From Master Brand Builders to Lame Duck Providers?

In July 2022, Norwegian telecom giant Telenor signalled its intention to conduct a strategic review of its operations in Pakistan after posting a $244 million loss. Then, in October, the company announced that its underlying earnings in Pakistan fell by 22% in the third quarter, and finally in November 2022, Bloomberg reported that Telenor planned to sell its one billion dollar operations in Pakistan.

Just a year before, Telenor was reported by Reuters to be looking for “merger opportunities” in Pakistan for further growth, consolidation and bottom-line improvements. The objective was to strengthen the company’s position in a highly competitive and saturated market – despite an already deteriorating economic situation.

Telenor is not the only cellular mobile operator (CMO) in difficulty. The other three operators also face similar troubles, triggered by the ongoing economic crisis, import restrictions, soaring costs of operations and interest rates, and the damage caused by the summer floods to the infrastructure. As a result, bottom lines have been severely eroded. Telenor and Ufone have posted losses while Jazz’s revenues ran into negative growth for foreign investors in dollar terms for the last four consecutive quarters. As Mudassar Hussain, VP, Corporate and Regulatory Affairs, Jazz puts it, “The telecom industry’s worsening financial health means it is facing an existential threat.”

The fall in the average revenue per user (APRU) has been affecting the operator’s performance, their investment in digital infrastructure and their rollout obligations, leaving them with little to spend on improving the quality of their services. The APRU (a key tool to measure the financial health of CMOs) has dropped from nine dollars in FY 2003-04 to $0.80 – lower than in countries like Bhutan, Ethiopia, Libya, Rwanda, Sudan and Syria. The global ARPU average is over eight dollars and according to The Groupe Speciale Mobile Association (GSMA), in terms of ARPU, Pakistan ranks 267 out of 269 telecom markets monitored globally. 

In addition to the exponentially recurrent rise in the cost of operations, CMOs are hugely exposed to exchange rate fluctuations, as all licenses, spectrum and equipment payments are denominated in dollars, while revenues are earned in rupees. For example, three operators paid $291 million each for telecom licences in 2004-05. These were then renewed at the 55% higher rate of $450 million in 2019. In rupee terms, the increase was 360%. Hussain explains, “Pakistan’s telecom sector has a dollarised cost structure in terms of spectrum fees, capex and fuel, so a weakening rupee makes telecom equipment more expensive. Added to which, the rising interest rates are making its financing twice as expensive.” 

An IT ministry official agrees that the dollarised cost structure is unfair to the industry. “… it is not fair to any company, especially when their costs are spiking and they are left with little to invest in new infrastructure or pay back to their foreign investors, who are doing much better in other economies like Bangladesh, Malaysia and Thailand and getting a lot bigger return on similar investments. CMOs have invested close to six billion dollars since 2017/18 in network expansion and infrastructure upgradation.”

He adds that the telecom sector has contributed over Rs 1.2 trillion to the national exchequer in terms of income tax, customs duty, withholding and other taxes, as well as about Rs 45 billion to the Universal Service Fund (USF) to bridge the digital divide and support the start-up ecosystem through Ignite. Infinite currency devaluation exposure adds to the uncertainty which no business plan can withstand. “If a major player is considering exiting Pakistan because of our bad regulatory environment and tax policies, and the costs imposed on the operators because of these policies, it should be of some concern for the government policymakers.”

With the ongoing macroeconomic situation showing no sign of stabilising, the near-term future of CMOs appears bleak as the industry is increasingly likely to run into the red zone unless both they and the government took long-delayed measures. 

Aamir Ahsan Khan, Country Manager, Ericsson Pakistan, says that if business conditions do not improve, Pakistan may be headed into digitally dark ages. Quoting research studies, he points out that the increase in mobile broadband is directly linked to increases in GDP.

“The analysis shows that a 10% increase in mobile broadband access raises GDP by 1-1.3%. In the case of markets like Pakistan, the ratio is 1.85%. The current situation demands that policymakers look at the long-term benefits for GDP, rather than short-term gains from license fees.” According to a report called Unlocking Pakistan’s Digital Potential, the country’s digital transformation can help unlock up to Rs 9.7 trillion in annual economic value by 2030 or the equivalent of about 19% of Pakistan’s GDP in 2020.

Khan agrees that the market needed consolidation as four CMOs in a saturated and competitive market would have impeded the profitability of individual companies. Telecoms underwent their first round of consolidation about five years ago, when Warid signed a share-swap agreement with Mobilink (now Jazz) for a 15% stake in the merged entity.

Khan’s view is, “We have too many players with too low profitability. I believe three operators are enough for the Pakistani market. However, this will not restore the profitability of the industry on its own. Policymakers need to recognise the telecom sector as a key enabler of productivity across the economy. Telecom is not just an industry, but a cross-sector enabler. In my view, the policy focus should be on providing the right speed to our consumers and the right spectrum to our operators. There are also regulatory relaxations that the government can extend to operators to get them out their present predicament.” 

Hussain agrees, adding that “in order to address the digital emergency, the telecom industry needs urgent policy interventions, including denominating spectrum payments in rupees, staggering license payments in 10 rather than five annual instalments, suspension of the industry’s annual contribution towards the USF and a regulatory approach to allow for disciplined inflationary pricing.”

In the short term, all stakeholders agree that to restore the industry’s financial health, an increase in ARPU is required, which Hussain argues must rise to at least $1.5 in the next 12 months to ensure improvement in the quality of services. The question is, what is stopping the companies from raising their prices?

According to the IT ministry official, the issue is that the telecoms are working against each other. “It is a known fact that Zong is undercutting other operators and unless Zong raises its prices, the others will not do so either, for fear of losing their customers. This is why the first step in restoring financial help to the industry has to be taken by the operators themselves.”

Khan agrees, but says the regulator also has a responsibility towards the industry and broadband users. “When industry players are unable to settle their issues, it is the obligation of the regulator to sit and hammer out decisions for their long-term existence.”

It seems that until both the government and the industry take the action they need to, the industry will continue to shrink and consumers will continue to face a slowed mobile internet service.

Nasir Jamal is Bureau Chief, Dawn, Lahore. nasirjamal6592@gmail.com