PAKISTAN TELECOMMUNICATIONS LIBERALIZATION (PART II)

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 26 - Jun 01, 2003 

DEREGULATION POLICY IN TELECOMMUNICATIONS

With the promulgation of Telecommunication (Re-Organization) Act 1996, Pakistan Telecommunication Authority was established as the Telecom Regulatory body. Following the open licensing policy in accordance with instructions from Government of Pakistan and in exercise of powers conferred by Pakistan Telecommunication (Re-Organization) Act 1996, the Authority issued a number of licenses to operate value-added telecommunication services to encourage the private sector. However, as per Act, basic telephony was put under exclusivity and PTCL was given a seven years monopoly over basic telephony which ended by December 31, 2002. Being a signatory of WTO, the Government of Pakistan has to honor the commitment and deregulate the telecommunication sector in Pakistan. For this deregulation a comprehensive policy is to be framed. In this regard, the Government of Pakistan has hired the services of International consultants (Messrs. McCarthy Tetrault and Analysis UK) for arriving at some useful model for Pakistan.

In order to make the regulator effective and competent, the deregulation policy on telecommunications sector is under the review of Ministry of Information Technology & Telecommunications (MoITT) and Pakistan Telecommunication Authority to formulate a comprehensive market liberalization process which include opening up of telecommunications market both at vertical and horizontal levels, service and infrastructure levels (up-stream and down-stream), licensing formalities, network roll out commitments, access network plan, tariff rationalization plan, interconnection agreements, unbundling of local loop (LLUB), and Universal Service Obligations both for infrastructure operators and service operators at national and regional levels to ensure fair competition, consumer protection and integration with national development programs.

With the end of PTCL monopoly in December 2002, the deregulation policy proposed two (2) types of licenses of fixed operators i.e., Local Loop (LL) fixed telecommunications operator and Long-distance and international (LDI) fixed telecommunications operator with no limit of licenses to market entrants who meet the licensing criteria.

The deregulation policy on radio spectrum is based on the intent that Pakistan follows ITU specified radio frequency bands specific for the purpose of operators of wireless local loop (WLL), point-to-point microwave and backbone services in the bands such as 3.5GHz, 10GHz, 26-40GHz, among other and the unoccupied radio spectrum will be available through a transparent allocation procedure to the interested operators.

ACCESS PROMOTION CONTRIBUTION (APC)

APC regime will be introduced for an interim period of time to promote local loop roll-out for accelerating tele-density growth and wider service coverage in the country. APC will be governed through a formula and APC will be mentioned in the license conditions of LL operators and mobile operators commensurate to their commitments to revised license condition requiring roll-out and improved QoS.

There are some serious apprehensions by the private sector to promote APC regime. APC regime seems to raise foreign operators cost and makes settlement rates high eventually costing extra to the consumer. The ultimate benefits the incumbent more as compared to the new entrants. The regulator must draw a balance between market access and universal access as USO commitments adequately covers related issues.

SIGNIFICANT MARKET POWER (SMP) OPERATOR OBLIGATION

As the liberalization process thrives competition there emerge significant market power (SMP) operators which from regulator's point of view have market share of more than 25% or a particular telecommunication market where relevant market will be determined by sectoral revenues. The regulator may also identify an operator as SMP with less than 25% market share keeping in view:

a. operator's ability to influence market conditions
b. operator's turnover to the size of the relevant market;
c. its control of the means of access to customers;
d. its access to financial resources;
e. and, its experience in providing telecommunication services and products in the relevant market.

It is therefore, a daunting task for the regulator to ensure fair, competitive and non-discriminatory environment for all operators prohibiting cross-subsidization, price manipulation, or interference with competitive market dynamics. There will be a level playing field provided to non-SMP operators and the regulator will ensure balanced approach for market forces to deliver best services to consumers. The incumbent operator PTCL which is also SMP both in LL and LDI markets to facilitate market liberalization through regional interconnection provision, indirect access, and carrier pre-selection. Under current PTA regulatory regime the licensing criteria is under review which burden the operator with SMP status with more stringent regulation compliance. But at the moment, there is no clear policy which provides the prefential or stringent treatment of SMP status by and large.

TEN CONFLICTING PRIORITIES: BALANCING BETWEEN REGULATION AND COMPETITION

The coexistence of competition and monopoly, competition between private and public firms, profitability verses public service obligations such as Universal Service raise many conflicting priorities for regulators during different phases of the market liberalization process. For a regulator there are no easy answers to determine the strategy to achieve policy objectives in a dynamic world of competition, globalization, privatization, politics and law. There is always players who gain and praise the policies, whereas the losers condemn the policies. There are hard choices to make between investors and consumers, regulation and competition, short-term vs. long term, affordability vs. accessibility, accountability vs. transparency, monitoring vs. secrecy, information dissemination vs. information security, urban vs. rural, developed vs. underdeveloped, digital divide vs. digital provide, encouragement vs. equity. The following is the list of 10 conflicting priorities from which any regulator has to make a tough choice keeping in view of the best information and ability it possess.

SR. NO.

CONFLICTING CHOICES BETWEEN REGULATORY OBJECTIVES

1

SHORT TERM

As telecommunication is technology intensive, hence, regulatory guidelines should be flexible to cope up with the pace of change in short-term

LONG-TERM

As telecommunication is capital intensive due to which may take many years to successfully complete, policy framework must be of longer term

2

EFFICIENCY OBJECTIVE

General prices of telecommunications should be affordable, cost based and efficient, which means cheaper services for users.

EQUITY OBJECTIVE

Universal Access and Universal Service Obligation directly effect the offer cost of telecommunication services roll out and price of services offered. Telecom services are basic services which must be provided through out the country where prices may be higher.

3

INFRASTRUCTURE-ORIENTED COMPETITION

All firms invest in setting up their respective infrastructure in order to compete among themselves using "Economics of Scope". This means that investments and competition must be open for competition.

SERVICE LED COMPETITION

All firms investing in common infrastructure and compete on service let competition using "Economies of Scale". Infrastructure may not be open for competition, but telecom operators can compete in services.

4

SLOW LIBERALIZATION

Due to political and country specific regulatory objectives keeping wait-and-see approach also determined by the level of competitiveness in the market. Therefore, introduction to full competition must be slow and steady.

FAST LIBERALIZATION

Again country and regulator specific in order to adopt changes to benefit the consumers and also let by intensity of competition. Introduction must be quick and fast, where the regulatory framework may or may not be skipped to achieve full competition.

5

PUBLIC OWNERSHIP

Boundary is clearly drawn between state as regulator and state as owner. Like in the case of PTCL there is little clarity of ownership between Government and Private.

PRIVATE OWNERSHIP

Fear of unfair competition between private vs. public ownership specially in the case of incumbent operator. As the PTCL expects to achieve privatization and private management to run the affairs of the company.

6

SECTOR SPECIFIC REGULATION

Regulators will be better able to focus on the knowledge needed to address problems within a specific industry but problem of defining the boundaries of a sector remains a challenge and a key policy matter.

GENERAL COMPETITION RULES

Guards general terms of the market with specific reference to anti-competitive practices and anti-trust laws.

7

RULES

Regulation through precise rules can be monitor competition without difficulty and ensures regulatory commitment.

DISCRETION

Regulation with general rules provides greater flexibility but may compromise regulatory commitment by giving extra-discretion to bureaucratic capture.

8

PERMANENT REGULATION

Regulation ensures close monitoring of a particular sector.

TEMPORARY REGULATION

A regulatory-framework is a surrogate of competition which will soften with the improvement in competition. Regulatory structure may include "Sunset Clauses".

9

CENTRALIZED REGULATION

Ensures quality and commitment for a regulatory structure. Independent Regulatory Regime.

DECENTRALIZED REGULATION

Decentralized regulation could lead to too much diversity and inconsistency. Dependent Regulatory Regime.

10

LIGHT-HANDED REGULATION

Means that rules and regulatory institutions are relatively few. It also means application of general competition rules.

Best in Phase 3

HEAVY-HANDED REGULATION

Means that specific rules and regulatory institutions are established to regulate an industry.

Best in Phase 2

Note: The shaded areas highlight Pakistan Telecommunication Authority policy preferences for liberalization.

The assessment of regulatory success in Pakistan at the moment is doubtful as a number of issues stay unaddressed creating unbalanced playing field for telecommunication operators and bars potential operators to come into play. Therefore, there exists a fear that the spirit of competition under Deregulation policy of PTA to achieve liberalization and competition may be compromised through a strategic sale of incumbent operator from government to another private sector investor where monopolistic or anticompetitive practices may continue. Therefore, the liberalization process through privatization process must not be used as a rubber stamp just to create an eye-wash in the face of general public. Concrete steps through heavy-handed regulation and clear regulatory legal framework must be accompanied by a liberalized telecommunication policy establishing a level-playing field for all the operators in Pakistan.

COMPETITION IN TELECOMMUNICATIONS

The telecommunications industry in Pakistan has come a long way and continues its journey towards transition from state-owned monopoly to liberalized competitive structure at multiple levels including policy, regulation, competition, privatization, and social development goals in sight.

COMPETITION STATUS OF TELECOMMUNICATIONS MARKET IN PAKISTAN

Sector

No. of market players/
licenses issued

Technology

Market Size
(Customers)

Fixed Line (Local Loop + International)

Monopoly of PTCL (1)*

Copper, Fiber, WLL, DSL, DXX

3,700,000

Public Payphone

123*

.

1,000,000

Mobile

4

GSM, D-AMPS, AMPS

1,500,000

Internet

72 (161*)

-

2,000,000

WLL

4

CDMA

125,000

Broad Band

4

DSL

10,000

Cable TV

922*

-

2,000,000

Source: Pakistan Status Report 2000-02, PTA

ROAD MAP OF LIBERALIZATION IN TELECOMMUNICATIONS IN PAKISTAN

Year

MILESTONES

1947

14000 Operational telephone lines at independence

1947

Pakistan Posts and Telegraph Department, Ministry of Communications

1962

Pakistan Telegraph and Telephone Department, Ministry of Communications

1990

1st Private Payphone License

1990

Pakistan Telecommunication Corporation

1991

1st Mobile License to M/s PakTel

1992

1st Card Payphone License

1994

1st GSM Mobile License to M/s Mobilink (Pakistan Mobile Limited): 3rd Moible Operator

1995

2nd Mobile License to M/s InstaPhone

1995

Pakistan Telecommunication (Re-Organization) Ordinance

1996

Pakistan Telecommunication (Re-Organization) Act

1996

PTCL, FAB, PTA, NTC

1998

Paknet (1st Internet Service Provider)

1998

First Card Payphone License

2000

Pakistan Telecommunications Rules

2000

Pakistan Telecommunications Authority Regulations

2000

Calling Party Pays Regime (CPP) for Mobile

2001

Internet over Cable Regulation

2001

M/s PTML (2rd GSM Mobile Operator): 4th mobile operator in Pakistan

2002

Ministry of Information Technology & Telecommunications

2003

End of PTCL Monopoly

2003

Telecommunications Deregulation Policy (Draft)

2003

Cable Television Rules

2003

Telecommunication Numbering Plan

2003

Telecommunication Tariff Regulations (Draft)

2004

End of PTCL Exclusivity on Cross border connection

FIXED LINE TELEPHONY

In Pakistan the most important player has been the Pakistan Telecommunications Company Limited (PTCL) which has been operating since 1996 after the promulgation of Telecommunications Ordinance 1996. PTCL as being as state-owned monopoly has been the only player in market for provision of telecommunication services to general masses. National Telecommunication Corporation (NTC) only serves the government, Special Communication Organization (SCO) services only the Northern Areas of Pakistan where both NTC and SCO has been relying mostly on PTCL.

As the monopoly of PTCL has ended as of December 2002, the government has opened local loop (LL) and long-distance and international (LDI) fixed telecommunications for private participation along with a robust plan to privatize PTCL.

By end of June 2002, PTCL has deployed 4.33 million lines out of which 3.7 million lines where in service which shows the ALIS (Access Lines in Service) to ALI (Access Lines Installed) ratio need improvement. There is a gradual growth in incumbent operators profitability with an increase of 7.1% in FY 2002 was lower than that of the latest five year's average revenue growth rate of 10% which is attributed largely to falling international settlement rates, universal access provision and mobile cellular telephony. Another reason is over-staffing of PTCL with approx. 55,000 employees effecting the profitability of the company and poses a potential challenge towards the privatization of the company. PTCL lines per employee were 55 in June 2000, 58 in June 2001 and 60 in June 2002 which was higher than the average-low-income-countries (44) but far behind the average-middle-income-countries (117) and high-income-countries (172).

UNBUNDLING LOCAL LOOP

Unbundling is the degree to which an entrant can pic and choose from the incumbent's infrastructure. For local loop unbundling (LLUB) the challenger operator is required to start roll out by building atleast one (1) point of interconnection in each PTCL region within one (1) year and roll-out a predefined level of network structure within three (3) years providing both incoming and outgoing interconnection services for voice and data traffic to all the customers within and outside the country. Whereas, for LDI fixed telecommunications operator the starting commitment is atleast two (2) points of interconnection in the areas where they operate and rise over time to two (2) per PTCL transit area serving the licensee's area by accepting incoming traffic, both voice and data, at acceptable technical and quality standards laid down by the regulator.

THE MOBILE MARKET

Mobile industry in Pakistan comprises of four companies namely Instaphone, Paktel, Mobilink and Ufone. The industry has experienced phenomenal growth over the years as the subscriber base in 2001-02 has reached 1.2 million (70% increase from 2000-01 as of 0.2 million subscribers). Cellular mobile penetration rate has reached to 1.16% compared to the fixed-line penetration rate of 2.57% (June 2002). According to conservative estimates the total number of mobile subscribers is getting double each year and will surpass the fixed-line subscribers by the end of 2004.

PTA has played a vital role in the promotion and support of mobile industry by adopting CPP (calling party pays) Regime from MPP (mobile party pays) in 2000 giving a tremendous boost to the market which grew in that particular year by 142% as the affordability for mobile reaches the public at large. The mobile market is slowly moving from duopoly and oligopoly to near competition though there remains only two (2) GSM operators Mobilink and Ufone respectively.

Mobile sector is still opening up where Mobilink enjoys a monopolistic situation because of its nation-wide coverage until 2000 when PTCL launched its subsidiary Ufone. Mobilink and Ufone are both GSM operators. The previous market leader Paktel has been taken over by the Millicom from Cable & Wireless which is also the parent company of Instaphone the runner up in cellular competition after Mobilink due to its nation-wide coverage.

SR. NO.

MOBILE OPERATOR

FOREIGN PARTNER

TECHNOLOGY

MARKET SHARE

1

Instaphone

Millicom (Tele2)

D-AMPS

26%

2

Mobilink

Motorolla & Orascom

GSM

46%

3

Paktel

Cable & Wireless
(Sold out to Millicom)

AMPS

17%

4

Ufone (PTML)

-

GSM

11%

Mobile market has experienced both vertical and horizontal integration with costing separation. Still interconnection, quality of service, network rollout, universal access remains real issues to this market making the customers to be exploited in the hands of few operators. In this regard, PTA has taken concrete steps and have initiated necessary action against key violator namely, Mobilink which has earned the status of SMP in mobile market but congestion and denial of service problems has created a lot of inconvenience for its customers.

WLL (WIRELESS LOCAL LOOP)

In order to address the urgency of shortfall of telecommunication access and connections in the country the regulator has forwarded a franchise concept so that the WLL operators can collaborate with the incumbent operator's infrastructure for expansion of payphone network in the country. Currently four licenses have been awarded out of which three have chalked out there respective rollout plans as given:

SR. NO.

WLL OPERATOR

TECHNOLOGY

LINES

1

TeleCard

CDMA

125,000

2

Telips

-

50.000

3

WorldCall Payphones Ltd.

-

50,000

Only TeleCard Limited has started its WPS in Pakistan. The company has started the service in May 2002 in Karachi and within four (4) months it has expanded the network to various cities and has touched 22 cities by December 2002 with a WLL coverage in a radius of 10-15 KM in rural areas.

Promoting innovative and cost effective telecommunication access technologies is a key policy strategy the regulator encourages and would like to promote in order to fulfill the universal access and universal service obligation commitments.

INTERNET SERVICE PROVIDERS (ISPS)

With Rs. 8-9 billion a year, market is run by some 72 operational ISPs creating over-heated completion in the market running after thin margins making a significant number of smaller ISPs taken over by larger market players. In order to promote Internet in the country PTA has adopted an Open License Policy and introduced a state of competition in the market resulting in a lower and affordable price with improved quality of Internet access. Some market growth barriers are low computer education, culture, cost of computer, IT education facilities, and lack of skill or vision with reference to value addition within majority of population.

Government reduced the international bandwidth charges from USD 90,000 to USD 3800 per month decreasing ISP prices to dirt-cheap levels making it possible for people from all walks of life to use Internet facility. Still the productive usage of Internet in Pakistan is quite limited and it is mostly used for messaging, chatting, email, entertainment and pornography (90%) and research (10%).

VOICE OVER INTERNET PROTOCOL (VOIP)

The regulatory treatment of IP telephony varies significantly from a particular country to country. With over three (3) million overseas Pakistanis VoIP is one of the most attractive markets. According to a study by PTA, total volume of VoIP traffic termination was more than 140 million minutes where traffic originated through Internet (PC2PC Voice Chat and PC2Phone subscribed calls) was a over 3.5 million minutes in the country for 2000-01 with rapid growth in the volumes.

The most debated area has been Voice Over IP regulation (VOIP) which PTCL has blocked for ISPs to enable users to communicate over Internet. This has been due to the fact the the accounting rates has been falling under new FCC rules(3) making international telecommunication revenue all time low. Though PTA has instructed PTCL to open VoIP traffic as a policy stand per second, the incumbent, PTCL is slow to follow suit due to its apprehension that this phenomenon may eventually cause lose of millions of dollars through illegal voice termination.

To stay abreast with the technological revolution, PTCL has embraced the VoIP phenomenon by working with operations and maintenance (O&M) contractors to develop IP gateways with a guarantee monthly payment for traffic volume of 3 million minutes @ US$ 0.25 per minute for each of the three IP gateways installed at Karachi, Lahore and Islamabad where international bandwidth for IP connectivity shall be provided at PTCL prevailing commercial rates.

BROAD BAND ACCESS

The incumbent PTCL has taken initiative of modernizing its networks to offer new and advance technologies and has launched its DSL project in collaboration with private sector, which will provide both narrow band and broadband services. In this regard four (4) companies has signed Operation and Maintenance (O&M) contracts to namely Habib Rafiq International, Micronet Broadband, Multinet Broadband and Sysnet Pakistan to deploy countrywide networks. First ever broadband service was launched from Islamabad on July 2002 by Micronet Broadband. The DSL services are vertically integrated with accounting separations where PTCL provides services as well as supplying infrastructure to four competitors. In simple terms the infrastructure operator remains the same but DSL services are operated at different regions distributed throughout the country which does not create a direct competition among DSL operators.

CABLE TV ACCESS

The cable TV is a growing industry in Pakistan as more and more international TV channels are showing there keen interest to enter Pakistan market. Keeping in view of government Media Regulations which is monitored by Pakistan Electronic Media Regulatory Authority (PEMRA) most of the existing channels offer digitized and encrypted signals. There are about 9 million households had TV sets, where about 1.5 million people are with Internet access and around 2 million cable TV subscribers. There were 822 licensed cable TV network operators by June 2001. The unbundling of cable TV has been partially done as PTCL provides international transmission access to international channels to these cable TV operators throughout the country.

INNOVATIVE BUSINESS IDEAS USING TELECOMMUNICATIONS

INNOVATIVE USAGE OF TELECOMMUNICATIONS

EXAMPLES

Tele-banking

0800 Services, ABN-Amro, Citibank,

Tele-Medicine

Comsats,

Tele-Centers

PTCL Franchises

Tele-Entertainment

0900 Services,

Tele-Polling

Advertising Agencies, TV Programs,

Tele-Marketing

Multinationals

Tele-Charity

Call and Pay for Charity

Tele-Customer Care

Moblink, Paknet, Ufone, PTCL

Tele-Security

Brinks, Various Security Services Providers

INTERCONNECTION REGIME

In markets with perceived or expected market failure, as is the case in part of the telecommunications market, there will often be a need for regulation in order to counteract anti-competitive behavior of incumbent operators and to stimulate competition e.g. by facilitating market entry for new operators. When access and interconnection charges are based on economic costs they do not distort the build/buy decision of new entrants they will be encouraged to use existing facilities if and only if it is economically desirable to do so. Just as important, cost oriented access and interconnection also means retaining investment incentive for incumbents to upgrade or extend their existing network when new technology is available.

In order to ensure the successful liberalization of, and full competition in the telecommunications sector, the Government and the Regulator endorse a policy of full and fair access to telecommunication networks. The rules give all licensed operators a right, and when requested by other licensed operator, an obligation, to negotiate interconnection arrangements. Interconnection arrangement should be a matter of commercial negotiation between the relevant licensed operators. Regulatory intervention should only arise if the relevant licensed operators are unable to agree on their interconnection arrangements.

The government also endorses an interconnection regime, which provides for charges, which are transparent and cost-oriented, and for non-discriminatory interconnect access and pricing. However, it is recognized that different interconnect tariffs may apply to different classes of operators, to the extent that they gives rise to different costs. Interconnection arrangements should ensure the security of network operation, the maintenance of network integrity, the interoperability of services and the protection of data.

Effective and compatible interconnection the physical and logical connection between operator's connectable systems which allows telecommunications services from other system or interconnection regime are sine-qua-non for a competitive market or a newly liberalized market where incumbent operator initially enjoys market power may try to prevent competition using interconnection terms as a shield to ensure its dominance in the telecommunication market or refuse to unbundled network elements. In order to resolve disputes, to promote competition and avoid unnecessary delays framing of interconnection-framework is an essential part of regulatory framework. Among interconnection issues cost-sharing remains the vital issues among the telecommunication operators.

There are various cost methods on which the operators can mutually agree or the regulator may use its influence to promulgate a particular method to ensure consumers interest in general so that the telecommunication services remain as basic utility for living rather a mode of charging exorbitant profits by the operators by enforcing interconnection regime on higher rates or to prevent monopolistic activities as shown in the figure.

The following figure highlights the relationship of higher and lower interconnection prices with competition behavior of incumbent operator and potential competitors either to use existing or building new telecommunication infrastructure.

(to be continued)