Further investments needed to accommodate growth in Ghana's telecoms and IT sector

Long one of the fastest-growing and most dynamic parts of the economy, Ghana’s telecoms sector is undergoing a transition towards increased data activity. Rising costs in the 27.9m-person country have forced operators to raise tariffs and intensify their efforts to develop growing streams of revenue, particularly data-intensive services. As with most African telecoms markets, mobile data volumes are growing rapidly, while voice subscriptions continue to rise at double-digit rates. This entails further investments in infrastructure to accommodate the increased traffic, and as a result, a continued trend towards tower sharing and outsourcing of network management.

Regulator

The telecoms sector, as well as internet provision and radio and television broadcasting, are regulated by the National Communications Authority (NCA). The authority was established in 1996 under the Ministry of Communications and had its role enhanced by the National Communications Authority Act 769 of 2008. The NCA has a wide-ranging remit; its responsibilities include: granting licences for communications; ensuring fair competition among licensees; establishing and monitoring quality-of-service indicators for operators and service providers; ensuring compliance with and enforcement of regulations; educating and protecting consumers; approving equipment standards; and coordinating international frequency. In its capacity as a licenser, the authority assigns, allocates and regulates the use of frequencies and manages access to the radio spectrum. It has the authority to release spectrum for new uses, as well as develop spectrum pricing and trade to ensure that spectrum is used efficiently. The NCA also monitors the airwaves to tackle interference, illegal usage and unauthorised wireless devices.

Penetration

According to the NCA, Ghana had 37.2m mobile voice subscribers in September 2016, with overall mobile penetration at 133.35%. However, the unique penetration figure – that is, the proportion of Ghanaians with their own mobile telephones – is likely lower. As with elsewhere in the world, penetration figures are inflated by ownership of multiple SIM cards, whether subscribers have more than one phone or switch between SIMs to take advantage of on-network tariffs and special offers.

In 2012, when the year-end penetration was approximately 100%, a survey by the GSM Association, a global industry body, estimated unique penetration to be much lower, at 49%. This figure has almost certainly increased over the past five years, but is indicative of the remaining scope for subscription growth. Ghana’s fairly strong population growth, at around 2.5% per year, and large youth population – with 39% of the population under the age of 15, according to the World Bank – are factors that will continue to contribute to market growth over the medium term. Indeed, mobile subscriber growth is still in the double digits, recording 13.1% year-on-year (y-o-y) at the end of the second half of 2016, with the penetration rate COVERAGE: However, there are still some rural areas of the country that are not well covered by the operators’ networks, and the development of niche products is still in its infancy. “Incentives are needed for telcos to go into sectors, such as agriculture, to offer tailored services, but also to be more present in the three northern regions,” Ernest Brown, executive director of Broadband Home, a wireless broadband provider, told OBG. “Taxes are a big challenge for the sector. If taxes are decreased, more customers are likely to sign on and thus mobile penetration and internet subscriptions will increase. Taxes have remained a barrier MARKET BREAKDOWN: While there is ample potential for niche activities, Ghana’s mobile telecoms sector is maturing, and subscription growth has slowed somewhat in recent years. This has led to rising competition between players to win over new and existing customers. The market leader in voice subscriptions is MTN Ghana, a subsidiary of South African telecoms giant MTN, with 17.05m subscribers and a market share of 48.5% in September 2016, according to NCA data. Second is UK-based Vodafone, with 8.16m subscribers and a market share of 21.9%. It is followed by Tigo, owned by Luxembourg-based Millicom, with 5.4m subscribers and a market share of 14.5%; Airtel, part of India’s Bharti Airtel, with 4.7m subscribers and a market share of 12.6%; and Glo, part of Nigeria’s Globacom, with 828,200 subscribers and a market share of 2.2%. Expresso, majority-owned by Sudan’s national telco Sudatel, had 102,200 subscribers, and market share of just 0.3%.

Competitive Landscape

The introduction of mobile number portability (MNP) in 2011 has added an extra element of competition, allowing subscribers to change networks in a matter of minutes. The scheme has been hailed as one of the most successful in Africa, with 1.66m subscribers changing networks in the first three years, according to the NCA. During the second quarter of 2016 alone, a total of 161,703 subscribers switched from one network to another.

While the market is dominated by two big players – sharing more than two-thirds of the total subscriber base between them – smaller players have benefitted from MNP. “These smaller companies have identified how flexible they can be in terms of market share, and as such have provided niche products for their customers,” Brown told OBG.

Nonetheless, the number of competitors, in a relatively small market, may lead to consolidation in the longer run. Kwaku Sakyi-Addo, CEO of the Ghana Chamber of Telecommunications (GCT), told OBG in mid-2016 that foreign investors were eyeing some of the incumbents for acquisition, though with the sector experiencing a slowdown, they may wait for the short term. One potential shake-up may come via the possible acquisition of the country’s smallest operator, Expresso. International sanctions on Sudan have made it difficult for parent company Sudatel to recapitalise its Ghanaian subsidiary, and local media have indicated that the Sudanese company was exploring the possibility of selling. In late 2016 the NCA announced that it would potentially revoke Expresso Ghana’s licence if Sudatel was unable to find a financial investor to overhaul the operator. An NCA official told local media that Expresso was “seriously looking for investors”, and that while the process of revoking the operator’s licence had been launched, it would be lengthy, with no certain end-date yet in sight, allowing ample time for discussion with potential investors that want an entry point to West Africa’s second-largest consumer market.

Pre- And Post-Paid

The vast majority of mobile subscriptions are pre-paid – 99% as of the end of the second quarter of 2016, according to the NCA – however, the market share of post-paid subscriptions has been growing strongly, with subscriptions more than doubling in just a year, from 163,597 in June 2015 to 354,628 in June 2016. The post-paid segment is limited by a range of factors endemic to emerging and frontier markets, including low and irregular incomes, which make paying monthly bills harder; issues with addressing bills; and consumer preference for the flexibility of pre-paid, which makes switching between networks to take advantage of favourable tariffs easier. Nonetheless, post-paid subscriptions are likely to continue to grow as incomes rise in Ghana, as work in the formal sector expands and as operators encourage customers to sign contracts.

Data Growth

With voice revenues unlikely to continue to grow strongly as the market matures, and competition placing pressure on operators’ margins, there is an increasing focus on expanding data usage to boost revenues. The trend is similar to that in many emerging markets. Mobile data subscriptions in Ghana grew rapidly from 17.3m in September 2015 to 19.33m in September 2016, with a penetration rate of 69.22%, according to the NCA. Relatively low penetration in an environment of rising incomes and population expansion suggests that the market will continue to grow for some time, particularly with smartphones becoming cheaper and more accessible, and competition among operators for the data segment on the rise (see analysis).

Total mobile data usage in the first half of 2016 was 28.1m GB. Volumes continue to grow strongly, with usage doubling from 7.44m GB in the second quarter of 2015 to 14.94m GB in the second quarter of 2016. Demand for data services is being driven by the improved reliability of networks and higher download speeds, both of which are a result of 3G and 4G LTE coverage across the country’s 10 regions.

Volumes

In the second quarter of 2016 domestic mobile voice traffic usage was up 14.6% y-o-y from 12.9bn minutes to 14.8bn minutes, with the average subscriber totalling 134 minutes monthly, up from 132 minutes. Inbound international voice traffic totalled 345m minutes, while outbound totalled 396.6m minutes. Meanwhile, international usage declined from 217.7m minutes outbound and 189.2m minutes inbound in the second quarter of 2015 to 178.9m minutes outbound and 155.8m minutes inbound in the same period of 2016.

Subscribers in Ghana sent 997.5m text messages in the first half of the year. However, SMS usage has been declining, falling by 25.2% y-o-y in the second quarter of 2016, according to the NCA. The drop in SMS volume was attributed, in part, to a rapid increase in the number of application-to-person notifications, which can be generated through a range of interactions between businesses and telephone subscribers, for example bank transactions and news alerts.

Tariffs

In absolute terms, Ghana has some of the cheapest mobile telephone rates in the world, according to the International Telecommunication Union (ITU), a global industry body. In 2014 the organisation estimated that the average monthly cost of using a mobile phone in Ghana was just $3.61, equivalent to 2.45% of average gross national income, or $11.80 in purchasing power parity terms. This is a function of a market that is relatively poor, sensitive to price and has six operators competing for business. Despite these factors, average tariffs rose slightly in the second quarter of 2016. On-network voice tariffs increased from an average of GHS0.10 ($0.03) a minute in the second quarter of 2015 to GHS0.11 ($0.03) in the second quarter of 2016, while off-network calls rose from an average of GHS0.12 ($0.03) to GHS0.13 ($0.03). On-network SMS, meanwhile, rose from an average of GHS0.04 ($0.01) to GHS0.50 ($0.13), while off-network messages increased from an average of GHS0.05 ($0.01) to GHS0.06 ($0.02). Data also increased in cost, up from an average of GHS0.10 ($0.03) per MB to GHS0.11 ($0.03) over the period.

Costs Rising

Rising costs for operators, particularly utilities and fuel prices, are the main reason for increasing tariffs. In April 2016 local press reported that call charges had hit a 10-year high, with network operators raising prices by 15% on average. Prices for on-network calls saw the biggest proportional rise, a clear move to bolster margins as on-network connections entail the lowest operational expenditure for operators. The tariff rises come after a period of reductions; in the 12 months to February 2015, operators cut on-network fees by 4.8% and off-network charges by 3.8%. That operators are able to pass on rising costs to consumers in a traditionally price-sensitive, low- to middle-income environment at a time of economic uncertainty and high competition, is indicative of the high demand for mobile services. That subscriptions and usage have continued to grow suggests that demand is less price-elastic than may have been expected. Nonetheless, Kenneth Gomado, finance director of Vodafone Ghana, told local press in early 2016 that the scope for operators to pass costs on to customers was limited. Operators’ costs have been pushed up by large hikes in electricity, water and fuel prices since December 2015. Energy costs account for around 60% of the industry’s operating costs, according to the GCT. Ebenezer Twum Asante, CEO of MTN Ghana, told local media that these expenses would cost his company an additional GHS48m ($12.4m) in 2016, while Gomado said that the sustainability of the telecoms sector was dependent on operators improving efficiency to bring down their overall costs. “One of the challenges right now is that our operating expense is growing faster than the rate at which our revenue is growing,” he said.

Fixed Line

Ghana has two fixed-line operators, Vodafone and Airtel, with a total of 254,021 subscribers in September 2016, down from 270,356 in September 2015. Vodafone dominates the market, with 249,425 subscribers, representing 98% of market share, while Airtel has 7596 subscribers. Fixed-line usage has been falling, dropping 18.4% y-o-y in the second quarter of 2016 to 28.27m minutes. Vodafone had a 90.2% share of traffic in that quarter, suggesting that while Airtel subscribers may be fewer, they use their fixed lines more than Vodafone’s clients. Average minutes of use for all fixed-line subscribers fell by 25.9% y-o-y in the second quarter of 2016, from 45.87 minutes to 32.32 minutes per month.

Most individuals and households primarily use mobile telephones. For many, a mobile device is the first telephone they have owned, as Ghana has leapfrogging the era of fixed-line connections. However, for many businesses, government bodies and other non-residential subscribers like NGOs, fixed line continues to be an important means of communication. Fixed-line connections are now often sold in a triple-play bundle with mobile and internet.

Tax & Regulation

Operators say that costs have also been pushed up by the communication services tax, commonly known as the talk tax – a 6% levy on calls introduced in 2008 and amended in 2013 to include international calls and data transmission, and close loopholes in the existing legislation. The government obtains around 7% of its revenue from telecoms taxes, according to PwC, making the sector an important contributor to government coffers.

Another factor affecting operators is the obligation for those operating 3G services to extend coverage to all district capitals. However, in some areas, data usage is still very thin, making the expansion of the network unprofitable. According to Sakyi-Addo, “The monthly revenue is a tiny fraction of the running cost, not even to talk about the capital investments.”

The regulations, enforced by the NCA, are intended to help close the digital divide between more affluent areas and the less-developed parts of the country, ensuring that residents of all main towns nationwide have access to mobile internet services. Following assessments in the first half of 2016, the regulator issued ultimatums to Airtel, Glo and Tigo to improve coverage in the Northern Region by the end of 2016.

Infrastructure

Rising costs for operators have helped catalyse greater outsourcing of network infrastructure, a trend that is on the rise across the world. In many cases, operators sell infrastructure such as towers to specialist companies and then lease the capacity back. A related trend is greater infrastructure sharing among operators. For years, GSM companies were reluctant to share towers with their competitors, but the economic impetus to do so has grown, as margins have declined over the past 10-15 years. Regulatory pressure has also helped, with the NCA obliging telecoms firms to use existing infrastructure if there is capacity. The shift towards outsourcing infrastructure has helped improve call quality, according to Gareth Townley, managing director of Eaton Towers Ghana, with dedicated tower companies focused on infrastructure maintenance.

Expanding Networks

Tower companies active in Ghana include American Tower and Eaton Towers. The latter provides services to MTN, Airtel, Tigo and Vodafone, and expects business to grow over the comping years as demand increases. “Demand is increasing for better coverage, and thus more towers are being built and erected,” Townley told OBG. “The real drive for us is 3G/4G. The operators built networks for voice, but now we need high-speed data, and that is where co-location really comes in.”

MTN announced plans to invest $18m in its roll-out of 475 4G sites across the country to support its launch of services in June 2016. Townley says that MTN will need up to 200 more to support its 4G network expansion. Given the company’s substantial operational expenditure, it will probably seek to use shared or franchised towers. According to Townley, demand is particularly strong in major urban centres, such as Accra, Kumasi and Takoradi, though infrastructure is already sufficient in most areas of Accra, so operators are seeking co-location rather than new towers.

Unlike in some countries, regulatory burdens on tower construction are not particularly onerous. Four permits are needed in Ghana: one for environmental standards, one for radiation, a building permit from the local authority and a civil aviation permit. All equipment must also meet ITU standards. However, as elsewhere in the world, there has been growing opposition from local communities to tower construction. To address this, tower companies try to work with the community to allay concerns.

Outlook

After years of strong growth, telecoms companies are facing a more difficult period, with higher operational costs and the prospect of weaker demand in some traditional segments. This may encourage greater innovation and diversification to develop revenue streams, particularly from data and services such as mobile money. Over the medium term, as some players deem the environment too challenging, some changes in the market may emerge – be it consolidation or the entry of new players looking to tap into Ghana’s growth story. Despite the slowdown, Ghana’s market fundamentals are robust and players able to respond astutely to changing dynamics stand to benefit. The trend of shifting infrastructure to dedicated companies is also likely to continue, with third parties to benefit as 3G and 4G are rolled out and volumes continue to increase.