PAKISTAN ATTRACTING FDI IN TELECOM SECTOR

CONSUMERS BENEFITING FROM INVESTMENT

SHABBIR H. KAZMI
Mar 03 - 09, 2008

Telecommunication plays an important role in economic development of any country. Pakistan is spread over thousands of square kilometers and reliable connectivity was missing. An efficient, strong and reliable back bone was also needed to integrate Pakistan with the global players. In the recent past liberalization, deregulation and privatization of the telecom sector has increased teledensity manifold and attracted substantial foreign direct investment but more importantly ushered in the new era of affordability. A landline connection or cellular phone is no longer a status symbol. The growth of telecom industry is having multiplier effect on the economy.

Telecom sector has received an investment of over US$ 8 billion during last four years and the fastest growth has been witnessed in the cellular telephony. The share of investment in cellular technology has been around 73% of total investment in the telecommunication sector. Cellular sector has received US$ 2.7 billion investment during 2006-07, which is about 66% of total investment of the sector. LDI operators have invested about US$ 603 million in 2006-07 which is about 15% of the total investment in the sector. The trend is expected to continue over the next 5 years because of increasing penetration in telecom sector.

Over the years telecom sector has emerged as the largest recipient of foreign direct investment (FDI) in Pakistan. Enormous opportunities and hardly any competition due to huge latent demand have attracted globally recognized players into Pakistan. During 2005-06, the telecom sector received a record FDI of US$1.9 billion, which was 54% of the total FDI. During 2006-07 sectors received US$1.8 billion FDI which was about 35% of total FDI.

FDI SHARE % BY MAJOR SECTOR

 

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

Textiles

3.8

3.3

3.7

2.6

1.3

1.2

Oil & Gas Explorations

55.3

23.4

21.3

12.7

8.9

10.6

Power

7.5

4.1

1.5

4.8

9.1

3.8

Telecom

1.2

1.7

21.8

32.4

54.1

35.6

I.T Services

0.5

0.5

0.6

0.6

0.7

1.2

Financial Business

0.7

26

25.5

17.7

9.3

18.2

Source: PTA

Telecom sector attracted 17% more than financial sector, which was due to keen interest of foreign players taking over operations of the local banks and it was 25% more than oil & gas sector in 2006-07. Therefore, it will be right to say that the telecom sector outperformed almost all the other sector in the country.

Over the last few years telecom sector of Pakistan has witnessed unprecedented growth. The liberal investment policies of the government, supported by deregulation and privatization have also led to acquisitions. During last financial year acquisitions worth about US $2 billion were made in the sector.

ACQUIRING COMPANY

ACQUIRED COMPANY

SHARE ACQUIRED

TOTAL AMOUNT PAID (US $)

Singtel

Warid

30%

758

China Mobile

Paktel

100%

477

Orascom

Mobilink

11.31%

290

Qtel

Buraq

75%

12.3

Source: PTA annual report 2007

There seems to be a paradigm shift because with the entry of large global players smaller local operators are finding it difficult to beat the competition.

Because of high competition and low profit margin some of the smaller players have been forced to decide offering their shares to other larger players who can make additional but heavy investment to introduce new innovative products. Orascom of Egypt already having majority stake has purchased additional 11.31% share of Mobilink from the local partner at a cost US$ 290 million.

China mobile, one of the largest cellular operator has acquired 100% share of Paktel from Millicom for US $477 million. Warid Telecom has sold about 30% of its share to Singtel. There are also some local acquisitions where leading companies have taken over small companies. Mobilink has purchased Zarco which has WLL license for Faisalabad and Lahore region. Similarly WOL was also purchased by the subsidiary of Mobilink.

Pakistanís performance has been quite outstanding compared to the regional market. The teledensity of Pakistan has grown to 46.9% in 2006-07 as compared to 4.3% in 2002-03, showing a remarkable increase over the last four years. In the region Pakistan is followed by Sri Lanka registering impressive growth of 37% in 2006-07 as compared to 12.2% in 2002-03, an increase of 24.8% over four years. India has 7.1% teledensity in 2002-03, which increased by 10% in four 4years to 17.1% in 2006-07. The Bangladesh had tele density of 1.6% in 2002-03, which grew to 15% in 2006-07.

Pakistan attained teledensity of 46.9% in 2006-07 mainly due to the remarkable performance of cellular segment. As against this fixed line teledensity has slightly declined from 3.4% in 2005-06 to 3.3% in 2006-07. The key reason behind this decline is the gradual switch over of subscriber from fixed lines to cellular telephony. The factors remarkable for the increase in cellular subscribers' growth are reduction in tariff rates and convenience, made possible by government's deregulation and liberalization policy.

The number of mobile subscriber was about 5 million in 2004, which went upto 63 million in 2007 and expect to grow to 100 million by 2010. There are a number of mobile operators but Mobilink continues to enjoy the highest market share, it is followed by Ufone. Telenor and Warid are working hard to snatch share from other operators.

Average revenue per user is dropping because of decreasing tariff rates and increasing competition. Due to decrease in average revenue per unit the profitability is also declining. The average revenue per user was $ 9.0 (per month) in 2003-04 which has declined to $ 3.2 (per month) in 2006-07. Telenor leads the market with highest ARPU of US$ 4 followed by Mobilink of US$ 3.8 and Warid US$ 3.4. Ufone's ARPU for 2007 was US$ 2.8 which decreased the overall ARPU.

Currently, Pakistan has a population of over 160 Million and if we exclude approximately 20% formed by children and extremely poor people then teledensity works out to more than 60%. Telecom sector is growing at an enormous pace where all players are benefiting. The sector is contributing about 2% to GDP directly and the sector is expected to continue to attract large foreign investment.