Sri Lanka was the first country in South Asia to roll out a nationwide 4G network, its mobile market is highly competitive and it is home to a number of major tech companies. Connectivity is improving quickly, the environment for innovation is undergoing a positive transformation and the government is starting to make significant investments in e-governance (see analysis). While Sri Lanka may not have the critical mass of places like India and China, it has – as with manufacturing – been able to establish a strong regional position and lay the groundwork for future development.
Despite the strengths of the sector, some problems remain to be tackled. The domestic market is arguably too competitive, with data and phone rates too low. The telecoms market is saturated, with the mobile penetration rate at 126% in 2017. Domestic economic conditions also weigh on the sector. Spending is constrained as the government works to reduce the budget deficit, while the operating environment can be difficult for companies working strictly in the domestic market. Furthermore, while policies and rates have been overall supportive, they have been inconsistently implemented.
Long History
The first telegraph connection in Sri Lanka was established in 1858, pre-dating the international adoption of Morse code. It ran 120 km between Colombo and Galle, with some lines strung between coconut trees. Later the same year, a 400-km connection was established between Colombo and Kandy. Over the subsequent two decades the network was expanded to include Trincomalee, Nuwara Eliya, Jaffna, Badulla, Batticaloa and Panadura. The first connections with Europe and with the US were achieved in 1865. The first telephone services were established in 1880 and an automatic exchange was introduced in 1938.
The first 1G services were offered in 1989 – at 900 MHz. In 1991 the Department of Telecommunications became Sri Lanka Telecom (SLT). Private licences for other operators were also issued at this time.
In 1996 the Telecommunications Regulatory Commission of Sri Lanka (TRCSL) was established under the Sri Lanka Telecommunications Act in order to regulate and monitor the telecoms sector. The Information and Communication Technology Agency (ICTA), responsible for developing the country’s ICT strategies was formed in 2004, while the Sri Lanka Association of Software and Service Companies (SLASSCOM) was founded in 2008 to represent the interests of the business process outsourcing (BPO) and ICT segments on a national level.
The state-owned SLT was partly privatised in 1997, with 35% of its shares being sold to Japan’s NTT. This company stake was acquired in 2008 by Global Telecommunications Holdings (GTH), a Netherlands based company that eventually increased its holding to 45%. The Sri Lankan Treasury retains a 49.5% share, while a number of local funds and insurance companies have smaller stakes. The first internet service provider was formed in Sri Lanka in 1995, though academic institutions had been making use of dial-up connections and email in the 1980s.
Major Players
The country currently has five key companies operating in the mobile market. Namely, Dialog Axiata, 83.2% of which is controlled by Malaysia’s Axiata; Mobitel, which has been a wholly-owned subsidiary of SLT since 2002; Etisalat, which is owned by the UAE company of the same name and traces its roots back to Celltel, the first mobile operator in Sri Lanka; Hutchison Telecommunications Lanka (Hutch), which is part of the Hong Kong based Hutchison Asia Telecom Group, and Airtel, which is a subsidiary of Bharti Airtel, an Indian company.
As of December 2017 the country had 2.6m fixed-access telephone subscriptions, or 12.1 per 100 people, and 28.2m mobile phone subscriptions, or 131.5 per 100 people, according to the TRCSL. In 2010 the mobile subscriber total was 17.3m, whereas fixed lines peaked in 2011 at 3.6m, highlighting a clear shift in consumption patterns.
Furthermore, the country had 1.2m fixed broadband subscriptions and 4.7m mobile broadband subscriptions as of December 2017, an increase of 305% and 2241% from 2010, respectively.
Fast Development
In 2013 Sri Lanka became the first country in South Asia to adopt 4G technology, with Dialog Axiata launching the service in 2014. Currently, the company’s 4G LTE system can reach speeds of up to 100 Mbps for short periods of time.
In May 2017 Dialog Axiata introduced 4.5G TD-LTE in selected areas in Colombo and plans to eventually offer the service nationwide. In the same month the company successfully completed a trial of Massive-Input Massive-Output (MIMO) technology. MIMO offers a potential six-fold increase of bandwidth using existing technologies. Furthermore, in June 2017 Dialog Axiata started offering voice over LTE (VoLTE) services to customers with Samsung JD and J7 terminals and in February 2018 introduced VoLTE services for international roaming.
In August 2015 the company initiated testing of 5G technology in collaboration with Ericsson and Huawei, with speeds of up to 35 Gbps being achieved. The hope is that latency can be reduced to near zero, allowing for the delivery of services that require virtually no delay, such as robotic surgery. SLT and Huawei started conducting tests on LTE A technology, also known as 4.5G or pre-5G, in June 2017. Download speeds of 855.9 Mbps were recorded and the 2.5MHz spectrum utilised. The main target for the technology is fixed-wireless broadband. Successful LTE-A trials were undertaken in November 2017 while Mobitel announced it was preparing to launch 4.5G in February 2018, with the commercial rollout of 5G planned for 2020.
Similarly, Airtel is partnering with international digital security firm Gemalto for the use of its LinqUs device management system. The platform allows for the service provider to automatically configure a user’s phone remotely and is intended to significantly improve smartphone services, enabling uninterrupted access to the internet.
In terms of cost, Sri Lanka is highly competitive. In 2016 the country was ranked 15th out of 184 countries as a percentage of per capita GNI for mobile services, by the International Telecommunications Union (ITU). Furthermore, based on the sample basket of services used by the ITU for global comparison purposes, the country had the lowest-priced mobile phone plans in the world in 2016, at $0.86 per month or $2.45 in PPP adjusted prices. In terms of fixed-broadband prices as a percentage of GNI per capita, the country was ranked 58th out of 182 countries in 2016 by the ITU and 34th in terms of mobile broadband data pricing on a pre-paid basis.
Rising Ranking
Sri Lanka has done particularly well in terms of BPO. While it is not a global powerhouse like India or the Philippines, the business is healthy and provides a significant contribution to the country’s economy, with the main areas of focus being IT, finance, accounting, engineering and legal services. In A T Kearney’s 2017 Global Service Location Index, Sri Lanka was ranked 11th, up three places from the previous year. It was beaten by India – which remained in the top position – China, Malaysia, Indonesia, the Philippines and Thailand but was ahead of Latvia, Russia, the US, Bangladesh, Romania, Bulgaria, Egypt, Mexico and Poland.
IT services and business processing as a sector has grown 120% between 2010 and 2016, according to SLASSCOM, with exports tripling over the same period and employment doubling. ICT is now the country’s fifth largest export segment – with export revenue’s in 2016 being $858m, up from around $200m in 2009 – and a total of 85,000 people employed by the sector. Building on this expansion SLASSCOM have set the goal of increasing IT and BPO export revenues to $5bn by 2022.
The country is a significant producer of software and a provider of relatively high-end solutions, with the focal points being telecoms, banking, finance and insurance. According to sector executives, the technological environment is rather unique. With its relatively small population of 21m citizens, the country lacks the sheer number of low-cost programmers needed to compete with India and China in terms of output. The country therefore focuses on complex engagements and projects. While the quality of human resources for the sector is high and the ICT sector generally finds itself able to operate in line with international levels, it does less bulk work and concentrates more on the value-added side.
“Here, you cannot do outsourcing anywhere near the scale at which it is done in India,” Gehan Dias, general manager of MillenniumIT, told OBG. “You are better off focusing on high-end products.” MillenniumIT, which develops systems for the financial market, was purchased by the London Stock Exchange (LSE) in 2009 and installed its Millennium Exchange system at the LSE. Other companies in Sri Lanka with significant international profiles include 99x Technologies, which has a presence in Norway, and the Nasdaq-listed Virtusa and WSO2, which provides its enterprise service bus to eBay. “A lot of the IT companies in Sri Lanka are global companies. They are not constrained by the local market,” Madu Ratnayake, chief information officer and head of business development for Virtusa, told OBG.
Increased Connectivity
In October 2017 the landing of the South-East Asia–Middle East–Western Europe 5 (SEA-ME-WE 5) cable was inaugurated at Matara, a coastal city 160km from Colombo. The undersea infrastructure, construction on which began in 2014, links South-east Asia and Europe, connecting 16 countries and running a total of 20,000 km. The cable is capable of delivering 48 Tbps of global bandwidth capacity to Sri Lanka, a 10-fold increase. A submarine cable landing station is also being developed at Galle by SLT in cooperation with Indian Ocean Cableship, a Singapore-based company.
Sri Lanka’s first earth station was installed in 1976, while the original SEA-ME-WE was commissioned in 1985. Following this, SEA-ME-WE 2, the first fibre-optic cable to connect to Sri Lanka, was commissioned in 1995. In 2008 the country linked to the 28,000 km FLAG undersea cable via the FALCON segment, and the Bay of Bengal Gateway (BBG) submarine cable began operations in April 2016. The BBG runs 8100 km, linking six countries, namely: UAE, Oman, India, Sri Lanka, Malaysia and Singapore. The consortium that built and maintains the link is owned in part by Dialog Axiata of Sri Lanka, along with Etisalat of the UAE, Omantel of Oman, Reliance Jio of India, Telekom Malaysia Berhad of Malaysia and the UK firm Vodafone. Initial capacity was set at 9 Tbps, with the maximum capacity possible is estimated to be around 55 Tbps.
Until the completion of the BBG cable, the country was limited to approximately 1 Tbps of total capacity, which was controlled by two companies, LankaBell and SLT. Dialog Axiata have noted that while the cable will result in the reduction of costs, the fall in prices for end users may not be as much as expected. The main focus will be to offer more bandwidth and better speeds. Significant discounts, if offered, could be exploited by competitors, as Dialog Axiata must sell capacity to other operators.
Local connectivity is also rapidly improving. In addition to increased mobile data through 4G, customers now have more options for getting online. Until 2016 public WiFi sites were limited to customers of the company providing the site. However, in that year the five operators agreed to make capacity available through a single portal so that users of any network could access all WiFi points.
Trade Deals
Sri Lanka is currently seeking to join the Information Technology Agreement (ITA), a WTO trade pact that reduces tariffs on relevant products to zero for member states. It was first introduced in 1997 and has since been signed by more than 82 jurisdictions. The ITA should improve business and tech performance overall, as membership lowers costs, harmonises intellectual property rights, trade rules and enables the purchase of better equipment. However, as of March 2018 a schedule for membership had yet to be published by the WTO.
Furthermore, India and Sri Lanka are working to conclude the Economic Technology Cooperation Agreement (ETCA). If signed, the pact would expand the current free-trade agreement to include services and investments, with a significant focus on ICT. The current target for the finalisation of the agreement has been set for June 2018.
Nevertheless, the country’s ICT sector has voiced opposition the agreement, believing that it would result in an increase in low-cost workers from India. Concerns have also been expressed that India’s technology giants would overpower their Sri Lankan counterparts and dominate the sector. Others are more positive, arguing that ETCA could help make the sector more internationally competitive. Significantly, the government has stated that the free movement of labour would not be included. Instead, visas would still be required, though the agreement will likely allow for the relatively easy entry of certain skilled professionals. However, current expectations are that this would not include programmers.
E-commerce
The e-commerce segment is undergoing fast development in Sri Lanka. The market was estimated to be worth around $40m in 2017 and is expected to grow ten-fold by 2022, according to estimates by the country’s largest online store Takas and the investment research firm York Street Partners. Furthermore, its evolution appears to be having a different impact from that in more developed countries. While the expansion of the segment has been associated with the downsizing of traditional retail offerings in the West, in Sri Lanka the physical retail environment is still relatively underdeveloped. It therefore appears that the overall growth in the bricks and mortar retail segment can continue in tandem with the expansion of the online segment.
A number of major local e-commerce companies are active in the country. Notable among these is Takas, which started in December 2012 and currently offers about 15,000 product lines. The company is considering listing on the stock exchange. Currently, Kapruka claims to be the largest e-commerce entity in the Sri Lanka. It was founded in 2003 and offers 15,000 products and 30 types of services. Nevertheless, 95% of e-commerce orders in the country is settled using cash on delivery. However, Dialog’s eZ Cash and Mobitel’s mCash are increasingly also used, as are credit cards, particularly for overseas orders.
In August 2017 the international banking services company Standard Chartered introduced its Straight2Bank Wallet. The product is offered in cooperation with eZ Cash and allows for corporations to make instant payments to individuals, even those lacking a bank account. It is expected that the Straigh2Bank Wallet will reduce costs and risk while helping more people access financial services.
Furthermore, in September 2017 in an effort to expand its presence in the financial technology (fintech) industry, Dialog Axiata acquired 80.34% of the financial services firm Colombo Trust Finance. Besides this and the company’s eZ Cash app, Dialog Axiata also runs e-commerce site wow.lk, along with doc.lk and guru.lk, which offer online health and education services, respectively.
E-governance
The e-Sri Lanka development project began in 2005, with the objective of fostering growth and equity through enhanced use of ICT. The strategy contains five main elements: the building of relevant infrastructure, the development of human resources, the upgrading of government operations, the use of technology for social and economic development and the transformation of Sri Lanka into an ICT investment destination.
Ongoing initiatives include the Lanka Government Network a project to connect all government institutions via a single network, Lanka Gate and the Lanka Government Cloud, while websites have also been set up for filing taxes and renewing licences. The Sri Lanka Automated Cargo Clearance System was one of the earliest efforts by the state to utilise ICT technology to streamline trade. Initiated in 2002 as a joint venture, it allows for the online filing of Customs documents as well as the payment of various types of fees. These various initiatives appear to have reaped results, with the country ranking first in South Asia and 79th globally in the UN’s 2016 E-Government Survey – the most recent index published to date – up from 94th in 2005.
Harin Fernando, minister of telecommunication, digital infrastructure and foreign employment, told local media in 2016 that $2m a day was being lost as a result of the lack of e-government services, especially in terms of Customs and pensions. He promised significant advances would be made with respect to the government’s use of online and data systems, adding that the initiatives would not result in job losses, owing to the creation of new e-governance jobs and the provision of retraining to fill these positions. In mid-2017 Verité Research, a Sri Lanka think tank, made a number of recommendations for the further development of e-governance. These included the introduction of requirements for the electronic publication of procurement plans, the lifting of prohibitions on electronic bid submissions, the issuance of a circular accepting e-signatures certified by an appropriate provider and the transition to e-government procurement within a set period. Furthermore, they recommended that the National Procurement Office (NPC) should be strengthened and empowered to undertake an audit on existing manual procurement processes as a basis for the development of further policy recommendations. Lastly, the think tank suggested that given the limited resources of the NPC use of third parties for e-procurement should be considered, along with the provision of training to suppliers.
Silver Linings
In mid-2017 Dialog Axiata established the first data centre and media hub in the country with Tier III constructed facility certification, granted by UPTIME Institute, a Washington-based professional services organisation. Located in Malabe the site includes the country’s largest satellite earth station. The awarding of Tier III status reflects the achievement of international standards.
In April 2017 Sri Lankan telecoms operator Lanka Bell announced that it would be cooperating with IBM in the provision of cloud services. The company will offer infrastructure as a service, platform as a service, virtual machines and virtual storage facilities. In addition, Microsoft is providing support for the development of cloud computing in the country. So far corporations in the country have shown themselves to be open to accepting new systems, with banks and ICT companies quick to adopt cloud technology. “Sri Lanka is one of the fastest countries for cloud adoption,” Ratnayake told OBG. “Banks and telecoms are going straight to cloud.”
Crowded Market
Despite the overall robust performance of the ICT and telecoms sectors, market weaknesses remain. The mobile market is overcrowded, with five firms serving the country’s relatively small population. The proposed merger between Airtel and Dialog Axiata, discussed in 2016, may have led to increased market discipline, but it never came to fruition. As the major players seek to expand their penetration in this competitive market, they must offer relatively low rates for their services.
Recent figures show mixed growth for commercial operators. During FY 2017 SLT reported an overall 17.7% fall in profits, despite a rebound in the fourth quarter of 2017. Since January 2018 the company has focused on the promotion of its fixed broadband and pay TV services, along with 4G, according to local media. As of late November 2017 Fitch forecast that the companies earnings before interest, taxes, depreciation and amortisation (EBITDA) would decline 24% over 2018 after falling 29% in 2017, but nonetheless argued that the companies outlook was stable, given its sufficient headroom and strong market position. Conversely, Dialog Axiata saw profits rise 19% over FY 2017, with a 16% growth in EBITDA. At the end of 2017 the company reported an 8% year-on-year (y-o-y) in mobile subscribers and a 6% y-o-y increase in mobile revenues.
Tax Hit
In 2016 the country reintroduced a 15% value-added tax (VAT) on telecoms services and removed the telecoms exemption stipulated in the 4% Nation Building Tax Act No. 9 of 2009. According to Fitch, the effective rate on voice and SMS services increased from 28% to 50% following the tax changes, while taxes on data increased from 3% to 12%. These tax rates are not only rather high but also subject to volatility. In January 2011 the levy on the telecoms industry was lowered from 27% to 20%, whereas the broadband tax was lowered to 10% the following year. However, in the 2014 budget the telecoms levy was increased to 25%, though the broadband tax remained unchanged. While the levy was temporarily removed in 2017 a 20% levy was reinstated in 2017 to boost revenues.
The high tax rates can be explained as arising from IMF-backed efforts to increase the government’s total tax collection revenues to 20% of GDP, from 10.1% in 2014. However, in seeking more revenues from telecoms operators, the authorities risk burdening one of the country’s most promising sectors and potentially slowing its development. Nevertheless, the indications are that the government is now working to maintain industry tax rates at reasonable and stable levels. The new Inland Revenue Act exempts ICT and BPO exports from tax, while the telecoms levy on internet data was removed on September 1, 2017. Providers responded by announcing a 10% data bonus, according to local media.
Other regulations and regulatory interventions have been proposed or undertaken. The TRCSL has requested that operators better regulate SIM cards following a Presidential Directive requiring the registration of the cards. Registration, which will involve the copying of customer ID cards, is aimed at reducing crime and fraud. However, the regulator has so far not detailed what will be done in the case of non-compliance.
Challenges
One of their biggest challenges for ICT companies is human resources. While the country has many qualified ICT professionals, it does not have enough to fill all the positions open at the highest levels. Indeed, some companies have noted that the salaries for key personnel are not much different from those it would have to pay in the UK.
“Although the ICT sector is equipped with highly skilled individuals, the size of the work force is limited. Growing demand for ICT human resources necessitates more skills training and education initiatives in this area,” Nitesh Khirwal, managing director of Lamudi Lanka, told OBG.
However, some of the efforts undertaken to address these issues have so far proven ineffective. In 2015 the government began discussions to introduce universal internet access in partnership with Google, using high-altitude balloons to reach the entire country. The company was to provide the hardware at no cost, with a one-year trial period. However, concerns arose that the Google venture would drive all the existing players out of business. It was also unclear what would happen after the initial phase ended, with the balloons requiring replacement after around 100 days. Lastly, the deal floundered on the issue of spectrum use, with Google requiring frequencies that were otherwise being utilised by mobile, radio and TV companies.
Stacking Up
The development of the ICT and telecoms sector is following an established pattern. Mobile phone penetration increased from 16.8% in 2005 to 116% in 2015, before rising to 127% in 2017. Analysts forecast tempered growth over the next few years, partly as a result of saturation. While it has reached certain limits, the sector still has avenues for growth, with internet penetration standing at 29.3% at the end of 2016, according to the ITU.
In the ITU’s “Measuring the Information Society Report 2017”, Sri Lanka was ranked 117th in the world and 20th in the Asia-Pacific region, with South Korea ranking first. Furthermore, the country was 68th globally in terms of average internet connection speed, ahead of both China and India, according to the “State of the Internet Q1 2017 Report”, published by internet software and services company Akamai Technologies. The average reported speed in the country was 8.5 Mbps, a y-o-y increase of 58%. Nevertheless, Sri Lanka remains vulnerable to malware, with 19.5% of computers running Microsoft products encountering malware in January 2017, nearly double the global average, according to the most recent published Microsoft Security Intelligence Report.
Structural issues within the sector have also been the subject of criticism. In 2016, Fernando harshly criticised SLT, stating that the state-owned company is complacent, overly unionised and has an unsustainable cost structure, with 48% of its expenses going to salaries versus 7% at Dialog Axiata. The minister threatened to create another government-related ICT company if SLT did not carry out reform.
Plans & Reforms
In 2017 the government announced plans to sell all or part of its ownership in Mobitel through a listing on the Colombo Stock Exchange. Mobitel is a subsidiary of SLT and currently has a 22% market share against Dialog Axiata’s 46%. In addition to raising at least $1bn for the government, the transaction is also aimed at helping to reduce overcapacity in the sector by diversifying the ownership base of the company.
Furthermore, in late 2017 the Sri Lankan government made progress in arriving at a resolution of the long-running dispute between SLT and the Dialog Axiata subsidiary Dialog Broadband Network (DBN) regarding the latter’s network licence. The TCSL has renewed the DBN’s licence for 10 years beginning in November 2015, but SLT petitioned against the ruling arguing that its rights had been violated. Dialog Axiata has been working to acquire a licence to provide last-mile connectivity to homes; a service currently monopolised by SLT, with Dialog Axiata’s last-mile services having been limited to businesses and multi-unit residential structures.
Lastly, discussions took place in late-2017 between the Ministry of Telecommunications and Digital Infrastructure and Huawei regarding the use of infrastructure sharing to increase the base of development of broadband usage in the country.
Outlook
Overall, everything indicates that the ICT and telecoms industries in Sri Lanka are set for a period of continued growth and development. While prospects may appear somewhat limited given that the mobile penetration is already well above 100%, and by the fact that its population is relatively small, gains are likely to emerge as a result of market evolution and continued investment. Customers will upgrade, demand for value-added services will increase and access to faster connections are set to significantly improve. Price competitiveness for operators could improve if consolidation between firms or privatisation of state companies proceeds, while leading ICT companies are set to continue to operate globally and expand accordingly. State policy has a positive role to play here, and moves should be made to ensure stable tax rates. Nevertheless, momentum is such that ICT should continue to advance in Sri Lanka regardless of tax policy.
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