AN OVERVIEW OF TELECOMMUNICATION SECTOR IN PAKISTAN

SHAHZEB KHANZADA
July 16 - 22, 2007

Telecommunication is one of the fastest growing sectors in Pakistan and is also the leading sector in attracting foreign direct investment. Five years back, no one could predict that Pakistan's telecommunication sector with one of the lowest teledensity in the region will see the mammoth growth that it has actually witnessed. Deregulation of telecom sector coupled with Government's investment friendly policies have brought fruitful results. Government declared telecom sector as an industry in 2004 and allowed foreign investment with no minimum requirement of foreign equity to start the business, later Government also decided that there will be no restriction on foreign investors to repatriate the profits and hence they were allowed to expatriate 100% of their profit, these policies and growth prospects in Pakistani market boosted the confidence of foreign investors and resulted in huge foreign investment inflows in the country. In 2001, total investment in Asia Pacific was $80bn and it was 40% of world's total investment and Pakistan's was unable to attract reasonable share of FDI in that number , but today Pakistan's population of more than 160mn people is an attractive destination for FDI in telecommunication. .

It becomes more evident after a glance at table 1. Despite tremendous growth in gross domestic product of the country, the FDI to GDP ratio has not only maintained but has also increased due to exponential growth in inflows. Due to higher FDI in financial sector, the overall base was higher and therefore the contribution of communication sector declined from 55% to 34% of the total FDI. However, due to lesser privatization proceeds and completion of initial investments by cellular companies FDI in telecom was lower even in absolute numbers.

TELE-DENSITY

Increase in fixed line teledensity was very subdued and was not inline with other Asian countries. It was 3.25mn in 2001 and stood at 5.274mn or 3.82% in 2006. The reason can be attributed to the monopoly of PTCL in fixed line segment, due to absence of competitors PTCL did not penetrate aggressively in the fixed line segment. No significant improvement has taken place even after the privatization of PTCL; its revenues have been declining due to stagnant number of fixed lines and decreasing tariffs because cellular companies are offering much lower rates in different segments and hence forcing PTCL to decrease its tariffs. However it was recently announced by Etisalat that it will invest $500mn in PTCL to widen PTCL fixed line network, it will add around 1mn telephone lines in the system.

In the absence of fixed lines the WLL segment has seen phenomenal growth in last two years. The number of subscribers in this segment increased to 649,685 in 2006 from just 267000 in 2005. It is believed that PTCL can take full advantage of its gigantic network across the country and hence can aggressively penetrate in WLL segment in rural areas, as it is likely to face stiff competition in urban areas by other WLL operators.

Pakistan lagged behind in cellular penetration as compared to other Asian countries, by 2002, the number of mobile subscribers had overtaken fixed line subscribers even in the countries like Bangladesh, Sri Lanka and Maldives, but growth was not very impressive in Pakistan, However in 2004, mobile phone subscribers in Pakistan surpassed those of Fixed line, and their number increased to 5.02mn v/s 4.4mn fixed line subscribers, as compared to .74mn v/s 3.25mn fixed line subscribers in 2001. Afterwards, exponential growth started in cellular segment and they totaled to 48mn v/s 5.274mn fixed line subscribers in 2006. Currently this number has been increasing at the rate of about 1.8mn new customers per month for the cellular companies.

GIANTS LOOKING EAST

In developed countries the cellular penetration is at maximum and there are no growth prospects, therefore Most of the international cellular companies are now focusing on developing countries. Recently British Vodafone, the world's largest mobile phone group by revenue, has acquired 67% stake in Hutchison Essar, India's 4th largest mobile operator, with its Bid of $19bn and it is considered to be the largest corporate deal in Indian market. In Pakistan the multinational companies have shown their keen interest and their experience is evident by successful operations of Egypt based Mobilink, Norway based Telenor and UAE based Warid, Furthermore these companies are reinvesting their profits as they foresee more growth in the sector. Mobile companies have announced to invest $2.4bn in telecom infrastructure.

Pakistan's cellular segment is in the second phase now, as the companies that earmarked their success in the industry are being taken over by the global telecom giants. Chinese giant, China mobile entered in Pakistan cellular industry by acquiring Paktel for $284mn. Egypt's Orascom telecom recently purchased the remaining 11.3 percent stake in Pakistani mobile operator Mobilink for $290 million thus valuing the company at USD 2.57bn. As a result, Orascom telecom holds indirectly 100 percent stake of the share capital of Mobilink. Another deal that has been reported to be in the advanced stages is Singtel's interest in buying 30% stake in Warid telecom that will value the company at USD1bn.

According to telecom analyst, an important and interesting criterion for valuing cellular companies is USD/subscriber. Orascom paid USD101/subscriber for buying 11.3% stake in mobilink based on 25.2mn subscribers in April 2007. Singtel for 30 % stake in 9.7mn subscribers is likely to pay USD103/subscriber for Warid telecom, However China mobile paid UAD269/subscriber for 1.06mn subscribers of Paktel which was on a higher premium. Analysts believe that the reason for this high premium was management control, which in both the above mentioned cases was not present. In India Vodafone's purchase of Hutchiston Essa was at a price USD807/subscriber for a management stake in the company. The reason for this can be attributed to low teledensity of India as compared to Pakistan which provides more room for the growth of telecom sector.

COMPETITION AND LOWER RATES

The competition between these giants has been very fruitful for the consumers, and they are reaping the benefits of lower tariffs, on the other hand, due to increasing number of subscribers the cellular companies have been able to achieve economies of scale and hence increased profitability even with lower tariffs. This situation is likely to improve further with entrance of china mobile. It will fragment the industry in terms of market share and hence increased competition will result in lower tariffs. In India, tough competition has resulted in better services to the consumers with low tariffs, as largest operator Bharti Airtel has 22% market share while according to PTA Pakistan's Mobilink has more than 50% market share.

The small and medium investors of Pakistan could not participate in the growth of telecom sector and hence could not be benefited with the boom in this industry. The reason is lack of interest by these companies to raise capital from local market. In 90's the cellular companies in Malaysia, Singapore and Taiwan listed themselves on the local stock markets in order to raise capital. In India almost all the big telecom companies are listed. But in Pakistan two cellular companies have indirect representation in the stock market through their parent and associated companies like Ufone is owned by PTCL (100%) and Warid Telecom by Bank Alfalah (18%).

Pakistan plans to have 90% teledensity by 2015, as compared to the current 39%, and it would be about 185mn as expected population is 206mn by 2015. This demonstrates tremendous growth potential in all the three categories i.e. fixed line, wireless and cellular. It is being proactively considered to migrate from seven digits to eight digits number for both cellular and fixed line services so that future demand can be accommodated. Efforts are being made to utilize the mobile services for diversified purposes such as transfer of money from Pakistanis working abroad. Consumers are being benefited more after the implementation of mobile number portability (MNP), as it allows consumers to move from one operator to another, without changing the number with the same SIM. Consumer will enjoy this competitive growth in form of lower charges and diversified services that will be offered by cellular companies in different packages.

FOREIGN DIRECT INVESTMENT IN TELECOM SECTOR

(US $ million)

YEARS

TOTAL FDI

FDI IN TELECOM SECTOR

CONTRIBUTION IN TOTAL FDI (%)

%AGE OF GDP

2001-02

484.7

6.1

1.26

1.6

2002-03

798

13.5

1.69

1.6

2003-04

979.9

207.1

21.13

1.7

2004-05

1524

494.4

32.44

1.7

2005-06

3521.0

1905.1

54.11

1.9

2006-07(MAY)

4520.8

1554.2

34.37

1.2