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Dependable ones can sometimes be taken for granted. So is the case with the telecommunications industry. Despite the operational and financial challenges brought on by Covid-19, fixed and mobile broadband operators continued to provide essential connectivity services. While there are issues with service quality, broadly speaking, the digital economy has been propelled in the pandemic era, in part due to assured connectivity. But now it appears that connectivity providers are catching a breath after stressful two years.

Latest central bank data suggest that the telecommunications industry’s foreign direct investment (FDI) profile is coming under an even darker cloud. During the Jul-Apr period of FY22, the net FDI (FDI inflows less outflows) came in at negative $76 million, about three times the net outflow of $26 million seen in the same period last fiscal. While gross FDI inflows for the sector remained stable around $120 million in this period, it was the 34 percent surge in FDI outflows to $196 million (mainly in March) that did the damage.

This is not to say that the overall FDI situation across otherindustries is great – the 10MFY22 total net FDI for Pakistan at $1.45 billion was down 2 percent year-on-year. But telecoms have been faring especially worse. In this ten-month analysis period over five fiscals since FY18, there was net FDI outflows in all years except for FY20. Nearly half a billion dollars in net FDI inflows during 10MFY20 were mainly due to partial receipt of fees from legacy license renewals of mobile network operators (MNOs).

The concerns that have been hampering investments by foreign sponsors of local MNOs mainly revolve around pricing of new spectrum and terms & conditions related to licenses. Those were the apparent reasons behind the top three MNOs staying on the sidelines during the mega spectrum auction that was held in September 2021 (only Ufone participated in that auction). Operators have long complained that they are not getting enough returns from this low-ARPU market to justify steep spectrum purchase prices.

Recent financial performance of MNOs has been disappointing, except for Jazz. During the Jan-Mar quarter this year, Jazz topline grew 9 percent year-on-year to Rs60 billion and its EBITDA grew 14 percent year-on-year to Rs28 billion (read: “Jazz: stability at home, uncertainty abroad,” published May 11, 2022). Telenor Pakistan topline rose just 1 percent year-on-year to Rs26.3 billion and its EBITDA declined 4 percent year-on-year to Rs13.3 billion (read: “Telenor: topline slowdown,” published May 12, 2022). Ufone saw a marginal increase of 1 percent year-on-year in its topline during the quarter, while scoring significantly large operating losses (read: “PTCL: into the read,” published April 14, 2022).

These days, investor apprehensions have seemingly intensified as a result of turbulence in key macroeconomic indicators. For instance, MNOs, who continue to invest capital in mobile broadband network expansion amid limited returns, are encountering declining connectivity spending in real terms, as customer purchasing power has been severely affected by entrenched inflation. And the inflation has not apparently peaked yet, as government has to raise administrated prices of hydrocarbons and utilities.

Moreover, the continued PKR depreciation is affecting sponsors’ returns in their reporting currencies. In effect, the rupee slide is nullifying for sponsors whatever organic growth local MNOs are getting in this highly-competitive market. This is not to say that the twin threats of currency depreciation and rising CPI inflation are not present in the other markets where those foreign sponsors operate. In the case of Pakistan, macroeconomic instability has exacerbated the pre-existing challenges faced by local MNOs.

Amid political and economic uncertainty, the likelihood of holding auction this year (to sell leftover spectrum from previous sale)seems low. Now during budget season, the telecoms executives would be anxious about the cash-starved government imposing additional taxes and duties on telecom services and devices. Recent blanket ban on imports of CBU mobile phones is already a factor that may impact uptake of broadband services.The overall situation, therefore, is not conducive for growth in telecom FDI.

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