PTCL, ISPs and the users
By Syed M. Aslam
Mar 11 - 17, 2002
Internet, in Pakistan, has come a long way since its modest beginning at prohibitive rates in 1995. From a symbol of luxury and a status carrying an hourly price tag of Rs 75 an hour then, today the ISPs are engaged in a fierce "price war" to lure users offering packages which offer less than one-tenth of the price seven years ago.
On the other hand, with the privatization of the Pakistan Telecommunication Company Limited (PTCL) drawing to a close in June this year and the end of its monopoly over the fixed-line telephone from January 1 next year an already aggressive IT sector of Pakistan is readying itself to play a much more prominent role to turn it into a full-fledged industry.
As is, the last 18 months have already witnessed a range of pleasant developments in the IT industry pushed zealously by Minister of Science and Technology, Dr Atta-ur-Rehman, of the friendliest IT government that Pakistan ever had. The encouraging signs of growth are visible all over, the most prominent indications of which have been a drastic increase in number of internet users, drastic reduction in internet bandwidth rates, expansion of universal internet access from 30 cities to over 500 cities, towns and villages across the country.
While much has changed much still remains to be changed to exploit the tremendous potential for the growth of the IT sector be it in software development and exports, human resources development, networking, etc.
While the three foreign cellular telephone operators have been the primarily beneficiary of the friendly government policies other player such as the Internet Service Providers (ISPs), Cable TV operators and software houses. Since ISPs serve as the most important link between the internet users and the telecommunication company, which in this case is PTCL, and since internet is the very lifeblood of the IT industry this article will deal specifically with the issues related to and status thereof of the internet in the country.
The friendly and pro-investment policy pursued by the Ministry of Science and Technology has attracted the global attention which is evident from an in-depth report carried out by Merrill Lynch & Company on the Pakistani IT industry. The report titled "Investment Opportunities Abound" is appreciative of the measures taken by the present government and call them encouraging for the investment in the IT and Telecommunication sector. The report issued recently by Khadim Ali Shah Bukhari & Co Ltd. says that the "growth in Pakistan's telecom and IT industry has been unleashed in the past year. Probably the most subtle growth has been that in fixed-line telephony, where capacity grew just 0.20mn to 4.49mn. However, digitization of fixed-line exchanges in the PSTN network was on target at 94%. The icing on the cake was that Internet users in the country grew by 250% as Internet access spread to 588 locations throughout the country, as compared to only 29 locations, 17 months ago. The question remains, is this growth sustainable?"
That certainly is an important question and though the report offers its own answer — "after recording three to four years of exponential increase, the growth is likely to subside to 30-40% over the next few years, until saturation sets in" — PAGE analyses the situation based on the ground realities as at today.
Let's consider these basic facts about the IT and Telecommunication industry of Pakistan — it reels from low fixed-line telephone density, PC penetration, number of internet users — due mainly to low per capita income. In addition to low telephone density the costs related to internet use is also one of the reason discouraging its use despite a tremendous reduction in rates during last one year. PC use, and for that matter internet, remains primarily restricted to corporate, education and commercial sectors and though there are individual users as a group they contribute a much less share.
"SHARED RESOURCES: THE KOREAN MODEL"
PAGE talked to Javed Naushahi who is a member of the Central Executive Council of the Computer Society of Pakistan about the issues related to the internet. Javed feels that under the prevalent circumstances it makes sense to follow the "shared resources" model successfully adopted by South Korea. "Despite the affluence South Korean has developed a culture of 'Baang' or cyber cafes though with a per capita income of $ 8,000 the majority of its population can well afford to buy a new PC. There are over 20,000 cyber cafes in South Korea which houses a population of 45 million which is one-third of Pakistan."
Compared to that, he said, "Pakistan which reels from a much lower per capita income of $ 462 has less than 3,000 cyber cafes to cater to the internet-access-starved population of 140 million people. That makes it all the more important to adopt the South Korean model of sharing the resources not only to tackle problems related to low PC and internet penetration and associated costs but for many other reasons.
"For instance, compare the Purchasing Power Parity (PPP) in Pakistan with other countries. The average monthly retail internet rate is $ 20 per month in the US, which has a high per capita income of $ 20,000 and that too for unlimited access. Internet rate in South Korea is almost the same. On the other hand, users in Pakistan are paying highly un-proportionate internet prices, despite tremendous reduction, compared to low per capita income and PPP. Those using the premium internet service like Dedicated Dial-up Port (DDP) costs much more — between $ 50-100 per month depending on city, the ISP and the quality of service which it provides.
DEVELOPING " DEMAND SIDE" INTERNET
Javed, who is also a member of the Task Force on e-commerce, Government of Pakistan, stressed on the need to take measures to help encourage and develop "demand" side of the internet. "We have thus far been busy to address issues related only to the "supply side". For instance, the government has allocated Rs 1.5 billion for the creation of a Virtual IT University but has allocated nothing for the development of e-commerce and e-business infrastructure in the country which is the center of the gravity acting as a catalyst in mobilizing IT activities in trade, commerce and industry. At present, internet is primarily being used for e-mail, surfing, chatting, etc. all of whom are part of the "supply" side.
"In the developed countries internet is the most convenient way of on-line shopping, reservations, banking, etc., to help reduce costs of transactions, personal convenience for paying utility bills, credit cards, etc. Increasing the use of internet on the "demand side" would automatically result in its use by the common man.
"Thus far internet is not being used for business and the government to help establish electronics links between people and government, people and business, business and government, government (departments) to government (departments), and business to business. Using internet for these purposes would help facilitate paperless trading and electronic cash culture for the overall benefit of the economy.
"For instance, the government is printing over 230 million utility bills each year. This include bills issued by such public sector power and telecommunication companies as WAPDA, PTCL, KESC, etc. The accumulated billing of these utility bills issued by these companies totals over Rs 400 billion, including Rs 150 billion billing by WAPDA and Rs 60 billion billing by the PTCL. As the currency in circulation is Rs 450 billion the situation puts a heavy load on its circulation on the one hand and costs incurred on printing new currency bills.
"The cash-based society needs to be transformed into electronic money society as each utility bill costs over 20 rupees from its printing to its delivery to the consumer. Developing an electronic cash system facilitated by internet can help reduce the cost of each bill by one-fourth to Rs 5 to help the companies increase their profitability the benefit of which can be passed of to the people.
"Other potential areas of "demand side" internet use are shopping malls, issuance of Passport and Identity cards, airline and hotel booking, on the line purchase, tuition fee, personal income tax returns. However, necessary measures should be taken to develop public infrastructure to facilitate easy and affordable internet access and formation of a certification authority to issue related digital certificates. All necessary legal and security measures should be taken to protect the people from any inherent misuse backed by a "payment gateway" to establish a link between users and a bank for payments. Developing a paperless electronic-cash culture will eradicate cash flow problems associated with paper money and help save costs as well as a welcomed personal convenience. It is imperative to make a beginning."
INTERNET TARIFFS: ISPs, PTCL AND USERS
During last year-and-half, PTCL has slashed the internet bandwidth tariff tremendously — from an extremely prohibitive $ 100,000 to $ 3,000 Mb per second. The reduction of the tariff by the PTCL to the ISPs has also resulted in reduction in retail internet tariff so much so that at present there is a raging price war for the share of the market between over 5 dozen ISPs operating in the country. Internet packages offered by various ISPs offer as low an hourly internet rates as Rs 5.
What has fueLled this sudden price war is not just a marketing strategy to capture a significant portion of the market by the ISPs to best benefit from the privatization of the PTCL this year but also the incentives given by the government to the providers. For instance, the ISPs now have to pay a much lower royalties 0.66 per cent instead of 1.5 per cent. In addition, of the 62 ISPs operating in the country there are many virtual ones, as well as smaller ones, which have almost no or relatively less operational and overhead costs to offer low internet prices.
However, it must be added that ISPs do not have any problems affecting their quality, customer relations or financial performance. Apart from the ongoing "price war" the ISPs, many of which are much vocal to deplore the practise and yet find it hard to remain detached from it, say that the approved but yet to be announced decision to issue the internet licenses to the financial sector by the government pose many challenges for them. This will take one of our biggest group of customer from us and could result well in creating a competition for us as these licenses can be used to establish a parallel ISP infrastructure.
Salman Khan, who works for one of the top ISP as vice president business development, that the decision to issue ISP licenses to the financial sector is all the more worrying as "financial sector has the money to manipulate. As is, cable internet operators — who themselves are customers of the ISPs — have become their very competitors. They are taking away a sizeable number of existing customers and may take away many more potential customers from the ISPs many of which have invested heavily to set up the expensive infrastructure and incur high running costs."
SLOW CONNECTIVITY AND SPEED
Asked about rampant slow internet connectivity he said that "while the majority of the PCs used in the country are equipped with standard 56 kb dial-up modems (today's dial-up modems are much more faster — 2 Mb launched by DSL recently) the PTCL's Public Service Telephone Network (PSTN) can facilitate a much smaller load of 3,900-4,200 kb per second depending on traffic at any given hour — 5pm-1 am being the peak hours."
Javed agreed that the "PTCL infrastructure is capable of handling an average of no more than 1.2 kb per second thus restricting the connectivity speed irrespective of and the size of modem and processor — be it a P 1, P II, P III. The slower connectivity has everything to do with the PTCL infrastructure and also depends on the resources allocated by the ISPs — modems, routers, RAM and other equipments and accessories. As long as the front-end PC is equipped with reliable hard disc, cache memory and RAM connectivity should be no problem to get connected speedily. The flow of internet traffic is made up of two parts: The first comprises PTCL "pipe" from a front-end PC to the ISP while the second includes the international backbone from the ISP onwards. Usually the majority of problems associated with connectivity are caused during flow of data between a PC and an ISP primarily due to PTCL's narrow "pipe" which can accommodate only so much traffic. While problems also occur once the traffic reaches the ISP for forward flow the fact that some 70 per cent of the ISPs are now owned and operated by a new breed of professionally and financial sound professionals makes it comparatively a less likely scenario. On the other hand, the least problems occur in the final leg — the international backbone."
The frequent internet users know that internet connectivity and speed of the data flow is much faster during the day than during the evening. This is due to the availability of much greater bandwidth as internet is used only by office workers and occasional house wives or children. However, the real internet traffic starts after 5 pm and touches its peak till 1 am as people back from work start getting on line. "This is the time to check the quality of an ISP — those relying solely on the PTCL let their users suffer more than those having an arrangement with an outside provider, basically satellite for backbone or direct fibre optic. However, the arrangement requires heavy costs which the most of the ISPs just cannot afford."
PTCL: THE ISP OF THE ISPs
PTCL is the internet service provider of the internet service providers. It itself has arrangement with foreign providers, the most prominent being STM-1 and has also signed an agreement with FLAG (Fibre Linked Around Globe). The total internet bandwidth of the PTCL is between 155-250 Mb depending on who you choose to believe. According to Javed twenty months ago it used to be a mere 22 Mb.
An ISP can buy a minimum of 256 kb bandwidth, only STM-1 circuit, from the PTCL and many small and virtual ISPs are doing just that. Many others are operating on 1 Mb bandwidth while only a few quality ISPs offer a 2 Mb bandwidth service. A 256 Mb bandwidth can serve an average of 120 users. PTCL reduced the bandwidth tariff to $ 6,000 per 2 Mb per month or $ 3,000 one Mb per month from January 1 this year. However, Salman said, what the PTCL failed to mention even in the fine print of its advertisements was that all new ISP operators have to dig over $ 15,000 to start operations. "Many new operators got the shock when they were told that they would have to come up with $ 15,000 comprising first and the last month rent, security deposit and installation charges. Allowing the financial sector to buy bandwidth from the PTCL means immense loss of business for the ISPs, particularly who have invested heavily in equipment, human resources and high overheads.
"Despite heavy investments ISPs are not provided any protection against the cable internet operators who are playing havoc. There are many operators who are operating on 512 Kb bandwidth, and there are few who are using as much as one MB bandwidth, without any license whatsoever while many ISPs are still operating on 256 kb. PTCL should not provide international bandwidth of less than one Mb to anyone to better protect the ISPs which are losing business.
"While PTCL and ISPs are both responsible for the inconsistent connectivity and speed the former shares a much bigger part of the blame because most of the time it is due to PTCL's busy circuits and its unstable infrastructure. While PTCL has international quality equipment, hardware and infrastructure the weakness lies in implementation, utilization and production.
"The rampant connectivity and speed problems faced by the internet users in Pakistan day-in and day-out is also caused by PTCL having a single international bandwidth provider. It should have a back-up provider- STM-1. PTCL, thus, has only one backbone and does not itself have a reduncy. Under such circumstances how could anyone expect any reduncy from the ISPs?"
While PTCL provides no reduncy on STM-1 there is no restriction on the ISPs to buy reduncy on satellite. However, this is an extremely expensive choice for the ISPs — half circuit costs $ 30,000 per month while the demand note for the same costs a prohibitive $ 40,000 — particularly in the absence of economies of scale. There are three major under-ocean fibre optics lines across the world. They are SMW-3, Oxygen and FLAG. Pakistan uses SMW-3 though Oxygen which also passes near to Pakistan is less expensive. However, we can not use it as authorities feel that it can be hacked to compromise our security because it passes through India, which also uses it.
"Though PTCL offers a reduncy package to the ISPs at $ 9,300 per month more than 50 per cent more costly than its regular package of $ 6,000 per month it provide only one-third of the 2 Mb bandwidth. This is too little a comfort at such a high price and can only be made more attractive, even if it comes at an increased tariff of say $ 10,000, if a full back-up is provided.
Salman said that though the internet bandwidth tariff has been slashed drastically it still remains much too high in Pakistan. The price of the 2 Mb bandwidth in Pakistan, i.e $ 6,000 per month, can buy 34 Mb bandwidth in a developed country. He also said that PTCL should ensure that the ISPs do not compromise on quality and that it should not treat oranges and apples alike. "There should be an accreditation policy for the ISPs just like the one for the IT institutions and every Tom, Dick and Harry should not be allowed to invest in ISP just because one has money.
INTERNET SERVICE PROVIDERS ASSOCIATION OF PAKISTAN (ISPAK)
PAGE also talked to the secretary of ISPAK, Air Commodore (Rtd.) V. A, Abdi, an ISP pioneer when internet was introduced here in 1995 and a "happy victim" of the frenzied crowds gathered outside his ISP office which smashed the glassy exterior. That was the time when internet rate was Rs 70 per hour. Abdi stressed the need for increased use of internet-related services and said that it is catching up because of development of many web sites by various government departments. However, he expressed concerns, that internet is not used for utility purposes in the country.
Putting the number of ISP licenses issued at about 100, he said that there are as many as 62-65 ISPs operating in the country, two-third or 42 of whom have a presence in Karachi. He said that the ongoing price war poses grave danger for the ISPs many of which will result in a number of closures ( he ruled out mergers as it is against our national egotist character).
He said that the price war resulting in as low an internet rate as Rs 5 hour hardly make any sense as the breakeven level for the ISPs is a minimum 500 ports — users or single accounts — which require at least 1 Mb internet bandwidth. "At any rate a retail internet tariff of below Rs 7 per hour does not make any economic sense at all and is akin to killing the future.
"PTCL network is old and rudimentary and needs serious upgrading. On the other hand, the government should ensure that it does not promote an eye-washed electronics culture but a real electronics culture to facilitate on line banking, shopping, services, tax payment facilities, etc.
"He said that PTCL is using three different types of international bandwidths — under the ocean STM-1 and satellite based Axim and Concert. In addition, it has signed an agreement with FLAG, under the ocean fibre optic backbone.
Asked if ISPs would be able to survive by selling same and singular product at the same price he said that "selling only ISP service is just not enough to survive. The government should take necessary measures to develop a networking to pay the utility bills on the internet. A single utility bill costs as much as Rs 35 from the time of it is issued to the time it reaches the consumer. Converting utility billing web-based will help save the utility companies, all of whom are in the public sector, immense amount of money the ultimate beneficiary of which will be the government.
"In Karachi alone some 1.4 million gas bills and 1.7 million electricity bills are issued every month and it is easy to see that a web-based bill payment system would help save immense money, time and energy all of whom can be spent better elsewhere. This would offer one good example of offering a value-added service for the ISPs. The government should also made it mandatory for the ISPs to connect district headquarters with the provincial headquarters and ultimately to federal headquarters for easy flow of information and data to help take timely decisions. The government should act as an enabler and this project can work as a catalyst for the ushering true electronic culture for the benefit of the people."
PRICE WAR: LET THE USERS REIGN
Is the "price war", which is benefiting a large number of users, is really all that un-economical for the ISPs? Let's do a little calculation. As mentioned above 2 Mb bandwidth can support almost 1000 ports or users. The monthly tariff for 2 Mb charged by PTCL at present is $ 6,000 per month or Rs 360,000 at current exchange rate. Let's be generous and add another Rs 300,000 for administrative, marketing and running costs monthly. The total costs incurred by an ISP to run a 2 Mb set-up thus comes to total 360,000 rupees per month. Let's assume that this particular ISP offers a 24-hour unlimited access at an attractive monthly price of Rs 1,000 to 1,000 users that its 2 Mb bandwidth can accommodate, it generates a revenue of Rs one billion per month.
Since all the ISPs are operating on much lesser bandwidth than 2 Mb and since many of them have loaded their system with much more users than the system can accommodate and since many of them have low overheads the "price war" is certainly not uneconomical. It, in reality, is a boon, even for the quality ISPs which have invested heavily on their operations. After all, one should not expect return on investment overnight like all other businesses as long as one is generating a consistent revenue.
The Pakistan Software Houses Association (PASHA) is the representative body of software developers. PAGE talked to the president of PASHA, Hamza Matin, about the status of internet in Pakistan. Matin said that the "responsibility of ensuring a reliable internet service rests mainly with the PTCL rather than the ISPs, which only serve as a middleman-buying the bandwidth from the PTCL and selling it to the users. However, I am satisfied with the overall quality of internet service in the country despite the 'last mile' problem."
He said that PTCL no more sells 64 Kb and 128 Kb bandwidth as previously. "It now sells a minimum of 256 Kb bandwidth and has sent letters to the software houses — a majority of which still comprise individually run and small entrepreneurs — to upgrade their existing infrastructure. This requires heavy finances which will be extremely hard for small software development houses particularly at a time when the national economy is passing through a recession."
He said that "internet tariff offered by the PTCL is competitive in the region and the subsidized rates given to the software houses is welcomed by the industry. However, electricity rates are another matter as software houses are not allowed to get subsidized power tariff. He said that the establishment of the first IT Park in Karachi next month is a welcome sign indeed as it would provide office spaces at subsidized rent, interconnectivity and power charges. However, power subsidy should also be offered to the software houses not located in the IT Park. The KESC offers no industrial tariff to the software industry like many other industries which it still chooses to treat as commercial consumers.
He lamented that incessant power breakdowns and load-sheddings are costing the software houses millions in lost productivity particularly to the small and medium size houses which can not afford to buy costly generators. He said that the PTCL should have at least another international provider to provide a reliable internet connectivity and speed — the two most important pre-requisites of the digital world of today where time means everything."
He said that though the software companies are allowed to buy their own bandwidth from the PTCL only a few of them are doing it primarily due to prohibitive initial costs.
He said that the ISPs should take measures to start providing value-added services. "They should develop specialized portals, offer tele-business services, video conferencing facilities, point-to-point set-up with international companies, on-line trading system. In addition, the services should be backed by a cost-effective, consistent, dependable and quality internet infrastructure. As is, the absence of value-added services by the ISPs are costing them heavily in terms of customer royalty as all of them are selling a single and same service which only slightly differs in term of price.
According to an estimate — there are only estimates as real figures related to IT industry in Pakistan are hard to find — there about approximately one million internet accounts and over 2.5 million users. There are 3 million e-mail accounts. Almost the entire use of the internet is on the "supply side" — educational institutions, surfing, e-mail, telephony, business and corporate usage.
Javed Naushahi puts the total internet bandwidth available with the PTCL at over 250 Mb and number of ISPs at about 90. He said that the objective of all policies should aim to provide internet access to educational institutions, homes, businesses and government offices. This can be achieved by sharing the PC and the communication resources to ensure equal opportunity of internet access to all the people.
In addition, he added, it is imperative to put in place legal and security pre-requisites to develop the "demand side" of the internet. The legal pre-requisite comprise legislation for acceptance of electronic transactions and their admissibility in courts. The security features include establishing Public Key infrastructure, Certification Authority, Digital Certificate, Firewalls and secured websites with SSL, SET and other features.
The key benefits of developing a "demand side" internet are: low transaction cost, accessibility to all the citizens, improved efficiency and competitiveness. In addition, it will help in increased cash flow for the companies, documentation of the economy, transparency, increased share of e-services in the GDP. All these, in turn, will help create a conducive and enabling IT environment to help attract foreign direct investment in the Information and Communication Technology sector.
Much has changed for better during last 18 months. Much, however, remains to be improved. Internet being the life-blood of the IT should be given the top priority it deserves to ensure a reliable, dependable, consistent and international quality service at affordable prices to the end users. Nothing less will suffice or acceptable.
MERRILL LYNCH REPORT
The following is the excerpt from the Merrill Lynch report a portion of which is mentioned in the cover story:
For a country like Pakistan, where the information and communication technologies (ICTs) sector is only 3% of GDP, relative to 50% in the US, there is still a long way to go.
For instance, though software houses have yet to unleash their growth, in the light of the GOP's recent policies, we are confident that over the next few years, they too will make their presence felt.
The GOP's concerted efforts directed at encouraging investment in the field of IT and telecom have opened vast avenues for investment in the sector, with the potential for attractive returns. At the same time, the licensing and regulatory procedures for the sector have also been simplified.
For foreigners, faced with the option of investing in any one of the several regional countries, the important question is "Why Pakistan?" The answer lies in the fact that not only is the GoP taking steps to enhance demand by laying out enabling infrastructure for private investors, but that also costs, in the cases of certain facilities, for operators are the lowest in the region, if not in the developing world. A case in point is the reduction of bandwidth charges to only US$3,000 per Mb/s.
At the same time, the country is also paying due attention to human resource development. Under the HR Action Plan, a large pool of academically as well as technically skilled IT manpower would be developed to meet the local and export needs. Consequently, it has been decided that 60-70% of the budget assigned by the government for the IT sector should go into the field of human resource development.
Emerging Investment Avenues, according to unofficial estimates, the sector has the potential to absorb investment of up to US$15bn over the next 5 years. This includes investments in projects with the potential for a attractive returns, which have been tried and tested abroad, but are new or unheard of in Pakistan.
For a country like Pakistan, whose IT sector is still in its nascent stage, the sector has not been through the "been there done that" cycle that the developed nations have. At present, a little over 5 per cent of Pakistan's gross domestic product (GDP) consists of the services sector out of which 2.5 per cent is the financial services sector, while 3 per cent is the information and communication technologies (ICTs) sector. To measure how far Pakistan can potentially travel, as a comparative benchmark the USA's ICT sector alone is over 50% of it's GDP. Further, fixed line penetration is only 2.3%, while the average for the Asia Pacific region is estimated at 8.6 per cent. Consequently, there is considerable room for entry for investors, in those segments in Pakistan's IT and telecommunication sector, which have proven to yield steady returns to investors elsewhere in the developed world.
Most has declared that it is actively pursuing a project to place Pakistan's own satellite (PAKSAT) into orbit and claim its parking space before April 2003.
Pakistan has a population of 140 million and a fixed line penetration of only 2.3%, while annual unmet (registered) demand is a further 0.2% per population or 275,000 lines. Further, with the privatization of PTCL on the cards mid-year and the end of its monopoly over fixed line telephony from 2003, existing players in the industry will begin to rev up their operations, as the increasingly deregulated sector makes the playing field level.