LAHORE: The year 2015 was bad for the telecom industry of Pakistan as no new foreign direct investment (FDI) came in, all the cellular operators were struggling to increase their average revenue per user (ARPU) to become more competitive and coverage of 3G/4G services was to be expanded, but long-awaited merger was announced in the outgoing year.
Similarly, long-awaited telecom policy was also announced by the Pakistan Telecommunication Authority (PTA) at the end of the year, while Mobilink-Warid merger started the consolidation process in the industry.
It was expected and after the successful merger a new merger is on the scene.
The PTA failed to announce the auction of the remaining available 4G spectrum. None of the existing operators may show interest in it even in the next year.
The finance ministry twice asked the PTA to do auction in order to create budgetary support of around Rs65 billion for the federal government.
The PTA allowed the mergers and acquisitions (along with allocated 100 percent frequency spectrum) even by the two existing operators, provided they have met all the licence obligations, including payment and rollout requirements.
According to the telecom policy, whether a merger or acquisition should be allowed to proceed is a competition matter, which is outside the jurisdiction of spectrum management, and legitimate mergers should not be impeded by an inability to transfer spectrum licences. Therefore, except where there are overriding technical reasons, or reasons arising out of the national interest, the spectrum rights and obligations of licences will be transferable to the merged or acquiring organisation.
PTA and Pakistan Electronic Media Regulatory Authority are required to intimate the Frequency Allocation Board (FAB) of any merger/acquisition.
Interestingly, the telecom policy was announced soon after the Mobilink-Warid merger news.
Market sources said both the companies had to get clearance from regulators, like Securities and Exchange Commission of Pakistan, Competition Commission of Pakistan (CCP) and others.
Zong and Ufone are expected to go for consolidation to remain competitive.
After the announcement of the merger, the total subscriber base of the Mobilink-Warid would reach 45 million. Telenor is second with 33 million, Zong 23 million and Ufone 19 million. ARPU of the telecom industry is Rs205.
The merger in the telecom industry was expected for the last five years. Warid had conducted due diligence with a number of local and international players for that.
Industry experts believed that the telecom sector in Pakistan is not too big for five operators; hence mergers in the industry were needed. More consolidations are expected within the next couple of years.
During 2015, good growth in the 3G subscriber base was recorded. Already two million subscribers have started using it, while 4G services subscribers stood at only 400,000. The main hindrance in adoption of 4G service is high cost of 4G-enabled handsets, while Zong, the only company, which acquired the licence of 4G was unable to get the added advantage of the licence.
Customers’ complaints regarding the cellular services increased as all the telecom operators were working on network improvement and integration project after the launch of 3G/4G.
The industry is expanding the network and expecting growth in data subscribers and services.
Impact of Biometric: Total number of mobile subscribers stood at 140 million when the telecom industry started biometric verification of the (subscriber identity module) SIM cards at the end of 2014 on the instructions of the federal government to curb the misuse of mobile phones in terrorism and other crimes.
The PTA data showed that the total mobile subscribers were 120 million by October 2015 after the completion of biometric verification process.
Telecom operators had to invest tremendous effort and resources in this nationwide activity owing to the security situation in the country in the beginning of 2015. However, this activity and investment of telecos seemed to be futile as a tragic incident of the Army Public School took place in which biometric verified SIMs were reported to be used by the attackers.
Fraudulent activities to deceive innocent public in the name of Benazir Income Support Programme stipend, along with many other text message frauds also continued. The authorities are still unable to check this. Interestingly, no such verification was ever done in any part of the world, even in Afghanistan, which has been in a state of war for over a decade and Saudi Arabia where millions of pilgrims visit every year.
Tax issues kept haunting the industry players. The government turned a deaf ear to their demands. The example was an imposition of 19.5 percent general sales tax on data services by the Punjab government. The Punjab government, however, withdrew the tax after six months of its imposition.
None of the operators had deducted this tax from their users in the six-month period (June-November 2015) to promote data usage in Pakistan.
Currently, taxes, applicable on telecom consumers, include sales tax on mobile phone (Rs150-500), international mobile equipment identity tax (Rs150-500), SIM issuance tax (Rs250), SIM activation tax (Rs250), federal excise duty/sales tax on calls and SMS (18.5 percent and 19.5 percent), advance tax (14 percent) and federal excise duty on branchless banking transfer (16 percent).
Overall, these taxes and levies are at least 40 percent, which is one of the highest tax rates in the world.
Among many other taxes, sales tax of 19.5 percent on telecommunication and data services is levied in Khyber Pakhtunkhwa and 18.5 percent in Sindh, which is impeding growth of much required broadband proliferation.
The industry has been so far unable to create local content for the data proliferation, while the data subscribers are mainly using data for emails, global social networking websites and chats.
The rapid data growth is possible only when the local language content will be created by the stakeholders in Pakistan or literacy rate is increased.
India is a successful example of data proliferation through local content development. The telecom industry is not in a mood for further investments due to declining ARPU, increasing taxes and slow growth of data.
A State Bank of Pakistan’s report said telecom companies are not reinvesting much and repatriating most of their earnings.
It is important to recall that the telecom sector had the second largest share in FDI in Pakistan after the financial sector.
Its contribution in profit repatriations has generally remained much less than other sectors, as stiff competition and heavy taxation never allowed firms to raise their profit margins. Revenues of the telecommunication companies are constantly declining.
The government policymakers need to revisit their priorities and create cushion for the once highest FDI attracting industry and one of the largest tax contributing sectors. Otherwise, it will be too late to decide and take measures.
Energy crisis still flickers bright
By Javed Mirza
KARACHI: Energy shortages have emerged as by far the biggest constraint on Pakistan’s economic growth. The country’s GDP growth averaged only 3.6 percent per annum during the last five years as primary energy supply growth diminished to 1.3 percent per annum while both had averaged 4.6 percent during the preceding 20 years.
With supply of electricity and natural gas trailing demand since 2007, Petroleum Institute of Pakistan (PIP) suggests the primary energy deficit has snowballed to an estimated 7.6 MMTOE in 2014. As against an estimated demand of 74.4 MMTOE, total primary energy supply amounted to 66.8 MMTOE in 2014.
The emerging trends in Pakistan’s oil and gas sector are less than encouraging on the whole. While domestic oil and condensate production have risen sharply in recent years, the trajectory of natural gas volumes, which are still more than six times bigger than oil, is not upbeat.
According to official numbers, the country’s gas production peaked at 4.3 BCFD in 2012 and has since been in a slow decline. The current production levels of around 4.0 BCFD are projected to marginally increase to 4.2 BCFD in 2016 where after they decline faster, falling to 2.4 BCFD by 2024.
Domestic crude oil/condensate production is projected to peak at around 100 MBPD in 2016 but would thereafter follow a trend similar to natural gas.
The general industry view is that Pakistan’s existing known players are attaining maturity in terms of conventional resources, and future endeavours need to be towards unconventional resources.
Pakistan Petroleum Limited (PPL) and ENI, in a joint venture, carried out a detailed study on shale gas potential of Pakistan and identified potential shale intervals in lower and middle Indus basins.
Lower Indus basin has been identified as the most prospective area for shale gas exploration owing to accessibility of information, favourable geological conditions, and availability of established T&D network.
However, absence of adequate policy incentives is a stumbling block in the development of shale and tight gas resources.
The downstream oil industry is the most neglected link in the energy chain in Pakistan. Over the last decade, the operating environment for Pakistan’s downstream oil sector has grown increasingly challenging which has stymied investment in the sector.
Regulatory uncertainties with respect to pricing and margins, excessive taxation, and circular debt have been the major problems afflicting downstream oil industry.
Absence of any new policy for the downstream sector since the petroleum policy 1997 reflects the neglect of the sector at government level. Lack of fresh investment in oil storage and pipeline transportation network and congestion at KPT have increased the risk of supply shortages amid rising demand for transport fuels in the country.
The gas distribution sector remains burdened by stubbornly high UFG levels which clocked in at 270 MMCFD in 2014.
Despite stagnant gas sales volumes since 2006, the gas transmission and distribution network of the two gas distribution companies has nearly doubled over the past eight years, which is one of the contributors to the increase in UFG.
According to the World Bank, the main reasons behind high UFG levels in Pakistan are obsolete infrastructure, gas theft in the form of meter tampering, inaccurate measurement due to old malfunctioning meters, and gas leakage due to higher than normal pressure.
Heavy investment is required for the rehabilitation of existing gas distribution network to reduce unacceptably high UFG levels.
Pakistan’s power sector remains plagued by multiple challenges in shape of insufficient generation capacity, transmission and distribution constraints, gas supply shortages, low thermal efficiency rates, expensive fuel mix due to natural gas shortages, high T&D losses, and chronic circular debt resulting from below cost tariffs.
While big power generation projects are being developed, massive investment is also required for evacuation of power from these projects and increasing the capacity of existing T&D system.
According to PIP, the primary energy demand is projected to increase to 111.4 MMTOE by 2024. This translates into a CAGR of 4.1 percent per annum on an estimated demand of 74.4 MMTOE in 2014 and 5.3 percent per annum over actual supply of 66.8 MMTOE in 2014.
On the bright side, oil price plunged to $35 per barrel for the first time since 2009 as over supply and sluggish global demand remain key concerns.
The latest round of meeting between the members of Organisation of Petroleum Exporting Countries (OPEC) ended without any mention on the status of output ceiling level.
Analysts assume Arab light oil price to remain $47 per barrel during CY16 first half while $50 per barrel in the second half and onwards. It is expected that crude oil will rebound as US shale gas may turn out to be expensive at current oil prices.
Plugging existing energy deficits and meeting incremental energy needs remains an uphill task requiring serious structural reforms and massive investment in the energy sector.
Resolving the energy crisis has become the biggest priority for the government and plans are in place for large scale capacity additions for power generation, augmenting gas supplies through imported LNG and cross-border pipelines, energy price reforms, and privatisation of power sector PSEs.
Nevertheless, given the large size of existing energy shortage, future demand growth and long lead times of energy projects, the energy shortages shall not be eliminated in the short-term.
Weakened fabric of exports
By Mansoor Ahmad
LAHORE: The year 2015 started for the textile sector on a gloomy note and is ending with panic all around; some of the wounds are self inflicted and some are circumstantial, made worse by inept government response.
The basic textile sector is hurt more than the clothing sector that is still riding on the GSP Plus concession it got from European Union at the start of 2014. In fact, the clothing sector has increased exports in the US market by eight percent in the first 10 months of this calendar year. United States by the way has not announced any concessions of textile exports from Pakistan.
Textile experts concede that the industry players erred in preparing themselves for long term challenges. However, this does not absolve the government of its role in facilitating the textile exports as was done by all other regional economies active in textiles. Slowdown in China triggered the downfall of basic textiles, as China is the largest global buyer of both yarn and fabric. Indian government responded to the slowdown by announcing various incentives for their spinners and weavers including an export subsidy for targeted markets ranging from 5-7 percent. Pakistan was also included in the target market by the Indian planners.
There was an anomaly in our import regime as the Indian yarn was allowed to enter Pakistani market at five percent duty, whereas the duty on Pakistani yarn in India was 25 percent. After the announcement of export subsidy on yarn by the Indian government, the Indian spinner challenged the Pakistani spinners in their home market. The duty imposed on Indian yarn in Pakistan was more than nullified by the subsidy for targeted market provided by the Indian government to their exporters.
The Pakistani spinners did not enjoy any export subsidy, rather they were subjected to some local taxes that they were bound to collect from their non-documented vendors, which in most cases were borne by the industry. Moreover, 25 percent duty on Pakistani yarn was prohibitive and deprived the Pakistani spinners from challenging Indians in their home market. This one instance gives insight into the operational capabilities of Pakistani and Indian planners.
Another difference was the high energy rates in Pakistan compared with India. This was understandable, especially when the global oil prices were high, since Pakistan produces almost 37 percent of its electricity from furnace oil against only 0.5 percent in India. After decline in crude oil prices by 1/3rd (from $115 per barrel in June 2014 to $35 per barrel in November 2015) the power generation rates in Pakistan dropped overwhelmingly. However, the government of Pakistan did not pass on the benefit of low cost to the industry, and instead
imposed an additional levy of Rs3.80 per Kwh in power tariff. This was the facilitation that the government should have passed on to the industry to help it cope with declining exports.
The clothing sector was not hurt as much by the slowdown in European Union and China as was the basic textile sector. Pakistan enjoyed zero rate exports to EU because of its GSP Plus status that is not available to India. Our exports to EU increased despite slow down in the region due to this facility. However, the increase that was about $1 billion in 2014 was restricted to $200 million in 2015 due to the lack of capacity to export more, as exports to US were also surging simultaneously.
The players in the clothing sector are mainly small and medium enterprises, which have grown constantly at a pace of 10 percent. This is because they have to train their skill force via in house training. In 2015, the clothing exporters had more orders than they could execute because of the limited capacity and unavailability of skilled workforce. This sector has traditionally been denied bank loans and most players operate on their own capital.
Now coming to the self inflicted wounds, it is worth noting that basic textile players have generally been on the driving seat and never had to worry about disposing their low value-added stocks both in the domestic and global markets. The competition sharpened globally after abolishing of quota regime in 2005. At that time Pakistan was the top country in technology and efficiency in basic textiles. India and China then started upgrading their basic textiles while the process started receding in Pakistan. Today, about 80 percent textile machinery in Pakistan is 8-10 years old.
The technological advancement during this period was very rapid. The modern spindles installed in China, India and even Vietnam and Bangladesh are much more productive, consume 40 percent less power and the manpower requirement is 1/5th of those installed in Pakistan. Thus, a 25,000 spindle modern mill consumes 0.78MW power compared with average usage of 1.3MW by the same-sized older mill. The number of workers in state of the art 25,000 spindle mill is 80-100 and that operating on 2005 technology is 600-800. The productivity of modern spindles is appreciably higher than older spindles. The same is true in case of the weaving sector, where shuttle less looms mostly operative in Pakistan are inefficient compared with modern air jet looms.
The industry did not upgrade technology even when it generated huge income. The second flaw relates to the viable size of the mills. Average spindle size in Pakistan is 25,000 whereas 50,000 is a commercially viable size. Thirdly, the basic textile entrepreneurs failed to diversify both in product and market. There are groups that started with one spinning mill, and are currently operating 17 mills. They did not install a weaving unit to consume some of its yarn. Similarly, weavers mostly never bothered to attach a garmenting and processing unit to consume the fabric they produce. As far as market is concerned, it is now totally located in Asia, while they wasted most of their marketing energies in developed economies. Textile entrepreneurs mostly are inward looking. Despite suffering from acute power and energy shortages in the last ten years they did not go for alternate energy solutions. They did not invest in research and development knowing well that this support would not come from the inept state institutions.
All these deficiencies haunted the textile sector in 2015 as the sector came under stress globally. Those entrepreneurs, who started small three decades back and gradually turned into composite units are flourishing even today. They have no dearth of orders as far as apparel is concerned. They consume their own yarn and fabric and also process it in their own facility. What they lose in low cost yarn and fabric is adequately compensated by the higher price they fetch for their knitwear and garments.
According to the data of Textile Commissioners’ Organisation, at the end of 2013-14 10 million spindles were operative in the country. As the year 2015 comes to close less than eight million spindles out of 13 million installed in the country are operative. The situation worsened in the last quarter of 2015, as 100 more mills or 225,000 spindles are destined to close down by the year end.
The stitching machines however, are fully operative, but Pakistan is losing its bed wear market to Bangladesh and India, whereas exporters are trying their best to keep their towel market intact.
