Interconnection

is the KEY to

Deregulation

Pakistan Case Study

Safdar Imam

Sr. Costing Specialist Omantel

Ex Director Finance Coord. PTCL

IIR Interconnection World ForumRadisson Blu Portman Hotel London

26 Jan 2010

INTRODUCTION

Implementing Interconnection was a Challenge for

Telecoms Liberalization in Pakistan

• My story starts in 2004-05, a landmark year in the historyof Pakistan Telecoms. Privatization, Deregulation andMobile policies brought the first phase of Telecomliberalization in Pakistan. However, bringing the vision ofderegulation into reality meant that there would be anumerous challenges of interconnect regulation.

• Issues like Significant Market Power, ReferenceInterconnect Offer, Co-location, Carrier Selection, NumberPortability, Termination Rates, Limited Mobility etc.; mostof all enforcement of RIO with proper Code of Conduct &Commercial Practices, were prime challenges afterliberalization.

• This presentation covers Interconnection developments andlesson learnt from the Telecoms liberalization policyimplemented in Pakistan

Market Overview

• Population 165 m

• GDP per head $ 880

• GDP Services 53%

• # of Households 23.2 m

• Urban Pop. 36%

• Exports $17.8 B

• Imports $32.6 B

• Reserves $15.8 B

Karachi – the largest city of Pakistan

Fixedline Subscribers

975

1,034 1,083

1,138

1,204

1,262 1,287 1,284

1,252 1,212

3.05 3.25

3.66

4.05

4.50

5.23

6.27

6.66 6.68

6.14

2.00

3.00

4.00

5.00

6.00

7.00

8.00

-

200

400

600

800

1,000

1,200

1,400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

World at large (CAGR: 4%)

Pakistan (CAGR: 12%)

Millions of ALIS

Growth has been

faster than the

world; Decline

started an year later

than the world.

Teledensity is low at

3.8% as compared.

Broadband

penetration < 1%

FLL Teledensity is declining fast

WLL Teledensity has reached

2% within five years

Dismal Broadband Penetration - reached merely

0.3% by Dec 2009

26,61145,153

168,082

413,809

0%

70%

272%

146%

0%

50%

100%

150%

200%

250%

300%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2006 2007 2008 2009

# of Connections Annual Growth (%)

Broadband Market is Estimated to

Reach 4.3 M by 2013

Mobile Users – World & Pakistan 2000-09

(# in million)

738

961

1,157

1,424

1,763

2,218

2,749

3,284

4,046

4,563

2 2 5

13

35

63

88

94

1.00

11.00

21.00

31.00

41.00

51.00

61.00

71.00

81.00

91.00

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

World at large (CAGR: 24%)

Pakistan (CAGR: 89%)

Pakistan’s

mobile growth

remained

slower than the

world until 2003

but picked up

tremendously

after

Deregulation

Mobile Market grew

tremendously since 2004

5.02312.771

34.507

63.16

88.0294.342

3.298.30

22.21

39.94

54.658.2

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

80

90

100

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

# of Users (Million) Teledensity (%)

Mobile Cellular Market

• Pakistan’s mobile market has grown phenomenally in last few years.

• According to BMI and Informa Telecoms, mobile users base will cross 110m in 2010 (current 98m)

• Total mobile network coverage has reached about 90% of the country’s total population

• Pakistan is one of the most dynamic markets. Market shares showed significant shift from 2005 -2009

Mobilink (58% - 31%) Ufone (20% - 21%)

Telenor (7% - 22%) Warid (4% - 19%)

Zong (3% - 7%) Insta (4% - 0.04%)

1994: GoP signed offer for WTO Telecom Accord, issues Telecoms Liberalization Policy & Legal Framework.

1996: Pakistan Telecoms (Reorganization) Act ; PTA & NTC established; PTA issues 25 years License with 7 years exclusivity to PTCL.

1998: CPP introduced and PTML, a PTCL subsidiary, gets GSM 900 license (4th CMO in the market)

1999: Internet/Data/Payphone & V.A.S licensed liberally.

2000: Liberalization initiatives on Intl. Telecoms; Satellite segment/GMPCS licensing, Submarine FO cable landing, Paksat launching.

Deregulation Timeline

2000: IT policy, Internet and Bandwidth price reduction

2004: GoP issued Deregulation Policy; Two new licenses for GSM Mobile service

2004: Fixed-line sector opened –

158 LL and 14 LDI licenses issued

2005: PTCL privatized to Etisalat (US 2.6 B) and PTA approved PTCL Ref. Interconnection Offer (RIO)

2008: Mobilink with 32 m subs. declared SMP of Mobile market and obliged to provide RIO

Deregulation Timeline cont.

14

PTA issued Interconnection & Tariff Rules in 2000; updatedwith Fixed and Mobile policies in 2004

In Dec 2004, Reference Interconnect Offer (RIO) of PTCLwas approved by PTA.

PTCL signed Interconnection Agreements with 127Licensees in FY 2004-05

LL and LDIs commenced Commercial Operations from December 2004.

Pak Telecoms Buzz by Interconnection

15

PTCL was obliged to provide following services:

Immediately (2004)

Co-location

Exchanges Connectivity (Points of Interconnect)

Domestic Private Leased Circuits (DPLCs)

International Private Leased Circuits (IPLCs)

Enable Access Number Codes for LDI’s

Within One Year

Carrier Selection (CCS and CPS)

Unbundling and FAC Costing within one year

Within 3 Years

LRIC based Costing/ Interconnect Prices

Interconnection Regime

16

Fixed-line Support: Two Important Initiatives

Access Promotion Contribution (APC)

and

Universal Service Funds (USF)

• APC : Difference of ISR (18 USC) – 6 USC onterminating Incoming Intl Calls to be paid to promotefixed line development and meet access deficit– By LDI operators to LL Operator

– By Mobile Operators to US Fund

• USF: Established by GoP to develop and providesubsidized telecom services, particularlyBroadband, in rural and underdeveloped areas. Alllicensees were required to contribute 1.5% ofrevenue to USF– PTCL was obliged to install 83k lines in rural areas annually until

2008 in lieu of USO.

17

APC Tariff & Traffic

2004 to 2007

Period Rate

(Cent /min)

APC Traffic

(mm)

Jul 04-Dec 04 10.29 15.81

Jan 05-Jun 05 7.50 54.04

Jul 05-Dec 06 6.83 62.20

Jan 07-Jun 06 5.00 75.53

Jul 06-Dec 07 2.50 74.12

18

Another Important Regulatory Determination

Asymmetric Fixed & Mobile Termination Rates

Period MTR (US Cents) FTR (US Cents)

Jul-04 2.38/min 0.35/min

Jan-06 1.90/min 0.60/min

Jul-06 1.49/min 0.60/min

Jan-08 1.19/min 0.60/min

19

Operational & Financial Challenges

• Incumbent’s profitability got hurt due to unpreparedness

Delayed establishment of Interconnect/Wholesale Wing

Lack of Support Processes throughout the Country

Congestion of Network and Increased Overheads

Had to face dual-role operators, New Licensee cum O&M Partners

which generated confusion and inefficiencies

Traffic/CDR Disputes and Delayed Settlements

Illegal International IP Telephony by New Entrants and burdensome

litigations

LDI Operator’s promoted Grey Traffic through masking numbers

and CDR parameters to avoid APC .

• Inefficient Capex due to lack of planning:

Provision of Interconnection at multiple Locations.

Unplanned Network expansion and capacity enhancement.

Un-coordinated and Delayed Operation Support Systems

PTCL Market Cap Crashed losing US$ 7 B of value:

from US$ 8.2 B (2005) to US$ 1.1 B(2009) Balance Sheet erosion due to bad Interconnect Management was the major cause

Jun 30 2009 Jun 30 2008 Jun 30 2007 Jun 30 2006

- 51%

123%

Good Domestic Trade Debts of Fixed Line business were reduced to half

whereas Doubtful Debts were more than doubled due to flawed RIO and

Interconnect Management.

Working Capital of the Incumbent Operator was severely affected as Trade

Debts reduced instead of growing with the new wholesale customers

On top of that Fixed line Revenue declined by 42%; from US$ 1.3 B (2005) to

US$ 0.7 B (2009)

Therefore, propensity to invest in the fixed industry was dampened

FIXED TELECOMS BLOOD BATH

21

Lessons Learnt

•RIO should be thoroughly planned, deliberated amongststakeholders and regulatory/ commercial/ legal experts

• Settlement & Recovery processes should be more Robust &Foolproof.

•Periodic recon. of Traffic/ Accounts Receivable, CDR/ ITsystem liaison and dispute resolution should be morefrequent and faster.

•Before deregulation, proper enforcement tools/ Guarantees& Arbitration mechanisms should be put in place to avoidtoxic debts (sick assets).

Commercial

• Incumbent Operator should be better equipped forinterconnect implementation & relationmanagement

• Wholesale Interconnect unit should be established 2months before first interconnect agreement issigned

• Value destroying weaknesses of OSS, networksecurity and billing system should be removedbefore first POI is commissioned.

• Interconnect billing system must have beencommissioned before implementing RIO

• Real time access to billing system should beavailable to both parties prior opening of POIs

Operational

22

Lessons Learnt

•Privatization of Incumbent should have preceded Deregulation rather than vice versa

•Well qualified single new license for integrated nationwide Fixedline operator, 2-3 years after privatization, was a better option instead of LL & LDI separation.

•Robust Interconnection Rules should have been adopted ex-ante with full consultation

•Price arbitrages must be avoided. Termination rates (FTR & MTR) must be the same no matter where the call comes from (national or international origination).

•APC model created a lethal arbitrage leading to huge volume of grey traffic. Instead of promoting access it killed fixed access business. FTR should have been increased instead of introducing APC.

•Number of POIs should have been limited (one in each LL Region) by regulated RIO.

•RIO should not be a static framework; it should live vibrantly with the market dynamics.

•Cartelization must not be allowed.

Policy and Regulatory

23

Conclusion & Way Forward Pakistan needs a robust ICT infrastructure with Information Highways of optimal Quality.

Telecoms will integrate the country into 21CN global info-society ; imperative to promote social change, counter bigotry, eradicate the roots of hate-crimes/ terrorism

Regulatory framework should be revisited to open up NGN for Broadband competitors but bias for facilities-based operators should remain.

High MTR have developed mobile penetration. It is high time that balance should tilt to promote fixed / broadband penetration and cheaper calls to mobile.

Incumbent should encourage revenue sharing models with efficient partners in the Broadband promotion and customer support services.

Close but non-intrusive monitoring of Operators with specific focus on management policies re; investment targets, QoS and infrastructure development KPI’s.

Optimally

interconnected

ICT network can

Produce a Great

“Environment”

Thank You

Your Questions are Most Welcome

??? Safdar Imam

Sr. Costing Specialist, Omantel

safdar.syed@omantel.om