Ignacio Roman Vila, President, Avantel; Fabián Hernández, President, Telefónica Movistar Colombia; and Marcelo Cataldo, President, TigoUNE: Interview

Interview: Ignacio Roman Vila; Fabián Hernández; Marcelo Cataldo

How has the sector adapted to new technologies, and how will it benefit the broader economy?

IGNACIO VILA: A reduction in the prices of telecoms services would increase GDP by two percentage points through increased connectivity. A 10-percentage-point increase in connectivity could result in a 1.3-percentage-point increase in GDP. Therefore, increasing penetration by lowering prices and deploying infrastructure would increase productivity for corporate and individual clients. However, this will not be achieved through the deployment of fibre optics given the associated costs and times. While those benefitting from this technology would most likely be higher-income individuals, it would do little to provide access to roughly 50% of the population who do not have 4G access.

FABIÁN HERNÁNDEZ: The competitive dynamics of the market are bringing in added benefits to users. As companies continue to adopt digitalisation processes, they are requesting different services that go beyond connectivity. Businesses are becoming stricter, requiring services related to the cloud, big data, the internet of things and cybersecurity. The democratisation of these services is also driving developments in the market. The low penetration of fibre optics, which only encompasses about 15% of the broadband network, remains a challenge. According to the National Department of Planning, increasing connection speeds by 1 Mbps can increase GDP per capita by up to 1.6%.

MARCELO CATALDO: The business of cloud computing, data centres, the internet of things and other related technologies have not only revolutionised the traditional business ecosystem, but have also become the main economic drivers. In this context, telecoms operators have widened their scope to include these technologies, especially targeting small and medium-sized enterprises (SMEs), given that the SME segment accounts for a very significant portion of the country’s GDP and employment. The expansion of these services has allowed SMEs to compete more effectively in the market, both locally and internationally, through the use of digital networks leased to third parties.

What could be done to increase 4G usage?

CATALDO: As of 2018, 32.5% of Colombians had access to 4G technology, compared to 62% in Brazil and 48.3% in Argentina. The spectrum auction will expand the 4G network and incentivise investment in infrastructure, effectively increasing coverage. The recent devaluation of the Colombian peso and the introduction of tax exemptions for phones worth less than COP700,000 ($239) has resulted in a vicious cycle that foments the purchase of low- and medium-tier phones, while high-tier phones are virtually impossible to acquire. Previously, the permanence clause subsidised phone purchases, but as users must now pay full price, most have decided to keep their 3G units.

HERNÁNDEZ: When we look at the most recent digital competitiveness indices, Colombia has dropped three places. One of the main causes is the ability to import sub-prime phones, only compatible with 3G or even 2G networks. While some consumers still purchase them under the assumption that they are cheap, price is not the barrier given that 4G phones can be purchased for $50. Increasing 4G usage could partly be addressed by tackling bottlenecks in consumption. Subsidising pricing for the lowest segments of the population would also enable them improved access to the internet, data services and value-added products.

VILA: Access to 4G devices is not a challenge in itself.

Devices fitted with 4G capability are not more expensive than 3G devices, yet consumers continue to purchase the latter. These dynamics can be explained by consumers either lacking 4G coverage or failing to see the added value of 4G. In the past we witnessed bottlenecks in the segment due to pricing, but this is no longer the case. While only 25% of all mobile phones in the market are 4G, approximately 75% of all new phones sold today are 4G compatible. As prices and 4G coverage improve, we will progressively see a stronger adoption of this technology.

How could the sector be improved?

HERNÁNDEZ: In an industry financed wholly by the private sector, the authorities must incentivise investment by lowering taxes and enacting market-friendly policies. Instead, the last few years have seen the government do the opposite. Income tax for telecommunications companies is currently at 2.2%, compared to an average of 1.5% in the region, and value-added tax (VAT) on capital goods can not be deducted unlike in most markets in the region. On the demand side, data services are subject to VAT and a consumption tax of 4%, putting data on par with luxury items and reducing its image as a primary necessity. Moreover, while access to certain utilities is subsidised for the lowest strata of the population, the consumer tax on data remains the same across the board.

VILA: The sector exhibits regulatory shortcomings that inhibit investment and free competition. Currently, a single operator controls over a 50% market share and more than 75% of all earnings before income, taxation and amortisation. This situation allows for an operator with investments made and recouped in the past to effectively block the market’s development and limit competition. In this context, liberalisation of the 700-MW spectrum under special conditions fomenting free competition is paramount.

CATALDO: Given the presence of five regulatory bodies overseeing the sector, dealing with the public authorities on procedural, regulatory and fiscal matters is challenging and inefficient. The creation of a single regulatory authority is in line with the OECD’s accession requirements and would enable stakeholders to focus on the objectives at hand, such as bridging the connectivity gap and improving infrastructure. The industry must be understood as a single ecosystem, which not only includes traditional operators but also accounts for a variety of newcomers, such as over-thetop content providers like Netflix.

What are the major challenges to increasing telecoms coverage across the country?

HERNÁNDEZ: The government wields a number of means to collect capital, which could be used to generate universal coverage, including fees paid to the Universal Service Obligation fund and proceeds from the spectrum auction. However, the funds collected are often used for matters unrelated to their intended goal of bridging the connectivity gap in underserved areas. Similarly, the spectrum auction provides an opportunity to gauge the government’s ambitions for the sector; they should look beyond financial returns in order to obtain greater benefits for all citizens.

CATALDO: According to President Iván Duque, only 50% of the country has access to either mobile or fixed-line internet. However, relying solely on private operators to expand coverage across the country, regardless of the population density or income base, makes little sense from a business perspective. Increasing access with social implications is therefore the responsibility of the government. During past spectrum auctions, the government focused on maximising fiscal returns while imposing very few social requirements. Reversing this strategy – which seems to be the case under the current administration – is a step in the right direction.

VILA: The issues facing regulation also hamper the deployment of infrastructure and the increase in coverage. While the taxes levied on the industry are prohibitive, the funds gathered by the authorities, such as the Ministry of Communication and Information Technology, have also not been adequately tracked and used. While a more adequate use of funds is an obvious necessity, free competition remains key. A more equal playing ground enables prices to drop and creates increasing accessibility for users, as seen in all markets that stimulate free market competition.