THE DEREGULATION OF TELECOMMUNICATION SECTOR
The policy is aimed at providing protection to the incumbent as well as creating profitable opportunities for the new entrants
By SHABBIR H. KAZMI
Oct 04 - 10, 2004
The deregulation of the telecommunication sector is the latest theme in the economic reform scene of Pakistan. The US$ 2.4 billion telecom market in Pakistan is likely to outperform the GDP growth in the medium-term with the market size going up to US$ 4.4 billion by 2010. Though the deregulation policy is providing protection to the incumbent, it is also creating profitable opportunities for the private sector. Cellular market is likely to be the engine for the sector. The Pakistan Telecommunication Company is expected to gain the most through Inter-connectivity arrangements and its 100% owned subsidiary, U-fone. The new players are also likely to be focusing on bundle services.
The country is a huge market in its own right and by any standard possesses enormous potential. Prospects of telecommunication growth and development are bright in Pakistan. The Government of Pakistan is deeply committed to the ideas of deregulation and liberalization and to promoting Pakistan as an investor-friendly country. To this end, the government has enacted investment and telecommunication policies that present a progressive vision and offer attractive incentives to potential investors.
With a penetration rate of about 2.7%, we believe that the level of teledensity in Pakistan is significantly lower than the regional level as well as other developing countries' average of about 8-10%. This ensures that there is still huge room for growth in this sector. According to our estimates, by 2010 fixed line penetration is likely to improve to 5.5% which may require an investment of about US$ 1.3 billion. Most of the growth is likely to flow from rural areas where the teledensity is much lower than in the urban areas.
With a timely end to PTCL monopoly and issuance of two more licenses in the cellular segment, the Pakistani telecom sector has opened its gates for fresh investment. The story is very simple. Pakistan's telecom sector, at a primitive stage in terms of teledensity, is now entering into the new era with a shift towards a deregulated and competitive structure from a regulated state-owned fixed line monopoly. By allowing two more operators in the cellular market the government is unlocking the untapped growth in this sector. In fixed line telephony wireless is likely to be the preferred technology to enter with, as it is less capital intensive and require lesser start up time as compared to optic fiber.
We expect about US$ 1.33 billion investment in fixed line telephony over 2004-10 whereas about US$ 700-720 million will be invested in the Wireless Local Loop (WLL). On the cellular side, total investment of approximately US$ 1.6 billion over the next five years is envisaged. Cellular users in Pakistan are expected to outnumber the fixed line users in the next few months. Further boost to growth is likely to come on account of expected reduction in mobile connection charges and more than 20% decline in calling rates.
The main threat to the fixed line operators is the mobile telephony and not other technologies like VoIP and broadband in the country. Mobile call pricing is likely to come down aggressively with the entrance of two new operators, which is likely to boost cellular penetration within the country. However, due to the overall lower teledensity analysts do not expect mobile to cannibalize the fixed line telephony as was witnessed in other countries after the deregulation of the sector. Other offerings, such as VoIP, Cable and broad band, are in their infancy, but may become more potent threats in later years.
Progress in deregulation is the key to unlocking value in the telecom sector and protecting returns. The main obstacle to investment, even in the recent past, has been the regulated environment. Therefore, the first attempt should be to examine, how the current regulatory environment is set to change. Tariff reform, the introduction of a transparent interconnect regime and the implementation of the policy seems to be the key issues.
Some important steps have been taken, particularly with regard to adopting market-oriented tariff and interconnect setting procedure, but analysts still notice opposition to widespread reform and limited appetite for widening the regulatory net to include the alternative operators. However, it is believed once reform is on track and a transparent regulatory process is in order, the market will be quick to discount the full potential of the fixed-line sector as well as of the cellular market. Saying this, analysts are of the view that the recently passed telecom laws may act as a catalyst for the regulator.
No one can deny that efficient and effective regulation is part and parcel of any liberalization process. Countries that have established separate regulatory authorities prior to privatization have seen relatively higher telecom investment, and fixed and mobile telephone penetration than those that have not. Furthermore, the nature of the telecommunication industry is such that for the foreseeable future it requires the presence of not only vigilant but proactive and forward looking regulatory agencies. This need is particularly urgent in most of the developing countries, which are in the process of transition to market economics, and have problems from market imperfection, asymmetric information and institutional immaturity. It is therefore vital for all nations to be cognizant of the need for progressive and proactive regulatory regimes.
Mindful of these global trends and a dire need of the time, a professional organization by the name of Pakistan Telecommunication Authority (PTA) was established in January 1996 under the Pakistan Telecommunication (Re-organization) Act 1996. The creation of PTA is evidence of the government's explicit commitment to separate policy making, regulation and service provision so as to ensure efficiency and transparency within the telecommunication sector. PTA's three primary objectives are to protect consumer interest, promote investment and ensure competition within the telecommunication market in the country.
The PTA as an independent and impartial telecommunication regulator has been bestowed the responsibility of protecting consumer interests, promoting investment and ensuring competition. With these guiding principles, the Authority is striving to create an enabling environment that holds promise both for the consumer and the investor. PTA being fully alive to the genuine concerns of potential investors has streamlined its regulations to make them simple, convenient and investor-friendly. Given these efforts, Pakistan is poised to embrace the global telecommunication revolution and reach new heights in the future. PTA has issued a large number of licenses out of which significantly large number of companies has already become operational. PTA started open license policy under which licenses are to be issued within 7 days. The PTA also issues licenses for other value-added services including audiotex, data communication network services, non-voice communication network services, special services, digital radio paging, trunk radio, vehicle tracking system, burglar alarm system, voice paging, voice mail, store and forward fax services, satellite, decoder/descrambler, GMPCS, inmarsat, possession dealership, VHF/UHF, amateur, inmarsat for expedition and satellite news gathering.
*Facilitating universal access to telephone and other modern telecommunication services
*Liberalizing the environment for investment in telecommunication equipment and services
*Leveling the playing field for all, especially incoming and small sized operators, with the ultimate objective of unbundling of services
*Regulating to protect interests of end users
*Pursuing an open licensing policy
*Ensuring transparency and non-discrimination in licensing
*Fixing cost-based tariffs-capped as opposed to rate of return
*Promoting the use of Internet
*Creating a backbone for reliable connectivity
*Developing indigenous knowhow and industry
*Maximizing the impact of telecommunications in social and economic development
*Creating an informed community by providing regular information on matters related to the telecommunications industry.
Consumer protection is one of PTA's main objectives and a responsibility that PTA is fully aware of. Protecting and promoting the interests of consumers is a guiding principle and a fundamental consideration for PTA in all of its regulations, determinations and adjudications. PTA believes in consumer awareness as a key to successful consumer protection. To this end, PTA has channelized its material and human resources, to disseminate information and host numerous interactive and participative forums. Consultation with end users is an essential part of PTA's decision-making process. To institutionalize this, PTA has devised a system of advisory committees that include key stakeholders and/or their representatives.
Public hearings and web hosting are also important means of creating awareness within members of the general public. The determination on PTCL's tariff proposal serves as a good example of PTA's consultative exercise at work. The proposal was put before the Central Advisory Committee and also given a public hearing. The exercise facilitated PTA not only in arriving at a fair and more informed decision but also created a sense of empowerment and participation in the stakeholders. Consultation with consumers has also played an important part in decisions regarding CPP for the mobile sector and tariff rate for cable TV.
A significant milestone in Pakistan's mobile sector has been the implementation of the Calling Party Pays (CPP) tariff regime from November 2000. This has not only fulfilled a long-standing demand of the mobile operators but has boosted mobile telephony tremendously within the country. Earlier tariff for mobiles was based on the Mobile Party Pays (MPP) regime which was an impediment to mobile growth and usage. Pakistan's mobile industry holds great promise in the future. The advent of new technologies, rigorous and innovative marketing, efficiency and cost savings can lead to very rapid and consistent growth in this sector as has been evident following the launch of U-Phone.
PTA has also initiated a public information disclosure programme through which key indicators for different telecommunication service providers are periodically determined and announced through the print and electronic media. Recently, this exercise was done for ISPs and the results were published in leading newspapers and posted on the PTA website. A major customer feedback survey was also recently outsourced to a market research consultancy for basic telephony, mobile, ISPs and cable TV. The efforts are expected not only to create awareness in the general public but will also promote healthy competition in the telecommunication market.
Complaint handling is an inevitable part of any regulators job. PTA has institutionalized complaint-handling procedures on the principles of fairness and efficiency both in time and effort. A dedicated complaint cell handles all incoming complaints and refers them to relevant departments for further action. All parties are given the opportunity to put forth their arguments and a decision is then taken accordingly. A timeframe is allocated for each step so that remedial action is taken timely and transparently.
Promoting healthy competition among the market players by far remains PTA's primary area of concern. PTA has repeatedly expressed its firm commitment to the prevention of abuse of market power. It also aimed at not allowing any player within the telecommunication market to distort conditions for smooth entry and operation. Mindful of the fact that an emerging telecommunication market such as Pakistan has to undergo the transition from monopoly to competition, PTA is fully aware and alert to the genuine concerns of potential entrants.
Presently, the incumbent PTCL overwhelmingly dominates the telecommunication market in Pakistan. This obviously means that like any dominant incumbent operator, it does and will possess certain 'incumbency advantages' over other operators. Amongst others these include control of essential facilities, economies of scale and scope, vertical economies and control over network standards and development. Monopoly has allowed it not only to cross subsidize but also bundle its services in a manner that goes against the spirit of competition. These plus a general inertia in customers to leave their existing service provider can create not only barriers to entry for new firms; it can also give the incumbent a significant edge in the market.
In order to check such monopolistic tendencies, regulatory authorities have access to a host of tools and measures. These include the powers to issue enforceable orders, revoke licenses, fine, order compensation and in extreme cases restructure or divest the dominant entity. PTA retains all these options in its regulatory toolkit and is prepared to use its powers as and when necessary.
Regarding cross-subsidization, PTA has already issued a directive to bring an end to this practice within a certain time frame. The incumbent PTCL has further been instructed to unbundl its services and initiate a system of separate cost and revenues accounting. This is currently under process and is expected to complete prior to the introduction of competition.
The PTA auctioned two new GSM licenses in April this year for US$ 291 million each. The licenses are for 15 years and are renewable after the period without any further payment. The license money was payable in two stages: 50% at the beginning with the remaining amount being payable in equal installments over the next ten years. The license price has another significance. All the existing companies have to pay the same price at the time of renewal of their licenses as they did not pay any such fee when they got their respective GSM licenses.
The US$ 582 million raised through the auction of the two cell licenses was above the market expectations.
Market expectation was a price of about one US dollar per capita whereas the successful bidders paid about US$ 2.01 per capita. From a regional and global perspective, the price paid may not look out of scope as most emerging countries have seen prices as high as US$ 3-4 per capita. However, in the local market perspective, this price looks on the higher side. The other point of view is that bidders chose to pay a premium mainly due to the enormous potential and their ability to beat the competition. The two successful bidders were Telenor and Space Telecom. However, later on Space failed in submitting the required payment and the third highest bidder, Warid, was asked to match the price.
According to a report from KASB Securities, the last two years have been very exceptional for the cellular market. Since the introduction of the CPP regime, the local cellular market expanded from three hundred and fifty thousand to over 4 million subscribers by the time this auction was held. This exceptional growth is the largest contributor towards the high price realized for the two licenses. The other factor was said to be Pakistan's improving economy and increasing visibility in international politics has also lowered the traditional risks attached with the Pakistani market. The interest from leading foreign operators was a direct result of improved perception about Pakistan. The third factor was said to be the last chance to enter into the Pakistani cellular market. It is believed that the PTA has no plans to issue more licenses in the medium term.
The only threat to the mobile market is the progress being made in the WLL segment, which allows local loop operators to offer limited mobility within their respective areas. However, some analysts are not hopeful about any significant growth in the capacity build ups within this segment owing to two factors: (1) the WLL startup costs are relatively higher than the fixed line and cellular networks, and (2) the companies owing these businesses are not very aggressive.
The Pakistani market has three basic areas that a new operator can exploit: 1) the catch up with the potential cell density level (about 10%), which requires targeting of new clients along with the existing players, 2) they can target the high end of the existing cell operator's clientele, which is not satisfied with the service quality of the existing players and would be keen making a switch over, 3) the new entrants can also compete with PTCL if they decide to lower the tariffs to PTCL's level. For new entrants, the opportunity lies more in improving service quality along with targeting high revenue subscribers from inefficient players. A nearly US$ 500 million worth of investment can only be recovered through a huge subscriber base and by targeting high end of customers. Moreover, the new players need to position themselves against PTCL as unless they offer better services than those of PTCL, they cannot gain out of the existing subscriber base of the operators. Competing on line rentals is always easy. However, tariffs can make a difference.