Government's 55% price increase to likely affect expansion and network improvement plans.
In order to provide telecommunication services and facilities within a country, telecom companies are required to obtain a licence. In May 2004, such licences were issued by the Pakistan Telecom Authority (PTA) to (the then new entrants) Telenor and Warid for a duration of 15 years subsequent to an auction that cost both entities $291 million. Five months later, for the same amount and duration, Zong renewed their license as well.
Fifteen years later, one would expect the renewal process to be a smooth one, especially given that the agreement required the process to begin at least two years before the expiry deadline. Yet, the process is in complete disarray. PTA did not have a chairman for almost a year and as the May 24 deadline looms, both Jazz (which merged with Warid) and Telenor have now approached the courts in order to obtain “clarity” on the terms and ensure the process is carried out in a transparent manner.
In an ideal situation, a third party determines the price and PTA did hire the services of a consultancy firm at the end of 2017 to set the terms and price of the licence renewals. However, due to a change in government and the absence of a PTA chairman, the consultants did not start work and with the deadline approaching, the Prime Minister had to constitute an inter-ministerial committee to set the terms and price of the licences based on the recommendations made by PTA.
The price of the licence has now become a major obstacle as the government has priced the renewal fee at approximately $450 million for both Warid and Telenor and approximately $470 million for Zong – an increase of almost 55% on the original price.
The government has set the price based on a combination of two factors. Firstly, increased penetration (especially in the mobile data market) as well as growth in the size of the population – and by extension, the market. Secondly and perhaps more importantly, the $395 million and $325 million 4G spectrum auction won by Telenor in 2016 and Jazz in 2017 respectively.
The telecom companies for their part argue that the price is too high. Their main argument is the fact that both the telecom policy and the relevant clauses in the license require that the first renewal take place at the same price upon which the license was originally acquired. This argument is boosted by the fact that licence renewal of Ufone (in which the Government of Pakistan has equity), was set at $291 million through interest fee payments in 2014.
Telecoms are one of the most taxed sectors in Pakistan, added to which Pakistan offers one of the cheapest cellular services rates. The telecom companies also pay 2. 5% of their annual adjusted revenues for the universal service fund. If one adds the devaluation of the rupee to these expenditures, the telecoms are looking at a huge amount that requires a lot more effort to recoup.
The proposed fees will help the government to earn north of $1.3 billion in desperately needed revenue. However, this is a myopic view as high licence fees disincentive any efforts towards investing in the expansion and improvement of network facilities which are critical in driving a knowledge economy.
This messy renewal process needs to be settled soon as it does not paint an encouraging picture among potential investors. Any settlement needs to be made with the agreement of all stakeholders – from the regulators to the operators – as only this will ensure the sustainability of a sector that is critical in driving us forward in the fourth industrial revolution.
Ans Khurram is an insights professional working in the telecommunication industry in Pakistan. firstname.lastname@example.org