Aggressive lobbying by self interest groups for 'break-up' of PTCL is in full swing and authorities are being purposely misled by so-called 'restructuring plans'.
Guised as restructuring proposals are in fact ill conceived to split-up PTCL which shall only result in destroying the value of a prime national asset that could otherwise help significant reduction in external debt burden.
The case for PTCL break-up is principally based on an anachronistic argument of natural monopoly which itself has been invalidated by technological advances.
It is true that PTCL, like other State-run companies, suffers from operational inefficiencies. However, the better solution is Privatisation and Competition.
The recent success of large privatisation sell-offs is a manifestation of reviving foreign investors' interest in Pakistan, owed largely to the government's economic policies.
It would be a national disservice not to make another push for PTCL's sell-off as an integrated entity before any alternative plans are considered.
PTCL: TOO PRECIOUS TO BE SACRIFICED: Most profitable company in Pakistan earning Rs 23 billion in annual profits, contributing Rs 36 billion to the national exchequer each year, generating over $300 million annually in international incoming revenues, investing Rs 12-15 billion each year in infrastructure, paying over Rs 650 million per annum towards R&D, providing subsidised Internet service in about 1,000 cities of the country and one of the few Pakistani companies of global scale, PTCL is a truly national asset.
It deserves better treatment than being mercilessly put under butcher's knife just because some self-interest groups have asked for its sacrifice to help their own hidden agenda, which is anything but the nation's best interest.
RESTRUCTURING MODELS ARE TECHNICALLY IMPRACTICAL: Even proponents of break-up are in disagreement on how this "national duty" be performed.
Two different models are being favoured; one calling for the break-up of PTCL on regional basis while the other recommending a vertical segregation of PTCL into several smaller companies (let's call them baby PTCLs) each having presence on countrywide basis.
The first model has been experimented in different countries and proved unsuccessful.
The second one, apparently being taken seriously by authorities, has never been attempted. To say the least, it is one hell of an expensive experiment with only one possible result ie, fiasco.
This model is technically impractical if not impossible and would result in highly inefficient market structure.
One need not be a telecom engineer to understand why vertical segregation is unfeasible. It assumes that PTCL is essentially a "collection of companies". In reality, PTCL is one integrated network and its vertical break-up would result in "incomplete networks". For example, in each city, PTCL has a tandem exchange and a transit exchange. All inter-exchange traffic is routed through tandem while all inter-region traffic is routed through the transit exchange and everybody knows that individual exchanges are not divisible.
So the first effort of each of baby PTCL shall be to complete their individual networks. Moreover, each baby PTCL shall need to interconnect with other Baby PTCLs and cellular mobile companies, further adding to complications.
These are some most obvious technical difficulties and there are dozens more. No wonder, nobody in the world has ever tried this model before.
Pakistan's telecom sector offers huge opportunities for growth and profits but requires capital commitment.
These piggy baggers want to take the easier road; weaken PTCL's position so that it is no longer a competitive player and then acquire these assets or expand their own empires.
ARGUMENTS FOR BREAK-UP OF PTCL ARE SERIOUSLY FLAWED: It would be unfair not to appreciate the writing talents of authors of these restructuring plans for deftly over-exaggerating the need for PTCL restructuring.
Perhaps a close match was sexed up intelligence reports on Iraq's WMD used as excuse to help achieve other objectives.
Moreover, the authors of these proposals themselves have no experience in telecom sector restructuring, which happens to be a very specialised subject.
It is like a chemist prescribing medicine for heart disease. Anyway, the following section analyses the main arguments that proponents of PTCL restructuring have put forward. Readers could draw their own conclusions.
ARGUMENT NO 1: PTCL is a natural monopoly, which makes any effective competition in the sector impossible, especially if PTCL remains an integrated entity.
For readers who are not acquainted with the term, "natural monopoly" is defined in economics as an industry where the fixed cost of capital goods is so high that it is not profitable for a second firm to enter and compete. Classic examples are utilities such as power, water and gas-distribution.
The natural monopoly argument has been rendered invalid by technological advancements.
Wireless technologies have already become a major threat to wireline communication, while VOIP is a far cheaper substitute to traditional circuit switching.
Cellular mobile is no longer a rich man's luxury; on the contrary, it is emerging as a substitute for basic telephony for low income groups. Ask a carpenter or plumber for his contact number and he will give you his cell number.
Cellular technologies are not limited to mobile service but are a fast gaining popularity as "fixed line" technology. CDMA based Wireless Local Loop (WLL) networks are growing faster than wireline networks in developing countries such as China, India, Brazil, Russia and Indonesia. WLL costs around USD250-300/subscriber as compared to USD500-600/subscriber for wireline network. Other benefits of WLL are Mobility, Better Rural Coverage, Network Scalability and value added services both voice and data based.
Technological advancement is driving convergence of various types of telecommunication services which were earlier considered divergent markets.
For example, a single cable could now provide Telephony, Cable TV and Internet. 3G wireless is the new wave in mobile services, shifting from voice only to multimedia enabled services.
With blurring boundaries between different types of telecom services, unified licensing regime is now replacing separate licensing.
Both WLL and cable technologies have marked their advent in Pakistan and once the local consumers are given the choice of wide range of services at cheaper rates, they are likely to prefer them over ordinary copper-wire telephone service.
ARGUMENT NO 2: Sum of values of baby PTCLs shall be more than the value of PTCL as an integrated unit.
This "presumption" is in total contradiction with the first argument; if PTCL is indeed a natural monopoly than its break-up would only result in value destruction.
The break-up proposals conveniently ignore the restructuring costs which itself shall be the biggest dent in PTCL's value.
A key global trend in telecom sector is consolidation ie, smaller companies are merging together even in those markets where governments experimented with breaking up the State-run telecom companies.
ARGUMENT NO 3: Privatization of PTCL shall covert a Public Sector monopoly into a Private Sector monopoly which is even worse.
A few misconceptions need to be rectified here. Contrary to the common belief, the Telecom sector has been open to competition since 1991 when the first cellular licence was issued.
PTCL was in fact the last of the 4 players allowed entry into the cellular market in 2001 when the earlier players had had 6-10 years to consolidate their positions.
Other segments of telecom services such as Internet Data Networking and Cable TV have been open to private sector since the mid 90s.
PTCL is a much smaller player relative to competition in all these segments. PTCL's exclusivity over fixed line telephony ended on December 2002 and deregulation of telecom sector effectively completed with fixed line deregulation policy of July 2003.
PTCL is fast losing its share in the domestic telecom market. It enjoyed over 92% of total domestic telecom spending (fixed line plus cellular) in 1996 but its share fell to 77% in 2003.
This is likely to fall faster in the coming years. Cellular mobile accounted for 6% of total telecom spending in 1996 which has risen to 22% in 2003.
The domestic telecom market is growing fast enough to accommodate many new players. It is not PTCL's fault that even 7 months after the release of fixed line telecom deregulation policy, the government has not even started the process of issuing new licences.
There are many local groups equipped with modern telecom technologies which are ready to launch telecom services and once that happens not only the overall growth rate of telecom market improves but the share of PTCL will fall at even higher rate.
People generally quoting the example of low tariffs in India conveniently ignore mentioning the fact that private operators in those markets have grown in basic telephony despite the presence of a State-owned telecom giant, BSNL - the counterpart of Pakistan's PTCL.
However, it would be unfair not to accept that PTCL does enjoy a position of market domination in fixed line services and would continue to be a major player for many more years.
The threat of abuse of this power could be countered through a strong and effective regulatory body.
ARGUMENT NO 4: REGULATION DOES NOT WORK: Regulation works only when it is allowed to work. Successful regulation requires capacity, independence and enforcement. Capacity building needs proper staffing, training and infrastructure.
Independence requires separation of its 'ownership' from government and those being regulated.
Regulators have a natural sympathy towards government sector companies but once these companies are privatised, the regulators tend to get tough. Finally, strong enforcement powers are the key to effective regulation.
Among the various regulatory bodies in Pakistan for power, telecom and oil & gas sectors, PTA the telecom regulator is the most effective, though at times it has been prevailed over by the government. The fault is not in regulation per se but in its implementation.
ARGUMENT NO 5: PTCL IS OVERCHARGING THE POOR DOMESTIC CUSTOMERS: One should first have some basic knowledge about PTCL's revenues and profit compositions.
The following table provides this information from PTCL's 2003 annual report. Exact cost of service for international business is not available but for the sake of analysis, 10% of PTCL's total operating costs have been allocated to this segment.
The cost of handling international incoming revenues is very low as compared to that for domestic operations.
Over 40% of PTCL's profits are contributed by international incoming revenues, which come from international callers dialling Pakistan. Had these not been there, PTCL would have had to increase domestic tariffs by over 50% to maintain its contribution to the national exchequer.
The champions of consumer interests oft cite examples of very low tariffs in India but one should ask our entrepreneurs whether they would be willing to accept the kind of returns Indian telecom companies are enjoying?
Almost all cellular companies in India are making losses while profits of most other companies are under severe pressure.
Pakistan needs large private sector investment in telecom and decent returns are the only reason why any rational investor would commit its money to Pakistan.
ARGUMENT NO 6: PTCL SUFFERS FROM INEFFICIENCIES AND HAS POOR SERVICE QUALITY: This holds true for PTCL inasmuch as it goes for any public sector enterprises.
However, the solution to this problem is not break-up of PTCL but shifting the company to the private sector.
CONDITIONS HAD NEVER BEEN BETTER FOR PRIVATISATION: PTCL has been on the privatisation list for more than a decade now. It is true that past efforts to privatise the company have not met with success but that was mainly for three reasons 1) poor macroeconomic position of the country, 2) lack of visibility on domestic telecom scene and 3) weak position of most international telecom players.
It would be wrong to use past as proxy for future especially when the country is witnessing the dawn of a new era. The country's macroeconomic indicators had rarely, if not never, been stronger.
The past four years of reforms have put the economy on track for higher growth. The biggest economic risk for the country viz., the fragility of external account has been virtually eliminated.
This was the key factor that kept off most foreign investors. When Pakistan did not have enough reserves to guarantee repatriation of dividends to foreign shareholders it would have been foolish to expect any sane foreign investor to buy a large asset such as PTCL.
The success of recent privatisation transactions is a clear manifestation of rising foreign investors' interest in the country.
Bulk of privatisation proceeds over the past 2 years have come from foreign investors who have acquired major assets like HBL, UBL and oil & gas fields. This makes a strong case for the government to make a sincere attempt for privatisation of PTCL.
Wasting time in mulling over half-baked restructuring plans would only result in loss of value of this asset as competition grows and starts eating into PTCL's profits.
The best option is to privatise the company as soon as possible and use the proceeds towards debt retirement.
Moreover, with 26% strategic offering, the government would still receive its full taxes and have over 60% share in company profits. That's the only win-win solution for the government.
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Rs Million % of Total
Domestic International Total Domestic International Total
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Revenues 50,198 17,549 67,747 74% 26% 100%
Operating Costs 28,886 3,210 32,095 90% 10% 100%
Operating Profit 21,313 14,340 35,652 60% 40% 100%
Operating Profit 42% 82% 53%
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