Cut in MTRs: Major CMOs oppose PTA’s decision

ISLAMABAD: Major cellular mobile operators including Telenor and Jazz have opposed the Pakistan Telecommunication Authority’s decision of revising downward the Mobile Termination Rates (MTRs) to Rs0.50 per minute from the current Rs0.70 per minute, terming it a drastic step, which will trigger off-net aggression/price war resulting in lowering the already low tariffs, besides negatively impacting on revenues and profitability.

However, other operators including the PTCL, Zong, Ufone, and Wateen have supported the PTA decision, saying it will ensure a level-playing field for all, while protecting the commercial interests of smaller operators.

This will shift the industry to a competition stage where all operators will strive to attract customers by improving the quality of their service, rather than merely having a higher customer base.

Due to rupee depreciation, Jazz pleaded that MTR should be revised upward rather than downward, and a detailed analysis is required to include all the demographic, economic, market, and other factors.

Pakistan’s economy has undergone a drastic devaluation in currency by more than 60 percent in the last five years, the company added.

The PTA has revised downward the MTR to Rs0.50 per minute from 1st January 2022 against the current Rs0.70 per minute.

PTA lowers Mobile Termination Rates to Rs0.5 per min from January

The MTR would be further revised to Rs0.40 from 1st July 2022 to 30th June 2023 and would be further revised downward to Rs0.30 per minute from 1st July 2023 onwards.

Telenor stated that the PTA’s proposal to reduce the MTR to Rs0.30 is a drastic step.

It would have a deeply negative impact on Telenor’s interconnection revenues and its profitability.

The PTA’s proposal builds on the benchmarking study undertaken on a group of countries.

Some of which have lower MTR, whereas, a number of countries with higher MTR are ignored.

Telecom market has not changed significantly after the last revision of the MTR was undertaken, to justify such a drastic drop in MTR from PKR 0.70 to PKR 0.30.

Overall, in terms of benchmarking, Pakistan’s rates are among the lowest in the world in absolute USD terms.

There is no evidence of termination rates having any significant contribution to skew in the telecoms market.

The downward revision will trigger off-net aggression/price war resulting in lowering the already low tariffs to unprofitable levels, which will inevitably impact the efforts to improve quality of service and coverage.

PTA hints at making off-net calls ‘more cheaper’

Moreover, amid slow economic growth, inflation and rupee devaluation, abrupt reduction in the MTR would further deflate the telecoms market. The MTR rate determined in 2018 proposed a gradual decline through a glide path model from PKR 0.80 to PKR 0.70 when the exchange rate was at PKR 138 against a USD.

Presently, we are at PKR 171.

The PMCL would make its case for increasing the MTR in the same ratio as the cost of interconnection is a function of imported equipment paid in USD. Due to rupee depreciation, PMCL considers that MTR should be revised upward rather than downward, and a detailed analysis is required to include all the demographic, economic, market and other factors.

Pakistan’s economy has undergone a drastic devaluation in currency by more than 60 percent in the last five years. In real dollar terms, therefore, the MTR has effectively decreased by 60 percent in the last five years.

Telecom industry’s operational expenditure has appreciated significantly during the same period due to rapid increase in energy prices, which has introduced further pressures on our financial viability.

A rapid decrease in interconnect revenue will further aggravate the existing challenges.

Pakistan presently maintains an extremely competitive telecom market.

Moreover, competition is further regulated with respect to tariff approvals after the merger of the PMCL and Warid.

Consumer welfare with respect to affordability of service is therefore already adequately protected.

India’s example is not the right one for Pakistan to follow due to the reason that India’s decision to abolish the MTR came with a change in billing mechanism – i.e. the implementation of “bill and keep” model.

This overall regime change resulted in an average increase of 15-25% in tariff plans. Also, multiple regime changes in India have resulted in multiple bankruptcies and spectrum auction failures in recent years.

The EU countries usually undertake a combination of cost studies as well as benchmarking to determine MTR caps. This study is normally followed by a multiple-year glide path to allow enough time for the industry to adapt to the new termination rates. This drastic proposal comes at a time when the industry is preparing for two spectrum auctions and ambitious roll-out obligations associated with licenses in Pakistan and AJ&K and GB.

This will require significant network investments, which is already a challenge, given the low ARPUs in Pakistan.

The MTR effectively serves as a price floor for voice tariffs.

Decreasing MTR will increase the price war that continues to afflict Pakistan’s telecom sector and eventually the relatively stable voice tariff market will become vulnerable to another round of unhealthy price war.

The MTR is a source of FOREX inflow and the reduction in the MTR will be counterproductive to what Government of Pakistan emphasises, i.e. increasing foreign inflows.

No empirical evidence has been shared to support the intended consequences of the MTR reduction.

The PTA should share impact analysis of reduction since 2018 determination before any further action.

Telenor recommends that the current MTR to be kept stable for another two years and local and international MTR be segregated in light of the PTA’s determination dated 16th November 2018.

Studies indicate that there is no or limited evidence of any link between MTR reduction and market share of smaller operators, increased usage, low mobile prices. Furthermore, through determination on Mobile Termination Rate (MTR) dated 16th November 2018, PTA took a hybrid approach and introduced a gradual decrease via a glide path to write off the negative effects of a sudden reduction in the MTR. The abrupt decrease in MTR can have enormous effects on all operators which PMCL requests PTA to take under consideration before proposing a major decrease in the MTR.

An abrupt decrease in MTR is not suggested as consumers have option to use OTTs for off-net calls. Rather, a pragmatic approach may be used and conduct an independent cost/bench-marking study to arrive at appropriate quantum and trajectory of the termination rate reduction in totality rather than looking at fixed line and cellular mobile in isolation, through a series of consultative workshops.

The PTA responded that considering MTR in USD of regional countries, Pakistan’s MTR @ US cents 0.40 per minute is much higher than those of Bangladesh, India, Malaysia, and Sri Lanka that turn out to be US cents 0.16, 0, 0.24, and 0.25, respectively.

It may further be noted that during consultation in 2018, international benchmarking results estimated MTR for Pakistan between Rs0.18 to Rs0.43 per minute, whereas, the Authority reduced the MTR to Rs0.70 per minute, therefore, further revision is already over-due since January 2021.

The Authority has included sufficiently large sample of countries in its analysis and more than half of these countries have higher MTR than Pakistan in absolute USD terms. Therefore, the sample is representative and have sufficient numbers of countries with higher MTR as well. Moreover, the sample is comparable to the extended sample used in the MTR determination in 2018.

In order to address concerns of operators on the recent rupee depreciation and its impact on the MTR analysis, the PTA has carried out an exercise to do the benchmarking analysis using latest exchange rates taken from https://www.xe.com/currencyconverter/ except for Pakistan and for Pakistan the rate i.e. Rs175.1789/USD taken from https://www.sbp.org.pk/ecodata/crates/2021/Nov/19-Nov-21.pdf.

It can be seen that the calculated MTR is close to the benchmarking results reported in the consultation paper issued in July 2021 i.e. proposed MTR for Pakistan is between “Rs0.27 (mean) and Rs0.13 (median)” using ARPU adjusted benchmarking and between “Rs0.30 (mean) and Rs0.28 (median)” using PPP adjustment. Therefore, apprehensions that recent depreciation will substantially impact the analysis and proposed MTR are not justified.

As per GSMA, the most common outcome of the MTR revision in developing countries is the one-off cut instead of the glide path.

Furthermore, it is a generally accepted principle that interconnection charges/ter-mination rates cannot be considered as a source of revenue, rather should be treated as a reimbursement for call being terminated on other networks, and should be cost oriented. It has also been observed that some of the operators are discounting their on-net traffic as they are generating more revenues from off-net traffic due to traffic imbalance.

The Authority is of the view that lowering of MTR will result in facilitating a more competitively neutral framework among the operators.

This would allow more competitive and innovative offerings such as free minutes bundles (for both off-net and on-net), which would be a great ease and beneficial for the consumers. The same is evident in the markets with lower MTRs. With regards to Telenor’s observations on international terminations rate, a separate industry consultation can be carried out to review the rates, and Telenor is encouraged to submit its analysis to the Authority in this regard.

Ufone viewed that it is a net termination out-payer and unable to compete effectively, and economically sustainably. As such, it is strongly recommended that not only are termination rates reduced to reflect costs, but also asymmetry should be re-introduced in order to protect smaller operators from the anti-competitive abuse of dominance through the exploitation of the significant club effect and the cross-subsidy paid from smaller operators and enjoyed by dominant operators.

Copyright Business Recorder, 2021