On the surface, Afghanistan’s nascent telecommunications sector could be considered a success: Four providers have invested more than US$1 billion in building a mobile phone network in one of the world’s poorest countries. It wasn’t so long ago that Afghans would have to travel to neighboring Pakistan to make an international call.

The Afghan government under former President Burhanuddin Rabbani focused on building a telecom network for the war-ravaged nation in the mid-1990s. “The situation in Afghanistan had become so bad,” says Ehsan Bayat, founder of Afghan Wireless Communication Company (AWCC), the country’s first mobile phone provider, “that someone had sold the ’93’ country code to a porn company.” The nation was able to regain its country code, and the government installed a few hundred lines and small public calling shops.

While the Taliban’s takeover of the government in 1996 and ensuing U.S. sanctions halted Bayat’s plans of creating a mobile phone network, the idea was quickly revived after 9/11, following the ouster of the regime. But a major obstacle remained: finding companies willing to work in Afghanistan. “We had a design to build a GSM network, and companies like Ericsson and Siemens that were working in Pakistan just were not interested in Afghanistan,” Bayat says. Eventually, Bayat found a company from which to buy machinery. In 2002, AWCC was able to set up a satellite system with Worldcom in Guam.

Afghanistan’s mobile phone industry has since exploded from no users in 2002 to five million to date. When first introduced to the market, a SIM card and handset were priced at nearly US$300. Today, a SIM card goes for US$1 and handsets are available for as little as US$10. The number of users is expected to reach 10 million within the next two years. Users spend an average of US$12 a month.

Building a communications system in a country with battered infrastructure comes with heavy costs. Each of the four mobile phone operators that now hold government GSM licenses made initial investments of up to US$300 million. AWCC, majority-owned by the U.S.-based Telephone Systems International, received the first such license in 2002. The government took a 20% stake in AWCC and signed a 15-year contract with the company. In less than a year, AWCC had signed up 50,000 mobile phone users, surprising even its initial investors.

Room to Grow

The government awarded its second GSM license to the Telecom Development Company Afghanistan Ltd., known as Roshan, in 2003. Roshan’s majority shareholder is the Aga Khan Fund for Economic Development, which promotes private-sector growth in developing countries. Monaco Telecom International and the U.S.-based MCT Corp. also hold stakes. Roshan’s initial business plan was for 12,000 users. It reached that goal in a month. “Because of affordability and low literacy rates in the country, we did not expect it to grow so fast,” says Altaf Ladak, Roshan’s chief marketing officer. “In hindsight, it makes sense. You have 25 million people who weren’t able to speak [on the phone]. They’d have to walk to neighboring countries to make a call.” 

Roshan began an aggressive marketing campaign, the first in the country’s history. “We conducted the first-ever focus groups in Afghanistan, and that is how we decided on the name ‘Roshan,’ which means ‘light,'” Ladak says. “To Afghans, it represented a reconstruction and a new beginning. Brand is huge. It’s part of what people are buying, especially in a country where there was no trust after years of war.”

With the number of mobile phone users doubling each year, the Afghan government decided there was room for two more providers. In 2005, the Lebanese company Investcom was awarded the third GSM license, and its Areeba network entered the market. Investcom has since been taken over by MTN Group of South Africa. A fourth license was awarded to the United Arab Emirates-based operator Etisalat.

“When we had two operators, we gave them a few years to test the market,” says Amir Zai Sangin, minister of communications and information technology. “But with the number of users growing so quickly, we saw there was room to issue two more licenses.” The first two licenses went for US$6 million each. The government received more than US$40 million each from the next two operators.

With coverage throughout half the country but just 14% of the population using phones, Afghanistan remains a largely untapped market. Growth has accelerated, Roshan’s Ladak says. “Today, we are adding 120,000 users per month.”

The four operators continue to invest up to US$400 million a year to expand their networks. “Imagine trying to do these things with no fuel, cranes or roads. New providers weren’t there in 2002 when we had to take donkeys, strap them with equipment and take them up mountains,” AWCC’s Bayat says.

Unpredictable Taxation

Operating in the telecom industry in Afghanistan can be challenging in other ways. The government’s unpredictable tax policies, such as a sudden doubling of custom taxes from 5% to 10% not long ago, vex the mobile phone providers. As the largest private-sector industry in Afghanistan (with the exception of a Chinese company’s recent investment in copper mines), telecom companies have been a mainstay government revenue source. “When the IMF [International Monetary Fund] puts pressure on the government to raise revenue, at the end of the day that hurts the consumer because it pushes the government to continue to tax us,” Bayat says. Telecom sector taxes comprise 15% of the government’s non-donor revenues. “If you don’t know what your taxes will be tomorrow, there are problems when you are trying to plan for the long term.”

The telecom providers have complained that sudden tax hikes have an impact on their expansion budgets. “Recently, we understand that there is a new prepay requirement in taxation and we don’t see the reason behind it,” says Saeed Al Hamli, CEO of Etisalat’s Afghanistan operations. “Etisalat’s main investment strategy includes telecommunications infrastructure development, local talent recruitment and training, and developing the country. This has to be considered. If you want to have a success story, you have to consult with the telecom operators before making such a move.”

Samir Satchu, Roshan’s general counsel and head of government affairs, agrees. “You are sending the wrong message to the private sector when you call them in and say, ‘You have to pay your taxes early,'” Satchu says. “There needs to be at least some advance notice and consultation. It affects the investment decisions of our company and forces us to grow less quickly.”

Afghanistan is still developing a telecom regulatory system that came about in 2005, and an appellate body has yet to be formed. Before the regulatory system’s initiation, an operator could take a dispute to international arbitration courts, rather than Afghan courts. “The quasi-law [situation] is a concern for us, and a number of things need to be developed to make the law have teeth,” Satchu says. The country still lacks an experienced independent regulatory body and the right of appeal of a court decision. “We want a situation where the regulator is completely independent,” Satchu says. “The government has a 20% stake in AWCC. If there is a dispute between Roshan and AWCC, the government could be biased.”

Flawed Strategies

While the mobile phone providers are investing heavily in microwave technology, the government-owned Afghan Telecom hasn’t encouraged development in CDMA (Code Division Multiple Access) and fiber optics, on which it holds monopolies. CDMA’s potential is evident in Pakistan’s experience. With the development of fiber optics in conjunction with CDMA technology, bandwidth prices in Pakistan were reduced from US$86,000 to US$1,400 for 2 megabytes. That enabled a telecom boom that increased the number of mobile phone users from 600,000 to 40 million.

Afghan Telecom’s own US$70 million investment for a fiber-optic wire ring doesn’t follow the recommendations of a World Bank-funded feasibility study. In that study, the global telecommunications company Alcatel-Lucent recommended that fiber be buried at least five feet deep. Instead, observers say, the holes are being dug at only one to three feet, making the fiber’s jelly shield an easy target for rats, not to mention anyone who would want to cut lines.

“A microwave ring has 64 points of failure,” Bayat says. “If one goes down, you can easily bring it back. Three thousands kilometers of fiber has 3,000 points of failure compared to 64. And someone has to dig just three feet into the ground to cut the fiber.”

The benefits of a well-constructed ring are clear: Afghanistan could receive higher-speed Internet than what microwave enables through connections with fiber optics in Pakistan, Iran and Tajikistan. It would also dramatically reduce the cost of Internet service in Afghanistan, which is currently delivered by satellite. Internet access comparable to the speed of DSL delivered through a VSAT satellite system costs US$1,500 a month.

Investors approached the communications ministry in 2005, willing to build a fiber-optic ring provided they would own it. But the government refused. The government has since decided to put Afghan Telecom up for sale. Critics say a better strategy would have been to let companies bid on a license to install fiber optics, just as it did with GSM. Mobile phone companies in Afghanistan have already built three microwave rings. Having multiple fiber-optic rings not only would reduce costs dramatically, but also provide backup in case one ring were to go down.

The public sector has been unable to duplicate the private sector’s success in teaching up-to-date technologies to a low-skilled labor force. Yet a double standard exists in licensing, with the government requiring some telecom consultancies, but not others, to pay heavy fees and buy a license to enter the market. The Indian company Aster, for example, hasn’t had to pay for a license or officially register. Sangin, the communications minister, is a former CEO of the company.

Security Concerns

In addition to the challenges originating with the government, telecom operators face threats from the Taliban. Over the last year, it has attacked mobile phone towers throughout the country. This has not only delayed expansion, but also has made it difficult to maintain existing operations, particularly in southern Afghanistan.

The telecom operators have trained thousands of Afghan employees and hired local staff to provide security. “If we have a tower in Zabul, for example, we hire people from the same neighborhood to guard it,” Bayat says. Still, this hasn’t been enough to keep sites from being attacked by militant groups that accuse the mobile phone industry of supporting international military forces. In some instances, the Taliban has threatened to attack if phone systems aren’t shut down by a certain time.

“We are extremely concerned,” Satchu says. “This is the first time the Taliban has made such a major threat. The Afghan government has been unable to provide security, so that leaves us with little choice but to comply with demands. Some members of the government often perceive the telecom operators as taking out extraordinary profits. But what needs to be understood is that the cost of doing business is high. Even the cost of borrowing money is high.”

To combat these problems, operators are beginning to work together by, for example, sharing towers. “In parts of the country where security is bad, it makes sense because it lowers costs,” Satchu says. AWCC and Roshan, which hold more than half the mobile phone market, insist that such decisions need to be made without government intervention.

All four providers are pushing for a telecommunications development fund that can also be used as common insurance. Afghan telecom providers pay a percentage of their profits each year into a development fund similar to the Universal Service Fund in the United States. The fund aims to promote development in rural parts of the country where it is less profitable to expand. Such developments have yet to take hold, however, and the mobile phone providers are asking that the money be used to provide insurance. “A common insurance will add comfort. Until then, we’ll have to make a decision to not work in certain parts of the country that are risky,” Satchu says.