Cross-border calls rip off telecoms, URA as shrewd operators reap big

Uganda’s tax collector and telecommunications firms are counting losses caused by small operators that have exploited loopholes in the One Area Network (OAN) system through offering cheap international calls. This has forced the latter to tighten surveillance measures while raising questions about innovation trends in the telecommunications industry.
The OAN system was launched in September 2014 by the presidents of Uganda, Kenya, Rwanda and South Sudan in an attempt to cut costs of roaming services incurred among Northern Corridor countries. Costs of telecommunication services account for a significant share of business expenses and also influence investment decisions, economists say.

Under the OAN system, calls made between telecommunications networks located in participating countries are exempt from excise duty charged on international calls, a move that apparently reduced calling rates for local subscribers coupled with stronger growth prospects for the trade and services sectors; an economic segment that largely relies on cheap communication services for growth. Incoming foreign calls are charged an excise duty rate of $0.09 US cents per minute in Uganda compared to $0.04 US cents levied in Kenya, Rwanda and South Sudan, according to tax officials.

However, shrewd operators, popularly referred to as “Simbox” agents have capitalised on loopholes evidenced in the OAN system through termination of calls originating from countries outside the gazetted territory in Kenya, Rwanda or South Sudan before routing them to Uganda, leading to substantial losses suffered by Uganda Revenue Authority (URA) and local telecommunications companies, sources revealed.
Industry experts claim “simbox” agents deploy telephone switch box tools that terminate calls to clients while local networks are used to carry voice traffic disguised as data messages from overseas users; a strategy that helps them conceal calling activity from security monitoring tools and URA’s business tracking tools.

What has stimulated simbox
Low set up costs, weaknesses in network security systems, regulatory gaps and high roaming fees charged in many countries, have seemingly spurred growth in the “simbox” segment but reliable performance data for this category was unavailable by press time. Though the telecommunications regulator has issued licences to some “simbox” agents in the past, industry sources claim the influx of illegal players in this segment has compounded the problem.

How the simbox” model works
Under the “simbox” model, small operators terminate international calls in countries with lower excise duty rates compared to Uganda and route them to domestic subscribers disguised as regional calls exempt from excise duty on international calls. An incoming call originating from South Africa, for example, would be terminated in Kenya before being routed to Uganda. Through this approach, a Ugandan telecommunication firm would earn $4 US cents per minute in termination fees compared to $15 US cents per minute earned from incoming calls originating from countries outside the OAN territory, sources explained.
The tax agency loses $0.09 US cents per minute in excise duties under the same scenario. While industry players have complained of significant sales revenue losses recorded on international calls during the first 12 months of operation under the OAN system, URA has reported weak performance in excise duties collected from this segment.

Estimated losses
Commercial estimates provided by MTN Uganda - the industry leader by market share, indicate local players have lost nearly $65 million (Shs221 billion) in revenues tied to international calls, with the company witnessing increased calling volumes but reduced incomes from this segment, according to Brian Gouldie, the firm’s chief executive officer. This trend is widely attributed to significant growth of “Simbox” activities, with industry players struggling to rein in crafty and slippery actors engaged in this trade.

“This practice is here to stay. It has become difficult to track down these players because of limited information available on trunking patterns in the regulator’s database. The use of ‘simbox’ services sometimes leads to excess traffic at base stations that cannot be detected by telecommunications companies and easily leads to technical failures,” noted Ibrahim Mwesige, IT operations manager at Smile Communications Uganda Limited.

Efforts to contact the Uganda Communications Commission were unsuccessful by press time.
“The company has tightened its controls and eliminated some of the ‘simbox’ players that have exploited local networks to make quick money. Due to these measures, it takes a few hours to detect unusual revenue flows on the network and this results into immediate blocking of suspicious numbers but it is still very difficult to arrest these people since they are based in remote places,” said a business analyst at Airtel Uganda who requested anonymity, citing confidentiality rules.

Who is to blame for the losses?
Whereas URA blames the problem on differences in excise duty rates charged on international calls among the participating countries, questions have arisen over the scope of innovation in the telecommunications industry. Is rapid innovation compatible with sustainability of older players crucial for generating future capital investments? How much innovation is good for the industry?

“The difference in excise duty rates charged on international calls across the Northern Corridor is largely responsible for these losses. We spoke to the industry regulator about this problem but they told us that ‘simbox’ operators are legitimate service providers but there are some illegal players engaged in that business. As a result, some telecommunications firms have lost significant sales revenues while our tax collections from this segment fell by half in August 2015 compared to August 2014,” explained Doris Akol, URA’s Commissioner General.

“Innovation is critical for growth in the telecommunications industry but illegal ‘simboxing’ is certainly bad for investor confidence in this sector. Telecommunications regulators ought to find a reasonable cost sharing formula between global players such as Vodafone and small local peers. That somehow helps to minimise the cost of roaming services incurred by users,” observed an industry analyst at Deloitte and Touche Uganda who requested anonymity, citing confidentiality restrictions.

Drop in excise duty on international calls

Latest data compiled by URA, shows total excise duties collected from international calls dropped by 12 per cent from Shsh21.3 billion ($6.2 million) recorded between September and November 2014 to Shs18.7 billion($5.5 million) posted during the period December2014 to February 2015.

In comparison, total excise duties collected from this segment fell by 43.6 per cent from Shs18.7 billion ($5.5 million) registered between December 2014 and February 2015 to Shs10.5 billion ($ 3 million) posted between March and May 2015. Total excise duties rose by 20.5 per cent to Shs12.7 billion ($3.7 million) between June and August 2015, the data revealed.
However, a yearly comparison shows excise duties collected from international calls stood at Shs7.3 billion ($2 million) by close of September 2014 compared to Shs3.3 billion ($962,376) registered in September 2015.

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