Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking (ME15Dubai Conference) ISBN: 978-1-941505-26-7 Dubai-UAE, 22-24 May, 2015 Paper ID: D532 1 www.globalbizresearch.org Impact of Liberalization of Sri Lankan Telecommunication Industry on the Industry, Consumers and Employment Generation S.K.T.I.Prabath, Telecommunication Regulatory Commission of Sri Lanka, Sri Lanka. E-mail: [email protected]S.C.Thushara, Faculty of Commerce and Management Studies, University of Kelaniya, Sri Lanka. E-mail: [email protected]___________________________________________________________________________ Abstract There are many studies done on the subject of liberalization and its impact on economies. Liberalization means relaxation of government restrictions or regulations in the areas or boundaries in a country or an economy. The main purpose of liberalization is to promote the private sector participation (local or foreign) in the economy as it is believed that the private sector is more efficient than the public sector. Currently telecommunication industry is a major service industry in Sri Lanka. Although telephone was considered a luxury good in the past, it has now become an essential good in Sri Lanka due to several factors. Despite the fact that Sri Lanka embraced liberalization in 1977, the telecommunication industry was liberalized in 1996.The main purpose of this study is to examine the impact of liberalization on the telecommunication industry, consumers and employment generation. The study is mainly based on secondary data before and after liberalization of the telecommunication industry collected through various sources. Descriptive statistics and t-tests were mainly used to analyze data. It was found that tele-density has increased rapidly while average revenue per user declined sharply As a result of intense competition consumers enjoy lower tariffs rates and value added services. An employment opportunity in the industry has also gradually increased after the liberalization. In conclusion liberalization of telecommunication industry in Sri Lanka has had significant impact on the industry, consumers and the employment generation. ___________________________________________________________________________ Key words: Liberalization, Telecommunication Industry, Sri Lankan Economy, Privatization JEL Classification: E 30 ; E 65 ; E 66 ; L5 ; L10 ; L86
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Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
Dubai-UAE, 22-24 May, 2015 Paper ID: D532
1 www.globalbizresearch.org
Impact of Liberalization of Sri Lankan Telecommunication Industry
on the Industry, Consumers and Employment Generation
S.K.T.I.Prabath,
Telecommunication Regulatory Commission of Sri Lanka,
As explained in the above from the initial period of liberalization mobile telecom market
was competitive. Therefore the service providers tried to retain their existing customers and
capture new customers by using the strategies. Accordingly the initial stage of the
liberalization of the mobile sector, it has used technology as the strategy to capture market.
The classic example is how the Dialog established in the Market. They have commenced their
network using Global System for Mobile (GSM) technology where the other operators with
Analog technology. GSM technology provides facilities to provide value added services
other than basic services. They have used technological advantage to attract customers to their
network. In line with this they have marketed their motto as “future today” to create customer
mindset that they provide the up to dated new products. However the other three service
providers reacted for Dialog’s strategy with immediate effect to protect the market share.
Hence the all Sri Lankan mobile operators had converted their networks to GSM technology
in 2000.
As the second market strategy the mobile operators applied to expand their network
coverage. They tried to provide network coverage for un-served areas of the country and
capture the customers of such areas. Accordingly the mobile operators could be able provide
their network coverage not only urban areas but also some rural areas in the country. At that
time mobile operators earned high profit margin. However they spent more money as capital
expenditure for investments to increase the network coverage. The above fact has been
confirmed by the annual financial statements of the services providers from 2001 to 2006
indicating more investment on telecom network infrastructure.
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
Dubai-UAE, 22-24 May, 2015 Paper ID: D532
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From year 2005 to Sri Lankan mobile industry started to apply price as the market
strategy. As a result of that it can be identified a huge price reduction in Sri Lankan mobile
market. Each operator tried to retain their customers in their network and tried to grab
customers from the other networks. As a result the Mobile operators started practicing
“anticompetitive practices”1 and “predatory pricing mechanism”2 . As an example it can be
identified Mobitel’s “Upahara”3 tariff plan and Dialog’s “Blaster”4 tariff plan. Both these
tariff plans are very attractive. The other operators have to apply pricing strategies to prevent
churning their customers. They also reduce prices. This went on for several months which
have a feature of “Price War”5 . Further there were another two service providers entered to
the Sri Lankan telecom market during the highly competitive stage that is Dialog Broadband
Networks (Pvt) Ltd in 2005 as fixed telecom service provider and Bharti Airtel Lanka (Pvt)
Ltd as a mobile service provider. Therefore the fixed service providers increased up to four
and the mobile service providers increased up to five. As a result of this the mobile telecom
sector became more and more competitive and the fixed telecom market was also become as a
competitive sector. The following graph (figure 4.8) shows the data about the price reduction
in Sri Lankan mobile market.
Figure 8: Trend of Mobile Call Charges (2000 – 2013)
Source: Authors Construction from the Data Extracted from TRCSL
Note: The data is not available prior to 2000
1 Business practices which harm for fair competition in the sector. 2 Price of the Product is below the cost. 3 Special tariff plan offered for government employees offering 1000 minutes free for onnet and fixed
lines for Rs.240/- monthly rental. 4 A tariff plan where 1000 on net outgoing minutes per month with Rs. 300/- monthly rental. 5 The firms continuously rivalry in the market by reducing price of the product.
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
Dubai-UAE, 22-24 May, 2015 Paper ID: D532
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Figure 9: Profitability of Mobile Telecom Industry (2005 – 2013)
Source: Author’s Construction from the Data Extracted from TRCSL
Note: The data is not available prior to 2005
By considering the industry scenario TRCSL has imposed a floor price for local call
charges in Sri Lankan mobile market to govern the unhealthy completion and protect the
going concern of the sector. The floor price was not affect for the existing customers who
subscribe the tariff plans below the floor price prior to 2009 approved by TRCSL. However
the service providers were not allowed to offer such tariff plans for the new subscribers after
imposed the floor price in 2009. The floor price regulation that implemented in 2009 for Sri
Lankan mobile market is as follows.
Table 1: Floor Price Regulation - 2009
Category Charge (Tariff)
On Net Call Rs. 0.50 per Minute
Off Net Call Rs. 2.00 per Minute
Source: Computed Using Data Extracted from TRCSL
In 2010 TRCSL has revised the floor price. This time the regulator imposed floor price as
per the billing mechanism i.e. per second and per minute. In addition to that it has
implemented a floor price for Short Message Service (SMS) since the service providers
significantly reduce the SMS price after 2009. The SMS charge was Rs. 2.00 per message in
2009 and it was reduce up to Rs. 0.25 per message in 2010. Further TRCSL has imposed
same floor price for fixed telecom sector. Since it also more competitive after 2009 and they
also reduced their call charges up to mobile floor price in 2009. The floor price revision
implemented in 2010 is as follows.
Table 2: Floor Price Regulation - 2010
Category
Charge (Tariff)
Per Minute Billing Per Second Billing
On Net Call Rs. 1.00 per Minute Rs. 1.25 per Minute
Off Net Call Rs. 2.00 per Minute Rs. 2.50 per Minute
On Net SMS Rs. 0.10 per message
Off Net SMS Rs. 0.25 per Message
Source: Computed Using Data Extracted from TRCSL
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
Dubai-UAE, 22-24 May, 2015 Paper ID: D532
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Based on the market situation TRCSL has revised the floor rate in 2011 and it applicable
for Sri Lankan telecom market (fixed and mobile) up to date. This time TRCSL has permitted
to the service providers to reduce their off net call charges Rs. 0.50. The other rates remained
unchanged.
4.2 Employment Opportunities Generation in Telecom Industry
As a whole the initial years after liberalization it has shown a growth trend in the
employments. However the recent years, there is a declining trend in the direct employment
in the telecom sector. The annual reports of the telecom service indicated that they have fired
some employees since their profit margins are shrinking. The above scenario is not healthy
for the economy since the unemployment is a core issue in Sri Lanka. By considering the
above as a hole it can be further proved that the floor price regulation is still needed for
telecom sector. Further it may generate again more employment opportunities when the
industries get the long term stability.
5. Conclusions and Recommendations
5.1 Conclusions
One key parameter to identify the telecom market is the change of teledensity. In this
study it was clearly identified that the number of telephone connections were very minimal
until 1996. Thereafter slide growth until 2002 and exponential growth after 2002. Which
clearly shows that the liberalization resulted increasing the telephone connections and thereby
the teledensity. Hence, it can be concluded that the liberalization has positively impact to the
telecommunication industry.
Another indicator considered in this study was the waiting list to get a SLT telephone
connection. Before liberalization telephone line was considered as a luxury item since a
potential customer has to wait years to get the connectivity. By that time SLT maintain a list
of their potential customers called waiting list. It was increasing sharply until 1997 and small
down trend in 1998 due to appearance of new operators Suntel and Lankabell as a result of
liberalization. After 2004 the waiting list was abolished due to two reasons. That is consumers
were able to obtain the mobile telephone connectivity and the boost of CDMA connectivity.
Hence it can be conclude liberalization has positively impacted to the telecommunication
industry in Sri Lanka.
Average Revenue Per User (ARPU) is another indicator which shows how the benefit of
liberalization passes to the customers. It was identified from the study that the ARPU has
dropped over the period. Hence liberalization improved the competition where the benefit
passes to the customers.
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
Dubai-UAE, 22-24 May, 2015 Paper ID: D532
17 www.globalbizresearch.org
Market and non-market strategies adopted by the operators as a result of liberalization. Before
the liberalization there was a monopoly hence no strategies required to increase the
subscribers. Rather in this era excess demand exist in the market. However after liberalization
the market competition push operators to adopt strategies to increase their subscribers.
Accordingly, they have adopted technological strategies by introducing latest technology
where customers could use value added services.
Together with the liberalization Sri Lanka telecom was privatized and conducted five
tariff rebalancing process. It mainly concentrated on liberalizing IDD tariffs. Further market
competition went up radically. The local call changes are also came down. The operators
started to excessive pricing strategies to attract customers. Accordingly lot of innovative tariff
plans was introduced to the market. Further they dropped the price rapidly even below than
the cost. The regulator has to impose a floor price and control the market. Hence it can be
concluded that the liberalization assists to droop the telecom prices.
It is a general phenomena that the growth of an industry creates more employment
opportunities. It was found from this study a gradual increase of employment opportunities
recorded in the telecommunication industry. Which is a positive indicator of the
liberalization.
5.2 Recommendation
Before liberalization of the telecommunication industry, it was controlled by the
government. Therefore the government is responsible on satisfying the stakeholder’s interests.
The consumer interests were looked after by the government. After the liberalization, the
foreign and local private entities were licensed as telecom operators. Hence, the independent
Telecom regulator had to play a vital role in safeguarding the consumer interest and to
achieve government objectives. Due to the increase of the competition the role of the
regulator became important than ever before. Hence it can be recommended to straighten the
regulator to achieve the objective of the Government, consumer’s interest and to safeguard
the industry.
The operator’s prime objective is to earn profits. Therefore when they invest, they look in
to the business model whether the investment is profitable. Investing in remote areas will not
generate enough revenue for them to promote investments. It is a government requirement to
give the connectivity to these unnerved or underserved areas. Hence It can be recommended
that the government should encourage the operators by giving subsidies to provide
connectivity to unserved and underserved areas.
As a result of liberalization more and more operators started their operations in Sri Lanka.
The new entrants struggling to increase the market share. They cut down the prices and
introduced attractive tariff plans. As a result existing operators have to tie-up their customers
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
Dubai-UAE, 22-24 May, 2015 Paper ID: D532
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by dropping the price. It is a threat for the sustainability of the industry. In order to keep
sustainability of the industry the rules relating to tariffs should be updated in timely manner.
The scare resource like spectrum has to be managed in effective and efficient manner to
deliver better service. It enhances resource availability to introduce new technologies and
managing existing services without interference. Hence it can be recommended to manage
scare resources allowing telecom operators to provide their services in optimal manner.
In line with the technology development the avenues were open for people to misuse the
service. Hence it is recommended to increase customer awareness on the services in
liberalized market environment in order to stop the vulnerability of misusing the services. The
service provider has to properly communicate the servicers and has to strengthen the
surveillance. The government has to impose proper legislations.
5.3 Further Study Areas
Telecommunication is an important service industry in an economy. Further this is a
dynamic industry. As per the industry need more modern ideas for its future success. The
following areas can be mentioned as the further study areas of the telecom industry.
Specific model for measure the telecom industry development.
Indirect employment opportunities generated in telecom industry and its impact for
unemployment issue in Sri Lanka.
The impact of the Floor Price regulation for telecom industry
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Dubai-UAE, 22-24 May, 2015 Paper ID: D532
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