KATHMANDU: Telecom service providers in Nepal are facing a noticeable decline in capital expenditure, directly linked to shrinking income levels.
As revenue decreases, the reduced budget for infrastructure development is impacting service expansion, quality upgrades, and delivery.
Experts have raised concerns about the future of these companies, pointing to limited investment in necessary infrastructure and the absence of key policy amendments.
High renewal fees, the rise of over-the-top (OTT) platforms, and operational challenges have compounded the issue.
Telecom companies, which once allocated nearly half of their income to infrastructure development, have now cut this expenditure to around 10%.
Experts suggest that telecoms are hesitant to invest in infrastructure due to declining revenue and operational hurdles.
Data shows that telecom companies made significant capital investments between 2008 and 2016, a period described as “hyper growth” in terms of capital expenditure.
Bheshraj Kandel, former chairman of the Nepal Telecommunication Authority (NTA), noted that this was a time of robust investment.
Capital expenditure remained healthy until 2017, after which both capital investment and revenue began to decline.
The revenue of Nepal’s two main telecom operators stood at NPR 97.3 billion in fiscal year 2073-74 BS.
It grew by just 1.44% to NPR 98.71 billion in the following year. However, since then, the income has dropped consistently.
According to the NTA, compared to fiscal year 2074-75 BS, revenue decreased by approximately 26%, reaching NPR 73.14 billion in fiscal year 2079-80 BS.
Telecom is a capital-intensive industry, requiring continuous investment in quality service delivery, infrastructure construction, and maintenance.
This includes costs for Base Transceiver Stations (BTS), fiber-optic cables, data centers, and spectrum fees.
In Nepal, telecom providers must pay high fees for radio spectrum, which is crucial for services such as 4G and 5G. The cost of acquiring new spectrum further increases capital expenditure.
Kandel emphasized that capital investment in the telecom sector is necessary and ongoing.
“Developing technology, expanding services, and improving quality requires continuous investment,” he said. The shift from 3G to 4G and from 4G to 5G demands significant capital.
However, with declining revenues, companies are unable to make the corresponding investments.
For example, the cost of deploying 5G services is three times higher than that of 4G.
Kandel explained that Nepal Telecom spent NPR 19 billion expanding 4G services, but 5G could cost up to NPR 60 billion.
He also pointed out that the current revenue of telecom companies is insufficient to cover service expansion and infrastructure maintenance costs.
Infrastructure in the telecom sector has a relatively short lifespan of 5 to 7 years, meaning that capital expenditure remains a constant requirement.
“Capital expenditure is ongoing, and there’s no certainty with a single investment,” Kandel noted.
He stressed the need for a large budget allocation each year for service expansion, new technology investments, spectrum acquisition, and infrastructure maintenance.
Telecommunication expert Vishal Upadhyay echoed these concerns, stating that while the demand for capital expenditure is rising, income is not increasing proportionately.
In the telecom sector, companies must still allocate 15 to 20% of their income to capital expenditure. By comparison, other sectors such as manufacturing (5–10%), technology (hardware and cloud, 5–10%), retail (2–5%), and banking (1–5%) require much smaller capital investments.
Impact on the Economy
The reduction in capital expenditure by telecom companies is also affecting the country’s gross domestic product (GDP).
A World Bank study shows that a 10% increase in internet investment leads to a 1.3% economic growth.
The study suggests that the impact would be even greater once internet services reach a broader population.
However, due to the declining capital investment in telecom, it appears that internet access will not expand as expected. As a result, the contribution of telecom investment to GDP is unlikely to rise.
According to statistics, the telecom sector’s contribution to the economy was 3.9% in 2016, but by 2023, this has dropped to just 1.8%.
The sector’s contribution to GDP has steadily declined over the years: 3.4% in 2017, 3% in 2018, 2.7% in 2019, 2.4% in 2020, 2.2% in 2021, and 1.9% in 2022.
The decline in telecom sector income has also affected state revenue. In fiscal year 2076-77, Nepal Telecom and Ncell together contributed NPR 67.48 billion.
By fiscal year 2079-80, this had dropped by NPR 20 billion to NPR 47 billion.
Ananda Raj Khanal, former senior director of the Nepal Telecommunication Authority (NTA), warns that telecom companies will face a crisis if laws are not amended promptly.
“With income continuously decreasing, telecom companies are in crisis. If expenses continue to rise while revenue falls, the sector will suffer,” he said.
Khanal stressed that the government must address these issues immediately to avoid further complications.
Khanal also emphasized that the benefits of capital expenditure by telecom companies extend beyond the companies themselves and positively impact society.
For instance, the installation of a telecom tower not only generates rent for homeowners and taxes for the government, but also provides telephone and internet services to the public.
“Companies need to generate income to reinvest in infrastructure,” Khanal noted. He also expressed doubts about the emergence of a third telecom competitor, given the sector’s declining income and rising expenses.
Sangita Pahadi, Managing Director of Nepal Telecom, shared that the company has proposed solutions to these issues in the draft of the new Telecommunications Act.
“A new act is crucial to addressing the challenges currently faced by the telecom sector. We have provided necessary suggestions, and we believe that most issues will be resolved once the new act is enacted,” she said.
Telecom service provider Ncell stated that telecom companies are currently spending more on capital expenditure than their total income.
Nearly 48% of their total income goes to the government under various taxes, including 13% value-added tax, 10% service charge, and 2% ownership tax.
Additionally, operating expenses, spectrum fees, royalty fees, and contributions to the Rural Telecommunications Fund further reduce the income, leaving just 38% for telecom companies.
After accounting for costs, financial expenses, license renewal fees, and installment loans, only 8% remains. After paying corporate tax, just 5% can be considered profit.
Telecommunications expert Bishal Upadhyay noted that while 5% used to be considered a significant profit margin, the sector’s income has now declined by about 25%, and projections suggest further decreases in the coming years.
He pointed out that telecom services, like water, electricity, and waste management, are essential public services, and therefore, fee adjustments based on inflation are necessary.
However, unlike other public services, telecom companies have not received inflation-based fee increases.
Annual Investment Requirement
Experts in the telecom sector estimate that annual capital expenditure of NPR 6 billion is necessary to maintain operations.
However, as revenue and profits decline, telecom companies have been reducing their capital expenditure.
While voice revenue has been shrinking in recent years, there has been little growth in data services, and service providers have been unable to increase their service fees.
“An annual investment of NPR 6 billion is required just to keep the service running, but currently, less than that is being spent,” said Khanal. “If revenue does not increase, the telecom sector will struggle to fund service expansion and quality improvement.”
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