Published 13 Aug, 2018 04:50pm

Tax, terrorists and telcos

Perhaps it is not a good time to be in the telecommunications industry in Pakistan. What had been awaited as the year in which cellular 3G services would finally make their official entry into the local market, has turned in its stead into a telecom sector stained by tax evasion allegations, possible blockage of the prepaid SIM market as a result of terrorists threats and what appears to be a PR ‘code of silence’ among the mobile network operators (MNOs).

It is an unfortunate turn of events that Interior Minister, Rehman Malik’s majestic ‘wisdom’ has drawn the telecom sector into the Government’s on-going security risk control exercise. During the recently promulgated Ishq-e-Rasool day, cellular services were blocked in as many as 15 urban cities making it the second of three blockages this year. As Mr Malik is fond of reminding us, this was a “necessary step” to deal with the security risk that militants pose since they can use “remote-controlled bombs detonated by cell phones.”

Leaving aside the obvious disconnect and inconvenience among the general public, it has been estimated by industry sources that the cellular telecom sector has borne upto three billion rupees in lost revenues during the Eid-ul-Fitr related blockage alone (Source: ProPakistani). Eid is by any means a high voice traffic and texting occasion. And the four major blocked cities of Karachi, Lahore, Multan and Quetta are located in provinces that account for 57% (Punjab) and 28% (Sindh) of MNO’s total mobile subscriber base – leaving all MNOs with a rather bad taste in the mouth.

The Government has termed the Eid-ul-Fitr blockage, in particular, as a “successful strategy” and it is becoming more and more obvious that this is a path the Government will not hesitate to take during forthcoming religioius celebrations. But what is more disturbing is that hand-in-hand with this strategy, the Government has plans to “permanently block prepaid services.”


After basking for so long in the sun, Pakistan’s telecom companies have had a particularly rough year. Yasmin Malik assesses what lies ahead.


When, during the post Eid-ul-Fitr period, Mr Malik’s proposal regarding prepaid SIM blockage was first made public, I am sure the entire telecom industry must have held its collective breath in both disbelief and utter panic, hoping the Interior Minister would soon retract his words.

However, in late August, Syed Qaim Ali Shah, Chief Minister, Sindh made public that he supported the proposal by the Interior Minister to suspend prepaid sevices and only allow postpaid services – a disquieting development that warrants a serious look at what such a proposal would mean for the cellular market if actually executed.

Pakistan has predominantly been a prepaid market with 98% of each MNO’s subscriber base falling under this category. The remaining two percent that makes up postpaid users has struggled to gain traction despite long term link-ups with handset manufacturers such as BlackBerry and Nokia – and more recent tie-ups with Samsung and HTC, for example. Despite a fall in ARPU (average revenue per user) especially over the last four years, the majority of revenue for the MNOs is still derived from its prepaid subscriber base with postpaid subscriptions not registering much growth in recent years. As a case in point, the international telecom analytics firm BMI reported that the market leader Mobilink had stopped reporting its subscriber breakdown since the end of 2009, when it announced that 98.3% of subscribers were prepaid. BMI’s prediction is that postpaid subscriber growth for Mobilink will remain flat until Q4-2012.

Of the $493 million invested in the telecom sector in Pakistan in FY 2010-11, almost 73%, i.e. $358.6 million was invested by the cellular sector according to the Pakistan Telecommunications Authority (PTA). In terms of revenue generation, the telecom sector’s earnings were at an all time high for FY 2010-11 with Rs 362 billion worth of earnings, of which Rs 262 billion came from the cellular sector – again almost 73%. During the same time period, the Government benefited (as it has for many years since the telecoms deregulation policy took effect) from Rs 52.6 billion in the form of GST from the telecom companies – a 20% gain on the previous year. Of this Rs 52.6 billion, it was again the cellular companies which contributed the bulk of GST at Rs 44.9 billion – a 25% increase from what they contributed to the exchequer in FY 2009-10 (www.pta.gov.pk).

With the prepaid SIM blockage proposal, the Government thus stands to seriously sway confidence in an industry that has contributed to the country in such significant economic terms. What is particularly unfortunate is the ‘timing’ of this proposal. The announcement comes at a time when there are some positive indications of a cautious return to growth in the cellular telecom industry, which since 2008 has suffered many of the effects of the global downturn as well as those of its own self-created and stifling market competition. One of these positive indications is the increase in ‘net additions’ or total number of subscribers gained per year which are both an indication of the positive effects of the de-regulation policy and of resilient market growth.

Until 2008, net additions remained very robust. During 2005 and 2006, for example, when both Warid and Telenor entered the local market, total net additions for all operators was a very impressive 21.7 million mobile subscribers. This growth continued until 2007-08 with total net additions at 24.9 million for that time period(www.pta.gov.pk). However, 2008 saw a sharp decline in net additions totalling only 6.3 million.


What had been awaited as the year in which cellular 3G services would finally make their official entry into the local market, has turned in its stead into a telecom sector stained by tax evasion allegations, possible blockage of the prepaid SIM market as a result of terrorists threats and what appears to be a PR ‘code of silence’ among the mobile network operators.


FY 2010-11, nonetheless, saw a return to higher net additions at 9.7 million as well as a modest increase in ARPU (from $2.41 to $2.45) as telecom operators restrategised and introduced many more mobile data driven packages to supplement voice-based offerings and drive earnings form alternate revenue streams.

Any suspension related to prepaid SIMs will hence not only have a hugely damaging financial and operational impact on all five MNOs, it will also stifle the recent growth signals we have been seeing. In addition, it will recreate tensions regarding investments in new services such as 3G. As I wrote in a previous article (3G too soon, Aurora, March-April 12), a certain amount of delay in the auctioning of 3G services is, in my view, welcome and necessary. But the long term future of Pakistan’s cellular industry relies on continued access to prepaid users both in terms of gaining new customers and earning revenue from the existing ones.

Since his initial gunshot proposal announcement, Mr Malik has attempted to calm the market by saying that only prepaid SIMs which were issued on fake ID documents would be targeted and that the blockage would be carried out in “phases”. For now, we await Mr Malik’s ‘final decision’ which he (unconvincingly) promises will be made “after consultation with all stakeholders and experts”.

There is word in the industry that with these enforced blockages and the prepaid SIM proposal the Government is engaged in a power play of sorts especially in the light of recent tax evasion (regarding interconnection charges) allegations against the MNOs. The Federal Board of Revenue (FBR) earlier this year, was investigating telcos’ claims that they are exempt from paying sales tax on revenunes earned from interconnection charges since 2007 under Section 65 of the Sales Tax Act (1990). While the FBR had agreed in principle that the so-called tax evasion was “inadvertant” and was considering a waiver for taxes due until end June 2012 to the amount of Rs 47 billion, matters were complicated when the National Accountability Bureau took up the case and halted the granting of the waiver. By mid-September (following a lot of bad press), all five MNOs agreed to resolve the tax dispute via an out of court settlement.

Throughout all this, MNOs have been struggling to put right their battered PR image. The prospects of the PTA’s 3G auctions earlier this year had kickstarted a spate of press conferences by the MNOs to bring to the fore how mobile subscribers would benefit from the new technology. However, the positive spin created by this could not hold at bay the negativity brought about by the tax evasion allegations. While the MNOs quite brazenly defended their respective positions with respect to the interconnection charge taxation issue, it is almost unsettling the way none of them have made any official statement regarding the Interior Minister’s SIM blockage proposal.

Behind closed doors, some serious rearrangement with respect to maintaining the media image has been taking place. Most notably at Mobilink, where Omar Manzur is back in his role of Manager PR despite having changed his portfolio to the HR department earlier this year with much ado. My parting thought, however, is that even Mr Manzur’s ‘firm hand’ may not be enough to shield off whatever the Interior Minister shoots out at the telecom sector next.

Yasmin Malik is associated with the UK’s Informa Telecoms & Media.

yasminmalik1@yahoo.com

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