Laws of Nepal's Telecom sector

23rd April 2024, Kathmandu

Nepal’s telecommunication journey started in 1916 AD (1972 BS) with the first telephone line connecting Kathmandu and Raxaul.

This marked the beginning of Nepal’s telecommunication development, while India, then under British rule, had already established an electronic telegraph link between Kolkata and Diamond Harbor in 1851 AD. In recent decades, Nepal has rapidly adopted new technologies like 3G, and 4G. However, the pace of advancement seems to have slowed down lately.

Nepal’s growing network connectivity between cities and towns necessitated a dedicated management body.

The Unfriendly Laws of Nepal’s Telecom Sector

Thus, the Telecommunications Department transitioned to the Telecommunications Development Board in 1969 AD (2026 BS). However, with the introduction of the Telecommunications Corporation Act in 1971 AD (2028 BS), the Board evolved into Nepal Telecommunications Corporation in 2032 BS. Finally, in 2004 AD (2061 BS), adhering to the Company Act of 1996 (2053 BS) and the government’s liberalization policies, it was restructured to Nepal Telecom Company (NTC) Limited with 8.48% public ownership.

Furthermore, to regulate the burgeoning telecom sector, the Nepal Telecommunications Authority (NTA) was established in 1996 AD (2053 BS) under the Telecommunications Act. The NTA’s key objectives include regulating the industry, formulating sectoral visions and policies, promoting private sector participation with cutting-edge technologies, and fostering a fair and competitive business environment.

In a move to achieve these goals (of regulating and promoting the telecom sector), India-backed UTL Pvt Ltd became the first private company to receive a telecom license in 2002, with permission to operate limited mobility CDMA technology.

This was followed by Spice Nepal Pvt Ltd (now Ncell) securing a GSM license in 2005, also funded by foreign investors. Subsequently, Smart Telecom and Hello Nepal, both foreign-backed, were granted GSM licenses with a regional focus on expanding services in Eastern and Western Nepal, respectively. In recent years, other companies have expressed interest in entering the market.

Interestingly, Nepal Telecom (NTC) holds licenses for all available technologies. This might suggest a policy favoring domestic players. However, it’s important to note that NTC and Ncell are currently the only active operators. All other licenses have been revoked due to unfulfilled obligations, such as insufficient network expansion or failure to renew licenses.

This raises a crucial question: Why have these companies failed? Are Nepal’s telecom policies unclear, or were the license terms too stringent?

Problems Laws of Nepal’s Telecom Sector

The Telecommunications Act 2053, in clause 25, explicitly specifies that a license for operating a telecommunications service can be granted for a period of up to 25 years. As per clause 25(1), a single license issuance will not exceed a 10-year duration. Furthermore, clause 25(2) mandates that the licensee must apply for renewal before the license expires, with each renewal valid for a maximum of 5 years.

In simpler terms, if you wish to set up a telecom service in Nepal, your license will be valid for a total of 25 years. However, after the initial 10 years of operation, you will need to renew your license every 5 years, three times. To continue operations beyond this, you would need to reapply for a new 25-year license, and the cycle repeats.

Clause 33(1) of the Telecommunications Act 2053 imposes stricter regulation on operators with foreign capital investment exceeding 50%. It mandates that all assets, including land, buildings, machinery, and infrastructure, will be nationalized upon the expiration of the license period. However, clause 33(4) allows operators with a foreign capital investment of up to 50% to apply for a new license to continue their services after the previous license expires. The question arises whether these provisions are in line with the core values and principles of economic liberalization, foreign direct investment (FDI), and private sector motivation.

The answer is likely no. Nationalization and Liberalization are fundamentally divergent concepts, making the policy appear fundamentally flawed. The liberalization and FDI principles typically encourage a more open environment for foreign investment, which can stimulate economic growth and technological advancement.

Let’s shift our focus to the topic of government revenues and charges. As per existing legislation, a mobile operator is subject to fees and taxes under 11 categories. These include the license fee, renewal fee, frequency charges, royalty, rural telecommunications development fund, import taxes on goods and services, VAT, and income tax. These companies are, in fact, among the highest taxpayers, significantly contributing to the national revenue.

Furthermore, these large corporations play a crucial role in promoting the growth of businesses that are supportive and reliant on telecommunications services. They establish a business ecosystem that generates thousands of direct and indirect jobs and taxes, thereby contributing to the national economy. Regrettably, this sector is a victim of poor and unfriendly policies.

The revenues of telecom companies are on a steady decline, leading to a proportional decrease in their contributions to the national treasury.

Foreign investors in the sector are consistently divesting their stakes to other parties, and companies are showing reluctance to invest in new technologies. This has put supporting companies in a precarious position. Demoralized employees are seeking better prospects abroad. Meanwhile, the regulatory authority is embroiled in investigations into allegations of misconduct and abuse of authority.

From former chairpersons to current staff of the NTA, no one is exempt from these investigations. The question arises: who should bear the accountability for the dismal state of this sector? Without a doubt, the blame lies with the 3-4 political parties that have governed the country over the past 20 years, and their lack of foresight. As for the political workers, the media is loaded with reports of police corruption and the illicit accumulation of vast wealth through covert dealings with certain businessmen. Yet, no one seems willing, or rather brave enough, to investigate these issues and unveil the truth to the world to safeguard our national honor.

Are the companies innocent? Absolutely not. They have repeatedly sold their shares without notifying the regulator, with all transactions taking place overseas. They’ve attempted to evade the responsibility of paying Capital Gains Tax (CGT), held cross-holdings in rival companies, and devalued their assets and wealth during share transactions. Such news is abundant in the media and has now become public knowledge.

Did they do all this inadvertently? Most certainly not. Foreign companies were given assurances of CGT and crossholding adjustments, backed by political figures. Bureaucracy was grossly exploited to carry out these unethical actions, while those shielded by politics continue to roam freely, showing no guilt. As a result, today’s “New Nepal” is riddled with malpractice, mismanagement, and a lack of accountability.

Remedy of Laws of Nepal’s Telecom Sector

The current turmoil and disarray can certainly be rectified. First and foremost, our fundamental principles need to be well-defined. Around the world, developing countries are advocating for socio-economic liberalization and foreign direct investment (FDI).

Similarly, Nepal is gearing up for an international investment summit. However, Clause 33(1) of the Telecommunications Act poses a significant obstacle in this context. This clause is not even considered in the Asset Management Regulation of Telecommunications Service Provider with Discontinued License, 2079. Therefore, it should be immediately abolished. In reality, no foreign investor would risk having their assets nationalized.

This clause is the root cause of the unnatural and repetitive share transactions among telecom operators. Additionally, a license renewal fee of Rs. 20 billion is excessively high given the size of the Nepali market. The renewal fee needs to be scientifically recalibrated based on the market size and a sustainable business model.

All operators should be provided with a level playing field through the provision of a unified license and technology neutrality. Due to the lack of ethics and accountability among political parties and government agencies, Nepal is classified as one of the most corrupt nations. This reputation has led to a significant decline in business activity and has tarnished Nepal’s image on the international stage. It is incumbent upon all of us to unite in the fight against all forms of corruption.

Conclusion Laws of Nepal’s Telecom Sector

In 2021, Ncell emerged as the top taxpayer, contributing Rs. 21.75 billion that year and a total of Rs. 263 billion since its inception. Similarly, NTC was the highest tax-paying company in FY 2079/80, contributing Rs. 28.45 billion to the national revenue. The sector also fosters a vibrant ecosystem of suppliers, service providers, and related industries, creating jobs and economic activities.

Given these substantial contributions, prioritizing the protection and promotion of the telecom sector should be a key government objective. It should realize that raising the corporate tax from 25% to 30% is not the solution for increasing the revenue. Lawmakers and concerned agencies are urged to take swift action on the proposed reforms mentioned above.

There’s an urgent need for legal reforms to ensure a more welcoming environment for foreign investment. Abolishing Clause 33(1) of the Telecommunications Act, which discourages foreign investment by threatening the nationalization of assets, would be a positive signal.

This reform, along with others, will demonstrate Nepal’s commitment to fostering a business-friendly environment for foreign investors.

By prioritizing these reforms, Nepal can attract much-needed foreign investment that will propel the telecom as well as other sectors forward. This, in turn, will contribute significantly to achieving the nation’s socio-economic goals, leading to a more prosperous future for all.

By: Rajeev Pandey, Independent Researcher and Analyst

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