Do you remember life without your mobile phone? It was only 8 years ago when we lived without a smartphone and no selfies to upload onto Facebook. Smart telecommunications have drastically changed our lives, generally for the better. The Internet has incontestably made the world a ‘Global Village.’ Modern government, education system, health care, businesses, transportation and socialization all rely equally and immensely on the telecommunication sector for their smooth functioning.
In 2016, the United Nations Human Rights Council (UNHRC) declared access to the internet a basic human right and condemned intentional disruption of the internet by governments. The introduction of the cellular phone service has changed the whole socio-economic landscape of Pakistan from entrepreneurship to crime and even the rules of elections; as cell phones are being used from electioneering campaigns to toppling governments.
Under the current legislation, cellular operators are not allowed to place customer data outside the country but the countries operating from abroad are not bound by the same Pakistani laws.
The ending of exclusive rights of the Pakistan Telecommunication Company Limited (PTCL) on all core telecom infrastructure services including international data and voice-services on December 31, 2002; was a watershed moment for Pakistan’s telecom sector. The 2003 deregulation policy helped suck in massive foreign investment, in the next decade, into the country and enabled the Pakistani consumer to become a citizen of the 21st century.
Foreign telecom titans entered the market; Mobilink (1994), Telenor (2004), Warid (2005) and Zong (2007) threw out PTCL from the cellular telecom market for a six. Consumers no longer had to wait for months to get a telephone line – now it took minutes. In 2018, Pakistan has 150 million cellular subscriptions, up from 250,000 in 2004, and 55 million 3G data subscriptions.
Telecoms: Anchor for Pakistan’s economy
In the last four years alone, the telecom sector has contributed over Rs700 billion to the national exchequer. Telecom companies have invested over $4.5 billion during this period, of which $2.5 billion was a foreign direct investment (FDI) into the country. Total telecom investment in the country since 2001 is close to $15 billion, of which over half is FDI.
During 2001-2007, the Pakistan Telecommunication Industry had a record annual growth of 119% in terms of cellular subscriptions and by 2007 there were over 63 million subscribers with mobile penetration at 55% of the market. The market thereafter has seen a steady increase with a dip in Mobile subscriptions in 2014, after the Interior Ministry canceled all unverified SIM cards and a restricted number of SIMs held per person to 5 from 25.
However, the market recovered quickly after the setback in 2014-2015, owing to the re-verification of SIMs. The latest figure from the Pakistan Telecommunications Authority (PTA) show cellular subscribers at a record high of 150 million.
There are over 57 million broadband subscribers (28% penetration of the market) and 55 million 3G/4G subscriptions at the end of May 2018. More coverage and reduced tariffs have increased the overall teledensity (number of telecom connections per 100 people) which stands at 74%. Currently, there is a 27% penetration in the 3G/4G subscribers’ segment.
Foreign Direct Investment in Telecoms
Total FDI into the telecoms sector has been over $7 billion since 2003. In 2001, only $6.1 million came into the sector. With this in mind, foreign direct investment in Pakistan’s telecom sector started in earnest after the deregulation of the industry in 2003 and by 2006-2007 it was close to $2 billion and was around 40% of share in the country’s total FDI.
The country saw increased investment during 2013-15, after the PML-N government auctioned 3G and 4G spectrum, which increased inflow into the sector as mobile companies expanded their businesses. In the first two quarters of the fiscal year 2017-18, the cellular mobile sector of the telecommunication industry invested US$268 million, but by the end of 2017, the telecom sector is saw a net outflow of FDI through profit repatriation of close to $90 million.
Further, large investment is expected only if consumers’ uptake of 4G is greater than expected, which may encourage the companies to buy more 4G spectrum, or when 5G spectrum is launched – which the government announced should happen by 2020.
The telecom industry has seen steady growth in revenues since 2003-4 from Rs. 117 billion to Rs. 465 billion by FY2016-17. This growth has been driven by the mobile market. The revenues from the telecommunication sector were approximately Rs.235.5 billion in the first two-quarters of FY2017-18. The launch of 3G and 4G services have opened up new opportunities for the operators.
The telecom market is extremely competitively priced, both in voice and data packages. Pakistan’s average revenue per minute is close to lowest in the world at around $0.005 cents per minute; by comparison, it is 7 cents in Malaysia and 2 cents in Thailand. Pakistan’s Average Revenue Per User per month is around Rs. 200 which is one of the lowest globally.
As the voice/text business for telecoms has declined steadily in the past few years, telecoms are increasingly looking to diversify into other markets for revenue generation. Slow growth in PKR revenues actually means a decline in Foreign currency revenues – the Rupee has devalued by almost 50 percent since 2008. Telecom industry cost for equipment, spectrum licenses, etc. is all in dollars.
The telecom sector has consistently been one of the largest contributors to the national exchequer. According to the PTA reports for the FY2016-17, the sector contributed over Rs.161 billion. In the first two-quarters of FY2017-18, the telecom sector has contributed an estimated Rs.79 billion to the national exchequer, in terms of taxes, regulatory fees, initial and annual license fees, activation charge and other charges.
In the FY 2013-14, its contribution was over Rs. 235 billion, due to the 3G and 4G spectrums. For the past decade, the sector is annually giving around Rs.50 billion in GST revenues alone to the government.
Pakistan getting ready to ride the Digital wave
The commercial launch of Next Generation Mobile service 3G/4G LTE in 2014 belatedly put Pakistan on the same route as that of neighbouring countries. Telecom companies are now at the forefront of pushing Pakistan into the digital century. Studies by the GSMA and the Word Bank have estimated that a 1% increase in mobile phone subscriptions boosts GDP growth by 0.28 percentage points.
The digital economy offers Pakistan a model for inclusive and sustainable growth by creating jobs for women, unskilled, home-based workers and those in far-flung areas; all who will now be able to sell their services and products more effectively.
With teledensity for mobile subscription standing at 74% and 3G/4G subscription around 27%, and formally financially covered population at 23%, Pakistan holds immense potential for expansion through a digital economy, especially since almost 80% of the mobile phone users are aged between 21-40 years.
The digital economy has mushroomed an industry of Uber/Careem drivers who on average can earn between Rs. 60,000 – 70,000 per month, as opposed to the local taxi driver whose take home, was closer to Rs. 15,000. The freelancing industry of Pakistan was ranked the fourth fastest growing industry in the world.
E-Government: Government at your doorstep
The Pakistani government has moved at a snails pace towards using digital technology in its operations. A few projects stand-out such as its use of e-governance in projects like Safe City which makes use of cameras and RF readers for surveillance of sensitive locations and risk management or the introduction of the e-sahulat service which is allowing the easy option of cash disbursement, billing payment and registration of vehicles.
The regime of e-challans has started in Punjab but on a very limited scale and the KP government has introduced the facility of filing FIRs online. However, the Federal and Provincial Government departments’ use of technology to improve quality of its service delivery and ease of use for citizens is still at a very incipient phase. It lags far behind much of the world.
The growth of e-commerce has even affected the advertising sector as digital advertising revenues are now worth $73 billion, overtaking TV ad revenues worth $71 billion in 2016-17.
Moving government services online will save huge amounts of time, cost and effort for citizens. Areas that stand out as needing immediate attention and faster movement towards electronic delivery include the Postal savings accounts – which has over 4 million account holders and the 8m National Savings Scheme account holders, the BISP payments model (worth over $1bn each year) is a good starting point.
There is considerable evidence that digitizing payments reduces associated delivery costs, improves access to financial systems, reduces leakages and enhances the transparency of payments to the right recipient. Efficient provision of public services to citizens involves setting up e-health, e-agriculture, e-energy, e-education and e-justice programs, Internet of things should be used for delivery of efficient utility services (water planning and electricity) and sustainable environmental planning.
E-commerce industry: goods and services in your hands
The flourishing e-commerce industry in Pakistan is second-largest in South Asia after India, currently valued to be around $600 million; government estimates show this growing beyond $10 billion by 2020. A necessary requirement for a successful e-commerce industry is an easy online payment process. This is still lacking in Pakistan as most goods and services are bought with cash on delivery.
However, under the 2018 Digital Pakistan policy, SBP is preparing to launch a national payment gateway through the coordination of relevant stakeholders to promote internet merchant accounts to facilitate transactions.
Regulations regarding a framework for Payment System Operators (PSO) and Payment Service Providers (PSP) have been devised and approved by the State Bank of Pakistan (SBP). Alibaba, the World’s largest e-commerce company, has signed an MoU with the Trade Development Authority of Pakistan to bring the small and medium enterprise to its e-commerce platform.
This will enable Pakistani products to reach out to international markets and help promote e-commerce. Alibaba has also bought 100% shares of Pakistan’s largest online clothes e-company daraz.pk. By the end of March 2018, the number of e-commerce merchants in the country has risen by 2.6 times and revenues have risen by 2.3 times from the previous fiscal year.
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This follows the growth of almost 300% that was seen between 2016 to 2017; the number of registered online merchants with bank rose to 905 from 344 merchants in 2016. The numbers in actual terms are negligible and show massive potential for increase. Online transactions rose to Rs.9.1 billion at the end of 2017 from Rs. 3.9 billion transacted at the end of 2016.
Food panda, Pakistan’s largest online food site claimed it generated extra sales of Rs1 billion for the restaurants. The growth of e-commerce has even affected the advertising sector as digital advertising revenues are now worth $73 billion, overtaking TV ad revenues worth $71 billion in 2016-17.
ICT to achieve sustainable development goals
Sustainable Development Goals have been given a prominent place in Pakistan’s first digital policy approved in May 2018. The ‘Digital Pakistan Policy’ aims to build a holistic digital ecosystem in the country that will establish cross-sector connectivity as well as connecting Pakistan’s far-flung areas to the mainstream through optical fibre coverage.
For poverty alleviation, the ICTs are already playing a crucial role in the disbursement of funds to the needy in the Benazir Income Support Program. The cellular networks in collaboration with the e-agricultural community are providing weather updates, farm advisory, and market prices to the farmers and financial services.
Modern government, education system, health care, businesses, transportation and socialization all rely equally and immensely on the telecommunication sector for their smooth functioning.
Jazz is working with the government on National Incubators centres have been set up in major cities to train entrepreneurs and access funding. The government of Pakistan has given special attention to the building of IT capacities of girls that will empower them and announced it will train one million people for freelancing and specialized IT skills during 2018-19.
The government of Pakistan has allocated over Rs.6500 billion for Information and Communication Technology under the Public Sector Development Program for 2018-2019. The policy has outlined the way for the digitization of socio-economic sectors that will directly correspond to the SDGs.
The component of infrastructural development in the ICT sector includes the establishment of Software Technology parks that will promote the research and innovation for further socio-economic development; corresponding to SDG9 and SDG 11 of innovation and sustainable cities and communities respectively.
E-banking: banking at your fingertips
Digital financial services underlay future economies. All the major economies of the world are already becoming cashless. Pakistan’s National Financial Inclusion Strategy (NFIS) 2015 aims to achieve universal financial inclusion and has set targets to increase access to formal accounts to 50% of the adult population by 2020; with 25% of adult females having accounts.
The goal is to make the maximum number of accounts easily accessible from mobile devices. For this, the State Bank of Pakistan is already in the process of developing a regulatory framework for a ‘Digital bank’ which will operate online without any physical branches. The State Bank is also working on setting up regulations to allow mobile banking called ‘Asaan banking’, which will allow individuals to set up bank accounts from mobile phones.
The regime of e-challans has started in Punjab but on a very limited scale and the KP government has introduced the facility of filing FIRs online.
E-transactions are not only environmentally friendly, but they also reduce corruption since it is easier through paper money, it reduces the risk of counterfeit cash and mitigates storage problems. Telenor’s ‘Easypaisa’ mobile transfer has almost 120k distribution points nationwide, total mobile banking distribution points at over 370,000 as compared to the combined 12,000 physical branches that all the commercial banks have.
As a result of all these initiatives, m-wallet accounts are now over 20 million with close to $21 billion being transacted through mobile banking accounts in 2017.
Storm Clouds on the horizon
There are a number of challenges to the growth of the digital economy and thus for the telecom industry. Pakistan’s literacy rate is only 58%, which is very low when compared to most developing countries. To reap the benefits of technological innovations in the world, the population needs to be literate enough to understand the intricacies of technology.
No doubt, illiterate people are using mobile phones for the number of activities, however, real productivity and growth enabler projects like e-governance, e-commerce, e-marketing and e-education – cannot succeed unless the population has baseline education.
Consumer uptake of 3G was faster than expected when introduced, however, so far demand for 4G has been slower. One of the main reasons is the low availability of cheap 4G handsets; high custom duties and other import taxes in Pakistan significantly increase the cost of mobile handsets and telecom equipment impeding mobile penetration.
Another major problem faced by the telecom sector is heavy taxation, which has been acknowledged even by the PTA as a challenge for the industry. Pakistan’s telecom industry is one of the most highly taxed sectors in the world and despite growth in the number of subscribers in the sector, the profit and investment ratio has been on the decline.
The combined percentage of tax levied on telecom sector services is around 53% of every Rs1 sold – with 17-19.5% of voice services (which is higher than most other sectors [6-16%]), 12.5% on withholding tax and 19.5% on mobile and fixed-line internet connections, and SIM activation charges.
Given that all the major companies are operating worldwide, evaluation of their return on investment is done on an international basis. Increasingly, Pakistan now offers very low ROI, compared to other markets, which in turn is lowering FDI in its telecom sector. In addition, high import duties on telecom equipment deters cellular operators from importing advanced technology in the country.
The freelancing industry of Pakistan was ranked the fourth fastest growing industry in the world.
Over-the-top (OTT) services like WhatsApp, Skype, and Viber present a big challenge globally to the telecom industry and are a major factor behind the decrease in the Average revenue per user in the industry. WhatsApp has become the biggest messaging service in the world with over 1.5 billion users and it has almost completely taken over the SMS market where 60% of messages are now sent via WhatsApp.
The same goes for voice services both of which were the chief sources of revenue for the telecom sector. For the telecom operator – the paradox is they still have to invest in capital infrastructure to give customers data access. The government has announced that it is working on a framework to regulate OTT services.
The availability of spectrum offers a major challenge to the telecom industry. Data needs of users are growing rapidly every day, increasing the demand for spectrum. However, current high rates at which spectrum is sold makes it harder for new players to enter the market and existing players to adapt to new technologies.
More efficient spectrum management is required, for the country to move in a big way towards digitalization and the benefits this brings – the one-off price of spectrum auctioned has to be weighed against the overall benefits brought by new technologies. It needs to be accompanied by a timely license renewal process. Currently, the government uses an auction system for renewal of licenses – which helps to raise the price of spectrum, however, to ensure long-run investment in and improvement of the sector it also has to take care of interests of existing players sustainability.
Data privacy regulations faced by the companies operating in Pakistan put them at a disadvantage compared to the companies operating abroad. Under the current legislation, cellular operators are not allowed to place customer data outside the country but the countries operating from abroad are not bound by the same Pakistani laws.
That way, international companies have more opportunities to innovate using Pakistani customer data. Therefore, either Pakistan based companies should be allowed to access user data in the same way as international companies or the same regulations should be applied to international companies as local companies.
Other general issues for the industry include Rupee devaluation (profits, when repatriated, are worthless), electricity shortages cost cellular network operators heavily, as they then use high-cost fuel to keep their sites running for uninterrupted network service to customers – one study showed that a 24-hour shut down across the country costs the mobile network operators a billion rupees – and finally the industry needs more government investment in telecom infrastructure.