The continuous decline in revenue among telecom service providers is significantly impacting their capital expenditure.

Reduced income has led to budget cuts in infrastructure development, affecting service expansion, upgrades, and overall service quality.

Experts warn that the future of telecom companies appears uncertain.

At one point, telecom companies allocated nearly half of their total revenue for infrastructure development. However, this expenditure has now been reduced to around 10%.

Experts in the telecom sector attribute this to declining revenues due to Over-the-Top (OTT) platforms, a lack of necessary legal reforms, high renewal fees, and operational hurdles.

A Shift from Hyper-Growth to Declining Investment

Data reveals that from 2008 to 2016, telecom companies heavily invested in capital expenditures, marking a period of “hyper growth.” Former Chair of Nepal Telecommunications Authority (NTA), Bheshraj Kandel, states that this period was crucial for investment in telecom.

The capital expenditure trend remained strong until 2017 but started declining alongside revenue thereafter.

The combined revenue of Nepal’s two telecom companies stood at Rs 97.3 billion in the fiscal year 2073/74, increasing by 1.44% to Rs 98.71 billion in 2074/75.

However, since then, revenue has consistently declined. According to the NTA, the total revenue dropped by approximately 26% to Rs 73.14 billion by the fiscal year 2074/75 compared to 2017/18.

Persistent Investment Needs in Telecom

The telecom sector requires significantly higher capital investment compared to other industries due to expenses in service quality enhancement, infrastructure development, maintenance, Base Transceiver Station (BTS) construction, fiber-optic networks, data centers, and spectrum fees.

Companies must pay substantial fees for radio spectrum, which is essential for 4G and 5G services, further driving up capital expenditure.

According to Kandel, the need for capital investment in telecom is constant. “Technology advancements, service expansion, and quality improvements require annual investments. Transitioning from 3G to 4G and now to 5G demands massive investments, but companies are struggling due to declining revenues,” he said.

Deploying 5G requires at least three times the investment of 4G. “Nepal Telecom spent Rs 19 billion on 4G expansion, whereas 5G deployment could cost around Rs 60 billion,” Kandel noted. “With the current revenue, covering even operational and maintenance costs is becoming difficult.”

Infrastructure in the telecom sector has a lifespan of only five to seven years, necessitating continuous investment. “Unlike other industries, telecom requires perpetual capital expenditure for service expansion, new technology adoption, spectrum acquisition, and infrastructure maintenance,” Kandel added.

Telecom expert Bishal Upadhyay stated that while capital expenditure needs are increasing, revenue growth is insufficient to meet them. The telecom industry currently needs to allocate 15-20% of its revenue for capital expenditure, whereas other sectors like manufacturing require only 5-10%, IT (hardware and cloud) 5-10%, retail 2-5%, and banking just 1-5%.

Economic Impact of Reduced Capital Expenditure

A decline in telecom investment affects the nation’s Gross Domestic Product (GDP). A World Bank study suggests that every 10% increase in internet investment leads to a 1.3% rise in economic growth.

Expanding internet access drives economic development, but reduced telecom investment is hampering the expected expansion.

In 2016, telecom contributed 3.9% to Nepal’s GDP, which dropped to 1.8% by 2023. The sector’s GDP contribution stood at 3.4% in 2017, 3% in 2018, 2.7% in 2019, 2.4% in 2020, 2.2% in 2021, and 1.9% in 2022.

Falling telecom revenues have also reduced government tax collections. Nepal Telecom and Ncell contributed a combined NPR 67.48 billion in taxes in 2019/20, but this fell by Rs 20 billion to NPR 47 billion by 2079/80.

Need for Legal Reforms to Prevent Crisis

Former Senior Director of the NTA, Anand Raj Khanal, warns that without immediate legal reforms, telecom companies will face severe challenges. “Telecom revenue is continuously declining, meaning they are heading towards financial distress. Rising expenses and falling income are unsustainable,” he said. “If the government does not address these issues soon, the sector will face significant problems.”

Khanal emphasized that capital expenditure in telecom benefits not just companies but the entire economy. “When a telecom company installs a tower, property owners earn rental income, the government collects taxes, and the public gains access to communication and internet services. Therefore, for companies to invest in infrastructure, they first need to generate sufficient revenue,” he added.

Although there is potential for a third telecom operator in the market, Khanal doubts new competitors will emerge soon due to the industry’s declining profitability and rising expenses.

Nepal Telecom’s Managing Director, Sangita Pahadi, stated that the company has provided input for the draft of the new Telecommunications Act to address these issues. “A new law is necessary to resolve the current challenges. We have submitted our recommendations, and we believe the new legislation will help address most of the problems,” she said.

High Government Levies Strain Telecom Revenues

Ncell reports that telecom companies must allocate a significant portion of their revenue to government fees and taxes. Around 48% of their total earnings go to various payments, including:

- 13% VAT

- 10% service charge

- 2% ownership tax

- 4% Rural Telecommunication Fund contribution

After deducting spectrum fees, royalties, operating costs, financial expenses, and license renewal fees, only about 8% of revenue remains for reinvestment. Once corporate tax is deducted, telecom companies retain just 5% as profit.

“Previously, 5% profit was substantial when total revenues were around Rs 100 billion. However, with revenue already down by 25% and expected to decline further, profitability is shrinking,” telecom expert Upadhyay said.

He highlighted that telecom services, like water supply, electricity, and waste management, are essential public utilities. He advocated for telecom tariffs to be adjusted in line with inflation, noting that unlike other sectors, telecom service providers have not been able to raise prices based on inflation rates.

Rs 6 Billion Annual Investment Needed

Experts estimate that the telecom sector requires at least Rs 6 billion annually for sustainable operations. However, due to declining revenue and profits, companies have been cutting back on capital expenditure.

“Maintaining existing services alone requires Rs 6 billion annually, yet current investment levels are lower. If revenue does not increase, companies will struggle to invest in service expansion and quality improvements,” Khanal warned.

Voice service revenue has been declining, and while data service usage has increased, its growth has not been substantial. Meanwhile, telecom operators have been unable to adjust their pricing models to compensate for the revenue drop.

As the telecom industry faces growing challenges, legal and regulatory reforms, along with supportive policies, are urgently needed to ensure its sustainability and continued contribution to Nepal’s economy.