to OTT platforms have contributed to a decline in both user numbers and market share for telecom providers. Data provided by the Nepal Telecommunication Authority (NTA), the telecom industry regulator, shows that business of both Ncell and NT has been declining steadily over the past five fiscal years.

In fiscal year 2017/18, the combined revenue of the two operators was Rs 105.95 billion, with Ncell accounting for Rs 60.49 billion. Five years later, this figure has dropped to Rs 74.24 billion, with Ncell's revenue down by 38% to Rs 37.44 billion and NT’s to Rs 36.80 billion.

Telco executives say that their main challenges are fierce competition with internet service providers and a market trend moving away from voice services toward data. Moreover, the increasing use of over-the-top (OTT) applications such as Messenger, WhatsApp, Viber and Telegram is significantly affecting their revenue. Earlier, telcos used to generate 30-35% of their income from international calls (ISD). However, with the rise of OTT platforms, their revenues have significantly declined.

Stakeholders say the primary reason for the crisis in the telecommunications sector is policy weakness. They said, although the sector is developing, it is still governed by laws established in 1996 - a time when mobile phones were nonexistent and the definition of a telephone was different. Today, telecommunication encompasses an integrated model where telephone, internet and broadcasting are inseparable. Internet, voice, film, video, pictures and audio now all converge through a single connection.

Need for Regulatory Reform

In December 2023, while announcing Axiata's departure from Nepal, the company's Group CEO and Managing Director, Vivek Sood, stated that increasing challenges in Nepal's operating environment had prompted their exit. "It has led the Axiata board to conclude, after a thorough process, that our foray in Nepal cannot continue due to the unfavourable conditions for Axiata, the uncertain regulatory and tax environment, and the looming risks associated with the expiry of the mobile licence in 2029,” he said in a statement. "The offer we received from (Spectrlite UK) has enabled and accelerated a clean exit for Axiata.”

Sood's remarks echo what many in the telecom sector, including those at the NTA, are now saying. Stakeholders agree that telecom companies are grappling with commercial challenges arising from regulatory policies, the shift of customers to OTT platforms and rapid technological advancements.

Telecom and ICT experts say it is high time the country reformed existing laws related to the development of the telecom sector and enacted new ones as necessary. In line with the theoretical framework outlined in the Telecommunications Policy, 2004, they suggest simplifying the outdated licensing system and streamlining the renewal process by tying the renewal fee to a fixed percentage of the service provider's annual revenue.

Experts say the current fees imposed on telecommunication services - such as royalty fees, rural telecommunication fund fees, telecommunication service fees and value-added tax - are unreasonable and excessive. They recommend integrating these fees and adjusting the overall service charges to more practical levels, ensuring that they align with the purchasing power of consumers.

In light of Nepal's commitments to the World Trade Organization and the recommendations of the International Telecommunication Union (ITU) to ensure proper investment security in the telecom sector, experts suggest that the proposed telecommunications laws should align with the foreign investment provisions outlined in the Foreign Investment and Technology Transfer Act, 2019 and the Industrial Enterprise Act, 2020.

Nepal's telecom market is valued at around Rs 100 billion, but its growth has been stifled by the numerous taxes, duties, and fees imposed by the government. Operators have been burdened with tax and fees like income tax, royalty fees, telecommunication service fees, rural area development fund contributions, spectrum fees, licence renewal fees and other financial obligations which have strained their financial health.

While the situation for some internet service providers is relatively satisfactory, it cannot be said the same for the telecom operators. While NT and Ncell remain the dominant operators in the country, the latter is facing uncertainty about its future post the expiry of its 25-year licence. Ncell has been hesitant to make new investments fearing that it will go under the government ownership after the expiry of its five-year licence.

Telecom experts argue that while countries globally have adapted to changing technologies, Nepal remains stuck in outdated practices. "The Build, Operate and Transfer (BOT) model is largely obsolete elsewhere, yet we continue to rely on it. Other nations have updated their regulations—why haven’t we?” questioned Ncell Chief Regulatory Officer Vishal Mani Upadhyay. “Unlike hydropower companies, which require a one-time construction followed by routine maintenance, telecommunications demands continuous investment in new technologies. Each shift, from 2G to 3G, and now to 5G, calls for substantial new investments, skilled personnel and advanced technology. Without these updates, we risk facing a ‘server down’ scenario."

While the government is in the process of amending the nearly three-decade-old telecommunications law, experts remain sceptical as the amendment has already been in progress for several years.

NTA and the Ministry of Communications and Information Technology (MoCIT) have drafted a revised version of the Telecommunications Act, 1997, which is currently under review by the ministry. A draft bill introduced in parliament was returned to the ministry for revisions after it faced significant objections in the National Assembly.

Purushottam Khanal, a former chairperson of the NTA, said there should be no further delays or hesitations in amending this critical legislation.

The existing Telecommunications Act allows the government to take control of the physical and technical infrastructures, land and equipment of telecommunications companies with more than 50% foreign investment after the expiry of the licence period. As per the existing legal arrangements, the licence period of the telecommunications company is 25 years and companies with more than 50% percent foreign investment come under the ownership of the government after 25 years.

"Who would invest in Nepal's telecom sector if they are required to hand over the company and its assets to the government after 25 years?" an executive of a telecom company told New Business Age.

Khanal also said the law prepared in the 90s cannot address today’s market. “It needs to be amended as soon as possible to remain relevant,” he added.

Discriminatory Policies

Telecom stakeholders have expressed concerns about perceived discriminatory policies within the telecommunications sector. They argue that while telecom companies and internet service providers (ISPs) now essentially deliver similar services, their investment requirements differ significantly.

ISPs primarily offer internet services through wired connections and provide voice services via Over-the-Top (OTT) platforms, whereas telecom companies deliver internet through 4G networks in addition to traditional voice services. Despite the similarities in service delivery, stakeholders say that the investment demands for these two types of services are vastly disproportionate.

Telecom companies are required to pay a substantial Rs 20 billion for licence renewal every five years, while ISPs are charged only Rs 270,000 for the same period. This considerable difference has become a major point of contention for telecom companies.

Telecom stakeholders argue that ISPs are benefiting from significantly lower costs, while telecom companies, having made massive investments in infrastructure and technology, are finding it increasingly difficult to remain viable in these challenging times.

According to Upadhyay, the licensing fee for all telecommunications companies should be uniform. “As the ICT sector evolves, the regulatory framework must become more ICT-friendly. For instance, when a company receives a ‘one-door’ approval, there should not be a need for multiple repeated approvals from various authorities. The process should be streamlined. Why do we need to go through mandatory licensing procedures for data centres repeatedly?” he questioned. “There should be consistency in licensing fees. ISPs provide voice services through OTT platforms and offer data services. But they face different licensing fees compared to traditional telecom providers. Why is there this discrepancy?”

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(Purusottam Khanal, Former Chairperson, NTA)

The decline in telecom revenue is not solely due to OTT platforms. When comparing data costs of today with those from five years ago, it is clear that expenses have gone up. This shows that telecom companies may be making some strategic missteps.

Also, the use of 4G services has increased by 3,000 times since its introduction in Nepal. Data usage is on the rise, driven by digital payments, Google Maps, and other OTT services, yet telecom revenue has fallen. Why is this the case?

While there is a slowdown in the telecom industry, internet service providers (ISPs) are flourishing. Telecom companies should focus on enterprise growth, invest in infrastructure and new technologies, and offer more affordable data rates to strengthen their business and revenue.

There has been a trend of holding licenses in Nepal, but who benefits from this? Consumers do not seem to gain any advantage from it. The authorities concerned should look into this matter. Another point to consider is that audits in the telecom sector should be conducted by third-party auditors. This would provide a clear and accurate picture of the sector's performance.

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Experts warn that telecom companies may collapse in the long run if discriminatory policies persist. A former managing director of NT, speaking anonymously to New Business Age, said that the high licensing renewal fee could be detrimental to telecom companies. “A licence renewal fee of Rs 20 billion is a significant burden for both Ncell and NT, especially as revenue continues to decline sharply each year. The government must urgently amend the Telecommunication Act,” the former NT chief said.

He cautioned that if the renewal fee remains unchanged, future earnings could be entirely absorbed by the government. “With only two major players left in the market, it would be disastrous if the government doesn’t revoke the requirement for telcos to pay the renewal charge in one lump sum,” he added.

Stakeholders argue that a level playing field is essential for all, whether it’s telecom companies like Ncell and Nepal Telecom or ISPs such as Worldlink and Vianet. Some telecom experts suggest that Smart Telecom’s inability to pay its licence renewal fee was due to declining revenues and discriminatory government policies.

NTA revoked Smart Telecom’s licence last year after it missed payment deadlines twice.

OTT Platforms Disrupting Revenue

Internet penetration in the country has reached 131% of the population, according to NTA. While 33% of the population has access to fixed broadband services, 98.46% use mobile broadband services. In 2020, Nepalis spent 2.6% of their gross annual income on internet services, according to the International Telecommunication Union (ITU), a rate higher than in most South Asian countries.

Despite high internet penetration, telecom companies have been seeing their revenue drop. One of the reasons behind this is the growing popularity of Over-the-Top (OTT) platforms, which are increasingly replacing the traditional services offered by Nepali telcos. Calls made via OTT platforms have surpassed those made through traditional voice services provided by telecom companies, according to operators.

The rapid growth of internet usage in Nepal began after the 2015 earthquakes as more people turned to mobile data for information. This shift led to increased adoption of wired internet which in turn boosted the popularity of OTT platforms. Over time, the use of these platforms migrated to mobile data. Mobile data started to become affordable after 2018/19 as telecom companies introduced data packages, further accelerating the use of OTT services like WhatsApp, Viber, and others.

A senior officer at NT said this shift to mobile data has affected the revenue of telcos. "Previously, telecom companies generated substantial income from domestic and international calls. Now, international calls have almost disappeared as Nepalis connect with family and friends abroad through platforms like Facebook, WhatsApp, Viber, and IMO," he added.

Mobile phone access has reached 73.2% of the population, according to the National Census 2022, indicating that more people are using OTT services via their smartphones.

As telecom revenues declined, OTT platforms began operating in Nepal without making any direct investments. In response, the NTA introduced the OTT Regulatory Framework in 2023, requiring OTT providers to register in Nepal. Under this framework, foreign OTT providers must either establish a branch office in Nepal, as per the Companies Act, 2006, or appoint an intermediary. However, foreign OTT platforms have yet to comply with these regulations.

Former NTA Chairperson Khanal, however, argued that the decline in telecom revenue is not solely due to OTT platforms. "When comparing data costs of today with those from five years ago, it is clear that expenses have gone up. This suggests that telecom companies may be making some strategic missteps,” Khanal said. “While there is a slowdown in the telecom industry, internet service providers (ISPs) are flourishing. Telecom companies should focus on enterprise growth, invest in infrastructure and new technologies, and offer more affordable data rates to strengthen their business and revenue."

A senior officer of NT said OTT platforms will eventually overtake Nepali telecom companies. "Given the current trend, people will soon rely on mobile networks for data use only," he said.

Stalled 5G Deployment

Nepal, once a pioneer in South Asia's telecom sector, was the first to introduce 3G in 2007. Nepal, however, is falling behind in the adoption of 5G wireless technology, while six neighbouring countries in South Asia have already implemented the service, due to regulatory stalemate. Consequently, Nepal is the only country in South Asia without 5G service.

5G, or fifth-generation mobile technology, offers up to 10 times faster internet speed than 4G and can accommodate ten times more devices per square kilometre.

The launch of 5G was originally planned for 2021 but was unexpectedly halted, with insiders citing geopolitical issues as the cause. Multiple sources say that both the US and Indian embassies had raised 'concerns' regarding Nepal’s decision to allow Chinese companies to conduct 5G testing without a competitive bidding process. NT had initially intended to start trials in July 2021. After receiving regulatory approval for 5G testing in November 2021, the company postponed the trial to June 2022, with commercial services projected to launch in August 2022. NT has now announced that it is conducting a commercial feasibility study for 5G.

According to a senior NT official, the existing 4G service still requires quality improvements, and it is essential to strengthen it before fully launching 5G.

NT has concluded internal trials in four locations with selected mobile devices, assessing whether the technology is compatible with their network. Due to the enormous investment required, Nepal is carefully considering the cost, market readiness, and potential returns before moving forward with 5G deployment. NT has also argued that the absence of 5G-compatible phones in Kathmandu and other cities makes the technology launch unfeasible. However, records show that millions of mobile phones with advanced features have been imported in the last two years.

While Nepal Telecom has delayed the 5G launch, private telecom provider Ncell has declared itself “ready for 5G adoption”. However, the rollout may take time as it needs to prepare the necessary equipment and network infrastructure. Despite its request, the government has not granted Ncell permission to conduct 5G trials.

Sources say that efforts to halt the 5G trial targeting Chinese major Huawei, a key player in the telecom sector, have stalled 5G deployment in Nepal for over a year. NT has integrated 5G with 4G by utilising technology and equipment from Huawei. NT signed a contract with Huawei to facilitate both the expansion of 4G and the future introduction of 5G. At that time, the state-owned telco divided the contract process into two components: the core network and the Radio Access Network (RAN) for 4G expansion. Concurrently, it arranged for a technical transition of the 4G infrastructure to 5G with support from Huawei.

Will There Be A Third Operator?

With companies like CG Communications, Smart Telecom, UTL and Hello Nepal losing their operating licence due to failure to meet the regulatory requirements, there are only two telecom operators in the country. Stakeholders say that having just two service providers (a duopoly) in a competitive market can be worse than a monopoly.

The need for a strong and effective third telecom operator, capable of competing with the government-owned NT and the privately-owned Ncell, was felt to break the duopoly in the telecommunications market, with hopes of providing consumers with more affordable and higher-quality services. However, the government has not created a conducive environment for the third operator to thrive. Potential investors in the telecom sector are hesitant to enter under healthy conditions.

It has been 15 years since the Nepal Telecommunications Authority (NTA) last invited applications for a third telecom operator. The most recent call, in 2008, required applicants to submit economic and technical feasibility reports, along with other qualifications and operational plans. Smart Telecom ultimately received the licence.

It is hard to envision that any new service provider will emerge under the current arrangement, which requires a licence renewal fee of Rs 20 billion and has a legal framework that expires in 25 years. Experts in the telecommunications sector argue that even if someone expresses interest in the current landscape, they should be welcomed with open arms.

Introducing a third telecom service provider in Nepal, however, is unlikely without foreign investment, as it entails significant capital expenditure and intense competition. Foreign investors, however, can own only up to 80% of shares as the law requires the remaining 20% to be held by domestic investors. According to telecom experts, foreign investors are hesitant despite potential opportunities, as the limitations make it difficult to benefit from such arrangements.

High renewal fees have effectively halted the entry of new service providers. A notice published in the Gazette on April 13, 2008, outlined a licence fee of Rs 350.75 million rupees and a renewal fee of Rs 20.13 billion rupees for telecom companies. The permit duration is limited to just 10 years which means telecom service providers must set aside Rs 2 billion annually on renewals.

In addition to this, companies must also pay frequency fees, a 6% royalty on income, and a rural telecommunications fee. Recently, while the voice business in the telecom sector has been declining, service providers argue that associated fees have been on the rise.

'Nepal Must Evolve Beyond Traditional Services'

(Vishal Mani Upadhyay, Chief Regulatory Officer at Ncell )

If the current situation persists, the telecom sector is on the verge of decline with the industry steadily shrinking. We remain confined to the traditional concept of "telecom", focusing solely on voice, data and SMS. By limiting ourselves to these three aspects, we risk missing broader opportunities. Instead, we should shift our focus towards expanding into the ICT sector, rather than being restricted to telecom alone.

When we were first licensed as voice service providers, voice call technology was quite limited. We acquired spectrum and built towers specifically for voice services. However, technology has continuously evolved. During the 2G era, GPRS and HSPA (H) emerged for data services. With the introduction of 3G, users began gravitating more towards data, and by the time 4G arrived, the transition to data services was complete.

In this data revolution, there are numerous ways to provide data, whether through wired or wireless means. Yet, even today, we are still primarily viewed as voice service providers. In Nepal, there are many voice service providers, but the real difference lies in the technology they use. Additionally, discriminatory policies have further impacted the sector's growth and development.

In 2016/17, the telecommunications sector generated over Rs 100 billion in revenue. However, this has since declined to Rs 96 billion. If the current trend continues, revenue from the telecom sector could drop further to Rs 70 billion within the next five years. Similarly, revenue of telecom companies are projected to decrease from Rs 73 billion to Rs 56 billion. In contrast, fixed-line ISP service providers might see a slight increase in revenue. It is crucial to consider how this decline will impact the public. Like any issue, there are two sides to the coin. If this sector continues to shrink, will it support or hinder the government's plans and policies?

Government revenue is already declining, and although the telecommunications sector has the potential to contribute up to 10% of GDP, it currently accounts for only around 3-4%. If we fail to revitalise this sector, government revenue could decrease by an additional Rs 5 billion over the next five years. Some might ask, “Aren’t telecom companies still making a profit?” Yes, they are, but profit alone doesn’t sustain a business. Investment in technology is crucial. Technological advancements are necessary, particularly as we move towards digitisation in Nepal—a process largely driven by innovations from telecom companies. Without significant overhaul, all of this progress is at risk, and our journey towards digitisation may come to a halt.

We need focused discussions and targeted policy reforms. The current law, established when licences were issued for voice service providers, requires amendments. We must revisit the licensing framework to assess how many service providers are truly necessary and what kinds of services they should offer. It is essential to approach this issue from both a global and regional perspective.

Take Foreign Direct Investment (FDI), for example. Following the influx of foreign investment into our telecom sector, we experienced significant growth. FDI has played a crucial role in this development, but we must consider whether our laws are genuinely conducive to promoting FDI.

Globally, the Build, Operate, Transfer (BOT) model is no longer prevalent, yet in Nepal, we are still clinging to it. Other countries have updated their regulations, so why haven’t we? Unlike hydropower, which requires one-time construction and ongoing maintenance, telecommunications necessitates continuous investment in new technologies. From 2G, 3G, to 4G and now as we approach 5G, each transition demands substantial new investments, skilled manpower and cutting-edge technology. Without this, we risk ending up in a "server down" situation.

The stagnation in this sector often stems from restrictions on FDI. Our laws need to be amended to ensure that existing players do not exit the market while also creating opportunities for new entrants. Whether public or private, this industry must remain open to evolution and growth.

The licensing fee for all telecommunications companies should be uniform. As the ICT sector evolves, the regulatory framework must become more ICT-friendly. For instance, when I receive a 'one-door' approval, I shouldn't have to repeatedly seek approvals from multiple authorities repeatedly. Why do we need to go through mandatory licensing procedures for data centres repeatedly?

There should be consistency in licensing fees. Take ISPs, for example, they provide voice services through OTT platforms and offer data services. They have a different licensing fee compared to traditional telcos. Why is there this discrepancy? Voice calls made via OTT platforms now surpass those made through telecom companies. While global players utilise the infrastructure that we have built in Nepal, they are not contributing financially to either that infrastructure or the government. There needs to be a level playing field. In some countries, governments have launched their own national OTT services, sharing the revenue with both operators and the government.

In Nepal, the licensing renewal fee is excessively high, making it almost impossible to pay in one lump sum. The government should take this reality into account by assessing profits and savings. The key question is: what is the right amount? Should the licensing fee follow global trends as a fixed amount, or should it be a percentage of revenue? Additionally, telecom companies are already paying taxes under various categories, which should also be considered when determining renewal fees. With revenue declining, expecting payment in one lump sum is unrealistic.

(The news article was originally publihsed in the  October, 2024 issue  of the New Business Age Magazine.)