Taxing times

Pakistan, the world’s sixth most populous country, has been an alluring market for foreign telecoms players, with all but one of the six operators hailing from outside the country’s borders. However the high rate of churn, diminishing ARPUs amid a price war, and increasing demands from regulatory powers mean the mobile market is not as profitable as it once was. Michelle Mills considers the factors that are placing pressure on operator margins, and reviews the prospects for 3G

The circumstances surrounding the postponement of Pakistan’s 3G auction remain murky; with the Pakistan Telecommunications Authority (PTA) originally planning a process to be completed by the end of 2008, yet no such event has yet occurred. The PTA has not issued an official statement as to why the auction has not taken place or when one might do, suggesting the process is on hold indefinitely, due to the global economic crisis lowering the potential sale price that can be achieved, as well as the risk of limited interest from bidders.

What is known is that there were three licences on offer, in a market of six mobile operators; namely Orascom’s Mobilink, Norway’s Telenor, Etisalat’s Ufone, SingTel’s Warid, China Mobile’s Zong; and the sole locally-owned operation, Pakcom’s Instaphone.

According to Fede Membrillera, partner at Dubaibased telecoms consultancy Delta Partners, Pakistan is not ready to receive 3G connectivity yet because there is still much to be done with existing 2G licences and expansion of current GPRS and EDGE networks, with EDGE mostly confined to the major cities.

“There is not much point in an operator investing in 3G when it still has a lot to do with 2G and 2.5G, which are not yet fully developed,” suggests Membrillera. “The operators do not have a large appetite for investing additional money into this technology at the moment. Liquidity is also not as high as it used to be, but as soon as this returns and the money is available again, you will have operators willing to invest in 3G, but I think now is not the right time,” he adds.

As of the end of 2008, mobile connections in Pakistan topped almost 90 million, translating to a mobile penetration rate of around 55 per cent. However, the true penetration rate is much lower as double and triple SIM holding is common amongst consumers. Mobilink leads the market with 31.68 per cent market share or 28.5 million subscribers, followed by Telenor and Ufone, which are neck-and-neck with 21.56 and 21.47 per cent market share respectively, according to Wireless Intelligence.

A closer inspection of subscriber figures for Q408 reveals that market leader Mobilink recorded a net loss of users for the period of almost 2.88 million subscribers. Overall, the size of the Pakistani market declined by 0.33 per cent during the fourth quarter, though Membrillera says this is not due to a particularly bad quarter for Mobilink, but owes more to a crackdown on subscriber accounting methods in line with international standards.

“All operators have not been considering churn as part of their accounting procedures. It is not that the market has plummeted, but that there were a lot of inactive customers in the numbers that were being reported before, and now operators are cleaning up their subscriber bases,” comments Membrillera. “The problem is that there were fewer active subscribers than what everybody claimed. In such a high growth environment, claiming high numbers of subscribers has traditionally been the name of the game. But in reality, what counts is revenue and you will see that revenue has not increased.”

Telenor noted it had eliminated 400,000 inactive subscribers due to this accounting policy, but including new subscriptions, it came out on top for net additions for 4Q08 with 916,000 additions. Warid was in second place with net additions of 756,000 during the period.

Another factor that may have contributed to Mobilink’s inflated numbers in previous quarters are rumours that Orascom was in discussions to sell the subsidiary, potentially adding pressure on the operator to report the highest subscriber numbers, in order to gain a premium selling price.

The PTA’s new SIM verification scheme may also have affected the reporting of subscriber numbers, given the scheme requires the identity of consumers to be verified through a multi-step process before a new SIM is activated. The regulator has also been looking to verify existing connections and last October announced 10.5 million unregistered SIMs had been blocked. These connections were gradually being verified through the National Database and Registration Authority (NADRA), and of the 10.5 million unregistered SIMs, 600,000 of these connections remained unverified and have
been permanently blocked.

Mobilink is Pakistan’s leading mobile operator with a 32 per cent market share. However in Q408, its subscriber base contracted by almost three million  

According to Wireless Intelligence analyst, Matt Ablott, the negative growth in the country’s telecoms sector is due to broader market and regulatory forces.

“The decline in Pakistan’s mobile market is attributable to a slowdown in consumer spending caused by high inflation, high taxes and the wider economic situation. Despite a nationwide mobile penetration rate of just 52 per cent, the market is unlikely to grow further until the situation improves. This creates further pressure on the country’s mobile operators, which were already operating in a fiercely competitive, high-cost, lowmargin market,” wrote Ablott in a research note last month.

“The situation also appears to have stalled plans to issue 3G licences in the country….  the prospect of cash-strapped operators investing in highspeed networks seems unlikely in the short-term. As a country that has greatly profited from mobile services in recent years, it is hoped that the Pakistani government will soon take measures to relieve the regulatory and economic pressures on its operators in a bid to stimulate the flagging market.”

Mobile companies invested US$2 billion in Pakistan in 2006, representing 54 per cent of all foreign direct investment, according to the PTA. Meanwhile, a study conducted by Deloitte for Telenor in 2007 showed that the mobile sector contributed a total of PKR342.8 billion (US$4.3 billion) to the national economy, representing 5.1 per cent of the gross domestic product. As a result, the growing sector has been a target by the government for increasing revenues from taxes. General sales tax on telecommunications services was bumped up to 21 per cent in 2008, compared to 16 per cent for other industries, while a customs duty levy added PKR500 onto the price of each imported handset. Additionally, a SIM activation tax amounting to PKR500 has been raised to PKR750, according to Ablott.

Last July, after the government’s budget announcement where sales tax was raised, executive vice president and acting CEO of Telenor Pakistan, Irfan Wahab Khan, released a press statement asking for a more friendly taxation and regulatory environment.

“With subscribers already experiencing double digit inflation and rising fuel costs, spending on telecoms services has to compete with very basic requirements and extra taxation and stringent policies do not help the customer or the investor,” Khan contended. “We believe the impact of these factors will become more pronounced in the future… Therefore, we also ask for [regulatory] frameworks that make it more accessible for the masses rather than increased associated costs.”

The number of mobile subscribers in Pakistan stood  at 90 million at the end of  2008, while ARPU stands at approximately US$2.50

Delta Partners’ Membrillera believes the PTA needs to ease the pressure and taxation on operators, in order for international operators to maintain profitable investments.

“The country does not have many sources of income and it puts a lot of pressure on telecommunications, which is growing and adding value. We have seen cases of the taxes being dropped in Bangladesh and I think Pakistan needs to follow, because if not, there will be a situation where the investment does not make sense for operators. The operators will increase the cost of ownership in order to make money – it doesn’t make sense for telecoms to continue to subsidise the economy.”

Falling ARPUs are also a major concern for operators, with Telenor reporting in its Q4 results that Pakistan had the lowest ARPU of its operations in 12 countries, of NOK19 (US$2.75), down from NOK26 in 2007. Meanwhile, an investment note from Trading Markets last month noted the ARPU of Etisalat-owned Ufone was expected to settle at US$1.56, a decline of 31 per cent yearon- year in US dollar terms and 10 per cent year-onyear in PKR terms. In Q308, market leader Mobilink’s ARPU stood at US$2.90. 

Aside from the six mobile operators, the telecoms sector has seen further development with the launch of WiMAX services. Last October, Mobilink launched its WiMAX broadband and telephony service ‘Mobilink Infinity’ in Karachi, targeting 50,000 subscribers by year-end. Alcatel-Lucent supplied the WiMAX Rev-e solution using both fixed and nomadic terminal devices from various customer premises equipment (CPE) partners, as part of its Open CPE programme, designed to ensure service providers have access to a wide range of interoperable end-user devices. The WiMAX network leveraged existing sites and equipment in Mobilink’s GSM network, and was the second operator to launch the technology in the country, the first being Wateen Telecom.

Membrillera of Delta Partners says while he believes Pakistan remains an attractive market for foreign investors, the PTA needs to reduce taxation on the telecoms sector if the market is to develop further

Wateen Telecom, an existing wholesale carrier and sister company of Warid Telecom, announced in October it was doubling its network capacity to cover 22 cities to serve a potential market of 30 million people. This was in addition to a contract in January 2008 for the supply of 198,000 Motorola end-user WiMAX CPE devices for indoor and outdoor use. Wateen’s network offers broadband Internet with dedicated speeds of up to 2Mbps, as well as advanced telephony with 40 value added features and the ability to watch IPTV through the same connection.

The PTA last month stated that a local operator in Peshawar, Mytel, had launched commercial WiMAX operations across the city, while other wireless local loop operators Burraq, PTCL, Z-WLL and Cyber Internet are busy in the development and testing phases of their own WiMAX networks.

Membrillera believes WiMAX presents a huge opportunity in the country, with Warid and Wateen having a clear competitive advantage. Overall he believes the country still remains an attractive market for further investment in telecoms, with Telenor and Ufone both performing strongly. He notes that Warid Telecom probably has the highest quality network, although it faces challenges in the commercial areas such as sales and distribution. China Mobile’s only overseas subsidiary Zong, on the other hand, has positioned itself as the cheapest operator, which Membrillera says is “quite dangerous” in this country which is already experiencing diminishing ARPUs.

Telenor Pakistan

Telenor Pakistan, a 100 per cent-owned subsidiary of the Telenor Group, has been the fastest growing operator in the country since launch in 2005, to now occupy second place with 19.4 million mobile subscribers. It holds nationwide GSM 900/1800 licences, as well as licences to build and operate a mobile network in Azad Jammu and Kashmir (AJK) and the Northern Areas. The operator launched EDGE in 2006 and has the country’s widest EDGE network.

In its full year results for 2008, Telenor Pakistan posted an operating loss of NOK310 million (US$44.74 million), an improvement of 14.36 per cent on a loss of NOK362 million a year earlier. The operator recorded revenues of NOK4.011 billion, an increase of 17.5 per cent on 2007.