Telecom Deregulation and Post PTCL privatization

The telecommunication sector around the world has been undergoing dramatic reforms since the 1980s. Developing countries have been privatizing state-owned firms and slowly introducing competition into the telecom sector. In general, privatization, especially when combined with effective regulatory institutions, improves telecom service. However, we have almost no empirical information on the real effects of the details of the privatization transaction. Therefore how this animal will look like? is still a debate. Telecom markets around the world in the nineteenth century were highly competitive (Petrazzini, 1996). Nonetheless, telecom soon came to be viewed as a natural monopolythat it could be provided at the lowest cost by one firm. Most developing countries nationalized their telecom providers in the 1960s, with disastrous consequences for service. By 1981 Africa and Latin 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 by country and region, in large part three common factors drove reforms around the world: First, the exceptionally poor performance of state-owned telecom firms generated pressure for reforms. Long waiting periods for telephone connections and the unreliability of those connections generated popular demand, while inefficient operations often requiring large subsidies encouraged governments to divest firms that were draining national treasuries. Second, international lending organizations began pressuring countries to divest. Substantial evidence reveals that privatization can lead to performance improvements.

Megginson, et al (1994) compare pre- and post-privatization financial and operating performance of 61 companies (in 32 industries, including telecommunications) 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 is from Latin America. In general, these studies find positive effects of reforms (e.g., Wellenius, et al 1992; Kikeri, Nellis, and Shirley, 1992). Finally, there was a general worldwide trend towards divestiture, started largely 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 had fully or partly privatized their incumbent telecom operators. The process is going on in many countries. However, some countries face difficulties with attempted privatization. The pace of privatization has stalled basically due to poor market conditions and for political reasons. In most cases, privatization faced resistance from labor unions, oppositions parties and armed force on amount of national security concern due to perceived involvement of foreigners 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.
Arab States - 43% Africa - 40% Asia Pacific - 53% Europe - 73% Americas - 74% 0 20 40 60 80 100
Gloabal Landscape of Privitization

Objectives of Privatization
The countries opting to privatize national telecom monopolies have different objectives. Many countries have resorted to privatization as part of the reforms of telecom sector (Europe, USA, Japan). Some countries have turned 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 global trends in technology advancement and liberalization. Global focus on developing countries has influenced the prospects of deregulation and trade liberalization in the telecommunications sector. Consequently, leading edge communications services will have to be offered if they have to stay abreast of their competitors. In a landmark pact by the WTO, 68 countries, which control 95% of the worlds telecommunications market have agreed to completely liberalize their telecommunications. Privatization has also been done to meet the WTO obligations. The market barriers are breaking down by lowering costs to consumers through increased competition. In the developing countries, investment in Telecom infrastructure is considered a necessary foundation for economic growth. Massive investment is required to combat low Tele-density, poor service quality and to introduce modern technologies. Such investments are far beyond the reach of many governments that other social and development programs requiring urgent funding. 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 (to promote greater rivalry among firms, leading to improved productivity, wider consumer choice and lower prices) and growth of the sector (sector growth to act as catalyst in stimulating the competition of economy). World growth depends on the telecommunications sector. The telecommunication's market is highly concentrated in the developed world

while developing countries are experiencing double digit growth. Services innovation should be enhanced in the basic and value added services for generating quicker revenues. Further, the orders in which structural adjustments take place determine their effectiveness. Countries are increasingly moving towards competition especially in mobile communication and Value Added Services such as Internet, cellular phones and paging. Telephone service providers will accelerate this competition by providing advanced cost effective services. Still, more than 70 percent of all countries maintain a monopoly in basic services while more than half allow competition in mobile service (ITU, 1999). Cellular and mainline penetration in competitive markets is higher than in noncompetitive markets. There is an increase in the number of telephone mainlines per capita in countries that privatize relative to countries that do not. Although privatization can lead to performance improvements but a monopoly provider faces fewer incentives to offer quality services at lower cost than do firms operating in a competitive environment. Simply moving the monopoly from the public to the private sphere will not result in competitive behavior. A firm with a guaranteed monopoly is also likely to invest less since it does not have to worry about more efficient competitors stealing market share. Even the threat of entry, which is typically the situation when reforms are introduced, can be enough to induce the incumbent to invest. Competition is also essential for network improvements and insuring profitability. It is an important factor than ownership in introducing efficiency in a post privatization scenario. Bermuda could be a great example to follow where multiple international carriers introduced a competitive environment. The incumbent carrier in Bermuda was not disadvantaged in this environment. Rather, the country is beginning to emerge as a transatlantic telecommunications hub that will ultimately link North America, Europe, Latin America and the Caribbean.

Approaches/Methodologies
No specific model of privatization has been followed/ recommended. Infact, there are as many approaches as there are countries who have embarked upon privatization programmed. The privatization has either been undertaken as an independent process or combined with market liberalization programmed. Generally four patterns have emerged:-

a. Privatization with Full Competition: In this model, a policy of full and open competition is implemented at the same time as privatization. Restrictions on entry into all sections of the telecom market are removed. This model was utilized by New Zealand in 1990: Chile the first Latin American country to open its Latin American country to open its telecom markets to private sector is another 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 of exclusivity rights, or limited competition, in basic telephone services. In some instance only fringe services are liberalized at the outset. In this model, national carriers are privatized with a gradual and measured implementation of competition with exclusivity in the provision of basic service guaranteed for a certain period of years. Several countries in Europe have followed the process of partial privatization. Some countries have broken the incumbent into number of companies before privatization (USA, India, Argentina, China and Brazil etc) while others have opted to privatize it as a single entity (Sri Lanka, Malaysia, Philippines, Mexico, Denmark, Hungary, UK and New Zealand etc). c. Liberalization without Privatization: Government may introduce liberalization into the telecom market without actually privatizing the national carrier. One reason for pursuing this approach is to gain the advantages of foreign investment, technology and management expertise without suffering the political disadvantages and disruptions of privatization transaction. Some of these disruptions include opposition from worker union based on fear of job loss, military and

defense interest based on fear of loss of control and security over critical communication facilities and in some instances, constitutional prohibition again foreign ownership. d. Private sector Participation without Privatization and Liberalization: This is an innovative way of attracting private sector investment and expertise without actually privatization and introducing competition. Ways of doing this include the granting of concessions by national operators to private industry to build and/ or operate certain facilities or services. The national operator then enters into a management contract to improve operations and enhanced profitability. In this model, foreign investments are invited in the form of build, transfer and operate (BTO) arrangements. In this arrangement, private companies invest capital to develop a project and operate the system for a period of time; ownership rights are eventually transferred to the government company. Example of these arrangements is in Saudi Arabia and China where private sector participation in telecom is not permitted. Private company involvement is limited to consultant services and supply contracts. It has generally been experienced that investor that obtains management control of a national company through privatization transaction is itself 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 countries who have privatized the incumbent along-with sector liberalization is that private monopolist invariably resort to anticompetitive practices with a view to retain the market share and create problems for the business of new entrants. The success of new entrants depends, inter-alia, on the behavior of incumbent to accommodate new players. If incumbent doesnt cooperate on account of interconnection and sharing of facilities etc, the new operators will run into difficulties. The examples of non-cooperation from the

incumbent are Sri Lanka, Mexico, Philippines and New Zealand etc where new operators faced difficulty because of incumbents behavior. As a result market share of new operators remained marginal even after many years. The sector growth was also slow and incumbent retained the major market share. The fairness and success of competition depends significantly on the ability of the authorities which control market abuses caused by dominant operator. This arrangement could be possible through regulatory control of interconnection 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 deregulatory approach by implementing competition without establishing regulatory authority. As a result there were many court cases on account of interconnection. Finally, the courts suggested establishing regulatory authority to deal with such issues. It may be kept in view that though tight regulatory frame work is very important for ensuring fair competition but in practice, incumbent still has the capability to create hurdles in many subtle ways to hamper growth of other 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 negligible

Sri Lanka Experience

Some Licenses Issued before Privatization 38.5% shares of the incumbent (SLT) sold to NTT Japan in 1997

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 post deregulated environment. In India, the government has attempted to address the problem of capital access by allowing foreign companies to participate in service provision. The Indian government also provided an institutional framework for disinvestment but the overall regulatory issues, legal framework and infrastructure unavailability are still the impediments to attract foreign companies in India. Indigenous technology development in post deregulated environment guarantees a healthy growth in telecom sector. Lessons from Korea's experience of successfully developing indigenous switching technology are worth noting. The key components of this strategy were the alliance between the telecom authorities, equipment manufacturers, and telecom research institutions. Continued and stable financial support from government and its role in effectively coordinating the interlinkages between business and research institutes were important instruments in this program. Further, the government closely monitored the progress and removed bottlenecks during the development phase. The state owned service provider PTCL is going to be privatized in coming months. The company has a huge infrastructure which is primarily providing voice services to 4.3Million customers. Voice services make up a total of 95% of PTCL revenues. Data services make only 5% of the revenues which is far below the globally accepted standard of 30% so, after the privatization of PTCL, we are anticipating a broadband data services future based on next generation network solutions.

Liberalization of Telecom Sector in Pakistan

Pakistan followed a gradual approach to liberalize its telecom market. During 1990s, as a first step, market was opened for value added services and competition was introduced in cellular mobile sector as four licenses were issued (Mobilink, PTML, PakTel and Instaphone). The government monopoly was retained in fixed line services, however, PTCL legal monopoly ended w.e.f 31 December 2002. The government announced Telecom Deregulation Policy and Cellular Mobile Policy in 2003 and 2004 respectively. The telecom regulatory, issued new licenses for Long distance International (LDI) and Local Loop Fixed (LL Fixed), Wire Local Loop (WLL) and Cellular Mobile. With the issuance of new licenses the market is now open for full competition in all segments of the sector. The number of new licenses issued :a. Cellular Mobile b. LDI c. LL (Fixed) d. WLL 2 12 76 92

Efforts have now been renewed to privatize the PTCL, the incumbent state owned operator. Looking at the general pattern of liberalization and privatization, 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 process is concluded; new entrants would have established their networks and will be busy in consolidating their business. New operators will have sufficient time to sort out interconnect agreement and other problems with the government owned incumbent before its control is handed over to strategic investor who will obviously have different outlook and objectives vis--vis government policies. Dr. Abdul Hafeez Sheikh (Federal Minister for Privatization and Investment) said that the process of the privatization not only helped in lending more depth to country's stock market but also ensured the share of common man in the ownership of state-owned enterprises. Government of Pakistan should demonstrate its political will to enforce the rules and regulations for the growth of telecom sector enterprises in a deregulated environment.

Currently Services and ICT sector make up for 5% and 3% respectively of the GDP of Pakistan. In a post deregulation scenario these figures will show significant improvements in the coming years. PTCL has tons of copper buried under the ground which can be exploited for broadband services based on IP technologies. The average distance between the exchange and the subscriber in the case of Pakistan is too high. This is so because the network was planned for voice-only operations that work on the old technology. However, as residential and commercial broadband access solutions gain popularity, these copper pairs will be used for xDSL services as well. A prime requirement for running most of the DSL service is that the cable length from the exchange to the subscriber should be limited to less than three cable-route kilometers. A few services that can offer multimegabit access rate require an exchange-to-subscriber cable distance of less than a kilometer. Currently, PTCL has O&M Contracts with four private sector operators namely Habib Rafiq International, Micronet Broadband, Multinet Broadband and Sysnet Pakistan to deploy countrywide DSL networks. The new management of PTCL may make the situation better by redesigning their whole network, where instead of one big exchange covering a very large area the scene would change to smaller areas being serviced by numerous exchanges. In a deregulated environment we can anticipate the establishment up of private telephone operators that would follow this trend or will establish wireless broadband services whose market is estimated over $100M. This would generate immense competition among the service providers and ultimately at the end of the day it will be the customer who will benefit from this competition. Advances in wireless technology alone allow competing firms to roll out telecommunications services with relatively low sunk costs which is an attractive option in many developing countries. PTCL has successfully rolled out its first phase of CDMA WLL project for 0.284M customers to provide basic telephony and data services. The contract for provisioning of 2.2M CDMA WLL connections during this year has been signed and efforts are in progress for the provision of 6M WLL connections next year. Other Local Loop operators like WorldCall, DVCom and Telecard are also building their infrastructure for provision of basic telephony services based

on CDMA WLL. All these operators will have a healthy competition among themselves to exploit the vast untapped market of Pakistan in fix line services. The only big question remains unsolved is the roaming rights of fixed local loop subscribers. WLL operators are just unjustified in their approach. About one third of the PTCL revenue comes from international communications. The Long Distance International operators in Pakistan will share that revenue of PTCL. The deployment of NGN solutions by the LDI operators will offer the customers very cheap rates for international communications. The private management of PTCL will have to be proactive in this regard to ensure healthy revenue assurance from international communications. PTCL will still have an edge over other LDI operators due to its nationwide Optical Fiber System infrastructure backed by DWDM systems. The LDI operators will have to pay the international call termination charges as well as long distance charges for using the OFS backbone of PTCL. Since call charges will play an important part in capturing the market share, PTCL can exploit its strength to tap the revenues after its privatization. However private sector have now started to build their own backbone on optical fiber and PTCL should be ready for competition on this segment.

PTCL Obligation
The telecom De-regulation and Cellular Mobile Policies announced by the Federal Government place certain obligations on Pakistan Telecommunication Company Limited (PTCL) to facilitate market liberalization. PTCL is bound to comply with these obligations within a stipulated time frame. These obligations are of paramount importance for successful implementation of the policy and failure or any deviation thereof may result in substantial damage to the deregulation process/liberalization program. Similarly Defense, NTC and SCO also depend on PTCL for many facilities. Therefore, PTCL has important obligations towards Defense of the country and other existing operators. In addition, PTCL has been declared SMP operator. Under the status of SMP also, PTCL has certain obligations. PTA, as regulator, has to ensure that new management of PTCL fulfils all these obligations.

PTCL Obligations towards Defense Forces

Tri-Services strategic communication is established on PTCL fiber optic backbone. Operation, maintenance and security of these facilities as well as the main fiber route are with PTCL. The present arrangements will continue in post-privatized environment. Once PTCL is handed over to a private owner, security of this network could be become an issue. PTCL presently is providing all services to the defense forces on non commercial PTCL rates.

PTCL Dominance on Essential Bottleneck Facilities

PTCL has complete dominance on all essential bottleneck facilities. By definition, essential facilities are those (1) that are required by competitors in order to compete for the business of end customers (2) predominantly supplied by the incumbent (3) technically or economically difficult to substitute, at least on a widespread basis. A telecommunications operator that controls an essential facility often has both the incentive and the means to limit access to the facility by competitors. The Government should ensure that essential facilities are available to competitors on reasonable terms. Without such access, competition will suffer, and the sector will operate less efficiently than it could. The network facilities for which other operators will depend on PTCL, which can not be substituted in immediate future and implications/ 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 PTCL has monopoly on, for selling to private customers in Pakistan. Similarly for satellite circuits, access through PTCL earth station is another essential requirement of LDI operators. IPLC rate are specified in the RIO, however, PTCL is offering IPLCs against security advance. The amount of security advance is not fixed and may be burdensome for some operators. PTCL has

reserved the FLAG cable for IP Connections; however, IP rates are not covered in the RIO. LDI operators have been prohibited not to establish hubs in 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 carriers who have hubbing facilities. Therefore, restrictions on hubbing need to be reviewed.

Digital Interface Unit (DIUs)

DIUs (EIs) are interfaces installed between PTCL Transit switches and LDI Transit Switches/Micro Gateways for which rates are covered in the RIO. DIUs are also required for LL and CMTs operators. Availability of DIUs has been a problem even for existing CMTs operators and PTA has to intervene and direct PTCL to meet their requirement. Non-availability of DIUs as per demand will create severe problems for LDI, LL and CMT operators.

Access Networks
As per the license conditions, LDI operators are authorized to provide certain telecom facilities to corporate customers. This includes VPNs; data service and call centers etc. Different locations of corporate customers may require to be interconnected for provisioning of these facilities. The interconnection of such sites will be through LDI or PTCL leased circuits i.e. optical Fiber Access Network (OFAN) or Optical Fiber Junction Access Network (OFJAN). Refusal or delay in providing essential facilities to competitors; providing services or facilities to competitors at excessive prices or on discriminatory terms; Predatory pricing and /or cross subsidization of competitive services with revenues obtained from services which are subject to less competition; Bundling of services designed to provide the dominant firms with exclusive advantages in subscriber markets or require a competitor to obtain services or facilities which it does not truly need.

Copper Local Loop

Fixed Line Local Loop operators (new entrants) may require leasing Copper Local Loop from PTCL for extending service (Voice and DSL etc.) from their network to the customers. New management of PTCL may exploit its dominance on copper pairs to its advantage by offering substandard pairs to other competitors thus making their service in-efficient and poor from quality point of view. This facility could have been availed by new operators on competitive rates if the incumbent had unbundled local loop. Since unbundling of local loop has not been done, therefore, rates for copper pairs have not been fixed/specified in the RIO. The unbundling can be (1) Full unbundling (2) Shared use of the Copper Line of Provision of DSL etc. (3) High speed bit stream access by the incumbent. The purpose of unbundling is that new entrants need not pay for network components or facilities which are not required for services to be provided. In Pakistan shared use of copper line of DSL and other is already being done, however, full unbundling of local loop has not been done, as some is not required under Telecom DeRegulation Policy. The purpose of this policy decision seems to be forcing new fixed line operators to develop their own local loop network instead of depending on PTCL. However, fixed line local loop operators can / will still utilize PTCL copper pair in required basis through commercial agreements in different telecom regions.

Other Facilities
Other essential facilities may include right way and support structure (poles and conduits) etc. The policy and regulations are silent regarding these aspects and new entrants are expected to deal with PTCL as individual clients.

Abuse of Dominant Position

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

there are common themes in the definitions. The essential characteristics of abuse 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 increasingly concerned to monitor progress of the sector and watch for the impediments that may hinder the growth of new entrants and thus the growth of sector. Among other difficulties, likely abuse of dominance by PTCL, the incumbent operator, cannot be overlooked. The dominance abuse of incumbent in Pakistan may be manifested in more pronounced manner in future as government is planning to transfer management control of PTCL to a strategic investor through privatization process. It is extremely difficult to enumerate and codify all forms of anticompetitive behavior which PTCL, a market dominant entity may use to hinder the development of competition and growth of new entrants. In addition to the classic forms of abuse of dominant position, PTCL has many subtle ways in which massive network dominance can be exploited to create unmatchable advantage. It is this nature of advantages that PTA needs to asses very carefully and take appropriate regulatory initiatives for ensuring fair competition. Analysis of telecom market, around the globe reveals that there are number of anticompetitive practices, being practiced by the incumbent operators. These practices are almost same in every country. However, certain new forms of abusive conduct are also being recognized today.

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

the lower prices in other markets where more competition is faced. Analyzing PTCL position against this experience and seeing the prevailing competition environments of Pakistan, it can be safely concluded and seeing the prevailing competition environments of Pakistan, it can be safely concluded that cross subsidization is not possible in Cellular Mobile and ISP markets. However, in Fixed Line segment, there is a real possibility of cross subsidization. PTCL can lower rates of line rent, installation charges and local calls and correspondingly increase rates of NWD and International out bound traffic/maintain present level/ lower the prices but still remain on the higher profit margin side. Alternatively as part of overall business strategy, it can offer different packages i.e. residential and corporate customers, rural and urban and economy groups etc. within each package the prices can be cross subsidized. This practice can have adverse effects on the growth of other licenses particularly those not having vertical integration. This abuse can be controlled through license conditions and accounting separation which will determine the existence of cross subsidization.

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

Vertical Price Squeeze

PTCL can increase the price of upstream input (local access). It monopolizes, and keep the downstream services (ISPs, DSL and Payphones etc.) price same. The effect would be reduction or elimination of the profit of downstream service providers because their margins would be squeezed. To increase the squeezing effects, PTCL can also reduce downstream price of its own services. To control price discrimination, the regulator can impose wholesale cost imputation requirements.

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