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Telecom Deregulation and Post PTCL privatization

The telecommunication sector around the world has been undergoingdramatic reforms since the 1980s. Developing countries have beenprivatizing state-owned firms and slowly introducing competition into thetelecom sector.

In general, privatization, especially when combined with effective regulatoryinstitutions, improves telecom service. However, we have almost no

empirical information on the real effects of the details of the privatizationtransaction. Therefore how this animal will look like? is still a debate.

Telecom markets around the world in the nineteenth century were highlycompetitive (Petrazzini, 1996). Nonetheless, telecom soon came to beviewed as a natural monopolythat it could be provided at the lowest costby one firm. Most developing countries nationalized their telecom providersin the 1960s, with disastrous consequences for service. By 1981 Africa andLatin America averaged only 0.8 and 5.5 telephones per hundred people,respectively, compared to 83.7 in the United States. In the 1980s, the

nationalization trend began to reverse itself. Though the specifics differ bycountry and region, in large part three common factors drove reforms aroundthe world:

First, the exceptionally poor performance of state-owned telecom firmsgenerated pressure for reforms. Long waiting periods for telephoneconnections and the unreliability of those connections generated populardemand, while inefficient operations often requiring large subsidiesencouraged governments to divest firms that were draining national

treasuries.

Second, international lending organizations began pressuring countries todivest.Substantial evidence reveals that privatization can lead to performanceimprovements.

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Megginson, et al (1994) compare pre- and post-privatization financial andoperating performance of 61 companies (in 32 industries, includingtelecommunications) from 18 countries. They find increased sales, profits,

investments, and employment following privatization. Not surprisingly,given the regions relatively early start in reforms, most of this evidence isfrom Latin America.

In general, these studies find positive effects of reforms (e.g., Wellenius, etal 1992; Kikeri, Nellis, and Shirley, 1992).

Finally, there was a general worldwide trend towards divestiture, startedlargely by Britains Thatcher government in 1979, which coined the term

privatization (Megginson, 2000).

At the beginning of 2003 , more than half of the countries in the world hadfully or partly privatized their incumbent telecom operators. The process isgoing on in many countries. However, some countries face difficulties withattempted privatization. The pace of privatization has stalled basically due topoor market conditions and for political reasons. In most cases, privatizationfaced resistance from labor unions, oppositions parties and armed force onamount of national security concern due to perceived involvement offoreigners in critical telecom sector. In Pakistan, efforts have been going on

to privatize PTCL since 1992 but so for without any outcome.

Global Landscape of Privatization

Figure.

0 20 40 60 80 100

Americas - 74%

Europe - 73%

Asia Pacific - 53%

Africa - 40%

Arab States - 43%

Gloabal Landscape of

Privitization

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Objectives of Privatization

The countries opting to privatize national telecom monopolies have differentobjectives. Many countries have resorted to privatization as part of thereforms of telecom sector (Europe, USA, Japan). Some countries haveturned to the sale of incumbent company as a means of generating revenue.The sale could be part of the social agenda (Nicaragua).

The present environment of telecommunications is characterized by globaltrends in technology advancement and liberalization. Global focus ondeveloping countries has influenced the prospects of deregulation and trade

liberalization in the telecommunications sector. Consequently, leading edgecommunications services will have to be offered if they have to stay abreastof their competitors.

In a landmark pact by the WTO, 68 countries, which control 95% of theworlds telecommunications market have agreed to completely liberalizetheir telecommunications. Privatization has also been done to meet theWTO obligations. The market barriers are breaking down by loweringcosts to consumers through increased competition.

In the developing countries, investment in Telecom infrastructure isconsidered a necessary foundation for economic growth. Massive investmentis required to combat low Tele-density, poor service quality and to introducemodern technologies. Such investments are far beyond the reach of manygovernments that other social and development programs requiring urgentfunding.

Bottom line of all privatization decisions, stated objectives notwithstanding,remains to address the needs of telecom modernization, attract private sector

investment, reduce government involvement to ensure fair competition (topromote greater rivalry among firms, leading to improved productivity,wider consumer choice and lower prices) and growth of the sector (sectorgrowth to act as catalyst in stimulating the competition of economy).

World growth depends on the telecommunications sector. Thetelecommunication's market is highly concentrated in the developed world

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while developing countries are experiencing double digit growth. Servicesinnovation should be enhanced in the basic and value added services forgenerating quicker revenues. Further, the orders in which structural

adjustments take place determine their effectiveness.

Countries are increasingly moving towards competition especially in mobilecommunication and Value Added Services such as Internet, cellular phonesand paging. Telephone service providers will accelerate this competition byproviding advanced cost effective services. Still, more than 70 percent of allcountries maintain a monopoly in basic services while more than half allowcompetition in mobile service (ITU, 1999).

Cellular and mainline penetration in competitive markets is higher than innoncompetitive markets. There is an increase in the number of telephonemainlines per capita in countries that privatize relative to countries that donot. Although privatization can lead to performance improvements but amonopoly provider faces fewer incentives to offer quality services at lowercost than do firms operating in a competitive environment.

Simply moving the monopoly from the public to the private sphere will notresult in competitive behavior. A firm with a guaranteed monopoly is alsolikely to invest less since it does not have to worry about more efficient

competitors stealing market share. Even the threat of entry, which istypically the situation when reforms are introduced, can be enough to inducethe incumbent to invest.

Competition is also essential for network improvements and insuringprofitability. It is an important factor than ownership in introducingefficiency in a post privatization scenario. Bermuda could be a greatexample to follow where multiple international carriers introduced acompetitive environment. The incumbent carrier in Bermuda was not

disadvantaged in this environment. Rather, the country is beginning toemerge as a transatlantic telecommunications hub that will ultimately linkNorth America, Europe, Latin America and the Caribbean.

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Approaches/Methodologies

No specific model of privatization has been followed/ recommended. Infact,there are as many approaches as there are countries who have embarkedupon privatization programmed. The privatization has either beenundertaken as an independent process or combined with marketliberalization programmed. Generally four patterns have emerged:-

a. Privatization with Full Competition: In this model, a policy of fulland open competition is implemented at the same time asprivatization. Restrictions on entry into all sections of the telecom

market are removed. This model was utilized by New Zealand in1990: Chile the first Latin American country to open its LatinAmerican country to open its telecom markets to private sector isanother example of a privatized and fully liberalized market.

b. Privatization with Phased- In Competition: In model two,privatization of national carriers is accompanied by the period ofexclusivity rights, or limited competition, in basic telephone services.In some instance only fringe services are liberalized at the outset. Inthis model, national carriers are privatized with a gradual andmeasured implementation of competition with exclusivity in theprovision of basic service guaranteed for a certain period of years.Several countries in Europe have followed the process of partialprivatization. Some countries have broken the incumbent into numberof companies before privatization (USA, India, Argentina, China andBrazil etc) while others have opted to privatize it as a single entity (SriLanka, Malaysia, Philippines, Mexico, Denmark, Hungary, UK andNew Zealand etc).

c. Liberalization without Privatization: Government may introduceliberalization into the telecom market without actually privatizing thenational carrier. One reason for pursuing this approach is to gain theadvantages of foreign investment, technology and managementexpertise without suffering the political disadvantages and disruptionsof privatization transaction. Some of these disruptions includeopposition from worker union based on fear of job loss, military and

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defense interest based on fear of loss of control and security overcritical communication facilities and in some instances, constitutionalprohibition again foreign ownership.

d. Private sector Participation without Privatization andLiberalization: This is an innovative way of attracting private sectorinvestment and expertise without actually privatization andintroducing competition. Ways of doing this include the granting ofconcessions by national operators to private industry to build and/ oroperate certain facilities or services. The national operator then entersinto a management contract to improve operations and enhancedprofitability. In this model, foreign investments are invited in the form

of build, transfer and operate (BTO) arrangements. In thisarrangement, private companies invest capital to develop a project andoperate the system for a period of time; ownership rights areeventually transferred to the government company. Example of thesearrangements is in Saudi Arabia and China where private sectorparticipation in telecom is not permitted. Private companyinvolvement is limited to consultant services and supply contracts. Ithas generally been experienced that investor that obtains managementcontrol of a national company through privatization transaction isitself controlled/influenced by government of foreign country, the

investor belongs to. This has commonly occurred in Latin America(Mexico, Chile, Peru and Bolivia etc)

Lessons from Global Experience

One of the most important lessons learnt from the experience of countrieswho have privatized the incumbent along-with sector liberalization is thatprivate monopolist invariably resort to anticompetitive practices with a view

to retain the market share and create problems for the business of newentrants.

The success of new entrants depends, inter-alia, on the behavior ofincumbent to accommodate new players. If incumbent doesnt cooperate onaccount of interconnection and sharing of facilities etc, the new operatorswill run into difficulties. The examples of non-cooperation from the

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incumbent are Sri Lanka, Mexico, Philippines and New Zealand etc wherenew operators faced difficulty because of incumbents behavior. As a resultmarket share of new operators remained marginal even after many years.

The sector growth was also slow and incumbent retained the major marketshare.

The fairness and success of competition depends significantly on the abilityof the authorities which control market abuses caused by dominant operator.This arrangement could be possible through regulatory control ofinterconnection and pricing policies.

In new New Zealand, there was no regulator when Telecom Corporation of

New Zealand (TCNZ) was privatized in 1990. It was a true deregulatoryapproach by implementing competition without establishing regulatoryauthority. As a result there were many court cases on account ofinterconnection. Finally, the courts suggested establishing regulatoryauthority to deal with such issues.

It may be kept in view that though tight regulatory frame work is veryimportant for ensuring fair competition but in practice, incumbent still hasthe capability to create hurdles in many subtle ways to hamper growth ofother competitors.

Mexico Experience In 1990, 20.4% shares of the incumbent (Telmex) sold to a

consortium

Deregulation started in 1996 New entrants slow in network deployment Telmex created interconnect problems for new entrants WTO through Regulator intervened and initiated corrective

action concerning high tariff and poor QoS

Telmex still dominant operator Market share of new entrants negligibleSri Lanka Experience Some Licenses Issued before Privatization 38.5% shares of the incumbent (SLT) sold to NTT Japan in 1997

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NTT resorted to anticompetitive practices Leased line charges unreasonable Hurdles to share infra structure Interconnection problems Market share of new entrants negligible Line rent and local call rate increased by 200% and 250%

respectively.

Access to capital investment is a major issued to be solved in a postderegulated environment. In India,the government has attempted to addressthe problem of capital access by allowing foreign companies to participate in

service provision. The Indian government also provided an institutionalframework for disinvestment but the overall regulatory issues, legalframework and infrastructure unavailability are still the impediments toattract foreign companies in India.

Indigenous technology development in post deregulated environmentguarantees a healthy growth in telecom sector. Lessons from Korea'sexperience of successfully developing indigenous switching technology areworth noting. The key components of this strategy were the alliance between

the telecom authorities, equipment manufacturers, and telecom researchinstitutions. Continued and stable financial support from government and itsrole in effectively coordinating the interlinkages between business andresearch institutes were important instruments in this program. Further, thegovernment closely monitored the progress and removed bottlenecks duringthe development phase.

The state owned service provider PTCL is going to be privatized in comingmonths. The company has a huge infrastructure which is primarily providingvoice services to 4.3Million customers. Voice services make up a total of

95% of PTCL revenues. Data services make only 5% of the revenues whichis far below the globally accepted standard of 30% so, after the privatizationof PTCL, we are anticipating a broadband data services future based on nextgeneration network solutions.

Liberalization of Telecom Sector in Pakistan

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Pakistan followed a gradual approach to liberalize its telecom market.During 1990s, as a first step, market was opened for value added servicesand competition was introduced in cellular mobile sector as four licenses

were issued (Mobilink, PTML, PakTel and Instaphone). The governmentmonopoly was retained in fixed line services, however, PTCL legalmonopoly ended w.e.f 31 December 2002. The government announcedTelecom Deregulation Policy and Cellular Mobile Policy in 2003 and 2004respectively. The telecom regulatory, issued new licenses for Long distanceInternational (LDI) and Local Loop Fixed (LL Fixed), Wire Local Loop(WLL) and Cellular Mobile. With the issuance of new licenses the market isnow open for full competition in all segments of the sector. The number ofnew licenses issued :-

a. Cellular Mobile 2b. LDI 12c. LL (Fixed) 76d. WLL 92

Efforts have now been renewed to privatize the PTCL, the incumbent stateowned operator. Looking at the general pattern of liberalization andprivatization, Pakistan seems to have followed a safe approach i.e.liberalization followed by privatization (under process). Comparatively, this

approach is considered safe because by the time PTCL privatization processis concluded; new entrants would have established their networks and willbe busy in consolidating their business. New operators will have sufficienttime to sort out interconnect agreement and other problems with thegovernment owned incumbent before its control is handed over to strategicinvestor who will obviously have different outlook and objectives vis--visgovernment policies.

Dr. Abdul Hafeez Sheikh (Federal Minister for Privatization and

Investment) said that the process of the privatization not only helped inlending more depth to country's stock market but also ensured the share ofcommon man in the ownership of state-owned enterprises.

Government of Pakistan should demonstrate its political will to enforce therules and regulations for the growth of telecom sector enterprises in aderegulated environment.

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Currently Services and ICT sector make up for 5% and 3% respectively ofthe GDP of Pakistan. In a post deregulation scenario these figures will showsignificant improvements in the coming years.

PTCL has tons of copper buried under the ground which can be exploited forbroadband services based on IP technologies. The average distance betweenthe exchange and the subscriber in the case of Pakistan is too high. This is sobecause the network was planned for voice-only operations that work on theold technology. However, as residential and commercial broadband accesssolutions gain popularity, these copper pairs will be used for xDSL servicesas well. A prime requirement for running most of the DSL service is that thecable length from the exchange to the subscriber should be limited to less

than three cable-route kilometers. A few services that can offer multi-megabit access rate require an exchange-to-subscriber cable distance of lessthan a kilometer.

Currently, PTCL has O&M Contracts with four private sector operatorsnamely Habib Rafiq International, Micronet Broadband, Multinet Broadbandand Sysnet Pakistan to deploy countrywide DSL networks. The newmanagement of PTCL may make the situation better by redesigning theirwhole network, where instead of one big exchange covering a very largearea the scene would change to smaller areas being serviced by numerous

exchanges. In a deregulated environment we can anticipate the establishmentup of private telephone operators that would follow this trend or willestablish wireless broadband services whose market is estimated over$100M. This would generate immense competition among the serviceproviders and ultimately at the end of the day it will be the customer whowill benefit from this competition.

Advances in wireless technology alone allow competing firms to roll outtelecommunications services with relatively low sunk costs which is an

attractive option in many developing countries. PTCL has successfullyrolled out its first phase of CDMA WLL project for 0.284M customers toprovide basic telephony and data services. The contract for provisioning of2.2M CDMA WLL connections during this year has been signed and effortsare in progress for the provision of 6M WLL connections next year. OtherLocal Loop operators like WorldCall, DVCom and Telecard are alsobuilding their infrastructure for provision of basic telephony services based

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PTCL Obligations towards Defense Forces

Tri-Services strategic communication is established on PTCL fiber opticbackbone. Operation, maintenance and security of these facilities as well asthe main fiber route are with PTCL. The present arrangements will continuein post-privatized environment. Once PTCL is handed over to a privateowner, security of this network could be become an issue.

PTCL presently is providing all services to the defense forces on noncommercial PTCL rates.

PTCL Dominance on Essential Bottleneck Facilities

PTCL has complete dominance on all essential bottleneck facilities. Bydefinition, essential facilities are those (1) that are required by competitors inorder to compete for the business of end customers (2) predominantlysupplied by the incumbent (3) technically or economically difficult tosubstitute, at least on a widespread basis. A telecommunications operatorthat controls an essential facility often has both the incentive and the meansto limit access to the facility by competitors. The Government should ensurethat essential facilities are available to competitors on reasonable terms.Without such access, competition will suffer, and the sector will operate lessefficiently than it could. The network facilities for which other operators willdepend on PTCL, which can not be substituted in immediate future andimplications/ connected problems are mentioned here under.

International Private Leased Circuits (IPLCs)

IPLCs (E1/E3s/STMI) are leased for international tariff by LDI operators.These circuits are leased from under sea cable (SEMEWE-III) which PTCLhas monopoly on, for selling to private customers in Pakistan. Similarly forsatellite circuits, access through PTCL earth station is another essentialrequirement of LDI operators. IPLC rate are specified in the RIO, however,PTCL is offering IPLCs against security advance. The amount of securityadvance is not fixed and may be burdensome for some operators. PTCL has

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reserved the FLAG cable for IP Connections; however, IP rates are notcovered in the RIO. LDI operators have been prohibited not to establish hubsin foreign countries. However, enforcement of this particular restriction is

not easy and there is a strong possibility of violation of this restriction.Moreover, PTCL itself is not entering into agreements with other carrierswho have hubbing facilities. Therefore, restrictions on hubbing need to bereviewed.

Digital Interface Unit (DIUs)

DIUs (EIs) are interfaces installed between PTCL Transit switches and LDITransit Switches/Micro Gateways for which rates are covered in the RIO.

DIUs are also required for LL and CMTs operators. Availability of DIUs hasbeen a problem even for existing CMTs operators and PTA has to interveneand direct PTCL to meet their requirement. Non-availability of DIUs as perdemand will create severe problems for LDI, LL and CMT operators.

Access Networks

As per the license conditions, LDI operators are authorized to providecertain telecom facilities to corporate customers. This includes VPNs; dataservice and call centers etc. Different locations of corporate customers mayrequire to be interconnected for provisioning of these facilities. Theinterconnection of such sites will be through LDI or PTCL leased circuitsi.e. optical Fiber Access Network (OFAN) or Optical Fiber Junction AccessNetwork (OFJAN).

Refusal or delay in providing essential facilities to competitors;providing services or facilities to competitors at excessive prices or ondiscriminatory terms;

Predatory pricing and /or cross subsidization of competitive serviceswith revenues obtained from services which are subject to lesscompetition;

Bundling of services designed to provide the dominant firms withexclusive advantages in subscriber markets or require a competitor toobtain services or facilities which it does not truly need.

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Copper Local Loop

Fixed Line Local Loop operators (new entrants) may require leasing CopperLocal Loop from PTCL for extending service (Voice and DSL etc.) fromtheir network to the customers. New management of PTCL may exploit itsdominance on copper pairs to its advantage by offering substandard pairs toother competitors thus making their service in-efficient and poor fromquality point of view. This facility could have been availed by new operatorson competitive rates if the incumbent had unbundled local loop. Sinceunbundling of local loop has not been done, therefore, rates for copper pairshave not been fixed/specified in the RIO. The unbundling can be (1) Fullunbundling (2) Shared use of the Copper Line of Provision of DSL etc. (3)

High speed bit stream access by the incumbent. The purpose of unbundlingis that new entrants need not pay for network components or facilities whichare not required for services to be provided. In Pakistan shared use of copperline of DSL and other is already being done, however, full unbundling oflocal loop has not been done, as some is not required under Telecom De-Regulation Policy. The purpose of this policy decision seems to be forcingnew fixed line operators to develop their own local loop network instead ofdepending on PTCL. However, fixed line local loop operators can / will stillutilize PTCL copper pair in required basis through commercial agreementsin different telecom regions.

Other Facilities

Other essential facilities may include right way and support structure (polesand conduits) etc. The policy and regulations are silent regarding theseaspects and new entrants are expected to deal with PTCL as individualclients.

Abuse of Dominant Position

The concept of abuse of dominance includes a broad range of anti-competitive conduct recognized in the laws and policies of many countries.It is similar to, but broader than the concept of monopolization that is foundin some laws. While there are different definitions of abuse of dominance,

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there are common themes in the definitions. The essential characteristics ofabuse of dominance include:-

A firm has a dominance market position in the relevant market; and The firm uses that position to engage in abusive conduct which is or

likely to be harmful to competition.

With liberalization of telecom markets in Pakistan, PTA is now increasinglyconcerned to monitor progress of the sector and watch for the impedimentsthat may hinder the growth of new entrants and thus the growth of sector.Among other difficulties, likely abuse of dominance by PTCL, theincumbent operator, cannot be overlooked.

The dominance abuse of incumbent in Pakistan may be manifested inmore pronounced manner in future as government is planning totransfer management control of PTCL to a strategic investor throughprivatization process.

It is extremely difficult to enumerate and codify all forms ofanticompetitive behavior which PTCL, a market dominant entity mayuse to hinder the development of competition and growth of newentrants.

In addition to the classic forms of abuse of dominant position, PTCLhas many subtle ways in which massive network dominance can beexploited to create unmatchable advantage. It is this nature ofadvantages that PTA needs to asses very carefully and takeappropriate regulatory initiatives for ensuring fair competition.

Analysis of telecom market, around the globe reveals that there are numberof anticompetitive practices, being practiced by the incumbent operators.These practices are almost same in every country. However, certain newforms of abusive conduct are also being recognized today.

Cross Subsidization

PTCL is providing range of services i.e. Fixed Line, Cellular Mobile andInternet etc. As the world experience shows, incumbent can engage in crosssubsidization which means that price of one market may be increased abovethe cost and use the surplus revenue obtained from this market to subsidize

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the lower prices in other markets where more competition is faced.Analyzing PTCL position against this experience and seeing the prevailingcompetition environments of Pakistan, it can be safely concluded and seeing

the prevailing competition environments of Pakistan, it can be safelyconcluded that cross subsidization is not possible in Cellular Mobile and ISPmarkets. However, in Fixed Line segment, there is a real possibility of crosssubsidization. PTCL can lower rates of line rent, installation charges andlocal calls and correspondingly increase rates of NWD and International outbound traffic/maintain present level/ lower the prices but still remain on thehigher profit margin side. Alternatively as part of overall business strategy, itcan offer different packages i.e. residential and corporate customers, ruraland urban and economy groups etc. within each package the prices can be

cross subsidized. This practice can have adverse effects on the growth ofother licenses particularly those not having vertical integration. This abusecan be controlled through license conditions and accounting separationwhich will determine the existence of cross subsidization.

Price Discrimination

In order to retain and even expand the market share, PTCL can resort toprice discrimination. This can be between users of own network and otheroperators networks. For example PTCL may fix different rates for intra-network calls and inter-network calls. Lower rates of intra-network calls willbe strong temptation for customers to remain stuck of PTCL instead ofswitching over to other choice operators. This practice will be a restraint forother operators, hence will be considered anti-competitive.

Vertical Price Squeeze

PTCL can increase the price of upstream input (local access). Itmonopolizes, and keep the downstream services (ISPs, DSL and Payphones

etc.) price same. The effect would be reduction or elimination of the profit ofdownstream service providers because their margins would be squeezed. Toincrease the squeezing effects, PTCL can also reduce downstream price ofits own services. To control price discrimination, the regulator can imposewholesale cost imputation requirements.

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Conclusion

The above mentioned issues, like dominant positions, IPLC PTCLobligation, and states should be taken care of; otherwise PTCL will becomea wild animal, unleashed.