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Interconnection Pak Case Study

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My presentation made to World Interconnect Forum in London on 26 Jan 2010

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Interconnection Pak Case Study

  1. 1. Interconnection is the KEY to Deregulation Pakistan Case Study Safdar Imam Sr. Costing Specialist Omantel Ex Director Finance Coord. PTCL IIR Interconnection World Forum Radisson Blu Portman Hotel London 26 Jan 2010
  2. 2. INTRODUCTION Implementing Interconnection was a Challenge for Telecoms Liberalization in Pakistan • My story starts in 2004-05, a landmark year in the history of Pakistan Telecoms. Privatization, Deregulation and Mobile policies brought the first phase of Telecom liberalization in Pakistan. However, bringing the vision of deregulation into reality meant that there would be a numerous challenges of interconnect regulation. • Issues like Significant Market Power, Reference Interconnect Offer, Co-location, Carrier Selection, Number Portability, Termination Rates, Limited Mobility etc.; most of all enforcement of RIO with proper Code of Conduct & Commercial Practices, were prime challenges after liberalization. • This presentation covers Interconnection developments and lesson learnt from the Telecoms liberalization policy implemented in Pakistan
  3. 3. 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
  4. 4. Fixedline Subscribers Millions of ALIS 1,400 8.00 1,287 1,284 1,262 World at large (CAGR: 4%) 1,204 1,252 1,200 1,138 1,212 Growth has been 1,083 7.00 1,034 6.68 faster than the 975 6.66 1,000 world; Decline 6.27 6.14 6.00 started an year later Pakistan (CAGR: 12%) 800 than the world. 5.23 5.00 Teledensity is low at 600 4.50 3.8% as compared. 4.05 4.00 Broadband 400 3.66 penetration < 1% 3.25 3.05 3.00 200 - 2.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
  5. 5. FLL Teledensity is declining fast
  6. 6. WLL Teledensity has reached 2% within five years
  7. 7. Dismal Broadband Penetration - reached merely 0.3% by Dec 2009 450,000 300% 413,809 400,000 272% 250% 350,000 300,000 200% 250,000 146% 150% 200,000 168,082 150,000 100% 100,000 70% 50% 45,153 50,000 26,611 0 0% 0% 2006 2007 2008 2009 # of Connections Annual Growth (%)
  8. 8. Broadband Market is Estimated to Reach 4.3 M by 2013
  9. 9. Mobile Users – World & Pakistan 2000-09 (# in million) 5,000 94 Pakistan’s 4,500 88 4,563 91.00 mobile growth 81.00 4,000 4,046 remained 71.00 slower than the 3,500 3,284 world until 2003 63 61.00 but picked up 3,000 World at large (CAGR: 24%) 2,749 tremendously 51.00 2,500 after 2,218 41.00 Pakistan (CAGR: 89%) Deregulation 2,000 1,763 35 31.00 1,424 1,500 1,157 21.00 961 1,000 738 13 11.00 5 500 2 2 1.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
  10. 10. Mobile Market grew tremendously since 2004 100 94.342 70 88.02 90 80 58.2 60 54.6 70 63.16 50 60 39.94 40 50 40 34.507 30 30 22.21 20 20 12.771 5.023 8.30 10 10 3.29 0 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 # of Users (Million) Teledensity (%)
  11. 11. 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%)
  12. 12. Deregulation Timeline 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.
  13. 13. Deregulation Timeline cont. 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
  14. 14. Pak Telecoms Buzz by Interconnection PTA issued Interconnection & Tariff Rules in 2000; updated with Fixed and Mobile policies in 2004 In Dec 2004, Reference Interconnect Offer (RIO) of PTCL was approved by PTA. PTCL signed Interconnection Agreements with 127 Licensees in FY 2004-05 LL and LDIs commenced Commercial Operations from December 2004. 14
  15. 15. Interconnection Regime 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 15
  16. 16. Fixed-line Support: Two Important Initiatives Access Promotion Contribution (APC) and Universal Service Funds (USF) • APC : Difference of ISR (18 USC) – 6 USC on terminating Incoming Intl Calls to be paid to promote fixed 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 provide subsidized telecom services, particularly Broadband, in rural and underdeveloped areas. All licensees were required to contribute 1.5% of revenue to USF – PTCL was obliged to install 83k lines in rural areas annually until 2008 in lieu of USO. 16
  17. 17. APC Tariff & Traffic 2004 to 2007 Period Rate APC Traffic (Cent /min) (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 17
  18. 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 18
  19. 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 19
  20. 20. 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% FIXED TELECOMS BLOOD BATH  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
  21. 21. Lessons Learnt • RIO should be thoroughly planned, deliberated amongst stakeholders and regulatory/ commercial/ legal experts • Settlement & Recovery processes should be more Robust & Foolproof. • Periodic recon. of Traffic/ Accounts Receivable, CDR/ IT Commercial system liaison and dispute resolution should be more frequent and faster. • Before deregulation, proper enforcement tools/ Guarantees & Arbitration mechanisms should be put in place to avoid toxic debts (sick assets). • Incumbent Operator should be better equipped for interconnect implementation & relation management • Wholesale Interconnect unit should be established 2 months before first interconnect agreement is signed Operational • Value destroying weaknesses of OSS, network security and billing system should be removed before first POI is commissioned. • Interconnect billing system must have been commissioned before implementing RIO • Real time access to billing system should be available to both parties prior opening of POIs 21
  22. 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 & Policy and MTR) must be the same no matter where the call comes from (national or international origination). Regulatory • 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. 22
  23. 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” 23
  24. 24. Thank You Your Questions are Most Welcome ??? Safdar Imam Sr. Costing Specialist, Omantel safdar.syed@omantel.om

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