Responsible expansion?

March 22, 2018

The recently proposed country-wide expansion of the Azad Jammu and Kashmir and Gilgit-Baltistan-based state-owned telecom operator, the Special Communication Organisation , is being much talked...

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The recently proposed country-wide expansion of the Azad Jammu and Kashmir (AJK) and Gilgit-Baltistan-based state-owned telecom operator, the Special Communication Organisation (SCO), is being much talked about in the telecom industry.

In my opinion, independent and efficient state-owned entities can act as an effective revenue source for a state whose fiscal deficit is ballooning. In such an environment, the proposed expansion of the SCO is a matter that needs to be prudently decided by the government.

Over the last couple of decades, technological innovations in the telecom industry across the globe compared to Pakistan’s low teledensity rates, high costs of telephony services, low absorption of the country’s workforce in the industry and lack of utilisation of the industry’s potential to attract FDI, among other factors, led to a gradual deregulation of the telecom industry and opened up avenues of investment for the private sector.

Moving towards deregulation, the Pakistan Telecom (Reorganisation) Act, 1996, passed by parliament in October 1996, formally laid the foundation structure and paved the way for a deregulated industry. The act established and defined mandates for government entities including the Pakistan Telecom Authority (PTA), Frequency Allocation Board, National Telecom Corporation and others. Over the years, the state’s narrative of ‘deregulation’ and ‘private-sector participation’ was reiterated through deregulation policies announced in 2003 and 2015. The privatisation of PTCL also took place during this period.

The Special Communication Organisation has been operational since 1976. As per the rights conferred on the SCO under Section 40 of the Pakistan Telecommunication (Reorganisation) Act 1996, the entity’s licence gives it the right to operate and provide telecom services within the northern areas and the AJK region. Last year, the SCO expressed its intention to expand its services across Pakistan, causing a stir in the telecom industry circles.

Contrary to the proposed expansion through public funds, the Ministry of IT believes that allowing the SCO to expand outside of the northern areas and the AJK region would potentially bring the state-owned entity into competition with PTCL. This can qualify as a breach of the shareholding agreement inked between the government of Pakistan and Etisalat in March 2006, for the sale of PTCL. The ministry further maintains that the SCO’s area of operations, as defined in the Telecom Act, 1996 and as mentioned in the Telecom Deregulation Policy, are the northern areas and the AJK region.

In the Ministry of Law and Justice’s opinion, defining the region as the SCO’s jurisdiction cannot be interpreted as a ban imposed on the organisation from providing services outside of the region — across Pakistan. Furthermore, in view of the law ministry, the shareholding agreement is in contravention with Section 3 of the Competition Act, 2010 wherein the Competition Commission itself finds the non-compete covenant void in terms of sub-section (3) of Section 4 of the Competition Act. However, the opinion rendered by the CCP is non-binding.

On the other hand, the office of the attorney general of Pakistan maintains that as far as the SCO operates within the confines of its mandate and establishes a regime that caters to the strategic and security concerns of the country, there is no impediment in awarding the SCO the licence to expand across Pakistan.

Having gone through the legalese and administrative palaver, it seems like a basic question has been ignored. Is the telecom industry ready for a new player?

Analysing the industry’s statistics shared by the PTA, Pakistan’s telecom industry registered 1 percent compounded annual growth (CAGR) in total revenues between 2012 and 2017, whereas the CAGR in the subscriber-base (customers) sector remained 2 percent during this period. Within revenues, cellular revenues, which make up for 73 percent of the industry’s revenue, saw a 3 percent CAGR increase, whereas the local loop, 18 percent of the industry’s revenue, and LDI, 8 percent of the industry’s revenue, witnessed negative growth rates of 2 and 13 percent respectively. It is worth mentioning that the Average Revenue per User (ARPU) of the Pakistan’s telecom industry is one of the lowest in the region.

In a nutshell, the statistics speak of a saturated industry. According to the current operating models of the telecos, an intense battle for market share in an energy-challenged environment has shrunk profit margins. Hence, the industry is characterised by cost-cutting orientation, outsourced operations, high employee turnover, job insecurity, late vendor payments and increased employee targets despite low benefits.

Even after deregulation, Pakistan significantly lags behind in global technological trends and advances in ICT and the telecom industry. According to the World Economic Forum’s Global Competitiveness Report 2017-2018, Pakistan ranks 111th out of the 137 economies in ‘technological readiness’. Therefore, we still need to achieve the desired deregulation objectives.

We need to realise that continuing with the deregulatory regime can keep the industry healthy only if it is carried out under an effective policy framework. Pakistan can improve its telecommunication industry or technological footprint in the region if the ‘internet of things’ and 5G services, to be provided in future, are rolled out by private-sector telecom operators with the backing of their parent groups. Moreover, the well-being of the telecom industry is cardinal to the China-Pakistan Economic Corridor as well.

When the National Telecom Corporation is already catering to the public-sector telecom needs, with an established infrastructure, introducing a state-owned market player in an already saturated industry will potentially hurt the industry further.

The pros and cons of the proposed expansion need to be critically analysed before moving forward with the plan. Besides, potential litigation could also hurt FDI and the future state of the industry. Perhaps, Pakistan’s 102nd ranking out of 137 in the ‘Business Impact of Rules On FDI’, according to the WEF Global Competitiveness Report 2017-2018, is also worth quoting.

Unless the proposed expansion meets the extraordinary strategic objectives of the government, allowing the SCO’s expansion through public funds does not seem to be a rational plan to many. A broader consultation of stakeholders under parliamentary oversight and a prudent and well-informed decision with regards to the SCO’s proposed expansion is the need of the hour, and the government needs to respond to it.

The writer is a chartered accountant.


Twitter: Shahzad_91

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