PAKISTAN TELECOMMUNICATIONS LIBERALIZATION (PART I)

The present need for liberalization process will determine a country's ability to enter a new phase of development transforming her into a truly Information Society

By Yousaf Haroon
Assistant Professor (Management) National Post Graduate Institute of Telecommunications & Informatics (NPGIT&I)
May 19 - 25, 2003  

The dynamism of global telecommunications markets is widely attributed to rapid technological development and an increasingly liberal policy environment. Over the past decade, a large number of world economies have also embarked on reform paths, and witnessed significant expansion of their telecommunication networks and striking improvements in quality. But neither performance nor policy have been uniform across the region. Countries differ in both the sequence and extent of reform. Furthermore, it is not always apparent where the improved performance is because of specific policy choices rather than in spite of them, and where more could have been achieved had policy been different. Such has been the case of telecommunications in Pakistan where after 54 years of independence the tele-density remains just 2.5 which is a serious telecommunications regulatory and policy challenge the nation has to grapple with in the emerging world of Information Communication Technology (ICT).

This paper addresses two questions. Is it possible to identify the constituents of good telecommunications policy? And is it possible to further the choice of good policy at the national level through multilateral negotiations? Telecommunications liberalization is a complex and relatively new process. Choices have to be made regarding the privatization of state-owned telecommunications operators, the introduction of competition, the opening of markets to foreign investment and the establishment of pro-competitive regulations. While there is growing consensus that each of these elements is desirable, it is a rare country that has immediately gone all the way on all fronts. In Asia and Pakistan, in particular, governments have differed in their willingness to concede control to the market, and most have a penchant for gradualism. Competition has been introduced, but the number of firms has been fixed by policy; privatization is often partial and there are limits on foreign participation; separate regulators have been created but they are rarely fully independent in decisively perusing a path to mature competition in telecommunications.

Even though economic theory is bold in its pronouncements on the extremes, it is more tentative in its prescriptions on the transition path. How much greater are the social benefits if privatization is accompanied by competition? How much greater are the benefits if all barriers to entry are removed in markets where some competition has already been introduced? How much competition is desirable-is there no good reason to limit entry? How far should foreign investment be encouraged in concentrated markets? How important is an independent regulator for the emergence of robust competition? What should the regulator regulate? How is any adverse impact of liberalization on income distribution and poverty best addressed? There is a surprisingly long list of questions to which we cannot yet provide definitive answers, though there is no dearth of strong opinions.

LIBERALIZATION PROCESS IN TELECOMMUNICATIONS

Present is the past of future! The future technologies take telecommunications beyond transportation of voice over channels to exchange of high speed IP (Internet Protocol) data integrating industries and services across homes, across markets, across countries into a telematic society which fulfills its needs using telecommunications services. Therefore, the present need for liberalization process will determine a country's ability to enter a new phase of development transforming her into a truly Information Society.

The need for liberalization leading to competition in network industries such as telecommunications is required to promote healthy competition for improved productivity, wider consumer choice and lower prices. Even greater is the need to provide basic necessities of life such as health care, education, security and employment. Communications is today ranked as a top-level basic need for sustainable development of the human beings. Telecommunications, therefore, play a vital role to develop Information Communication Technologies (ICT) competencies at the global level bringing access to an unlimited resources and human activities just a push button away.

In telecommunication industry the most significant constraining factors are:

* The legacy of monopoly control
* Wide spread public ownership and state aids
* Political and institutional diversity
* Public service objectives
* Interconnection issues

The liberalization process today is a function of regulation which ultimately seek competition govern the telecommunications industry of which the most significant examples are of US and UK which have successfully rolled out market liberalization in telecommunications and various other sectors of the economy and have reaped desired goals. The liberalization of telecommunication market structure can be divided into three phases:

* PHASE 1: Monopoly : Single Dominant Market Player
* PHASE 2: Emerging Competition : Mix Market
* PHASE 3: Mature Competition : Many Market Players

The evolution of regulation over 3 phases of liberalization of market.

Market liberalization generally goes hand-in-hand with regulatory reforms, as the nature of regulation has to adapt over time to the new economic environment (globalization, shifts in technology etc.). An improvement in the regulatory environment does not necessarily mean deregulation and it may also entail re-regulation provided that the new rules are better adapted to the new economic environment. In a changing business environment, regulations that were appropriate in the past may no longer be so in the future. They may even prevent enterprises from competing successfully in the larger world markets, causing a destruction of employment or productive capacity. Governments therefore have a responsibility to keep regulations under continuous review and assess their appropriateness in the current business environment. The issue of regulation and its evolution over time is particularly important for the network industries where the respective roles of regulatory and competition authorities must evolve with the degree of liberalization.

Pakistan endeavors to introduce competition in telecommunications through a market liberalization process where the government has to make tough choices between the incumbent operator having a monopoly in telecommunications PSTN infrastructure to be fairly treated as national asset, and to promulgate a balance regulatory regime based on open and mature competition both at infrastructure and service levels. Like the rest of the world, telecommunications sector in Pakistan is going through a process of rapid change in convergence in focus on mobile, Internet, cable TV, and other value added services not to mention IT (Information Technology) developments in specific.

HISTORY OF TELECOMMUNICATIONS LIBERALIZATION IN PAKISTAN

In order to determine the intensity of liberalization process the history of telecommunications plays an important roll highlighting key mile stones achieved in this regard.

Pakistan at the time of its inception in 1947 owned a meagre telecom base with just 14,000 operational telephone lines. Telecom service was meant just to meet the needs of country administration. The year 1962 saw the first sector change when Post Telegraph & Telephone services were separated by establishing independent T&T and Postal Departments. Since the mid-1980s, a number of countries including Pakistan overhauled telecommunications sector, to arrange mobilize additional capital, improve performance of operating enterprises and respond to rapidly growing pressures for more varied services. The pace and scope of sector reforms has varied considerably in South, Latin America and Asia. A number of countries opted to privatize their telephone entities. In the Far East (early 1990s) there have been initiatives on partial privatization (Thailand & Malaysia etc) including liberalization of non-basic services. The results achieved were found to be beneficial. This brought the wave of change in South Asia also. To begin, Pakistan in 1990 also started taking gradual sector reform measures within the existing legal and regulatory framework. In line with emerging trends, private sector participation and deregulation initiatives were taken between 1989-91.

The Telegraph and Telephone (T&T) Department was converted into Pakistan Telecommunication Corporation on 15th December 1990 by delegating the powers to the Board of Directors for better functioning of the telecommunication system in the country. Thereafter, on 1st January 1996, the said system was reorganized by establishing Pakistan Telecommunication Authority (PTA), the National Telecommunication Corporation (NTC) and Frequency Allocation Board and Pakistan Telecommunication Company Limited (PTCL). Government is further committed to deregulate and liberalize telecommunications industry through privatization of state-owned monopoly i.e., Pakistan Telecommunications Company Limited (PTCL) under ITU and WTO Agreements by end of 2002 opening up the telecom sector for private sector and international competition under the ambit of PTA as a regulator.

Pakistan telecommunications and IT sector has seen a major structural shift for growth and development in the last few years. The key highlights of the telecom sector can be depicted as the state-owned monopoly PTCL has earned over USD 1 billion revenue in FY2001-02 while preparing for a deregulated scenario. Internet access has expanded over 1000 cities and towns across Pakistan. Internet bandwidth capacity availability has increase to 400 MB/s and 250 cities are connected through fiber optics. PAKSAT-1 Pakistan's own satellite is ready for launch and positioned at 38o E orbit slot.

PRIVATIZATION PROCESS

Pakistan Telecommunication Corporation (PTC) was established in December 1990 to take over operations and functions from the Pakistan Telephone and Telegraph Department. Its operations were governed by the Pakistan Telecommunication Corporation Act 1991. At the same time the Government of Pakistan (GOP) began to introduce private participation in the sector and licenses were awarded for cellular, card-operated payphones, paging and more recently, for data communications services in the country.

In 1991, GOP first announced its intention to privatize PTC. In 1994, the Government of Pakistan decided to test the appetite of the domestic and international capital markets for PTC which later become PTCL (Pakistan Telecommunication Company Limited) though subsequent partial privatization. Consequently, in the third quarter of 1994, the Government of Pakistan issued six million 'Vouchers' exchangeable into 600 million shares (with a par value of Rs. 10 per share) of the future PTCL in two separate placements. These Vouchers were converted into shares of PTCL in mid 1996. Following such conversion the Government of Pakistan own (88%) and private investors own (12%) shares in PTCL. There are now five telecom companies listed in the local stock exchanges which are:

Name of Company

Sector

Pak Datacom

Data Communication

Pakistan Telecommunications Company Limited

All Sectors

Telecard

Payphone

World Call Communications

Payphone

World Call Multimedia

Cable TV

Source: Telecom Status Report 2001-02

Currently Pakistan is carrying out privatization for which the government has recently promulgated Privatization Ordinance 2000 to privatize public sector holdings in Telecom, Oil & Gas, Banking & Finance, Transport, Power and Real-Estate sectors. Although the government is a staunch supporter of quick privatization of the incumbent operator i.e. PTCL in order to ensure efficient management of the company's assets yet the downturn in international economy has adversely affected the ongoing plans for privatization of the incumbent operator. The government has decided to hold its position at the moment until the bidders can offer a reasonable price, keeping in view of the high profitability in the telecommunication sector.

INCUMBENT OPERATOR IN PAKISTAN: PTCL MONOPOLY

The incumbent operator Pakistan Telecommunications Company Limited is a government-owned joint stock company and provides basic telephony, value-added services, email & Internet, digital cross-connect, ISDN, leased lines, call waiting/forwarding, speed dialing, toll-free numbers etc. In accordance with Pakistan's WTO commitments and the Act, the Government will maintain PTCL's exclusivity in the provision of domestic and long distance services until 31st December, 2002. Keeping pace with the fast changing telecom world, PTCL has taken key initiatives to modernize and upgrade its network and takes quantum leap, rapidly expanding the country's IT & Telecom services to all concerns of the country. In the liberalization process the key issues between the incumbent operator and the regulator i.e. Pakistan Telecommunication Authority, has been the interconnection charges, unbundling of Local Loop (LLUB) and tariff rationalization.

At the moment the competition in Pakistan has just entered stage 2 (Mix Competition). During this time the country has seen a sharp decline in international calling rates but a rise in domestic calling rates under Tariff Rebalancing by the incumbent in order to eliminate cross-subsidization of domestic calls. At the moment the incumbent enjoys monopoly on PSTN which is also the access point of almost 99% of Internet access for connection to the ISP (Internet Service Provider) Network. Until December 2002, all international traffic was also routed using the incumbent International Gateway giving PTCL a direct influence to control both prices and content for Internet access.

Last but not least, the job of regulator in Pakistan today demands a great deal of commitment and competence to promote and accelerate the process of liberalization through introduction of healthy competition keeping in view the goals of the development of society at large by offering affordable prices and attractive services which can take Pakistan from an Agri-Society to Info-Society.

WTO TELECOM SECTOR COMMITMENTS

In Pakistan the exclusivity on cross-border supply of voice telephony as of January 2004, will end with no commitment on commercial presence. Pakistan also under WTO commits on full competition in private leased circuit services (transmission capacity) as of January 2004.

Pakistan allows competition in satellite based services, including voice telephone and value-added services subject only to restrictions on cross-border supply to preserve monopoly rights on basic and international networks and services until their expiry which has ended on December 2002.

Under WTO commitments Pakistan has opened markets for data transmission, e-mail, internet and intranet, domestic VSAT, trunk radio services, video conferencing, tele-medicine and tele-education etc.

REGULATION FOR MARKET LIBERALIZATION

Last decade saw a number of changes happening in telecommunications industry and most predominantly the emergence of Internet, innovations and inventions in electronic equipment and software applications. Globalization and international trade on one end and ICT (Information Communication Technology including telecommunications on the other end, have created a new way of life to be lived. Numerous state-owned telecommunications operators were privatized, and a wave of pro-competitive and deregulatory telecommunications policies swept the world. New market-based approaches to the supply of telecommunications services were introduced in scores of countries. This liberalization of telecommunications markets was motivated by various factors, including:

* Increasing evidence that more liberalized telecommunications markets were growing and innovating faster and serving customers better.

* The need to attract private sector capital to expand and upgrade telecommunications networks, and to introduce new services.

* Growth of the Internet, which caused data traffic to overtake voice traffic in many countries, and led to the introduction of many new service providers.

* Growth of mobile and other wireless services, which provided alternatives to fixed networks and introduced new service providers to telecommunications markets.

* Development of international trade in telecommunications services, which are increasingly provided by transnational and global service providers.

The objectives of telecommunications regulation vary from country to country. Governments in most countries continue to see telecommunications as an essential public service. Even after telecommunications networks are no longer run by them, governments normally retain a regulatory role to ensure that telecommunications services are supplied in a manner consistent with national perceptions of the public interest.

TELECOMMUNICATIONS REGULATORY FRAMEWORK IN PAKISTAN

A comprehensive "Pakistan Telecommunication (Reorganization) Ordinance" was promulgated in 1996 which established the framework for the creation of Pakistan Telecommunication Authority (PTA) as an independent regulator of all telecommunication activity in the country, the Frequency Allocation Board (FAB), the National Telecommunication Corporation (NTC) as a second carrier in Pakistan exclusively for public sector communication needs and the Pakistan Telecommunication Employees Trust (PTET). The Ordinance provided details of the establishment, constitution, powers and rights of PTA, FAB, NTC, PTCL and PTET and defined the terms of the monopoly of PTCL, the mechanisms of transfer of assets, liabilities, employees, rights and obligation from PTC to PTCL, NTC, PTA, FAB and PTET. This law also covered issues such as rights of employees transferred from PTC to the other entities and national security.

The Government's broad objectives in the telecommunications sector are:

1. The expansion and improvement of the telecommunications infrastructure in Pakistan to better support economic, social and cultural developments in Pakistan.

2. The facilitation of new investment and competition in the telecommunication sector by developing the legal and regulatory framework.

3. The encouragement of increased private sector participation in the development of telecommunications, in particular by the privatization of PTCL through the recruitment of strategic investors.

4. The development and improvement of telecommunications capacity to meet the demands of the information technology sector.

5. Encouraging the development of local telecommunications expertise to promote local research and manufacturing so as to create a telecommunications industrial base in Pakistan.

6. The protection of consumer interests.

TELECOMMUNICATIONS POLICY FRAMEWORK

In 2000, a separate division on Information Technology & Telecommunication (IT&T) has been created in Ministry of Science & Technology (MoST) headed by the Federal Secretary. In 2002, under an Ordinance the division was up-graded into Ministry of Information Technology & Telecommunications (MoITT) in order to govern the IT and Telecom sector and to devise a policy-framework for promotion of investment, transfer of technology, competition and human resource development. The Telecom Policy will be implemented and regulated by the sector regulator, namely, Pakistan Telecommunications Authority (PTA) and Electronic Media and Content Policy will be regulated by Pakistan Electronic Media Regulatory Authority (PEMRA) respectively.

TELECOM SECTOR REGULATOR: PAKISTAN TELECOMMUNICATIONS AUTHORITY

The telecommunication industry is regulated by the Pakistan Telecommunication Authority an autonomous body established under section 3 of the Pakistan Telecommunication Re-Organization Act, 1996, an Act of the Parliament to regulate the telecommunication industry in Pakistan, including matters relating to protecting consumers' interest, licensing regime, tariff regulation, type approval of equipment and interconnection arrangements.

The Authority has the following major objectives and functions:

1.regulate the establishment, operation and maintenance of telecommunication systems and the provision of telecommunication services in Pakistan.

2. promote and protect the interests of users of telecommunication services in Pakistan;

3. promote the availability of a wide range of high quality, efficient, cost effective and competitive telecommunication services throughout Pakistan;

4. promote rapid modernization of telecommunication systems and telecommunication services;

5. make recommendations to the Federal Government on policies in the telecommunication sector.

The Authority has been vested with the necessary powers by the federal government to effectively perform its functions.

FREQUENCY ALLOCATION BOARD (FAB): SPECTRUM MANAGEMENT

The FAB has the exclusive authority to allocate and assign portions of the radio frequency spectrum to the Government, providers of telecommunication services and systems, radio and television broadcasting operations, public and private wireless operators, and others. The FAB has an executive director, who is the vice chairman, devoting his full time to the business of the FAB. The objective of the FAB is the efficient management of the spectrum.

PAKISTAN TELECOMMUNICATION AUTHORITY (RULES & FUNCTIONS) REGULATIONS 2000

Under Section (5) of Pakistan Telecommunication (Reorganization) Act 1996 PTA (R&F) Regulations 2000 came into force. The rules provide a detailed regulatory framework for regulator to regulate the telecommunications sector heavy-handed. The rules define the powers of the regulator to conduct regulatory function with full force clearly charting out policy of public hearing; license conditions; grant and renewal of license; roll-out conditions; quality of service conditions (QoS); anti-competitive practices; procedure for appeal and penalties; universal service obligation condition; consumer protection; standardization of equipment; spectrum management conditions; numbering plan; and details about fees including chalking out details for effective monitoring and market survey commitments.

CRITERIA FOR GRANT OF TELECOMMUNICATION LICENSE

Criteria for application of evaluating license include the following:

a. economic viability;
b. technical competence;
c. financial capability;
d. credibility and track record;
e. Pakistani share in ownership;
f. prospects of technical progress and introduction of new technology or market concepts.

CRITERIA FOR QUALITY OF SERVICE

Good quality service provision by the regulator as:

a. average time to get a line;
b. faults per line per annum;
c. average time to repair a line (hours);
d. answer to seizure ratio: local calls (% of total calls);
e. answer to seizure ratio: international calls (% of total calls);
f. billing errors;
g. current bill delivery timings;
h. directory inquiries: time to get a response (seconds); and
i. in case of pay phone, % of pay phones operating at any one time

In order to determine the quality of service the regulator conducts various market surveys through professional market research firms and publishes them periodically in the public rating various operating services in terms of quality of service and takes necessary actions to ensure that the standard of quality is not compromised by any operator beyond acceptable limits. PTA has been publishing sector specific QoS ratings of operators in mobile and Internet service providers.

CRITERIA FOR APPLICATION OF REGULATORY FEES

PTA has the power to charge or levy the following type of fees for grant and renewal of licenses which include:

a. license fee (initial license fee and/or annual license fee);
b. license renewal fee;
c. special fee;
d. license fee for allocation and use of radio frequency spectrum;
e. license revalidation fee;
f. license modification fee;
g. license restoration fee;
h. transfer and assignment of licenses fee;
i. license fee for type approval of terminal equipment;
j. fee for providing copies of the license documents;
k. license applications fee;
l. number usage and allocation fee;
m. any other fee (levied by PTA from time-to-time).

PAKISTAN TELECOMMUNICATIONS RULES 2000

These rules define a comprehensive regulatory framework for liberalization of telecommunications in Pakistan elaborating interconnection rules, costing rules such as LRIC (Long-run incremental costs), SMP (significant market power) operator, quality of service and telecommunication operator rules in general.

INTERNET OVER CABLE REGULATION 2001

IC regulation authorizes cable operators to provide Internet access via cable to users with is indeed a major step towards promotion of IT and Internet services at the national level. These regulations specify quality of services commitments, interconnection, license regulations and penalties related to cable operators who would like to provide Internet over cable.

(to be continued)