Opinion & Analysis

Understanding the cost drivers in the telco industry

A lot has been said about the Zimbabwean telecommunications industry’s apparent penchant for hiking tariffs, but few have taken the time to understand why the industry regularly reviews it prices.

Unlike their peers elsewhere in the continent, who are more preoccupied with satisfying their customer needs, telcos in Zimbabwe have to contend with endemic power cuts, high taxes, foreign currency shortages, vandalism, a burgeoning foreign currency debt, and a depreciating local currency, among many challenges within their operating environment.

Electricity shortages
To put this into perspective, telecommunication companies have in the past two years forked out an estimated US$8 million annually to secure diesel needed to fire up base stations and keep the nation connected in the face of crippling electricity shortages. This situation alone means telco’s
operating costs are already high before we factor in labour, depreciation and other operating costs.

In some cases, MNOs are reportedly unable to support some base stations for weeks on end due to the inordinate cost of running them using diesel generators – with the diesel procured in foreign currency – which would be higher, in some cases, than the revenue generated by some of these

In its latest annual report, Econet Wireless Zimbabwe said it used as much as three million litres of diesel per year to power up generators to keep base stations online. A simple calculation shows that Econet is using over US$4 million a year to procure diesel only.

Although some companies, such as Econet, are turning to solar power instead of diesel-powered generators, which are more expensive to run and maintain, the set up cost of installing solar panels and batteries is also high, especially in the initial stages.

Foreign currency shortages
Zimbabwe has been experiencing foreign currency shortages for the past few years now, especially since Zim dollarization. What consumers may not fully appreciate is that telecommunications network infrastructure and components – particularly software and license fees – are purchased and
paid for in foreign currency.

But since the introduction of the Dutch foreign currency auction system by the Reserve Bank of Zimbabwe in 2020, mobile network operators have received less than 1% of the over US$2.5 billion allotted in the past two years. This situation has made it difficult for the telcos to refurbish and
upgrade existing infrastructure, resulting in network congestion and compromised quality of service.

The fact that the industry owes foreign suppliers in excess of US$1 billion shows the extend of what the telecom operators are up against.
Infrastructure costs

Closely linked to foreign currency shortages are the costs of infrastructure needed for high-speed internet and quality network service. A major cost driver for telecom service providers is network equipment and infrastructure upgrades.

For instance, when mobile network operators upgraded from 2G to 3G, and from 3G to 4G (and now they are eyeing 5G) all this investment required foreign currency. What is more, many areas in the country are difficult to access, making it particularly expensive to set up telecoms infrastructure

According to the industry regulator, mobile network operators invested ZW$248 million in infrastructure development in 2020 up from ZW$70 million in 2019. As the demand for internet continues to grow, it means telcos have to invest more money for bandwidth, to keep up with

High taxes
As if this is not enough, mobile network operators (MNOs) in Zimbabwe are expected to pay very high licence fees. A few years ago Econet paid US$137.5 million for a 20 year license, compared to about US$12.5 million in Zambia or US$10 million in Kenya. Last year, a senior Econet executive told
an ICT Parliamentary Portfolio Committee that had visited the company that the sector is saddled with a 5% health levy, a 15% Value Added Tax, a 25% corporate tax, a 3% universal service fee and a 2% IMT tax.

It is hardly surprising then, that the sector has to regularly review its tariffs to absorb some of these costs and to remain viable.

Zimbabwe’s high annual inflation rate, which closed 2021 above 60%, is also a cause for grave concern in the telecommunications industry. A recent report by Potraz shows that costs in the sector are growing faster than revenues. According to the telco regulator, mobile operator revenues grew by 15.8% from the previous quarter, to record ZW$19.5 billion while at the same time operating costs grew by 40.9% to record ZW$12.5 billion in
costs in the same quarter.

Costs are also being driven by the volatile domestic currency, which has been losing value against major currencies in the last two years. Most companies in Zimbabwe are pegging their prices in United States dollars and constantly adjust the Zim dollar prices to match the greenback street rate
thought to be around US$1:230 compared to the official rate of US$1:115.

They do this to hedge against inflation and value erosion. This has resulted in MNOs paying significantly more to local

After considering in all these factors, and the list of cost drivers addressed here is not exhaustive – it should them not come as a surprise when telcos regularly review their tariffs. The overriding reason for the price adjustments is more about industry survival and viability, rather than to make huge
profits. It has more to do with being able to maintain a reasonable quality of service, than it is about just making money.