Reforms in the existing tariff framework of PTCL are imperative in view of the decline in international settlement rates, introduction of corporate tax for PTCL and need for the company to have re-balanced its tariffs by the time competition is introduced in basic telephony. These reforms would also include the introduction of a system for periodic review and modification of tariffs. The Financial Advisors for privatization of PTCL have presented their report on the proposed measures for re-balancing of PTCL tariffs to the government recently with specific recommendations for the Financial Year 1999-2000.

In the absence of tariff re-balancing, it is apprehended by the Financial Advisors of PTCL that PTCL's financial position would be adversely affected and the Company is unlikely to have sufficient cash to fund future planned network expansion. As per the Financial Advisor's analysis, the impact would be as follows: 33 per cent decline in the Company's earnings per share, 31 per cent reduction in Company's dividends per share and 36 per cent reduction in the cash available for network expansion by the Company in 1999-2000 as compared with 1998-999.

The deteriorating financial health of the Company is likely to have an adverse stock market reaction and the level of interest from potential strategic investors would diminish substantially because it would demonstrate an unwillingness on the part of the Government of Pakistan to take necessary steps to secure the long term health of the Company.

According to the Financial Advisors, the tariff re-balancing proposals are essential to convey the right messages to strategic investors and to make PTCL attractive in relation to other telecom opportunities around the region. PTCL must be made ready for 2003 when competition would be introduced. These measures are essential for the continued financial health of the Company irrespective of the privatization process, as PTCL is one of the Federal Government's largest cash flow producing entities.

Recommendations

i) The Company may be allowed to increase basic telephony services prices (exclusive of Central Excise Duty) by an average of 19 per cent from July 1, 1999, to reflect the impact of: (a) declining international settlement rates, (b) inflation and, (c) the introduction of corporate tax on the Company. ii) The rate of Central Excise Duty on telecommunication services be reduced from 25 per cent to 15 per cent from July 1, 1999, to mitigate the impact of the above price increase on customers, without unduly affecting the Government of Pakistan's revenues. iii) The Company may be allowed to charge the following prices for basic telephony services from July 1, 1999 (inclusive of 15 per cent CED) in implementation of the above recommendations, and in line with the Government of Pakistan's commitment to have allowed the Company to have re-balanced its tariff by the time competition is introduced in basic telephony: installation charge (Rs 4,390 per line), monthly rental charge (Rs 235 per line per month), local call charge (Rs 2.10 per 5 minute unit), NWD call charge (Rs 9.25 per average call) and international call charge (Rs 67.04 per average call minute).

The Financial Advisors have also recommended that Company may be permitted to make price changes of a similar nature, but somewhat lesser magnitude, to those described above, in each of the next four years, in order to achieve re-balanced tariffs in advance of the introduction of competition in basic telephony. Basket-based, inflation-linked, price control formulae be introduced for the on-going regulation of basic telephony service prices, with the parameters of the formulae to be pre-determined for a minimum period of four years in the first instance. The formulae will protect consumers against excessive price increases by the Company at two levels i.e. (i) by controlling the rate of increase of individual service prices and (ii) by controlling the overall level of prices that the Company can charge customers. This will provide the Company with an incentive to improve efficiency, and increase the number of customers and their use of the basic telephony service. Within the limits of the formulae, the Company must have the commercial freedom to set prices as it alone sees fit, without interference from any third party, thereby establishing the effective independence of the Company from the Government of Pakistan and Pakistan Telecommunication Authority in this regard.