Sri Lanka’s vibrant telecommunications industry has benefitted from two decades of market liberalisation, with five competing mobile operators driving retail tariffs to some of the lowest levels worldwide. End users and operators benefit from the country’s position as a swing point between Europe and East Asia, and its advantageous geographic location atop a host of high-capacity submarine cable networks.
Unlike in many other markets, fixed-line subscriptions have not shown the same rapid recent decline in the country, with robust growth in fixed internet connections helping to offset fixed-line losses, while mobile uptake has soared in recent years, with penetration now standing at over 100%, and operators the first in South Asia to offer next-generation mobile internet services to customers.
Fierce competition in an overcrowded market is the most significant challenge to future growth, as five operators compete for market share in a country with just 20m people, although unprecedented demand for data services has driven the strongest players to invest heavily in new infrastructure and acquire smaller operators in a bid to expand their networks – a trend that is expected to continue. Combined with solid macroeconomic fundamentals, strong capital expenditure is expected to keep the industry on a stable growth path, while government initiatives to deliver universal internet connectivity will support data-driven industry growth.
History
Telecommunications development in the country first commenced in 1858 with the establishment of the first telegraphic circuit linking Galle and Colombo, as well as the first international telegraph communications between what was then Ceylon and India. International telephone services were first launched in 1935, and in 1951 the Post and Telecommunications Department of Ceylon was established to take over telecoms operations from the country’s Cable & Wireless Company. Post and telegraph services were delineated in 1980 to form two separate departments, Postal and Telecommunications, and in 1991 the country’s incumbent, state-owned operator Sri Lanka Telecom (SLT) was formed.
Privatisation in Sri Lanka commenced alongside the introduction of internet and email services in 1996, and SLT was converted into a public company, with Japan’s Nippon Telegraph & Telephone Corporation (NTT) acquiring a 32.5% for $225m. By 1998 SLT’s customer base stood at 500,000, and in 2002 SLT acquired the country’s first GSM operator, Mobitel, before listing on the Colombo Stock Exchange (CSE) in 2003. Today the government of Sri Lanka owns 49.5% of SLT, while Dutch firm Global Telecommunications Holdings, which acquired NTT’s stake in 2008, owns 44.98%, and the remaining 5.52% is publicly traded on the CSE.
Government Oversight
Sri Lanka’s Ministry of Telecommunication and Information Technology, formed in 2010 and renamed the Ministry of Telecommunication and Digital Infrastructure following parliamentary elections that took place in late 2015, is responsible for development of local internet content, making telecoms services available nationwide, and increasing access to and usage of information communication services, including the internet. The ministry is also responsible for supporting development of new e-government systems, although the Information and Communication Technology Authority has taken the lead on e-government initiatives in recent years (see IT overview).
The country’s independent regulator, the Telecommunications Regulatory Commission of Sri Lanka (TRCSL), plays a more prominent role in telecommunications development. The TRCSL was established under the Sri Lanka Telecommunication Act No. 27 of 1991, which was amended in 1996 to create the authority, and is the primary piece of legislation overseeing the sector. The commission is tasked with protecting public and consumer interests, and ensuring fair competition in the open market. The commission’s responsibilities include monitoring competition to ensure operators are working in the best interest of the general public, ensuring seamless interconnection between networks and services, maintaining a transparent and fair licensing process, and maintaining affordable tariffs.
Fixed Line
The advent of GSM services and market liberalisation has seen a number of new players enter the market as SLT gradually lost its monopoly, and today there are three licensed fixed-access operators, including the incumbent, SLT, Lanka Bell and Suntel. Sri Lanka’s fixed-line market, in contrast to global trends, recorded strong growth over the past decade, despite a moderate decline in recent years, even as mobile services expanded rapidly, with the TRCSL reporting that total fixed-line subscriptions rose from 1.2m in 2005 to 2.7m in 2007 and 3.5m in 2008, peaking at 3.6m in 2011, before falling to 3.45m in 2012 and 2.7m in 2013, and recording a moderate increase to 2.71m in 2014.
Although fixed-line telephones have become less popular in the wake of advanced mobile services, robust expansion in fixed broadband connections has helped operators offset these losses, with the TRCSL reporting that fixed broadband connections grew by 18% in 2012 to reach 423,194, by a further 20% to 507,845 in 2013, and by 19% to 606,100 in 2014. SLT, for example, reported that fixed broadband connections accounted for 14% of its growth in 2014, despite a 9% decline in fixed telephone services.
Operators
SLT – at group level including its eight subsidiaries – recorded a relatively strong performance in 2015, with revenues rising by 5% to LKR68bn ($490m), and operating profits up 19% year-on-year (y-o-y) to LKR6.7bn ($48.2m). However, after-tax profit declined by 38% to LKR3.7bn ($26.6m) following a number of one-off measures. In March 2016 SLT was downgraded alongside the government’s sovereign rating to “B+”, with its second-biggest shareholder possessing no provisions to dilute the government’s shareholding.
Lanka Bell was established in 1997 with a $150m investment, representing the largest firm founded under Sri Lanka’s Board of Investment (BOI) at the time. The company was acquired by Milford Holdings Private in 2005, and currently offers both post- and pre-paid fixed services. The company has grown its customer base from just 40,000 lines in the late 1990s to over 600,000 lines today.
Suntel, the country’s third fixed-line provider, held 382 base stations delivering fixed voice, broadband internet and data communication services, with investments totalling LKR11.8bn ($85m) between 2006 and 2012, when the provider was acquired by Dialog Axiata for $34.5m.
Mobile Market
Sri Lanka’s mobile market has witnessed strong growth in recent years, with the TRCSL reporting that mobile users soared from 3.4m in 2005 to 5.4m in 2006, 8m in 2007, 11m in 2008, 14.3m in 2009 and 17.3m in 2010, representing growth of 414% in just five years, before rising a further 6% in 2011 to reach 18.3m and 11% in 2012 to hit 20.3m. Mobile penetration stood at nearly 115% in 2015.
There are five mobile operators licensed at present in Sri Lanka: Dialog Axiata, SLT’s Mobitel, Etisalat Lanka, Hutchison Telecommunications Lanka (Hutch) and Airtel Lanka, a subsidiary of India’s Bharti Airtel. The fiercely competitive market in the country has created some of the lowest mobile and data tariffs globally, posing significant challenges for mobile operators. “Input costs are high and price points are such that companies do not have the freedom to raise their tariffs. Margins are thin, and so the general feeling is that there are not enough returns available to justify investments in the sector,” Rohan Samarajiva, founding chairman of Colombo-based regional think tank LIRNE, told OBG.
The International Telecommunications Union (ITU) reported that Sri Lanka ranked 14th globally in the 2011 mobile-cellular price basket, with prices dropping over 40% between 2010 and 2011, while its 2014 “Measuring the Information Society” report found that Sri Lanka and Bangladesh offer the lowest mobile tariffs globally, with tariffs in Sri Lanka averaging $.095 per month, or $2.60 in purchasing power parity. According to the ITU, 90% of mobile subscriptions in the country are prepaid, while virtually 100% of the country is covered by a mobile cellular signal.
Rising taxes have also created problems for operators; in the 2014 budget the government raised its general telecoms operator tax to 25%, from 20% in 2013, although it did not raise its 10% tax rate on provision of broadband internet services, which was halved in 2013. The new taxation scheme came just three years after the government amalgamated a host of telecoms taxes into a 20% telecommunications levy, replacing the previous rate of 27%, broken down into a 12% value-added tax, 10% mobile and fixed subscribers levy, 3% nation-building tax and 2% environmental conservation levy.
Proposed tax hikes under the interim budget of newly elected president Maithripala Sirisena caused Fitch to downgrade the sector’s outlook to negative (B+) in March 2015. The proposals included a one-off Super-Gains Tax of 25% on all profits and a tax of LKR250m ($1.8m) on all operators. Also proposed was a shift in the burden of a reoccurring telecoms levy from consumers to operators. The moves ultimately would have shifted one of the highest tax regimes in the Asia-Pacific region onto operators, already coping with some of the lowest prepaid rates. The rating remained in place throughout 2015 over uncertainty around proposals and their effect on operators’ leverage. However, in January 2016 Fitch revised its rating to stable following the introduction of that year’s budget proposals in late 2015, which scrapped reoccurring taxes on the sector. By the end of 2015 SLT and Dialog had paid LKR1bn ($7.2m) and LKR2bn ($14.4m), respectively, in one-off taxes. Also included in the 2016 budget is a proposed move to separate fibre, spectrum and tower businesses, but as of early 2016 no moves had been made in this regard.
Big Three
Sri Lanka’s three largest mobile operators hold a collective market share of 86%. There is fierce competition among operators, leading to several acquisitions and ownership changes in recent years, while calls for further consolidation continue. There have been ongoing discussions over the last few years, including a potential acquisition of underperforming Bharti Airtel by Dialog, though no progress has been made as of early 2016. The government moved to halt Mobitel’s planned $132m acquisition of Hutch in May 2014.
In early 2016, in a report that downgraded SLT to “B+”, Fitch highlighted some level of acquisition risk associated with a debt-funded acquisition of a smaller entity, depending on the price, funding mix and financial profile of the operator. Fitch expects the two poorly performing operators will exit the market in 2016 or 2017. “In a market of 20m people, five mobile operators is simply too many. I think we will see, going forward, that one or two of the weaker operations will be acquired by the larger ones. As it stands now, the mobile market is close to saturation, and companies are only winning market share through churn and price wars,” Samarajiva told OBG.
Dialog Axiata, a subsidiary of Malaysia’s Axiata Group, was established in Sri Lanka in 1995, and is the dominant player in the market, reporting 10.8m mobile customers at the end of 2015, for a market share of around 43%. Dialog Axiata reported that group net profit contracted by 15% to LKR5.2bn ($37.4m) in 2015, after rising 17% in 2014 to hit LKR6.1bn ($44m), while total overall revenues rose by 9% to LKR62.9bn ($453m).
The second-largest mobile operator in the market, Mobitel began operations in 1993, and today has 5m customers, or a 22.6% market share. Now owned by SLT, Mobitel was the first operator to introduce 2.5G services in 2003, and was one of the first operators globally to launch an advanced 3.5G network, in 2007, following which it became the first South Asian operator to carry out a successful 4G LTE trial, with speeds of more than 96Mbps.
Mobitel accounted for 47% of SLT Group revenues in 2014, and recorded the highest profits in its history, LKR2.8bn ($20.1m), as a result of 11% revenue growth and new cost efficiencies. In 2015 it built upon this moment, growing revenues by 6.4%, with a sales turnover of LKR32.5bn ($234m), while after-tax profits decreased to LKR2.7bn ($19.4m).
UAE-based Etisalat launched operations in Sri Lanka in February 2010 after acquiring a 100% stake in Tigo, which was a subsidiary of Millicom International Cellular. Tigo, the country’s first mobile operator, established operations in 1989 before rebranding in 2007. Still fully owned and operated by the Emirates Telecommunication Corporation, which boasts 167m subscribers across 16 countries worldwide, Etisalat is Sri Lanka’s third-largest mobile operator, holding a 20.3% market share as of June 2014, according to telecoms research firm TeleGeography.
Data Demand
In keeping with global trends, Sri Lanka’s telecoms market is increasingly shifting towards data-driven services, and the country has been an early adopter of next-generation mobile broadband technology, with Dialog Axiata being the first operator in South Asia to deploy commercial 3G services in 2006. Other operators followed suit, and in April 2012 Hutch became the last operator to offer 3G services, while Dialog Axiata became the first to launch 4G LTE services just eight months later.
In May 2015 the Central Bank of Sri Lanka (CBSL) released a report which found that total internet connections in the country rose by 68.4% in 2014 as a result of a sharp increase in mobile internet usage, which expanded by 85.8% in 2014.
Mobile operators are noticing the trend; through its subsidiary Mobitel, SLT Group reported that even though mobile voice revenues remain the dominant growth driver, and comprised 40% of total growth in 2014, mobile internet services comprised 13% of total growth, with the group reporting in 2013 that mobile data demand had expanded by 45% y-o-y since 2009, and was one of the most significant telecommunications growth drivers in the country.
Smartphone uptake is rising as a result, and in March 2015 the International Data Corporation (IDC) reported that mobile phone sales crossed the 1m mark in Q4 2014, of which 22% were smart-phones. The CBSL, meanwhile, reported that smart-phone shipments to the country rose by 100% during Q3 2014, to comprise 20% of the 1m total phones imported. Samsung devices hold a 30% market share, according to the IDC – with the Galaxy S Duos the most popular smartphone in the country – followed by China’s Huawei, with an 18% market share through its distributor Singer, while Finland’s Nokia sits in third place with a market share of 9%.
Capital Expenditure
In a bid to establish a competitive advantage and meet rising data demand, mobile operators have been active in investing in new infrastructure in recent years, particularly as smart-phone penetration and demand for next-generation mobile broadband services spreads beyond Colombo.
Mobitel, for example, is currently in the midst of expanding its network of base stations to 5300 nationwide, from the present level of 3500, an endeavour that will see its coverage expand to 100% of the population. The company reports having invested $500m in infrastructure and services to date, while Etisalat unveiled similar plans in December 2014, announcing it would build 200 new base stations in 100 days, which will expand its 2G and 3G networks to 100% of the population. These efforts join an ongoing government push to expand internet access to 100% of the population, a highly publicised promise of newly elected president Maithripala Sirisena, who came to power in January 2015 (see analysis). Dialog Axiata reported LKR19.6bn ($141.1m) in capital expenditure in 2015, a significant portion of which was used to deliver new 4G LTE and fibre networks to business and residential customers, although its largest single project remains the Bay of Bengal Gateway (BBG) submarine cable system.
Submarine Cables
In addition to benefitting from a young, well-educated and digitally literate population driving mobile growth, Sri Lanka also enjoys a favourable position at the southernmost axis between the Middle East and East Asia, and is advantageously located along a host of international submarine cable networks. Its first submarine cable was established in 1858, providing connectivity to India, with new submarine cable networks expanding considerably over the following two decades.
In 2006 SLT inaugurated two new submarine cable systems: the Dhiraagu-SLT cable linking Sri Lanka to the Maldives, and the SEA ME WE 4 system, the latest upgrade to the fibre-optic cable in the SEA ME WE series, with the original cable deployed in 1993, and upgraded in 1994 and 1999. Commissioned in 2005, the SEA ME WE 4 system is an ultra-high-capacity fibre cable system linking South-east Asia to Western Europe via the Middle East, and spanning 18,000 km in total. The cable network is owned by a consortium of 17 telecoms operators from 15 countries, including China Mobile International, China Telecom Global, China Unicom, Du, Orange, Myanmar Post and Telecom, Telin, Saudi Telecom, SingTel, Telekom Malaysia, Telecom Italia Sparkle, TOT and Telecom Yemen. India’s BSNL also launched the 320-km Bharat Lanka submarine cable system, developed in partnership with SLT, in October 2006.
Bay Of Bengal Gateway
Dialog Axiata has pursued its own submarine cable capacity expansions through the BBG. First unveiled in April 2013, the BBG system will deliver sharp improvements to intercontinental connectivity in Asia and the Middle East. Connecting Oman to Singapore via the UAE, India, Sri Lanka and Malaysia, the BBG project will be delivered by a consortium of operators including Omantel in Oman, Malaysia’s Telekom Berhad, the UK’s Vodafone Group, Etisalat in the UAE, Reliance Joi Infocomm in India and Dialog Axiata. The BBG submarine cable system will span over 8000 km and connect at landing points in Barka, Oman, Fujairah in the UAE, Mumbai and Chennai in India, Sri Lanka’s Rathmalana, Penang in Malaysia and on to Singapore, offering design capacity of 28 Tbps, and providing upgradable transmission facilities using 100 Gbps technology.
Outlook
Although intense competition and an unpredictable tax regime in 2015 continued to impede operators in the country, Sri Lanka’s telecommunications sector remains buoyed by surging mobile and data demand, rising purchasing power and growing consumer preference for smartphones, which have created a positive growth forecast for the industry. These factors should see the country’s dominant operators continue to invest in and expand their well established next-generation broadband networks and infrastructure, enabling them to remain at the forefront of mobile innovation in South Asia.
