Download - Strategic Study for Competitiveness in Pakistan Telecom Sector

Strategic Study for Competitiveness in Pakistan’s Telecom Sector

February

Competitiveness of Pakistan’s Telecommunication Industry through a Gap Analysis & Needs Assessment - Current Challenges and Recommendations


DISCLAIMER

The CSF’s experts endeavor, using their best efforts in the time available, to provide high quality services hereunder and have relied on information provided to them by a wide range of other sources. However, they do not make any representations or warranties regarding the completeness or accuracy of the information included this report.

The information provided in this is report does not necessarily represent the views or positions of the U.S. Agency for International Development, or the Ministry of Finance, Government of Pakistan.

About the Competitiveness Support Fund (CSF)

The Competitiveness Support Fund (CSF) is a joint initiative of the Ministry of Finance (MoF), Government of Pakistan and the United States Agency for International Development (USAID). The concept of the CSF is based on similar funds established in other economies (i.e., India, Thailand, Turkey, Ireland and Finland) and benchmarked against these funds, structured according to the international best practices and tailored to the current Pakistani economic environment.

The CSF has been established to support Pakistan’s goal of a more competitive economy by providing input into policy decisions, working to improve regulatory and administrative frameworks and working to enhance public-private partnerships within the country. The CSF will also provide technical assistance and co-financing for initiatives related to innovation and competitiveness, the private sector with research institutes, universities and business incubators that contribute to creating a knowledge-driven economy.

This report has been prepared by Mailander & Co. of USA for the Competitiveness Support Fund.

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Map of Pakistan

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CELLULAR MOBILE COVERAGE MAP OF PAKISTAN

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WLL COVERAGE MAP OF PAKISTAN

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Acronyms and Abbreviations

CSF Competitiveness Support Fund

HEC Higher Education Commission

MOIT Ministry of Information Technology

BOI Board of Investment

R & D Research and Development

PTA Pakistan Telecommunication Authority

OECD Organization for Economic Co-operation and Development

GOP Government of Pakistan

VOIP Voice over Internet Protocol

ARPU Average Revenue per User

GSM Global System for Mobile Communication

ISP Internet Service Providers

USF Universal Support Fund

FAB Frequency Allocation Board

CBR Central Board of Revenue

ITU International Telecommunication Union

GPRS General Packet radio Service

MNO Mobile Network Operators

WIMAX Worldwide Interoperability for Microwave Access

WLL Wireless Local Loop

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Contents

1. Introduction 9

1.1 Objective 9

1.2 Background 91.3 CSF 101.4 Research Methodology 111.5 USAID 12

2. Strategic Overview 13

2.1 Global Considerations for Telecom Sector 132.2 Benchmarking 132.3 State of Pakistan’s Telecom Industry 142.4 Projections about Future Requirements of Telecom Industry 152.5 Position of Telecom Operators with respect to their Business 15

3. State of Telecom and IT Industry in Pakistan 17

3.1 Mobile Sector 173.2 LDI 193.3 Local Loop Services 213.4 Broadband and Value Added Services 233.5 IT Sector 23

4. Pakistan’s Competitiveness in Telecom 25

4.1 Economic Overview of Pakistan 254.2 Telecom Sector Overview 254.3 Imports in Telecom 264.4 Investment in Telecom Sector 274.5 Telecom Revenues 274.6 Market Potential 284.7 IT Sector Overview 28

5. Key Issues 29

5.1 Infrastructure Cost Sharing 295.2 Manufacturing Industry 325.3 Integration of IT and Telecommunication 345.4 Collaboration with Universities 365.5 Cost of Doing Business in Pakistan 375.6 Telecom Status as “Industry” 395.7 ARPU – Average Revenue per User 395.8 Interconnect 415.9 Voice over Internet Protocol (VOIP) 435.10 Research and Development (R&D) 445.11 Taxation 465.12 Universal Service Fund (USF) 475.13 3G License 49

6. Recommendations 51

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7. Appendices 54

7.1 Significant Documents Consulted 547.2 List of People Met 557.3 Case Study – Infrastructure Sharing 56

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1. Introduction

1.1 Objective

The overall objective of the activity is to develop ‘basic’ understanding with respect to the competitiveness of Pakistan’s telecom industry through a gap analysis and needs assessment that results in an Inventory of Current Challenges and Recommendations to address them.

1.2 Background

The "official" OECD definition of a nation's competitiveness is "the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term". All rankings of a country’s competitiveness include several telecoms related indices such as penetration and services provided.

Despite being hailed as a leader in “Mobile Industry Growth,” the continued success and rapid expansion of Pakistan’s telecom industry is threatened by a growing number of factors as evidenced by the recent global information technology competitiveness report (2006 -2007)1. This report, “Connecting to the Networked Economy,” highlights that Pakistan has shown a gradual decline in last three years; it has moved from the rank of 63 in 2004 to that of 84 in 2007.

Though Pakistan was the top reformer in South Asia in 2006 by the World Bank2 and the number ten reformer globally for making it easier to start a business, the cost of doing business is still high and telecom industry growth is being inhibited as a result. The decline in Pakistan’s competitiveness ranking for telecoms suggests that an analysis is required to identify issues that are constraining future growth.

To define the challenges that confront Pakistan’s telecoms industry and facilitate an exercise to address these challenges, Mailander & Co. jointly with CSF, carried out an exercise to mobilize a dialogue across the value chain that has resulted in an action agenda to address constraints and better position the industry in Pakistan to take advantage of opportunities for growth. The exercise and the report it produces serves as the basis for analysis and action to ensure that Pakistan’s telecoms industry contributes in the most efficient and effective manner to improving Pakistan’s overall competitiveness.

1 “Connecting to the Networked Economy”, Global IT competitiveness report 2006-072 “Doing Business in South Asia in 2006,” International Bank for Reconstruction and development/ The World Bank and the International Finance Corporation, 2006, p. 6

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1.3 CSF

The Competitiveness Support Fund (CSF) is a joint initiative of the Ministry of Finance (MoF), Government of Pakistan and the United States Agency for International Development (USAID). The concept of the CSF is based on similar funds established in other economies (i.e., India, Thailand, Turkey, Ireland and Finland) and benchmarked against these funds, structured according to the international best practices and tailored to the current Pakistani economic environment.

The CSF has been established to support Pakistan’s goal of a more competitive economy by providing input into policy decisions, working to improve regulatory and administrative frameworks and working to enhance public-private partnerships within the country. The CSF will also provide technical assistance and co-financing for initiatives related to innovation and competitiveness, the private sector with research institutes, universities and business incubators that contribute to creating a knowledge-driven economy.The report has been prepared by Voice Tel Tech Private Limited of Pakistan for the Competitiveness Support Fund.

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1.4 Research Methodology

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1.1. 1.5 USAID

The United States Agency for International Development (or USAID) is the U.S. government organization responsible for most non-military foreign aid. An independent federal agency, it receives overall foreign policy guidance from the U.S. Secretary of State and seeks to extend a helping hand to those people overseas struggling to make a better life, recover from a disaster or striving to live in a free and democratic country.

It advances U.S. foreign policy objectives by supporting economic growth, agriculture and trade; health; democracy, conflict prevention, and humanitarian assistance. USAID provides assistance in Sub-Saharan Africa; Asia and the Near East, Latin America and the Caribbean, Europe, and Eurasia. USAID is also organized around four main pillars: Global Development Alliance; Economic Growth, Agriculture, and Trade; Global Health; Democracy, Conflict, and Humanitarian Assistance.

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2 Strategic Overview

2.1 Global Considerations for Telecom Sector

New users, new uses and more frequent use of telecom innovations are resulting in the global telecom sector growth in depth and breadth, creating value across a wider range of products, services, segments and geographic markets. In order to support new technologies, one of the key areas that need to be carefully considered is Spectrum Management. Spectrum management includes the allocation and administration of the available frequency spectrum for each country.

New multimedia technologies based on telephone/mobile will require infrastructure upgrade to broadband networks. On the other hand, there is global need to introduce attractive applications which would be offered to users. Mobile internet, mobile email and multimedia messaging are just some of the services that telecom sector has tried to popularize. One of the latest and greatest hopes of the industry is mobile television. Companies have invested significant sums in developing mobile TV services however its performance has yet to be seen. Another application related to mobile TV would be making video using the mobile handset and uploading/sharing it to be viewed on a TV screen. Mobile video offers an opportunity to the telecom operators if they reduce data uploading prices since research has shown that there is strong price-demand elasticity in mobile data.

Due to a global regulation drive, there is a downward trend in prices and hence in the revenues of telecom service providers as well. This downward trend in Average Revenue per User (ARPU) can be balanced by adopting a suitable cost optimization strategy. A successful and tested strategy of cost optimization is infrastructure sharing. Infrastructure sharing offers a great opportunity to the telecom operators to save on their capital cost and operational expenses.

2.2 Benchmarking

Pakistan has made tremendous progress in telecom industry as compared to other countries of the region (e.g. India, Sri Lanka and Bangladesh). In 2001, the average mobile penetration stood at less than 1% whilst at the end of 2006, the penetration had grown to 31% exhibiting a compounded annual growth rate of 102% (Source: PTA). Despite of this exponential growth, there are a number of issues which need to be addressed. If these issues are addressed correctly following the example of other developing countries, the industry can enjoy sustainable growth for years to come. One of the most important issues is the infrastructure cost that prohibits the operators to target rural areas for providing services. Other countries have addressed this issue through utilization of universal service fund (USF) including India, Bangladesh, Peru. In India, USF triggered reverse auction. In 38 of the 81 regions on offer, many mobile operators bid zero. In other words, they asked for no subsidies at all. However, this model has not proven lucrative. Bangladesh has also allowed an innovative model based on micro-financing individual cell phones to reach populations previously underserved or un-served by telecommunications.

In addition to infrastructure cost, telecom policy of a country reflects the future growth plan for that country. The objectives of a country’s telecom industry are reflected in its telecom

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policy. Therefore, Malaysian telecom policy focuses on development of strategic and export-oriented manufacturing industry. Indian telecom policy focuses on manufacturing and emphasize on building world class manufacturing industry.

2.3 State of Pakistan’s Telecom Industry

Pakistan has remained as the fastest growing mobile telecom market in Asia. Currently, the telecom sector is undergoing intense competition among the six mobile operators, one major fixed-line operator and few small fixed-line operators. In the best interest of their long sustainability, the mobile operators are forming strategies driven towards being at lowest cost, extensive network coverage and connectivity, innovative products and segmentation.

As far as competitive advantage of telecom industry is concerned, Pakistan has good urban telecom infrastructure however there is dire need to drive infrastructure growth in rural areas. It can be achieved utilizing Universal Service Fund. There is need of skilled human resource to sustain telecom sector growth. For that, industry-academia linkage can play an important part. There is huge demand of telecom and IT services in the country. The main revenue generation is done by voice based services. Short messaging service is considered to be the second best revenue generating application so far. Telecom operators have launched value added services which have become very important over the last few years. Due to market growth, operators are also focusing on retaining customers, improving quality of service and introducing packages that concentrate on brand loyalty, fractional minute billing, international roaming and data services. Mobile telecom operators realize the need to segment their customers (based on age, preferences) and announce value-added packages to meet the needs of all segments of society. Recently introduced value added packages by top telecom operators (both mobile and fixed) were focused on youth segment, students as well as business users.

The Government of Pakistan is benefiting from telecom industry in terms of increased revenues obtained in the form of taxes, increased employment, and access to the inaccessible areas, enhanced economic activities and better living standards. The demand of industry services can be highlighted from the fact that number of cellular subscribers has more than tripled in the last two years. Revenues of Mobile sector have increased at an average growth rate of over 80% per year over the last few years, despite the unhealthy forecasts due to global and regional socio-political situation. The increase in revenues is mainly due to sharp rise in the number of mobile subscribers and reduction in tariff.Taxation on mobile telecommunication industry can be expressed in terms of total cost of mobile ownership in order to calculate the burden on the end user. Various taxes including corporation tax, license fees, withholding tax and sales tax contribute to increase cost of mobile ownership. In Pakistan during 2006-07, total revenue collected by the Government in the form of taxes and regulatory fee was more than Rs.100 billion which is 30% higher than the last year (Source: PTA). It is important to note that the reduction of taxes imposed on mobile services in Pakistan in the last few years has considerably reduced the cost associated with mobile phone ownership and increased demand. However, increased benefits to the mobile and telecom industry would arise if fiscal burden on mobile services is further reduced.

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2.4 Projections about Future Requirements of Telecom Industry

The future outlook of global telecom sector is quite promising and the years to come will witness a quiet revolution in telecom sector. Mobile voice will remain the dominating driving factor in telecom industry taking a growing share in the total voice volumes, while fixed networks suffer declining customer numbers and Voice over IP makes steady, but relatively modest, inroads. Broadband networks, both fixed and wireless, continue to grow their footprints but growth in customers and coverage may not match by revenue growth.

Convergence is also being considered by various companies in telecom sector as a powerful means of value creation. Convergence allows completely new lines of business to emerge and it creates huge opportunities. Benefits of convergence can be reaped by carefully considering the business model. The advent of Voice over IP is proving to be great for internet service providers but a threat for traditional phone companies until traditional companies revamp their business model to include Voice over IP in their portfolio as well.

In order to match the decrease in their revenues, the telecom operators are looking out for ways to cut down on expenses and operational costs. A tested model which is being deployed globally is infrastructure sharing. Infrastructure sharing offers tremendous opportunity for telecom service providers to share their existing infrastructure and reduce around 30% of their operational expenses. It also offers opportunity to carry out any joint infrastructure upgrade activity and thus share the overall investment on network upgrade. The developed countries have reaped various benefits out of infrastructure sharing and it is being implemented in the developing and under-developed countries nowadays.

2.5 Position of Telecom Operators with respect to their Business

The telecom industry is a very dynamic industry where the players have to constantly think about their positioning. They need to know their competitors, the competition, their competitive advantage and their relative positioning in the competition.

With the emergence of new operators and sector regulation, there is a downward trend in prices of offered services. Due to lower prices, the revenues are coming down. In order to sustain revenue streams, the telecom operators are focusing on the need of new services and products to attract customers. This would result bringing in new technologies and infrastructure to support multiple services and applications which require investment. As an outcome, the telecom sector would witness further sector consolidation in the form of mergers and acquisitions. On the global stage, the bigger telecom market players like T-Mobile, Vodafone, Telefonica, Orascom, Etisalat and Zain are continuing with acquisitions. In Pakistan, we see similar trend with recent acquisition of Paktel by China Mobile, Warid Telecom by Singtel and Burraq by Q-Tel. A telecom operator (Instaphone) has shut down its operations recently as its acquisition couldn’t succeed. We expect to see some more consolidation in Pakistan’s telecom sector in near future.

The telecom manufacturers are also facing fierce threat from low cost vendors from China (Huawei, ZTE). The traditional telecom vendor can either face this competition by becoming a low cost vendor itself or by shifting its domain and becoming service provider. Another likely outcome is merger and acquisition which is being witnessed among the traditional

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telecom vendors in the recent past in the form of Nokia combining with Siemens and Alcatel combining with Lucent. This trend is expected to continue in the near future.

The fundamental basis of a good performance on the long run is sustainable competitive advantage and telecom operators in Pakistan are using different types of competitive advantage strategies. Some telecom operators are using low-cost competitive advantage strategy to stay within the competition. This trend has been seen in both mobile and fixed line operators. Whereas the other operators are using differentiation based competitive advantage strategy which is driven by innovation.

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3 State of Telecom and IT Industry in Pakistan

3.1 Mobile Sector

Telecom Industry has shown significant improvement since its liberalization was initiated in January 2004, with an unprecedented growth in mobile sector.

Pakistan has remained as the fastest growing mobile market in Asia. Barring a third-quarter miracle in the United Kingdom mobile market, Pakistan has ousted the European country to take tenth place in the global mobile market rankings by customers3. The size of the base in Pakistan grew to exceed 70 million at the end of September by a margin of just a few thousand customers. Pakistan has experienced more that 150% growth rate4, which is unseen elsewhere.

Currently, the mobile sector is undergoing intense competition among the six mobile operators. In the best interest of their long sustainability, mobile operators are forming strategies driven towards being at lowest cost, extensive network coverage and connectivity, innovative products and segmentation. Value added services have become very important over the last few years. Operators have launched services like GPRS/ EDGE, MMS, blackberry, mobile banking, ring back tones and several other content based options. Due to market growth, operators are also focusing on retaining customers, improving quality of service and packages that concentrate on brand loyalty, such as Friends and Family (FnF) packages, fractional minute billing, international roaming, GPRS, prepaid roaming, low cost SMS etc. Mobile players are segmenting their customers and announcing packages to meet their needs. Recent examples include Jazz Octane and DeJuice focused on youth segment, TalkShawk for the financially constraint and students, and various other prepaid and postpaid offerings.

The Government of Pakistan is also benefitting in terms of increased revenues obtained in the form of taxes, increased employment, and access to the inaccessible areas, enhanced economic activities and better living standards. Mobile operators contributed PKR 312.5 billion (2% of total GDP) to the economy in 20065. Mobile sector contributes about 35% of its revenue to GoP in terms of taxes and other charges.

The number of cellular subscribers has more than tripled in the last two years and today mobile subscriber base has crossed 63 million whereas 7 million new connections on average are added in every quarters of 2006-07 improving tele-density further to 43 percent6.

Revenues of Mobile sector have increased at an average growth rate of over 80% per year over the last few years, despite the unhealthy forecasts due to global and regional socio-political situation. The increase in revenues is mainly due to sharp rise in the number of mobile subscribers and reduction in tariff.

3 PTA4 PTA Annual Report 075 Deloitte Report, March 076 PTA Annual Report 07

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Highest contributor to the cellular sector revenues has been Mobilink, while Ufone, Telenor and Warid are also performing well over the years. Most operators have expanded their networks, whereas Paktel and Instaphone’s subscription growth has remained stagnant. Since both companies are in transitional phase, so their share in the market has also dropped considerably. The table below gives a comparison of various cellular operators. All facts and figures have been taken from PTA’s Annual report 07.

No. of

Subscriber

s

Investment

in 2007

(USD)

Marke

t

Share

Technolog

y

ARPU

(USD)

Mobilink 28.5 Million 336.9 Million 44.3% GSM 3.8

Ufone 15.4 Million 250 Million 20.9% GSM 2.8

Telenor 12.5 Million 130 Million 16.3% GSM 4.0

Warid 11.9 Million 425 Million 16.1% GSM 2.5

Instaphone 0.3 Million 8.5 Million 0.6% CDMA 2.1

Paktel 1.2 Million 187 Million 1.9% GSM 3.3

The growth in the mobile sector is mainly attributed to prepaid subscribers, as is the trend in comparable economies. However, after the launch of two new operators in 2004/05, the mobile sector has now built more consumer friendly strategies around postpaid packages, resulting in a significant growth in postpaid segment, although it still represents less than 4% of the total mobile market.

Mobile penetration has also increased tremendously. It jumped from 8.3% in 2005 to almost 23% in 20067. With such increased penetration, there are still large number of rural and semi urban areas that are still inaccessible.

Significant growth in mobile subscriber base has also resulted in increase in mobile traffic. During the last two years, total minutes have increased by almost 300%. This increase is indicative of the elasticity in demand due to reduction in tariff packages offered by the mobile operators.

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There are many major issues surrounding the mobile sector like low ARPU, cost of doing business, infrastructure cost sharing, interconnect, regulatory issues, system inefficiencies etc.

The future of mobile sector in the country requires convergence of services, elimination of digital divide, effective regulation in changing telecom environment and adoption of potential technologies. The technology, service and infrastructure convergence is taking place at a very fast pace in Pakistan.

While forecasting the mobile market, Business Monitor International (BMI) has estimated 78.4 Million subscribers for Pakistan by 2008, in its Pakistan Telecommunication Report Q2.

3.2 LDI

Liberalization of ‘long distance and international’ (LDI) segment of the telecom sector in 2004 resulted in the award of new LDI licenses apart from the incumbent PTCL and NTC. Intense competition in the LDI section has resulted in drastic reduction of international and nationwide tariffs and substantial increase in traffic. Currently Callmate, Burraq, DV Com, Circlenet, Dancom, PTCL, Wateen, Multinet and WorldCall are providing international calling card facilities.

Multinet, one of the new LDI licensees is developing its own nationwide fiber optic backbone. At present all the telecom operators are relying on PTCL’s infrastructure. Wateen has also started laying nationwide fiber optic infrastructure. These two alternatives are considered to be enough for providing infrastructure redundancy in the country.

The LDI market in Pakistan is at its blossoming stages and the new LDI operators are aggressively participating in the market to capture the maximum share of LDI business in the country. During the last year or two, companies doubled their investments in the expansion of their network capacity and infrastructure. Revenues of the companies had increased by 168% during 2006.

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There is an intense competition in the calling card business. The LDI operators have drastically reduced international long distance in order to capture market share. The minimum international tariffs, which were PKR 58 per minute in 1996, are now as low as PKR 0.5 per minute. Callmate, Dancom and Worldcall calling cards have the lowest tariffs in the market. The low tariffs have resulted in a higher outgoing traffic. In addition, international long distance call charges from cellular mobiles have decreased by 83% in 2006.

The sector witnessed blooming health wherein telecom costumers enjoyed International dialing for as low as 0.5 PKR per minute. However hyped up market and stringent competition led to flirtation and companies who had been involved in price discrimination finally had to suffer in terms of financial losses. Companies have now started looking for foreign investment to survive in the market e.g. Worldcall has sold some of its shares to Oman telecom; also 30% of Burraq’s shares have been acquired by Qatar telecom8.

The figure below, taken from PTA Annual Report 07, shows the revenues of the LDI operators in the year 2007:

Only last year, total investment in LDI sector was around 51 Million USD, which grew to 603 Million USD in 20079. Main contributors to this huge investment were Multinet and Link Direct as both have laid their own Optical Fiber Access Network.

PTCL, the incumbent operator is facing intense competition from calling cards and cellular mobile operators due to their low tariffs.

8 PTA Annual Report 079 PTA Annual Report 07

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The changing telecom environment in the country and competition in the LDI sector has changed the traffic patterns. Traffic has increased significantly due to the ease of access and reduced tariffs. The new LDI companies have increased their traffic many fold over the last few years, however, PTCL is still the main player in the market. The LDI operators are competing with each other to attract the maximum traffic and revenue shares from the market resulting in the drop of international and nationwide call rates. Use of advance technologies and network deployment by some companies could further provide stability in the existing LDI market, which is at its initial stages of development.

The pie-chart below, taken from PTA Annual Report 07, shows the comparison of market share of companies in the last two years.

3.3 Local Loop Services

Under the telecom de-regulation policy 2003, two local loop licenses were delegated namely, fixed Local Loop (FLL) and the Wireless Local Loop (WLL).The companies which have been able to start commercial FLL operations and run them successfully include Brian Limited, Union Communication, World Call broadband, Nayatel, Dancom, call2phone, World Call multimedia etc. The companies are providing local loop services including voice and internet over fiber optic.

There are several issues that are hindering the new licensees from operating effectively, these include inadequate infrastructure, Right of way issues and roll out obligations.

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PTCL, the incumbent operator has 98% share in the local market. However, its fixed line connections dropped due to fierce competition from WLL and other services. The table below shows the fixed line subscribers for various FLL companies in 2006.

Operators Total Subscribers

PTCL 5,128,442

NTC 92,163

World call 13,327

Brain Limited 5,880

Union Communication 200

WLL services started in Pakistan in 2004 as a new segment of telecom sector after deregulation. The service was introduced with the aim to provide telecom accessibility to rural and far-flung areas. Four companies, Telecard, WorldCall, Great Bear and PTCL, are operational and providing WLL services in the country. All these companies have local stakes except for Great Bear, which has investment from Russia.The companies, so far, have not been able to achieve the desired level of penetration in the local markets. Low penetration of WLL is a result of number of obstacles which include non-availability of required investment, non-availability of WLL equipment in some frequency bands, high tariffs and almost no commercial campaign of services by the WLL operators.

WLL operators are using the CDMA technology, which is quite comparatively easy to deploy in rural areas. The total subscriber base of WLL services in Pakistan reached around 2 million in 200710. The facts and figures for the table below have been taken from PTA Annual Report 07.

Operators Cell Sites Franchises Subscribers

Great Bear 19 137 57,660

World Call 182 211 304,610

TeleCard 293 301 443,914

PTCL 1,439 236 895,914

Currently the WLL and FLL do not give a healthy picture and a number of policy decisions need to be taken.

10 PTA Annual Report 0722


3.4 Broadband and Value Added Services

Demand for value added services (VAS) is increasing with the increased use of data communication. Its usage is further expanded when such services become affordable to common man. Broadband has been instrumental in shrinking the planet virtually making people come close and transformed the world into an information age era. VAS has shown considerable growth in the last few years.Broadband is providing a base for the convergence of computing, communication and broadcasting. The use of broadband is not only limited to one segment of the society, it is essential for corporate, commercial and individual business. Broadband technology has also enabled a range of other possibilities, online activities like banking, shopping, telemedicine, e-learning, games and other forms of entertainment.

Broadband services in Pakistan started in 2002 and the growth remained fairly low due to high tariffs, less awareness and few service providers. In 2004 a policy was introduced, allowing all ISP’s to provide the broadband services. The policy set a target of 500,000 broadband users within 5 years. However, the broadband penetration in the country has not shown a reasonable growth and there are around 60,000 subscribers in the country11.

Some issues have emerged as major impediments in the way of broadband growth in the country. The lack of infrastructure and high broadband tariffs are considered as the major bottlenecks for the low penetration of broadband in Pakistan. Regulator and government have to strive hard to overcome these problems. Three companies, Multinet, World call and Wateen, are deploying optic fiber networks throughout Pakistan that would help broadband growth in Pakistan. New technologies are also being introduced, such as Wimax for wireless broadband.

The value added services are converging with the convergence of technologies. Efforts need to be made to make broadband services more affordable for common man in the country.

3.5 IT Sector

Pakistan has a low recognition factor in most advanced economies as a source for off shoring and software supply. Yet the country already has a substantial industry in its own right, with over 1,000 enterprises operating in the country, producing goods and services to the value of about $2 billion annually, of which half is exported. Such figures place it well ahead of other higher-profile countries such as Vietnam and many of those in Eastern Europe.

Pakistan has immense opportunities to rapidly grow the industry, both in absolute and relative terms, and further, to progress up the value chain while achieving this growth. The market for offshore services, including software development and business process outsourcing (BPO) is constrained not by demand, but by the lack of suitable resources in the off shoring countries. In addition, only a small fraction of the potential market has been addressed so far. Pakistan then faces an opportunity where the market is huge, growing, and where only a small proportion has been already won.

Achieving success comes at a price, not least in terms of significant Government financial commitment. Here again the prospects are good, with Pakistan having one of the fastest growing economies in the world, accompanied by a large inflow of foreign direct investment.

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This achievement has attracted little attention in Western economies, with other Asian countries with lesser performances achieving greater attention. And this attention counts, as perception in effect becomes reality when business decisions are made.

The two main impediments the industry faces are the bad international perception of the country and the need to ramp up skilled human resources. Fundamental and rapid improvements must be made in both cases if the initiative isn’t to fall short.Contrary to its image of being a low-performing economy, Pakistan’s is one of the world’s fastest growing, driven by investment, exports, foreign aid, banking privatization and consumer spending. Emigrant remittances were another significant factor, contributing an estimated $5 billion to the economy in 2006. The 6.6% growth in 2005-06 was 2nd highest in the world and was followed by a rate of 7% growth in 2006-07. International economic opinion suggests that short of a major political disaster, high-level growth can be maintained over the coming years. This performance has lead to a 50% increase in development spending in 2007.

While problems remain, overall this robust economic performance provides a solid foundation for the development of the ITES sector. Not least should be the long-delayed growth of the domestic market, both for the public and private domains.

Vast majority of local companies are very small – a 200 employee enterprise would be classed as large by Pakistani standards. In terms of numbers working in the sector, research in this space extrapolated a figure of approximately 75,000 professionals. This figure includes those working in the IT industry itself and also those in IT departments in public and private organizations. Unemployment in this sector is put at about 10%. However, reliable statistics relating to their qualifications, current roles and career paths are not yet available. It will be difficult to optimize manpower and resources planning in the absence of more detailed and reliable data.

So, to improve IT industry in the country it is imperative to improve country’s image and brand, develop human capital, enhance the IT infrastructure and implement governance structures and processes.

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4 Pakistan’s Competitiveness in Telecom

4.1 Economic Overview of Pakistan

Pakistan’s economy has maintained strong growth rate and in the fiscal year 2006-07, the economic growth was registered at 7%12. The country’s economy has been rated as one of the fastest growing economies in the Asia region. East Asian economies like Philippines, Malaysia, Singapore and Thailand grew at the rates between 5% and 5.5% mostly owing to robust growth in services, agriculture and manufacturing industry. The growth in economy is due to investments in the region. Total investment at 23% of GDP is the highest in country’s history. Private sector has played a pivotal role in investment whereby its share in domestic investment has increased from 64.2% to 76% in the last 7 years. The per capita income has also increased from 586 USD in 2002-03 to 925 USD in 2006-07. The table below shows Pakistan’s economic facts and figures in the last five fiscal years13.

Indicator 2002-03 2003-04 2004-05 2005-06 2006-07

GDP Growth (%) 4.7 7.5 9.0 6.6 7.0

Foreign Exchange Reserves USD (Billion) 10.7 12.3 12.6 12.8 15.1

Per Capita Income (USD) 586 669 733 833 925

Population (Million) 147 150 152 155 158

4.2 Telecom Sector Overview

Subscriber growth patterns in Pakistan are unmatched all across the world. In line with the extraordinary economic growth in Pakistan, the telecom sector of Pakistan has also been exhibiting thriving growth patterns especially in relation to the South Asian economies. As of now, tele-density of Pakistan stands at 46.9% surpassing Sri Lanka’s 37%. Fixed tele-density has slightly declined from 3.4% in 2005-06 to 3.3% in 2006-07. Major reason behind this decline is the churn of subscribers from fixed line to wireless based services. Prices of telecom services have also reduced significantly due to competition among operators which is the major reason behind the impressive tele-density. The graph below compares Pakistan’s tele-density with that of other South Asian countries14.

12 PTA Annual Report 0713 Pakistan Economic survey 2006-07, Ministry of Finance14 PTA Annual Report 07

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4.3 Imports in Telecom

Imports of Pakistan registered 6.8% increase in 2006-07 (30.5 Billion USD) compared to last year’s imports (28.5 Billion USD). The exponential growth in the telecom sector is burdening the overall imports of the country. During the last four years, cellular mobile handsets worth 1.7 billion USD have been imported. In 2006-07 about 4.4% of imports were for the telecom sector compared to 2.4% in 2003-04. So there is need for manufacturing industries of cellular mobile handsets and other equipments in Pakistan and a complete study should be carried out to ascertain the areas where the manufacturing industry can be offered a long-term sustainable business case with future growth. The table below shows the telecom imports in the country for the last four fiscal years15.

Description (USD Million) 2003-04 2004-05 2005-06 2006-07

Cellular Mobile Sets with Battery 144.1 371.1 569.2 670.2

Other Telecom Equipment 234.8 406.3 628.3 677.5

TOTAL 378.9 777.4 1,197.5 1,347.7

Telecom Share in Total Imports (%) 2.4 3.8 4.2 4.4

15 PTA Annual Report 0726


4.4 Investment in Telecom Sector

Telecom companies have invested over 8 billion USD during the last four years in Pakistan, with mobile sector being the main player with 73% investment share accounts. In 2006-07, cellular mobile sector invested over 2.7 billion USD, which is about 66% of the total investment by the sector. Local loop segment invested 7.8 million USD in 2006-07. LDI operators invested about 603 million USD in 2006-07 which is about 15% of the total investment by the sector. It is expected that the trend of investment may continue in the next five years because of the large potential market existing in Pakistan. The table below shows the investment in telecom in the last three years16.

Service 2004-05 2005-06 2006-07

Cellular Mobile (USD Million) 1158.1 1420.9 2718.7

Fixed Line (USD Million) 2.3 0.3 746.9

LDI (USD Million) 35.1 50.5 602.7

WLL (USD Million) 277.3 259.4 40.5

4.5 Telecom Revenues

Due to increase in the telecom traffic due to low tariffs and vast coverage of mobile and WLL operators, the revenues have shot up although the ARPU has gone down below 4 USD. Total revenues of telecom sector grew by about 21% compared to last year. However, this increase is over 100% compared to the revenues in 2003-04. The graph below indicates the telecom revenues over the last four years17.

16 PTA Annual Report 0717 PTA Annual Report 07

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4.6 Market Potential

Cellular Mobile Companies have grabbed only 63 Million of the potential 110 Million people market, which is only 61%. If 10% multiple SIMS users are excluded, then the access comes down to only 55% of the target market. Similarly the fixed line operators including WLL have covered only 6.6% of the potential population. As about 66% of the potential population in Pakistan is living in rural areas, the scenario provides a huge market potential for WLL and mobile operators.

4.7 IT Sector Overview

The IT marketplace offers lucrative opportunities for developing countries to join the ranks of the developed world. The scale and pace of growth in this sector is faster than in any other industry, and a number of developing countries are attempting to emulate the success enjoyed by countries such as China, Thailand and India.

The Government of Pakistan has to proactively develop the IT sector in Pakistan. A few of the incentives offered include tax exemption till 2016, establishment of IT Parks with low rent, foreign ownership of equity invested in IT and 100% repatriation of profit allowed to IT companies. Pakistan’s IT industry has been rising steadily since the last three years. A marked increase in software export figures are an indication of this booming industry’s potential.

The State Bank of Pakistan in its statement for the year 2006-07 reports the export figures of software and IT-enabled services to be US$116 million which shows a consistent annual growth. State Bank of Pakistan adopted BPM 5 Reporting system to report the IT exports revenue, which restricted the export figures to US$116 million only in 2006-07. It is significant to note that Pakistan IT exports growth in each of the last few years has been more than 50%. Pakistan offers various competitive advantages over other outsourcing destinations, such as high quality software development, swift and easy establishment of business, lowest cost basis and emerging and state-of-the-art telecommunication and IT infrastructure. Experts estimate an average annual growth of 33% in the sector. This will result in the total IT export revenue crossing US$ 10 billion in the next five years. Some of the statistics of IT industry in Pakistan are highlighted below:

Total Number of IT Companies 1082

Total Number of Foreign IT Companies 60

Number of CMM & CMMI level 5 Companies 2

Total Industry Size 2.8 Billion USD

IT and IT-enabled services Exports 1.4 Billion USD

Annual Percentage growth in Exports 61.18%

Number of IT graduates per year 20,000 approximately

Number of Universities offering IT/CS programs 110

Total Number of IT Professionals Employed Over 110,000

Number of IT Parks 11

State Bank Reported Earnings 116 Million USD

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5 Key Issues

5.1 Infrastructure Cost Sharing

The term Infrastructure Sharing generally refers to the sharing of airtime and/or network facilities between one or more operators. The objective of Infrastructure Sharing is to maximize the use of existing network facilities which can include network capacity and capabilities, existing base station sites, backbone, radio links, and other resources to reduce infrastructure duplication and costs.

Infrastructure sharing can take a number of forms. In its simplest form, it can involve the sharing of space on masts and associated buildings or sites. Alternatively, sharing can be more extensive such as in 3G infrastructure sharing arrangements that involve two or more operators coming together to share various parts of their network infrastructure for purposes of service provisioning. Another variant can also take the form of national roaming where two or more operators reach an understanding that their respective subscribers can use each others’ networks when outside the geographical coverage of their home network. Expanding the concept, Infrastructure Sharing can also extend to the co-location of network elements and the sharing of frequency spectrum for wireless-based telecom services.

Infrastructure sharing provides practical means to improve country’s competitive landscape. It offers an enormous opportunity to bridge up digital divide in under-developed countries by bringing ICT infrastructure within the reach of population in far flung areas in those countries. The telecommunications infrastructure sector is traditionally characterized by huge fixed, sunk and irreversible investment, often making telecommunications infrastructure investment a high risk undertaking. This situation is often made more unpredictable by the rapid introduction of successive generations of new technology. Operators are occasionally faced with a situation where even before recouping their investments in existing infrastructure they embark on further investment in a new generation networks of networks (e.g., migration from 2.5G to 3G). The sharing of existing or new network infrastructure can promote economic efficiency. It also ensures that new market entrants are able to compete effectively against existing infrastructure owners offering 3G or competing broadband or mobile services. Many mobile operators internationally are in severe financial problems partly due to the high costs of acquiring licenses in a number of countries, and these operators would certainly welcome the possibility of sharing the costs of building out the networks. It can prevent wasteful duplication of resources. In addition, network sharing can reduce infrastructure cost and consequently the upfront investment burden thereby enabling competitiveness.

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Infrastructure sharing is viewed largely as a measure to reduce costs. For example, experts at infrastructure manufacturers such as Ericsson and Siemens estimate that up to 40% of initial roll-out costs can be saved by sharing infrastructure in the case of 3G networks. Together with savings on costs, Infrastructure Sharing can be used both in the start-up phase to build coverage quickly and in the longer term to build more cost-effective coverage in rural area.

It is sometimes argued that infrastructure sharing runs contrary to the objective of infrastructure competition between network providers. This depends on the type of infrastructure being shared and the terms and conditions, including the time period for which infrastructure sharing to be made available. Most network operators currently share site facilities in order to co-locate network equipment. This is increasingly common for fixed network. For mobile operators, site and tower sharing has been commonplace for several years and has generally been considered to have promoted new entrant ability to compete against incumbent operators who already have the facilities available, usually having occupied the best available sites. Such site and facility sharing has also prevented wasteful facility duplication and from an environmental perspective has had a positive impact.

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In addition to western countries including Denmark, Germany, Norway, Spain, Sweden, Netherlands, UK, special attention is being paid to enable infrastructure sharing among the available mobile operators in under-developed countries in Asia and Africa. ITU’s Telecommunication Development held Connect Africa summit in Kigali, Africa in Oct, 2007. According to Bureau Director Mr Sami Al-Basheer (ITU-D), "Traditional business models do not work in all cases and we need to be creative and develop new ways of working together. Infrastructure-sharing, among other innovative approaches, was the centre of focus at the Summit in Kigali". In India, Vodafone Essar, Bharti Infratel and Idea Cellular have agreed to form an independent tower company, Indus Towers Limited, to provide passive infrastructure services in India to all operators on a non-discriminatory basis. Bharti and Vodafone will hold 42% stakes each in the company while Idea Cellular will hold 16% stakes. This infrastructure sharing will cut huge network roll out cost and will greatly enhance the speedy installment of network throughout the country.

In Pakistan, high CAPEX expenditures as evidenced in import bill are an attribute of infrastructure cost. (CAPEX for inside plant (ISP) and Outside Plant (OSP) normally in wireless industry has a breakup of 30/70). All the telecom operators in Pakistan have acknowledged the following:

The issue of high cost infrastructure in rural areas is severe creating a connectivity chasm between those having ICT infrastructure and those not having ICT infrastructure. The operators have expressed the need for the Government to utilize USF for the betterment of rural infrastructure.

There is serious need to strategize better utilization of available resources. Some operators are willing to share its fiber optic infrastructure with other operators while others want to share towers, sites etc.

MOIT (Ministry of Information Technology) has explained and encouraged infrastructure cost sharing in mobile cellular policy 2004 as follows:

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“It is important to encourage Infrastructure sharing as a matter of policy and keeping in view environmental issues related with towers and masts. Infrastructure sharing includes a requirement to lease facilities on a nondiscriminatory basis, to such other service providers. The facilities provided may include space, electrical power, air conditioning, security, cable ducts, space on antenna masts or towers, rooms etc. Infrastructure sharing, including co-location and facility sharing, shall be provided based on the guidelines established by PTA/FAB on the principles of neutrality, non-discrimination, equal access and commercial arrangements”18.

Based on the discussion above, it is imperative that the telecom operators in Pakistan adopt ‘mutually beneficial’ strategies for creating a conducive and competitive “infrastructure Cost” environment; sharing of fiber optic is healthy starting point to further the initiative. Infrastructure is considered the main obstacle by all operators in Pakistan in order to make their footprints all over the country. Due to extremely high cost of 3G licenses, telecom operators have written letter to PTA to postpone 3G licenses for two years. There is need to expedite infrastructure sharing among the operators in order to address the issue of high cost of 3G licenses. Pakistan has a considerable geographic spread and a populous rural footprint. If cellular services are to be taken forward, better practically working coverage is required. Pakistani cellular operators understand this and are trying different strategies to cope with the challenge. In 2002, Paktel and Instaphone entered into an infrastructure sharing agreement that allowed both the operators to use single civil facilities for putting up their cell sites. When Warid and Telenor entered Pakistani market in 2004, each went ahead with building its own infrastructure initially. However realizing the need of the hour, Telenor and Ufone have signed a MoU recently to share their infrastructures. This is just the starting point. As the operators move ahead with their strategy to unleash multimedia and broadband services, they will need to understand infrastructure sharing in more depth including its regulatory and interconnect related aspects and make bilateral agreements to reduce their infrastructure cost.

5.2 Manufacturing Industry

Self-reliance is the key to sustainable growth and it comes with a stable manufacturing industry serving all the needs of the telecommunication industry. In telecommunication industry, the under-developed countries lag far behind that of developed economies, not just in terms of tele-density but also in terms of technological sophistication. In order to enable domestic vendors to upgrade their technology and gradually get rid of dependence on foreign products, the governments in these countries need to formulate a strategic policy of telecommunication equipment import, digestion, absorption and creation. Using the domestic market to exchange foreign technology has been a preferred strategy of upgrading the technology of domestic manufacturers. These countries offer a lot of growth potential for the telecommunication sector due to low telecom penetration. Huge telecommunication market provides the government with strong bargaining power to urge foreign vendors to transfer their technology when a trade deal has to be made between the two parties, especially when a joint venture has to be established.

In addition to setting up joint ventures, the government needs to provide favorable support to domestic manufacturers. This support includes the assignment of research grants for R&D, low interest loans, discounted tax rates and a generous provision of land in high-tech industrial parks for the domestic manufacturing industry. Mobile telecommunication industry worldwide has immense potential especially in the developing world.

18 MOIT-Mobile cellular policy 200432


Malaysian telecom policy focuses on development of strategic and export-oriented manufacturing industry. Indian telecom policy focuses on manufacturing and emphasize on building world class manufacturing industry.

An ideal example is of China. When China began to reform its telecommunications system in the early 1980s, the first joint venture for switching equipment – ShanghaiBell – was established in 1984, the Chinese government defined clear terms on which technologies should be transferred to the Chinese side by the Belgian partner and in what manner. In 1998, more than 74% of ShanghaiBell’s hardware and 90% of its software products were developed and made in China. As a result of such concrete steps, the market share of Chinese local vendors in digital switching equipment rose from 0% in early 1980s to over 99 per cent in 1999. In the mid 1990s’, several domestic manufacturers were well established in China, including Julong, Datang, Zhongxing (ZTE) and Huawei. From early 1980s to 1999, the market share of local vendors in switching equipment rose to over 99 per cent. The achievement of domestic manufacturers has strongly encouraged the Chinese government and industrial sectors to move aggressively into the prosperous mobile communication sector. So far, Chinese domestic manufacturers have developed all of the key switching and base station technologies for the CDMA system with the exception of the base-band chip, which has been patented by Qualcomm of the US. While bidding for the first largest CDMA network of Unicom in 2001, Chinese government decided to use CDMA to stimulate the domestic manufacturing sector. Almost all foreign manufacturers had to set up partnerships with domestic vendors or China-based joint ventures: Huawei (Motorola, Ericsson), ShanghaiBell (Samsung), Nanjing Panda (Ericsson), Qingdao Lucent (Lucent), Guangdong Nortel (Nortel), Julong (Ericsson), Shouxin (LG), Datang (Nortel, Lucent), Hangzhou Motorola (Motorola), Eastern Communication (Motorola, Ericsson)19.

There’s no manufacturing facility in Pakistan as of now, even though Nokia is the best selling handset maker there and the total mobile subscribers are close to 50 million. According to statistics, telecom equipments of worth $1.05 billion were imported by Pakistan during Jul 2006 to Mar 2007, which was 26.7 percent more than the imports during the same period of the previous year20. Recently, Nokia has setup a test bed facility which is being used to train local industry resource including Nokia Pakistan’s own employees as well as Nokia’s clients. During a recent visit, the Hungarian Foreign Minister said that at present Nokia phones are

19 3G Mobile Policy: The case of China and Hong Kong-ITU20 PTA

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being manufactured in Hungary and steps are being taken by the Hungarian government to start manufacturing of Nokia mobile phones in Pakistan.

An official from the Telecommunication Ministry gave a statement in August 2007 that the government of Pakistan will soon offer a 10-point incentive package to foreign investors for manufacturing telecom equipment in Pakistan to save foreign exchange. Consultations have been held with foreign investors and a special committee is finalizing a package in the light of their suggestions. If the plan is implemented it would be first time telecom equipment including mobile sets would be manufactured locally. The incentives will include duty free import of machinery, smooth availability of raw material, reduction in corporate taxes, concession in power supply rates, human resource development, consistency in policies and other measures. The official also said a centre would be established in Islamabad at a cost of $4.5 million to develop human resource to cater to the needs of manufacturing of equipment in the telecom sector.

Some initiatives have been taken in this regard by Government of Pakistan. The federal government, about three years ago, allowed duty-free import of IT products, which helped the stakeholders to capitalize amid telecom deregulation. Later, in 2003 the IT stakeholders and telecom operators were given a free hand to import equipment and other products without any permission from the PTA (Pakistan Telecom Authority). It is part of de-regulation policy of Pakistan to encourage private investment and local telecom manufacturing industry. All the telecom operators agree that there should be manufacturing industry in Pakistan and a complete study should be carried out to ascertain the areas where the manufacturing industry can be offered a long-term sustainable business case with future growth.

5.3 Integration of IT and Telecommunication

The last few years have seen a major revolution shake the industry. Deregulation has led to intense competition – for every customer, every service, and even every call. At the same time, emerging technologies like broadband, mobile communications, and the Internet have transformed not only service and product offerings, but the very way business is handled. Integration of IT in Telecommunications provides end-to-end portfolio of solutions, applications, and services tailored to meet the needs of the telecommunications industry. IT integrates entire telecom business on a coherent platform, streamlining existing operations and introducing efficient, future-proof business functions. IT’s portfolio for telecom includes an unsurpassed range of industry-specific function, with support for convergent billing, receivables management, and customer relationship management (CRM). IT integrated with Telecommunications combines cutting-edge solutions for the telecom markets of today and tomorrow with industry-specific and general business expertise, helping to grow markets, survive the struggle, and become a success story.

IT solutions empower employees, customers, and partners to collaborate successfully. IT can handle the very specific needs of the telecommunications industry. IT solutions allow operators to target sales and services strategies effectively while accurately monitoring costs. End-to-end integration with IT provides consistent information across all customer facing processes and all channels at all times, from call centers to websites and sales representatives. Operators collaborate directly with customers and partners in buying, selling, sharing information and raising productivity. IT applications designed to meet the specialized accounting needs of the telecom companies have been developed. Solutions can support large number of customer accounts, customer hierarchies and automation of critical processes.

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Integration with IT is an important investment in telecommunication companies, delivering a

faster and bigger return in a variety of ways:

Streamline business processes across the enterprise saving time and money.

Take advantage of low total cost of ownership.

Manage customer revenue streams effectively and efficiently.

Exploit existing revenue streams to the fullest.

Identify and exploit new sources of revenue ahead of the competition.

Reduce costs by collaborating over the Web with key business partners.

Win new customers in established and new market segments.

Increase customer loyalty and revenue per customer by delivering personalized products and services.

Achieve greater cost transparency and control. Reduce the number of expensive legacy applications and their interfaces.

In Pakistan, however, operators have to outsource almost all solutions and applications. Operators believe that the IT industry has to start developing solutions that can handle the very specific needs of the telecommunications industry in the country. Telecom Operators have to spend loads of money outsourcing solutions like CRM, billing, VAS, receivables management, ERP etc. IT companies in Pakistan have to come up with solutions that can integrate entire telecom business on a coherent platform, streamlining existing operations and introducing efficient, future-proof business functions. It is thus vital for the IT industry in the country to come up with quality solutions that can handle the needs of the telecom industry. Government of Pakistan has to step in and provide an adequate amount of fund to the local industry so that it can come up with the solutions that can match the needs of the telecom industry thereby reducing the extra amount of money spent by the operators to outsource these solutions.

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5.4 Collaboration with Universities

Industry-university collaboration is defined as “the process in which the actors in the industrial and academic domains cooperate with each other so as to uplift the performance potential of both domains.” It is exactly due to the uplifting potential of human resources, innovation capability, and induced economic efficiency, that the promotion of industry-university partnership has been expected as one important means to facilitate economic recovery of a country. Collaboration between the industry and the academia is the base model of the “Triple Helix”. The collaboration between academia and industry in the areas of curriculum, training, and hands-on technical experience is need of the hour to tap the potential. There is a need for setting up of incubators in universities. Models followed by top competitive economies like New Zealand, US, Finland. Industry-University collaboration has been since recent years a frequently used terminology among industries, academics, and the government. Finland has been successfully following the triple helix model. It is attributable to such factors as rethinking of innovation model, promoting economic growth through technological innovation, and emphasis on the social accountability of science and technology (S&T) development, all leading to the favorable environment for cooperation between industry and academia in Finland. In Australia, “transforming into knowledge-intensive economy,” “ensuring economic recovery from recession and unemployment by promoting innovative start-ups and industries,” “reaching the academic contribution to social welfare via the major channel of technology transfers” have become common arguments.

Education in Pakistan is in crisis. Currently, less than 3% of Pakistanis in the age group of 17-24 are enrolled in a college or university, and the academic quality of graduates being produced is far below those from corresponding institutions in developed countries21. The problem is both of quality and quantity. Lack of funds and reason-based teaching and learning have been the principal causes of substandard education. Poverty and a lack of financial assistance and encouragement to economically disadvantaged youth have resulted in the low participation rate. There has to be a holistic approach to education. In all the policy planning so far, the thrust of all initiatives has been directed towards the universities, and in that, primarily public universities to the neglect of colleges. Public universities are heavily, if not entirely, dependent on public colleges for their intake of students. They are the weakest link in the whole chain of education in Pakistan. In all initiatives and planning these colleges have been ignored. Their infrastructure is in poor condition and equipment and libraries almost non-existent. Relying on outdated textbooks and learning by rote, they produce students who are ill prepared for university. It is imperative to identify the nature and causes of the low standard of college education in Pakistan, its impact on university education and subsequently on the industry.

In an article in Blue Chip magazine, President of Pakistan, Gen. Pervez Musharraf mentioned that a scheme for creating linkages between our industry and higher education has been launched. This involves opening of technology parks on campuses to encourage interaction between academia and industry for compatibility. TEVTA also launched TSTP (TEVTA Special Training Program) in July 2006, which was aimed at developing advanced human resource in the telecommunication industry through industry-academia collaboration in the areas of curriculum, trainings, and hands-on technical experience.

21 source: Second International Symposium on Issues in Higher Education in Pakistan, Nov 200636


So the way forward to solve this issue is by investigating the problems and prospects of technical education in Pakistan as well as examining the targets set in the policies. Technology commercialization is a long process, and between the academia and industry it would be incubators that bridge the gap. Besides industry, academia, and bridging intermediary, the government should act as an initiator, promoter, and supporter in the national innovation. Collaboration with universities and colleges is of the essence and strong association has to be maintained with the universities. It is imperative to educate students at every level about the dynamic relationship between science, society, business, ethics, and law in order to bridge the archaic divide between these various fields of study and instill academic interest in a broad range of topics, inspire scientific curiosity and discovery, and encourage undergraduates to explore interdisciplinary careers that span across traditional boundaries. The importance of incubators as bridging intermediaries has to be widely recognized in the policy series of industry-university partnership, new industrial emergence and regional economic uplift.

5.5 Cost of Doing Business in Pakistan

Cost of doing business depends on political stability, availability of skilled labor, costs of raw materials and fuel, literacy rate, quality of education, laws and regulations which govern business activities, sense of urgency in the officials, level of corruption prevailing in the officials of regulatory authorities, consistency of the government policies, simple and efficient governmental processes to start and run the business in the country. Some important factors which enhance the cost of business are: wages rates average total remuneration in manufacturing sector, time is the most precious thing in one's life, the degree of success is directly proportional to the effective use of time. The factors associated with any industry or business, are the cost of setting up a business, dealing with licenses and Taxes and contract enforcement.

In Pakistan the cost of doing business is very high. This is why; it is not being on the priority list of foreign as well as local investors. Pakistan is ranked 76 th out of 178 economies. Singapore is top ranked in the cost of doing business comparison. Business costs 24.4% of income per capita in Pakistan. This is high compared to an average 7% of income per capita in OECD countries and 14% in Europe & Central Asia22.

22 “Doing Business 2008 - Pakistan” co-publication by World Bank and the International Finance Corporation37


While dealing with licenses, the cost is prohibitively high at 12 times income per capita—93rd in the world and almost 3 times the South Asia average. Contract enforcement in Pakistan: Weak points are the cumbersome procedures and high costs. It remains a weak dimension of the business environment. It takes 395 days to resolve disputes through the courts, involving 46 procedures and with 35 percent of the debt value lost in the process—ranking Pakistan in 154th place on the ease of enforcing contracts23.

Overall summary of Pakistan’s ranking in doing business is highlighted in the table below24:

Pakistan has to import new technologies and products from the agencies which are skimming the market. In this situation to remain competitive becomes pretty hard. The Pakistani universities are ranked quite low in world. This macro aspect demands full attention. Political stability and literacy rate are factors which cannot be improved overnight. The eradication of these problem needs a lot of time. There are other factors which can reduce the cost pretty soon. The most important among these is the raging corruption. Eradication of this evil is possible by introducing better laws and their sincere application. For the up-gradation of the environment for the sake of business in Pakistan, the process of starting business must be simple and short to motivate investors. Consistent policies have to be implemented by the government and there should be no change in these policies.

23 “Doing Business 2008 - Pakistan” co-publication by World Bank and the International Finance Corporation24 “Doing Business 2008 - Pakistan” co-publication by World Bank and the International Finance Corporation

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5.6 Telecom Status as “Industry”

Industry is the segment of economy concerned with the production of goods and services. Many developed and developing/semi-developed countries depend significantly on industry for goods and services. It is an organized commercial exploitation or use of natural or national assets. Telecommunication has become one of the prime services which an economy needs for rapid growth, development and modernization of its various sectors. Government of Pakistan awarded status of industry to telecom sector in year 2003-04. Benefits that accrue to a declared industry are not available to Telecom Sector though. Over the past two decades, the institutional and regulatory framework of the telecommunications industry has not changed radically. Without industry status, mobile telecom is considered a commercial business and is subject to high level of taxation. In most of the countries, public telecommunication operators (PTOs) have been fully or partially privatized and regulations concerning access to telecommunication markets, provision of services to users and pricing mechanisms have been overhauled.

In 2001 the Average mobile penetration was less than 1%. But since then the Penetration has grown to 31% (Compound annual growth rate 102%). Mobile sector contributed PKR 312.5 billion (2% of total GDP) to the economy in 2006. Mobile sector contributes about 35% of its revenue to Government of Pakistan in terms of taxes and other charges25. Mobile sector contributed PKR 94 billion of value added to the domestic economy in 2006, up from PKR 22 billion in 2003. When the impact of the economy wide multiplier is included, the value contribution in 2006 was PKR 131 billion up from PKR 31 billion in 200326. It is high time that Engineering Development Board (EDB) approves industry status to mobile telecommunication in letter and spirit. This would in turn facilitate the growth of industry in the country resulting in an economic uplift.

5.7 ARPU – Average Revenue per User

ARPU (Average Revenue per User) is a powerful and extremely useful indicator of how well a telecom company is accessing its customers’ revenue potential. ARPU is a measure most often used by telecommunications companies to state how much money they make from the average user. ARPU is important because it provides a breakdown of what is driving revenue growth, and it also gives some indications of what is driving margins. ARPU growth can also indicate how successful a company is being in moving users to new services (e.g. pictures messaging, data connections etc.) that are regarded as strategically important and an indicator of how margins will fare.

The company that tracks ARPU will most likely want to know its profit potential in broad terms. However, mobile phone companies also track ARPU by examining revenues brought in by customers’ incoming calls as compared to revenues generated by monthly or annual fees. In this way, ARPU can be both general and specific. Low ARPU is a major issue and becomes an impediment to the industry growth.

25 Deloitte Report, March 0726 PTA

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Across the world ARPU is decreasing and only a very few countries are experiencing upward trends in ARPU growth. Malaysia and France’s ARPU is substantially lower than the $15 average, but is expected to rise through an increased mobile penetration. As compared to Malaysia and France, Germany and Switzerland’s ARPU are touching $30 mark.

Country Average Retail Price (US$)

Country Average Retail Price (US$)

Pakistan 0.03 India 0.06Bangladesh 0.07 China 0.09UK 0.41 Sweden 0.17Czech Republic 0.31 (Source: Tarifica & Mobile Operators)

ARPU is widely considered to be one of the benchmarks keeping a tab on the financial health of telecom operators. While globally, operators have an ARPU of around $15, in Pakistan it is decreasing quite drastically. ARPU in Pakistan has decreased from US$ 19.2 in 2002 to less than US$ 3.2 in 200727. Thus it has been dropping quite severely. The drop was moderate till 2005 but rapid decline has been observed in the last few years. Last year there was 31% decline in the industry ARPU and in this year the drop has been almost 44% 28. Lower ownership costs, lower usage and higher prepaid to postpaid subscription ratio (98:2) are termed as the main reasons for such a low ARPU. The often quoted 60 million subscribers figure masks the actual number of individual mobile subscribers in Pakistan. No research-based figures have ever been released, but various sources suggest that the actual number of individual subscribers in Pakistan today is 25-35 million. So there is a strong case of removing the inactive accounts for a possible increase in ARPU. In UK, for example, operators actively began to remove accounts inactive for 3 to 6 months and the net effect was an increase in the ARPU and a much sharper focus on profitable growth29.

It is concluded from the above discussion that for mobile operators to effectively grow ARPU, the existing subscriber base will have to be leveraged for migrating high value customers. There is a need for effective market segmentation and understanding of market segment desires and decision making factors. Effective marketing to reach the targeted market segments with compelling value propositions can also help in growing the rapidly falling ARPU. The mobile companies have to work on increasing the usage of voice service on mobile network. In addition, bundled offers like voice and SMS which is already present in the market may be amplified by offering value added services like mobile TV and GPRS in

27 PTA Annual Report 0728 PTA Annual Report 0729 “ARPU Strategies for mobile operators in Pakistan” Industry Report 07 by SourceOne

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package deal as well as come up with more such plans so as to bring some stability to the ever decreasing ARPU in local industry.

5.8 Interconnect

Interconnect is the physical and logical linking of telecommunication networks used by same or different operators in order to allow the users of one telecommunication network to communicate with the same or another telecommunication network or to access services provided by a telecommunication network and the services may be provided by the parties involved or other parties who have access to the network (European Commission Directive on “Interconnection”).

The regulators as well as telecom operators around the globe consider interconnect as one of most important issues in the development of a competitive telecom marketplace of telecom networks. Interconnect is the key to development in telecom market and is the main driver of growth and innovation in telecom market. Although regulators and policy makers understand the importance of interconnection, they face many tough decisions in implementing regulations and policies.Interconnection is important because it allows the customers of a carrier to access customers of other carriers. Interconnect has a key impact on competition and after liberalization of the sector, it is one of the key mechanisms through which an incumbent operator can affect the competitive landscape. Incumbent Operators have little incentive to make things easy for their new competitors, and most of the bargaining power in negotiations lies with the incumbents. Key elements of the interconnect regime, including costing/pricing methodology, scope for negotiations, and the nature of regulatory intervention, can send signals regarding policy intentions relating to the nature of competition. Interconnect is also important because it promotes infrastructure sharing. Interconnect allows for telecommunications to be viewed as other than a natural monopoly, because competitors may use the same facilities to provide service in whichever segment of the market they choose.

According to ITU surveys, interconnection related issues are ranked by many countries as the single most important problem in the development of a competitive market placed for telecommunications services. Almost half of all countries in the Asia Pacific region indicated that interconnection issues were a top regulatory priority. In markets with perceived or expected market failure, as is the case in part of the telecommunications market, there will often be a need for regulation in order to counteract anti-competitive behavior of incumbent operators and to stimulate competition e.g. by facilitating market entry for new operators. When access and interconnection charges are based on economic costs they do not distort the build/buy decision of new entrants — they will be encouraged to use existing facilities if and only if it is economically desirable to do so. Just as important, cost oriented access and interconnection also means retaining investment incentive for incumbents to upgrade or extend their existing network when new technology is available.In order to ensure the successful liberalization of, and full competition in the telecommunications sector, the Government and the Regulator endorse a policy of full and fair access to telecommunication networks. The rules give all licensed operators a right, and when requested by other licensed operator, an obligation, to negotiate interconnection arrangements. Interconnection arrangement should be a matter of commercial negotiation between the relevant licensed operators. Regulatory intervention should only arise if the relevant licensed operators are unable to agree on their interconnection arrangements.The government also endorses an interconnection regime, which provides for charges, which are transparent and cost-oriented, and for non-discriminatory interconnect access and pricing. However, it

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is recognized that different interconnect tariffs may apply to different classes of operators, to the extent that they gives rise to different costs. Interconnection arrangements should ensure the security of network operation, the maintenance of network integrity, the interoperability of services and the protection of data.

Effective and compatible interconnection — the physical and logical connection between operator's connectable systems which allows telecommunications services from other system — or interconnection regime are essential for a competitive market or a newly liberalized market where incumbent operator initially enjoys market power may try to prevent competition using interconnection terms as a shield to ensure its dominance in the telecommunication market or refuse to unbundled network elements. In order to resolve disputes, to promote competition and avoid unnecessary delays framing of interconnection-framework is an essential part of regulatory framework. There are various cost methods on which the operators can mutually agree or the regulator may use its influence to promulgate a particular method to ensure consumers interest in general so that the telecommunication services remain as basic utility for living rather a mode of charging exorbitant profits by the operators by enforcing interconnection regime on higher rates or to prevent monopolistic activities. Following issues faced in interconnect are how to ensure safe and quick inter-connectivity of a new operator with an incumbent, charging, billing disputes resolution, co-location and fault-Handling.

Interconnection with PTCL will be covered by the Reference Interconnection Offer (RIO) being developed by PTCL under the interconnection guidelines. Mobile Interconnection termination charges will not exceed the existing level until cost-based rates are available for both fixed and mobile operators. PTA will set rates before the end of 2004 based upon its view of termination costs by existing operators. Interconnection charges will move to a cost plus normal return basis for all mobile operators on the basis that each operator has a monopoly on termination of calls to customers connected to its own network. All operators have to provide the PTA with evidence of cost for interconnection termination rates within 12 months of beginning their operation.

Inter-connect related issues being faced by Pakistan’s telecom industry are as follows: The issue of establishing rates and regulation for interconnection between these networks. The interconnect pricing involves cost based modeling and branch marking.

Interconnect access dispute and regulatory issues. Regulatory issues include determining which of the various available approaches is most likely to further the Government’s objectives. It also involves determining the extent to which (and nature of) regulatory intervention is required to ensure the ‘correct’ approach is used in practice.

In Pakistan, PTA (Pakistan Telecom Authority) has issued interconnect policy according to which, the new licensee(s) will have the right to interconnect its network with other licensed mobile and fixed networks in Pakistan. It is important to enable customers to dial from one mobile network to customers on either another mobile network or customers on a fixed network at reasonable retail rates. To achieve this, the mobile operators must be free to decide and make connection to the most economic point of interconnection with other operators. Mobile operators will have the right to request leased lines from LDI operators. All the telecom operators in Pakistan believe that there should be a better definition of interconnect. The viability of the new VOIP/broadband services will depend not only on the interoperability of standards but also on technically and economically sound interconnection arrangements.

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5.9 Voice over Internet Protocol (VOIP)

VOIP involves the digitization, conversion and compression of voice signals into data packets that are transmitted over an IP network, to be reassembled and converted back into voice communication at the receiver’s end. VoIP services are currently offered by local telephone operators, long-distance operators, cable TV companies, Internet service providers, non-facilities-based independent providers and, in some countries, mobile operators. Using legal VOIP network, international voice calls can be made at incredibly low price thus introducing a new realm of attractive revenue generating packages that the telecom operators can offer to their customers.

VoIP can facilitate tasks that may be more difficult to achieve using traditional networks. It has the ability to transmit more than one telephone call down the same broadband-connected telephone line. This can make VoIP a simple way to add an extra telephone line to a home or office. Many VoIP packages include PSTN features that most telecommunication companies normally charge extra for, or may be unavailable from local telecom operators, such as 3-way calling, call forwarding, automatic redial, and caller ID. VoIP can be secured with existing off-the-shelf protocols such as Secure Real-time Transport Protocol. Most of the difficulties of creating a secure phone over traditional phone lines, like digitizing and digital transmission are already in place with VoIP. VoIP phones can integrate with other services available over the Internet, including video conversation, message or data file exchange in parallel with the conversation, audio conferencing, managing address books and passing information about whether others (e.g. friends or colleagues) are available online to interested parties.

In the US and Canada, where VoIP applications are legal, different service models are developing – some VoIP providers are offering their services for free, bundled in with other service offerings. Other service providers charge for long- distance calls carried over VoIP, similar to traditional fixed-line telephone services. Other VoIP providers allow flat-rate calling regardless of distance, a business model that is gaining in popularity. VoIP is not explicitly regulated in the European Countries framework, and European countries have tended to develop their own approach to VoIP in terms of regulation. At the European level, there have been moves by the European Regulators’ Group to formulate a common approach to regulation, with pro-competitive policies a particular concern of the European Commission. In Japan VoIP is permitted and is subject to minimal regulation. VoIP providers have to pay access charges to the PSTN operators when calls are terminated on their networks. By end of March 2005, an estimated 11.5 million people worldwide were using retail VoIP services for some part of their telephone calls. Adding in PC-based ‘soft-client’ VoIP services (Skype) adjusting for the number of minutes, this estimate grows to some 17.5 million people using VoIP services by March 200530. This is estimated to grow to approximately 250 million by the end of 2011 (as shown in the chart below).

30 Australian Communications and Media Authority, newsletter Jan 200543


In Pakistan, PTA has issued technology-neutral licenses. VoIP services may be offered by Long Distance & International (LDI) and Local Loop (LL) licensees. 11 companies in Pakistan offered VoIP in 200531. Some new operators are looking to deploy IP-based networks and PTA is working on the necessary arrangements to tackle issues of QoS, numbering plan, internet telephony and costing methodologies etc. ISPs are not allowed to offer VoIP. ISPs are licensed as either Electronic Information Service (EIS) or Non-Voice Communication Network Service (NVCNS) providers, neither of which permits licensees to allow voice over their data circuits i.e. grey telephony. ‘Grey telephony’ is illegal in Pakistan (the use of illegal gateway exchanges to bypass legal PTCL gateways and terminate/originate international traffic, including through VoIP gateways, GSM gateways, WLL phones, mobile SIMs or other related equipment. This traffic may then be distributed onwards using WLL and mobile numbers). PTA has issued policy guidelines to ISPs, PTCL, cellular mobile, LDI, LL and WLL operators to address illegal call termination/origination.

Based on the international benchmarking it is recommended that different guidelines have to be issued to licensees, depending on the nature of their businesses. Licensed operators are responsible for maintaining updated client records, monitoring clients, the correctness of their customer’s antecedents, and for overseeing clients on the transportation of voice on data circuits and formulation of their SOPs /procedures to discourage illegal activities and helping PTA. A clear strategy and a Vigilance Committee has been established to eliminate grey traffic and illegal call termination in June 2006, comprising PTA, the Ministry, PTCL and other operators. PTA now regulates international bandwidth rates and has directed PTCL to review its rates to promote broadband in Pakistan, building on Pakistan’s Broadband Policy published in December 200432. Operators await the policy for VoIP. In order to justify the investments required in VoIP, they must be guaranteed a clear regulatory framework that will reduce the risk inherent in regulatory uncertainty and help clarify (guarantee) returns on their investment in advance.

5.10 Research and Development (R&D)

The telecommunication field despite its more than 100 year history continues to demonstrate a strong capacity for innovation, reinvention and growth. Change is the only constant in this field. The first six years of 21st century have been both arduous and productive for the global

31 “VoIP Regulation in Pakistan: A general perspective”, Press Release, 15 November 2005, Pakistan Telecommunications Authority32 “VoIP Regulation in Pakistan: A general perspective”, Press Release, 15 November 2005, Pakistan Telecommunications Authority

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technology and telecommunications industry. The industry’s unprecedented growth has been possible because of a highly sophisticated research and development (R&D) culture. In the last 30 years, researchers and scientists have developed more innovation than in the entire history of man. Not because they were cleverer than their predecessors, but because they had a vast quantity of know-how and tools at their fingertips, and this accelerated their progress. Today, researchers and developers have an even greater base of tools and skills allowing even faster advancement. The most influential acceleration factor has perhaps been the option to communicate, share and debate ideas as they developed. In general, R&D activities are conducted by specialized units or centers belonging to companies, universities and state agencies. In the context of commerce, "research and development" normally refers to future-oriented, longer-term activities in science or technology, using similar techniques to scientific research without predetermined outcomes and with broad forecasts of commercial yield. R&D is normally led by manufacturers/vendors and supported by the operators around the world.

In USA and Canada, high quality research and development is performed in ICT. The traditions for close cooperation between industry and universities have also had a major impact on the ICT modernization and innovation in both the countries. In Norway, a council named ‘The Research Council of Norway’ is aimed at doing high quality research and collaboration with not only the local industries and universities but also an increased internationalization of research in the country. In countries like Japan, Malaysia and Singapore telecom companies have strong ties with the universities and research institutes. Research in areas like core networks, access networks, network and service management, IT services, broadband etc is at its peak.

In Pakistan, minimal R&D is being done and the R&D fund is underutilized. Mobile network operators are paying 0.5% of their revenues for R&D Fund. The Government has to come up with a policy for the utilization of R & D fund. Sustained growth can only be achieved if R&D (no matter how basic it is) is encouraged and included as a strategic pillar. Government will have to play a major role in encouraging an R&D culture. There is no basic infrastructure available, thus high-end R&D will not produce any fruitful results. The focus, therefore, should be kept on establishing basic infrastructure first. Similarly the telecom operators also need to introduce and encourage R&D related to various value-added services.Based on the discussion, it is concluded that promoting efficient, sustainable and effective information and communication technology initiatives through synergized development of industrial and academic resources is a key to transform Pakistan’s economy into a knowledge based economy. It is also essential that the public and private sector have a close collaboration with the academic world. Co-operation between universities, public and private sectors and research institutes represents a very important tool in paving the way for medium to long term innovative solutions in the ITC field. It is also imperative that the funds are efficiently and effectively used for the growth and development of the ICT industry, products, services and research projects. R&D organizations have to be developed which support public and private sector, telecom operators and individuals to research in and develop the infrastructures and related services from grass root level.

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5.11 Taxation

Taxation on mobile telecommunication industry can be expressed in terms of total cost of mobile ownership in order to calculate the burden on the end user. Various taxes including corporation tax, license fees, withholding tax and sales tax contribute to increase cost of mobile ownership. It is evident from the table shown below that the taxation rates and structures vary in various countries however they form a substantial portion of cost of mobile ownership and usage. Moreover it has been demonstrated through various studies that reducing taxes will have a significant positive impact on mobile penetration. It has also been proven that by reducing taxes, the revenues of government will not decrease rather the revenue will increase due to increase in penetration.

The consistent technical development in developed countries including 3G, WIMAX, in the near future, mobile broadband, promise to ease still further access to information through the internet, e-mail and telephony in the developed world. However, this development has benefited only a privileged minority and has threatened to widen even further the economic gap between developed and developing countries. Information access rates in developing countries are often more than 20 years behind those in the developed world. The implication of this is that governments of developing countries, in order to bridge up this digital divide, must choose to focus to their taxation strategies to increase economic development.

In Pakistan during 2006-07, total revenue collected by the Government in the form of taxes and regulatory fee was more than Rs.100 billion which is 30% higher than the last year. Telecom sector contributed Rs 36.3 billion in the form of sales tax which was 27% of the total GST collected by CBR and 9% of total indirect tax collection33. The mobile companies have paid Rs 17 billion as activation tax during the year 2006-07 out of which 66% has been paid by Telenor and Mobilink which are the fastest growing companies. Mobile operators and PTA has agreed that if the taxes are reduced further (i.e. withholding tax and activation tax) it will give enormous opportunity to mobile operators to spend their revenue on growth and expansions34.

33 PTA34 PTA

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It is important to note that the reduction of taxes imposed on mobile services in Pakistan in the last few years has considerably reduced the cost associated with mobile phone ownership and increased demand. However, increased benefits to the mobile and telecom industry would arise if fiscal burden on mobile services is further reduced. The telecom sector is directly contributing about 2% in GDP35. Despite the aggressive growth in telecom industry in recent years, there is tremendous growth potential to bridge up the digital divide and extend wireless access to the far flung areas in Pakistan. Taxation on mobile telecom services is an issue which if addressed properly will play pivotal role to substantially increase mobile penetration. It has been proven by a number of industry experts that the reduction in taxes will increase mobile penetration and will result in enhanced revenues to the Government.

5.12 Universal Service Fund (USF)

Universal Service Fund (USF) is a tax on telecommunication service which is used to fund and subsidize telecommunication infrastructure for remote and rural areas. There still remain substantial areas (geographic or service) in which there may still be natural monopoly or oligopoly (particularly in low-population density areas and in the local loop) or in which it is difficult for market entrants to gain entry. Profitable service provision requires sufficient demand to be available which can be met at an affordable price. It is possible to have no access in a remote area with a rich population or a less remote area with a poor population. These areas are the core areas addressed by universal access fund. Sources for funding of a USF mainly consists of Government’s national budget (subsidies), taxes on operator revenues, competitive least subsidy tenders and international development agencies. Chile, Peru, Columbia and Uganda are interesting case studies in this context.

USF is either managed by a Government ministry or telecom regulator or independent agency. The crucial policy decisions facing countries around the world relate to ensuring efficient markets and an optimal use of resources given the administrative, legal, cultural and social framework of the country. Regulators and Government telecom ministries around the world must begin to look at creating dynamic and responsive policies and regulatory frameworks that address the issues of universal access in a proactive and flexible manner.

A successful USF is characterized by independent, transparent and non-discriminatory management and transparent financing. It will have clear and well-defined goals and objectives (i.e., roll-out targets for operators; funds targeted to specific beneficiaries such as high cost regions, un-served rural areas, low income populations, educational and health sectors).For the most part, when the developing countries first establish USF, they place an emphasis on guaranteeing basic public access (i.e., public telephones, wireless infrastructure). As a country’s telecommunications network develops, its USF can then begin to support public access to value-added services (i.e., Internet, broadband).

In the preliminary results of an ongoing World Bank study show that the Peruvian model, through its Telecommunications Investment Fund, has had dramatic effects on improving Universal Access to some of the remotest populations of the country. In the first phase of the Peruvian project, a little over 200 sites reduced the average distance for the targeted consumers to access telephone service from 90 km to just 5 km. By the end of 2003, as a result of four tendering rounds, two private operators have installed and operate over 6,500 public phones in rural districts in Peru36. Close to 7 million people living in rural areas now

35 PTA36 ITU

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have access within five kilometers of their homes, for less than 10 USD per person? Bangladesh has also allowed an innovative model based on micro-financing individual cell phones to reach populations previously underserved or un-served by telecommunications.

This program known as Grameen Phone and financed by Grameen Bank, has been a phenomenal success with an extended phone service to over 57 million people through 23,000 "phone ladies". In Uganda, The Rural Communications Development Fund (RCDF) was established in 2001. The majority of the “start up” projects (public pay phones, Internet PoPs, IT content), and a few of the Internet cafes and ICT training projects were successfully completed by the end of 2003. Chile’s FDT (Fondo de Desarrollo de Telecomunicaciones) is perhaps the most successful of all the universal service fund models today. It achieved its initial objectives in the allotted time. In India, USF triggered reverse auction. In 38 of the 81 regions on offer, many mobile operators bid zero. In other words, they asked for no subsidies at all. In 15 regions India's biggest operator, Bharti Airtel, even offered to pay. As a result, barely one-quarter of the 40 billion rupees ($920m) available in subsidies is likely to be allocated which proved it not to be a very lucrative model37.

The regulators must make complex decisions regarding such issues as costs of various services and the appropriate levels of subsidies; how subsidies are to be funded; what users are entitled to subsidy; what services are to be subsidized, and many others. Developing such an approach in a competitive environment with multiple operators and multiple competing technologies which may or may not be substitutable is becoming increasingly difficult for even the most advanced regulators.

In Pakistan USF was also setup with similar intentions of reducing the digital divide and to advance ICT. The challenge to be faced is the rural tele-density including fixed, WLL and mobile services which is estimated at about 1% in 200538. Another issue is the uneven population and density across the four provinces of Pakistan. Ministry of IT has established competitive bidding process for implementation of universality projects. USF is expected to shift the focus of telecom operators from urban to rural unserved areas. MOIT has set targets of providing telephony (fixed, wireless) services to 85% of total population, increasing teledensity to 5% in rural areas, broadband penetration to 1% by 2010. In order to achieve these goals, MOIT has established Universal Service Fund Company. This company has already engaged consultants to lay down within the next couple of months a proper framework for the USF roll-out through a transparent bidding process to be conducted and overseen by the regulator.

Through interviews and study it has been found out that all the telecom operators are willing to work with Government of Pakistan to utilize USF to establish basic infrastructure in rural areas of Pakistan. The USF can finance the spread of network coverage and service to previously un-served or under-served areas and will make it possible for operators to supply individual service on normal commercial terms in areas which are covered through the USF, in order to trigger an ICT revolution.

37 ITU38 USF Policy-MOIT 2005

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5.13 3G License

3G is the third generation of mobile phone standards and technology, after 2G. It is based on the International Telecommunication Union (ITU) family of standards under the International Mobile Telecommunications program, "IMT-2000". 3G technologies enable network operators to offer users a wider range of more advanced services while achieving greater network capacity through improved spectral efficiency. Services include wide-area wireless voice telephony and broadband wireless data, all in a mobile environment. Typically, they provide service at 5-10 Mb per second.

Unlike IEEE 802.11 networks, 3G networks are wide area cellular telephone networks which evolved to incorporate high-speed internet access and video telephony. IEEE 802.11 (common home Wi-Fi) networks are short range, high-bandwidth networks primarily developed for data.

In Europe, 3G services were introduced starting in March 2003 in the UK and Italy. The European Union Council suggested that the 3G operators should cover 80% of the European national populations by the end of 2005. Roll-out of 3G networks was delayed in some countries by the enormous costs of additional spectrum licensing fees. In many countries, 3G networks do not use the same radio frequencies as 2G, so mobile operators must build entirely new networks and license entirely new frequencies; an exception is the United States where carriers operate 3G service in the same frequencies as other services. The license fees in some European countries were particularly high, bolstered by government auctions of a limited number of licenses and sealed bid auctions, and initial excitement over 3G's potential. Other delays were due to the expenses of upgrading equipment for the new systems. By June 2007 the 200 millionth 3G subscriber had been connected. Out of 3 billion mobile phone subscriptions worldwide this is only 6.7%. In the countries where 3G was launched first i.e., Japan and South Korea, over half of all subscribers use 3G. In Europe the leading country is Italy with a third of its subscribers migrated to 3G.

Other leading countries by 3G migrations include UK, Austria and Singapore at the 20% migration level. Mobile operators have had to pay phenomenal rents in auctions for 3G licenses, particularly in Europe. The United Kingdom, for instance, raised 33 billion USD in its April 2000 auction and Germany followed suit at 47.5 billion USD in its 3G auction later that year. Finland, on the other hand, awarded four licenses at no cost to the operators on the basis of comparative bidding39. As such, there is a wide disparity in license fees and methods across markets. This raises a number of issues related to market structure, pricing and service development.

In Pakistan, GSM is currently the main cellular technology in use. Five out of six cellular mobile operators are providing services with GSM technology in Pakistan. GSM is the main technology used by the operators therefore UMTS is preferred for 3G mobile licensing. Frequency Allocation Board is in the process of clearing the 3G spectrum. With the availability of frequency spectrum, Information Memorandum will be published for the information of mobile operators in Pakistan. Under the government decision, three countrywide 3G mobile licenses will be awarded through auction40. Only the existing mobile

39 www.3g.co.uk (Press Release 7-10-02)40 MOIT

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http://www.3g.co.uk/


operators in Pakistan are eligible for the 3G license and be allowed to participate in the auction process. The 3G mobile licenses will have conditions for rollout obligations under which licensees will have to ensure 3G mobile services in metropolitan cities within 18 months of the grant of License. In this connection, licensees will require to provide performance bond to ensure the 3G mobile rollout obligation.

Due to very high cost of 3G license, all the operators have jointly written a letter to PTA for the postponement of issuance of 3G license. The 3G licensing policy should be in line with the business plans of all the operators. It should deliberate the ARPU, infrastructure cost and growth opportunity for the customer and the markets needs and not be aligned towards ‘licensing financial gains’ for the Government. The policy has to be reviewed since the cost of 3G license is very high as compared to the revenues expected out of it.

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6 Recommendations

Based on the discussion on the issues surrounding the telecom market, following recommendations are put forward:-

It is imperative that the telecom operators in Pakistan adopt ‘mutually beneficial’ strategies for creating a conducive and competitive “infrastructure Cost” environment; sharing of fiber optic is healthy starting point to further the initiative.

There is need to expedite infrastructure sharing among the operators in order to address the issue of high cost of 3G licenses.

There is a need to understand infrastructure sharing in more depth including its regulatory and interconnect related aspects and make bilateral agreements to reduce their infrastructure cost.

There should be manufacturing industry for cellular mobile handsets and other equipments in Pakistan and a complete study should be carried out to ascertain the areas where the manufacturing industry can be offered a long-term sustainable business case with future growth.

For mobile operators to effectively grow ARPU, the existing subscriber base will have to be leveraged for migrating high value customers.

To increase ARPU, there is a need for effective market segmentation and understanding of market segment desires and decision making factors.

Effective marketing to reach the targeted market segments with compelling value propositions can also help in growing the rapidly falling ARPU.

The mobile companies have to work on increasing the usage of voice service on mobile network. In addition, bundled offers like voice and SMS which is already present in the market may be amplified by offering value added services like mobile TV and GPRS in package deal as well as come up with more such plans so as to bring some stability to the ever decreasing ARPU in local industry.

There is a need to investigate the problems and prospects of technical education in

Pakistan as well as examine the targets set in the policies. Technology

commercialization is a long process, and between the academia and industry it would

be incubators that bridge the gap.

Collaboration with universities and colleges is of the essence and strong association

has to be maintained with the universities.

It is imperative to educate students at every level about the dynamic relationship between science, society, business, ethics, and law in order to bridge the archaic divide between these various fields of study.

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For the up-gradation of the environment for the sake of business in Pakistan, the process of starting business must be simple and short to motivate investors. Consistent policies have to be implemented by the government and there should be no change in these policies.

It is high time that Engineering Development Board (EDB) approves industry status to mobile telecommunication in letter and spirit, as this would in turn facilitate the growth of industry in the country resulting in an economic uplift.

The mobile operators must be free to decide and make connection to the most economic point of interconnection with other operators.

Mobile operators should have the right to request leased lines from LDI operators.

There should be a better definition of interconnect since the viability of the new VOIP/broadband services will depend not only on the interoperability of standards but also on technically and economically sound interconnection arrangements.

Guidelines have to be issued to licensees, depending on the nature of their businesses.

In order to justify the investments required in VoIP, operators must be guaranteed a clear regulatory framework that will reduce the risk inherent in regulatory uncertainty and help clarify (guarantee) returns on their investment in advance.

Government of Pakistan has to provide an adequate amount of fund to the local IT industry so that it can come up with the solutions that can match the needs of the telecom industry thereby reducing the extra amount of money spent by the operators to outsource these solutions.

Promoting efficient, sustainable and effective information and communication technology initiatives through synergized development of industrial and academic resources is a key to transform Pakistan’s economy into a knowledge based economy.

It is also imperative that the R&D funds are efficiently and effectively used for the growth and development of the ICT industry, products, services and research projects.

R&D organizations have to be developed which support public and private sector, telecom operators and individuals to research in and develop the infrastructures and related services from grass root level.

Increased benefits to the mobile and telecom industry would arise if fiscal burden on mobile services is reduced.

Taxation on mobile telecom services is an issue which if addressed properly will play pivotal role to substantially increase mobile penetration.

It is imperative to utilize USF to establish basic infrastructure in rural areas of Pakistan.

USF can finance the spread of network coverage and service to previously un-served or under-served areas and can make it possible for operators to supply individual service on normal commercial terms in areas which are covered through the USF, in order to trigger an ICT revolution.

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The 3G licensing policy has to be reviewed since the cost of 3G license is very high as compared to the revenues expected out of it. It should deliberate the ARPU, infrastructure cost and growth opportunity for the customer and the markets needs and not be aligned towards ‘licensing financial gains’ for the Government.

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7. Appendices

7.1 Significant Documents Consulted

“De-Regulation Policy for the Telecom Sector”, Ministry of Information Technology, IT and Telecom Division, Government of Pakistan.

Pakistan Telecommunication Authority – Annual Report 2006-07.

“Doing Business 2008 - Pakistan” co-publication by World Bank and the International Finance Corporation.

“Broadband Policy”, Ministry of Information Technology, IT and Telecom Division, Government of Pakistan.

“Connecting to the Networked Economy”, Global IT competitiveness report 2006-07.

“SIM Activation Tax and Mobile Telecommunications in Pakistan”, Deloitte Report - March 07.

“Mobile Cellular Policy”, Ministry of Information Technology, IT and Telecom Division, Government of Pakistan.

“Technology–Based Industrial Vision and Strategy for Pakistan’s Socio-Economic Development”, Pakistan Institute of Development Economics, Higher Education Commission/COMSTECH.

“Pakistan Investment Policies, Incentives and Facilities”, Board of Investment, Government of Pakistan.

Pakistan Telecommunication Authority – Telecom Quarterly Review, March 2007.

Pakistan Telecommunication Retort Q2, 2007 by Business Monitor International.

“Socio-Economic Impact of Cellular Mobile Growth in Pakistan”, Study by TEACH (Pvt.) Limited.

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7.2 List of people met

During the course of study, several people were contacted from various fields of

telecommunication and IT. Some of the key people met are as follows:

Mr. Asad Karim, CEO, Burraq Telecom Limited

Mr. Saad M. Waraich, Head of Services Pakistan & Afghanistan, Nokia Siemens Networks

Prof. Dr. Atta-ur-Rahman, Minister/Chairman, Higher Education Commission

Mr. Zahid Hamid, Minister for Privatization and Investment, Government of Pakistan

Ms. Marvi Memon, Advisor, Board of Investment

Mr. Walid Mohamed Ahmad Suleiman Irshaid, President & CEO, Pakistan Telecommunication Company Limited (PTCL)

Mr. Zouhair A Khaliq, President & CEO, Pakistan Mobile Company Limited (Mobilink)

Mr. Peter Kuncewicz, CFO, Telenor Pakistan Limited

Mr. Mubashir Naqvi, President & Chief Executive Officer, Pakistan Telecom Mobile Limited (Ufone)

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7.3 Case Study – Infrastructure Sharing

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