PAKISTAN TELECOMMUNICATIONS LIBERALIZATION (PART III)

The Government shall be the facilitator and enabler to encourage the Private sector

By Yousaf Haroon
Assistant Professor (Management) National Post Graduate Institute of Telecommunications & Informatics (NPGIT&I)
June 02 - Jun 08, 2003 

To determine the right formula for interconnection costing regime is the most daunting task the regulator has to face. Keeping in view of the nature of costing arising in telecommunications can be determined with different cost categories and cost standards to grapple with the problem of cost allocation in telecommunications. The following are the basic costing methodologies for determining access and interconnection charges, which include:

INTERCONNECTION COSTING METHODOLOGIES

COST METHOD

DETAILS

PROS

COS

Marginal Costing

Additional cost of service per line

Easy to calculate

Unattractive

Long Run Incremental costing (LRIC)

All elements of costs are included(Historic + Expected)

Market Price nearest

Complex

Fully Distributed Costing(FDC)

All allocated costs

Simpler to LRIC

Historical value

Ramsey Pricing

Costing based on Price Elasticity of markets

Theoretically most efficient costing method

Very Complex to implement

Efficient Component Pricing Rule (ECPR)

Opportunity cost mark-up to the cost

Ensure efficient entry + protect from cross- subsidization by incumbent

Provides no room for negotiation or incentive to reduce

Source: Cost Oriented Interconnection in Sweden 2001

INTERCONNECTION PRICING REGULATIONS

There are the following approaches for preventing monopolistic infrastructure firms from charging excessively high prices:

SR.NO.

REGULATIONS

DESCRIPTION

1

RATE OF RETURN REGULATION

Used by USA, Canada, Japan.
The regulator sets the price that the operator can earn on its capital by allowing a specific rate of return.

2

PRICE CAP REGULATION

Setting explicit ceilings on prices charged on services in monopoly markets. The regulated price is adjusted periodically with Rate of Inflation (RoI) +/- X factor (representing efficiency of operator).

3

INTERNATIONAL BENCHMARKING

A method by which the prices are capped in accordance with the average of international interconnection prices.

4

GLOBAL PRICE CAPS

Allowing an incumbent to set low final prices in retail with high access charges, while meeting price-cap constraint.

For local loop interconnection incumbent's interconnection prices shall be based on international benchmarks where initial interconnection arrangement commencing from 1st January 2003, while LRIC based target benchmark for interconnection prices would come into effect from 2006.

PTA INTERCONNECTION GUIDELINES

Keeping in view of the issues related to unbundling of local loop, interconnection and access charges the regulator PTA has issued comprehensive guidelines elaborating point of interconnection (POI), unbundled charges, interconnection costs, and a interconnection grant procedure involving the concerned parties and the regulator for dispute settlement.

WTO AGREEMENT ON TELECOMMUNICATION

Pakistan has also acceded to the WTO Agreement on Telecommunication of General Agreement on Trade & Services (GATS) on trade liberalization of telecommunication services and equipment. Being the member of WTO Pakistan has to comply with the WTO basic principles of Most Favored Nation (MFN) and National Treatment in order to remove all trade related tariff and non-tariff barriers both in qualitative and quantitative terms. It also requires that there should be rational harmony between licensing procedures and investment regime; elimination of cross subsidization and all kinds of subsidies at large; protection to Intellectual property covering trademarks, copyrights, and industrial designs; standardization of telecommunication equipment; harmonization of custom rules and duties.

Under WTO Accord, at the moment Pakistan has opened its domestic and long distance market in telecommunication services in December 2002, under which a comprehensive telecommunication deregulation policy agenda is under development by the Government of Pakistan, as the cross border exclusivity is scheduled to finish by January 2004 of the incumbent.

Under the post-Doha agenda, Singapore issues have steered a significant debate which include competition, labor, and environment besides others. Not only Pakistan but in most of the countries the state of competition is mix which hinders the spirit of concept of competition itself. A large number of telecommunication services are not open for competition in Pakistan some of which are:

SR. NO.

TELECOMMUNICATION SERVICES

COMPETITION

. .

FIXED
(MONOPOLY)

MOBILE
(OLIGOPOLY)

1

Directory Services

Close to Competition

Close

2

Emergency Services

Open

Open

3

Numbering & Number Portability

Close to Competition

Close

4

Toll Free Numbers

Respective Operators/ Close for Competition

Close

5

Universal Access Numbering

Close to Competition

Close

6

Value Added Services

Open to Interconnection

Respective Operators/ Close to Competition(i.e. SMS, MMS etc.)

7

Prepaid Services

Competition
(Virtual Fixed Line Operators)

Close to Competition (Virtual Mobile Operators)/ Operated by respective operators

Source: Respective Fixed & Mobile Operators in Pakistan (Ufone, Mobilink, Instaphone, Paktel, PTCL)

Therefore, there is a serious job to be done by the regulator to open market access process through liberalization in telecommunication services which to a large extent remain antagonistic to competition.

Due to the convergence of broadcasting and telecommunication, the future challenges in telecommunication services become more complex due to the inventions and innovations, and of digitalization phenomenon of products and optical media providing a possibility to be traded internationally over telecommunication networks. Future of services related to Electronic Commerce and Electronic Government such as banking, advertising, medical treatment, consultancy, marketing, trade promotion and trade facilitation, and most importantly education indispensably telecommunication networks reliant.

TELECOMMUNICATION & DEVELOPMENT CHALLENGES

Under recent study by Accenture, and UNDP on Digital Opportunity Initiatives, telecommunication has been identified as business promoter as well as development enabler by studying various countries who have been able to successfully use telecommunication services for promoting Development Provide measures such as access to information, farms to markets reach, empowering women, poverty alleviation, gender sensitization, civic education, community development, local government, accountability of government, income generation, mass communication, and generating awareness on critical issues.

Internet connectivity is vital for content delivery in making telecommunication infrastructure dependent development models such as G2C (Government to Citizen), H2H (Home to Hospital), H2U (Home to University), F2M (Farms to Markets), C2C (Citizen to Court) etc.

Digital divide remains a momentous problem to be resolved to translate such X2X concepts into practical reality which is caused by various factors such as illiteracy, limited universal access, foreign language (like Internet is predominantly English), age, level of computer sensitization, gender, religion, culture, government control, and most importantly lack of competition.

Here, Universal Service Obligation (USO) remains an important telecommunication technique to promote universal access by bridging digital divide issues and expanding universal accessibility across the region and country. Therefore, the choice of developing an exhaustive and pragmatic USO framework is imperative for the telecommunication regulators in respective developing countries facing grave development challenges.

IT POLICY

The guiding theme for the Policy is that 'the Government shall be the facilitator and enabler to encourage the Private sector to drive the development in IT and Telecommunications'. This one single element has galvanized the entire Pakistani IT community to participate wholeheartedly in the process and over 200 professionals mainly from the private sector participated in various dialogues and eleven Working Groups meetings over the last four months to devise a comprehensive Policy and Action Plan document. The vision of the Policy is to harness the potential of Information Technology as a key contributor to development of Pakistan and the broad-based involvement of the key stakeholders is a must for its sustainable development. Core IT Policy strategies have been proposed under several focus areas and some of the lead recommendations in each area are as follows:

Human Resource Development
Infrastructure Development
Software Industry Development
Universal Internet Access
IT Sensitization and Promotion
IT Usage Promotion & Adoption
Legislation
Regulatory Framework

Key issues which have been problematic in the IT related field are:

Intellectual Property Issues
Standardization of IT Education
Adoption of IT by industry at large
IT Job market
Investment in IT projects

Significant steps have been undertaken for the promotion of Information Technology (IT) throughout the country both at private and public sectors. Under the WTO Agreement of Information Technology all the imports related to IT are exempted from import duties and taxes. Though standardization and piracy remain key issues they have played a key catalyst for promotion of IT in Pakistan due to the availability of cheaper software and hardware. The most important steps which have been taken for the promotion of IT is the promulgation of legal and policy framework which is sine-qua-non for projecting IT industry are:

KEY DEVELOPMENTS

AREA

YEAR OF ESTABLISHMENT

Pakistan Software Export Board (PSEB)

Software Export

1995

Pakistan Technology Park

IT Infrastructure

1997

Pakistan IT Commission

IT Promotion

1999

National Database and Registration Authority Ordinance

Database

2000

Patents Ordinance

Protection

2000

Pakistan Computer Emergency Response Team

IT Security Alert

2000

Ministry of Science & Technology

Government

2000

IT Ordinance

IT Policy

2001

Trade Marks Ordinance

Protection

2001

Technology Resource Mobilization Unit

IT Sector Mobilization

2001

Internet Over Cable TV Ordinance

Internet Promotion

2001

Electronic Transaction Ordinance

E-E-commerce

2002

Higher Education Commission Ordinance

IT Education

2002

Network Access Point (NAP)

Internet Access

2002

Electronic Government Ordinance

Government

2002

Ministry of IT and Telecom

Government

2003

Working Group for Network Security

Cyber Security

2003

INVESTMENT INCENTIVES IN TELECOMMUNICATION SECTOR

- Government of Pakistan has allowed now 100% foreign equity ownership, without any local partner, to freely work in Pakistan.
- Rules have also been changed to facilitate repatriation of capital and profits. More over 15 years a tax holiday has been announced for software export companies, with all facilities in Technology Parks in major cities of Pakistan.
- IT law is in place now to protect intellectual propriety rights. These laws also cover privacy, data protection and security.

UNIVERSAL SERVICE OBLIGATION & DIGITAL DIVIDE

Thought the market liberalization process offer much needed market forces for coverage of telecommunications services on commercial basis may populate in certain geographic areas and leave a percentage of population or geographic area. The universal service obligation (USO) policy is designed to ensure that these unserved populations receive adequate telecommunication access and services in a sustainable manner.

Prior to full competition in the telecommunication sector, the only contributors to universal services obligation would be PTCL and the mobile operators. The mobile operators' share of the universal service obligation should be funded by a uplift to the interconnection changes payable by them to PTCL.

UNIVERSAL SERVICE FUND

There are various ways to address the issue of universal access and universal service which vary from country to country as a part of license requirements, roll out requirements, or contribution from the revenues to be reinvested for expansion of telecommunication infrastructure and services to relatively less profitable areas of the population and geography. Competition encourages commercialization and focuses profitability where as the state objective is public welfare. In order to draw a balance between public welfare and profitability is to create a mechanism for promoting telecommunication services all around the country which definitely has serious financial costs and maintenance commitments.

To develop the main financing mechanism to promote universal service in Pakistan is the creation of Universal Service Fund (USF) which will be used to finance expansion of basic services both on an individual and a community basis. USF will be financed through USF Charge (based on a fixed percentage of net telecommunications services net of interconnection and other PTA approved inter-operator payments) to be collected from all telecommunication licensees and a matching contribution from the Government of Pakistan (GoP), funding from international and bilateral development agencies. The level of USF will be determined with reference to the international benchmarks in order to avoid the imposition of undue financial burdens on the telecommunications sector and telecommunication operators. USF will exclusively be used to finance new universal service projects by financing up to an operator's net cost of providing the defined service to facilitate and also by encouraging new investment in market-oriented, sustainable operations, whereas, the fund will be govern under Ministry of Information Technology and Telecommunication (MoITT).

DIGITAL DIVIDE STATUS IN PAKISTAN

Sr. No.

Indicator

Status

Digital Haves

Digital Have-nots

1

Total Population

141 Million

.

.

2

Per Capita Income

USD 429

.

.

3

Access Lines

3.7 Million

45%

55%

4

Access Penetration

2.5%

.

.

5

Desktop Computers

1 Million

50%

50%

6

PC Penetration

0.7%

.

.

7

Internet Users

2 Million

30%

70%

8

Internet Penetration

1.4%

.

.

9

Mobile Phones

1.5 Million

20%

80%

10

Mobile Penetration

1.1%

.

.

11

Cable TV Users

2 Million

20%

80%

12

Cable TV Penetration

1.1%

   

(Source: Own calculations with assumptions: 100%=Potential Market size. Every telephone serves atleast 10-50 people on average (including PCOs) ; every PCs and Internet are used by some 5-10 people (including Cyber-cafes, universities & schools, officers etc.); every mobile is used by some 1-5 people).

As 70% of the population is rural and the provision of telecommunication services is mostly to urban areas inferring that the urban-rural digital divide is quite wide. Likewise it is also based on gender, age, income, education, culture, and profession. In terms of Internet access only 1% on the population is online from the whole South Asia, which resides 20% of the world population making digital divide not only a national but a pan-south-Asian issue.

As the regulator has set the fixed telecommunications target to be 7 or 7.5% by 2006 with a population growth rate of 2.6% per annum there is a daunting task ahead to accelerate the telecommunication industry growth into double figures to bridge the widening gap of digital divide in the country. This requires a financial commitment of approximately USD $ 700 million in fixed line and USD $ 300 million to achieve the 15% sector growth rate in fixed and 45% growth rate in mobile, respectively.

CONVERGENCE: THE REGULATORY DILEMMA

In an age of ICT (Information, Communication, Technology) mean more than just telecommunications, computers, software applications and electronic equipment as technological revolution is converging industries, markets, and public services creating a new regulatory challenge. With the potential of electricity wires transmitting telecommunication services; television signals over telecommunications; and Internet over cable. With Internet over Cable Regulation 2001 and PTCL television transmission over telecommunication backbone is already a reality in Cable TV and fixed telecommunication market respectively. Electronic government, electronic commerce, electronic banking, virtual university, electronic procurement, mobile commerce, voice over IP, electronic directory services, electronic health services are some of the available services providing a universe of content over IP connection.

Killer applications and innovative ideas over IP have no mercy neither for market players nor for the regulators such as RealPlay, MediaRing, Net2Phone, CharlesSchawab. As Internet becomes more and more dominate it is providing more and more innovative solutions and involving more and more players and regulators across the economy besides media and telecommunications. These include Central Banks, Stock Exchange Commissions, Commodity Exchanges, Tax Authorities, Business and Trade bodies, Labour & Manpower bodies, and Higher Education Commissions etc. It seems that more and more content online from realms of government and industry making regulation in telecommunications and media harder.

This convergence paradox of electronic media over telecommunication, and telecommunication services over broadcasting channels are gradually creating a regulatory dilemma which the policy makers should be ready for. In Pakistan we have PTA (Pakistan Telecommunication Authority) and PEMRA (Pakistan Electronic Media Regulatory Authority) for telecommunication sector and media regulation. The market definition for telecommunications and media are quickly evaporating creating a regulatory dilemma for who to regulate what? How to regulate? How to define the market and related services? Is there are need for sector specific regulator? Should the media and telecommunication to be merged together? There are no easy answers. Regulators and SMP (significant market powers) are trying to resist the change using delaying tactics but the sheer pace of IT revolution is caring for none.

The debate of Information Society has already started in most of the developing counties which may take some time to reach the developing and the least developing countries. The maturity of IT-based solutions has taken the debate of regulation to another dimension altogether and that is General Competition Regulation beyond sector specific regulation for all sectors of the economy.

NEED FOR COOPERATE GOVERNANCE: FINANCIAL MELTDOWN & FRAUDS

All the four catalysts of change i.e., globalization, mobile communications, competition, and privatization demand a number of changes in telecommunication sector of Pakistan. The greatest challenge is for the regulator, Pakistan Telecommunications Authority (PTA) to develop a road ahead which can ensure level playing field for the competition, stable migration of mobile telecommunication into 3G services, universal access and universal service obligation (USO) framework, market accessibility, and most importantly consumer protection which remains the weakest area which liberalization process must ensure in terms of affordable pricing of telecommunication services. This remain a dilemma in 3G markets where the license-holders have paid billions of dollars to possess the license, which was followed by a bubble-bust in capital markets and telecommunication sector, in the form of mega defaults, liquidations, financial frauds, and liquidity crunch in financial flow of funds creating an imbroglio leading to a moratorium in sector growth worldwide.

The debacles of telecom giants like MCI, Lucent Technologies, and Worldcom issued a global warning of telecom frauds and failures across the world even effecting Pakistan as MCI has been a single most strategic partner routing US telecom traffic to PTCL.

Prudent corporate governance still remain one of the key issues for the telecommunication sector at global level. Therefore, as markets gradually become more competitive, there is an increasing number of telecom companies which opt for IPO (initial public offering) across the world in indigenous and international stock markets. The challenge becomes multifarious as there is a need to for a devout regulator in telecommunication, there is also need for dedicated cooperate governance framework through respective Security & Exchange Commissions (SECs) like that of Security & Exchange Commission of Pakistan (SECP) to ensure transparency and accountability mechanisms within the management of listed or publicly held telecom operators.

There remains a vital role of government to safeguard the public interest if due to some international or national catastrophe or financial crisis the significant market power faces default. An example would be of September 11, where US government injected billions of dollars of funds into airline industry which virtually collapsed and filed for chapter 1 to declare default. For example, in the telecom sector of Pakistan, market failure and financial default of Kismat prepaid calling card for example remain one of the burning issues where the company has floated prepaid calling cards worth millions of rupees among the masses, and today nobody is responsible to take the responsibility creating a worst kind of consumer catastrophe.

RISK MANAGEMENT & NETWORK SECURITY

Innovative financial and asset management measures are necessary for telecom operators in the increasing unpredictable world where strikes, riots, natural calamities, diseases, wars, hacking and political instability may hinder or effect the operators ability to run business by partially or fully paralyzing the operations.

Insurance remains a most effective way to manage uncertainty to a larger extent which covers most of the risks associated to assets or employees giving a financial cover at the time of immediate need. Besides, innovative financial ideas like securitization can also benefit the operator's ability to manage financial funds at cheaper rate hedging country and market risks. PTCL has been using securitization methodology for utilizing cheaper foreign loans on its secure account receivables, when the domestic financial market was offering loans with higher market up due to uncertain market conditions such as political instability of the government or due to cross border tensions.

The greatest nuisance has been created by hackers and network security loopholes creating a serious threat to business of a telecom operator. Denial of Service (DoS) attacks remain one of the most annoying network threat currently faced by the incumbent operator in Pakistan, i.e. PTCL. Recently, a number of government websites has not been accessible and the Internet traffic within the country is choked due to nasty overload of spamming of packets over local network. Though PTCL with the help of Ministry has established a Cyber Security Cell yet problem is still there by and large which has caused losses of millions of rupees to Internet Service Providers (ISPs) which have shifted the whole blame on to the telecom backbone and network operator, i.e., PTCL.

Keeping in view the gravity of network security problems created by various malicious softwares, DoS attacks, and network vulnerability there is a need for chalking out an elaborate intrusion detection mechanism using standard network reconnaissance by the regulator as a part of policy framework to grapple with the future challenges.

TELECOMMUNICATION POLICY: THE ROAD AHEAD

Ministry of Telecommunications and Information Technology, Government of Pakistan has to face cross roads ahead making tough choices between content and connection regulations, and sector-specific regulation vs general competition regulation if the spirit of liberalization is to eventually a competitive market in line with other sectors of the economy at the macro-strategy levels.

Cooperation with investment regulatory bodies and capital market development is another area to ensure that sector specific joint stock firms comply with all necessary corporate governance policies which ensure transparency within the management structure of operators abstaining from internal corruption and anti-competitive practices.

At telecommunication sector specific policy level a number of issues have to be addressed which are attracting investment and competition along with fulfilling universal service obligations (USO), privatizing the incumbent, human resource development, consumer interests, market research and market prices.

Most important is the issue of transparency and commitment of a regulatory body which the Ministry should ensure by law the regulator or regulatory process remains non-political and non-discriminatory. Therefore, there is a need the government regulator is by law functions independent of political set in the government leading to stable regulatory regime and enable regulator to act in the best interest of the consumers. In the past there has been some serious issues related to interconnection between mobile operators and between mobile operator and incumbent operator. It is expected of the regulator to expedite and react in time to resolve disputes which create unnecessary delays providing operators a window of opportunity to tax the pockets of consumers.

In future, telecommunication is destined to fulfill insatiable demand for Information Technology and related, such as, Electronic Commerce and Electronic Government. The telecommunication liberalization stage is just in the infancy in Pakistan in terms of competition in fixed line and local loop where privatization of the incumbent is expected concurrently with separating PTCL probably into two companies, one responsible for international traffic and the other for domestic traffic. At the moment there seems to be no potential competitive threat to the domestic market of PTCL and neither any foreign operators has shown interest to enter into the domestic telecommunication market. The threat to domestic telecommunication market is posed by contemporary converging technologies such as cable TV.

On migration process in mobile, the regulator seems to be quite and in dark with no clear policy on 3G mobile licensing regime, neither it has approached the general public for consultative opinion to calculate willingness to upgrade mobile telecommunication services to standards such as UMTS. Even the current mobile telecom market look quite imperfect and anti-competitive, with no interconnection between the mobile operators which is taxing the consumers in Pakistan to pay significantly high prices on one end, and on the other end, holding mobile penetration and growth a marginal levels to the extent that various countries which have started the liberalization process just recently has crossed the fixed line penetration levels in number of users in mobile. Due to the lag of competitive regulation or rules on competition, the mobile telecom market in an uneven playing field providing the SMP Mobilink to influence the market in uncompetitive manners or by limiting other operators to access its users even for trivial services like SMS.

In short, if we compare the regional market statistics of countries like India, China, Sri Lanka, and Bangladesh, or with African countries like Nigeria, Tanzania, Angola, South Africa Pakistan seems to have stayed behind in liberalization process in telecommunications.

Mr. Yousaf Haroon has been participated in an International Advance Telecommunication Policy training at Blekinge Institute of Technology, Sweden (9 March to 9 April 2003). He is currently working as Assistant Professor (Management) at National Post Graduate Institute of Telecommunication & Informatics (NPGIT&I) Islamabad. He specializes in telecom related issues to WTO, Competition, Regulation, Human Resource Development, Research and Analysis at international level.

You can reach him by email: prof_haroon@npgiti.edu.pk