Consolidation needed for survival

Low barriers to entry are supposed to foster competition, rationalize prices and incentivise product innovation. While that notion is true, it doesn always hold.
When price wars lead to low quality goods and services and when product recognition through marketing gimmicks overshadows product differentiation, the consumers suffer. On top of that, such practices also raise questions over the sustainability of the producers.
Therefore, just as consolidation helps bring economies of scale in manufacturing oriented businesses, in the case of service providing firms, the differentiation between a pear (good) and a lemon (bad) product amid poor governance structure calls for consolidation in relevant industries.
In Pakistan, financial services industries, including banking and securities broking, cellular companies and electronic media organizations are at similar crossroads, with sector consolidation needed to bring about synergies for the benefit of both consumers and service providers.
Of all the regulators, the State Bank of Pakistan realized it at the earliest and fostered an environment for mergers and acquisitions in the banking industry.
In 2008, the central bank directed all the banks/DFIs to increase their paid-up capital (free of losses) to Rs23 billion in a phased manner by 2013. However, in the face of higher non-performance and declining profits, the regulator relaxed the condition during 2009 - requiring institutions to raise their equity only up to Rs10 billion by 2013.
This, coupled with the condition of stringent capital adequacy ratio for commercial banks, was taken to safeguard the depositors by mitigating the chances of any bank default.
But knowing that there are still 13 banks (out of the pool of 36 commercial banks) awaiting wedlock or otherwise needing capital injection, SBP ought to be innovative in designing policies that provide incentives to buyers, especially foreign banks, as well as the sellers.
The story is similar in equity brokering business. Industry voices say that there are 145 active brokers out of 193 licenses issued at present. This, in comparison to around 170 active players before the recession badly hit the industry, shows that brokerage industry needs to move up the curve as well.
In the aftermath of crisis, it becomes a nail biting task for regulators - SECP and KSE - to safeguard the interests of investors. Thin margins and low volumes are compelling brokers to adopt a lean mean model while compromising on quality research and technological infrastructure.
Perhaps, SECP should learn lessons from SBP by amending regulations to incentivise consolidation in the industry. That will not only reduce chances of broker default but will also create room for better products including research while preparing grounds for deeper penetration.
Developments in cellular industry calls are also comparable. The desire of cellular operators to capture maximum market share led to severe price wars in recent years - a move that brought them on the brink of decreasing profits amid saturating density.
With their average revenue per user sliding to $2.48 by March, down by nearly three quarters in the past six years, industry players were forced to lower quality of service (like choked networks) while being lured by the idea of cartelization.
Being a proponent of four players instead of the existing five, PTA doesn plan to issue new licenses. On a related note, there have been rumours in the recent past about possible mergers and acquisitions in the sector, though nothing has materialized yet.
While the idea of reducing the number of telecom players may be questionable, PTA should at least foster passive consolidation by means of infrastructure and resource sharing among the players and encouraging the outsourcing of non-core functions to achieve operational efficiencies and cost synergies.
Likewise, Pemra too, has to pull its socks to rationalize the number of satellite TV licenses (83 at present) and at the same time rightsizing the cable industry, which has more than 2000 operators at the moment.
But then again, the proposed flurry of consolidation can potentially increase the risks of abuse of dominance on the part of players - and that calls for a strong antitrust and competition watchdog.