Month: October 2015

The following article was first printed in The Daily Express Tribune, October 5, 2015.

Hundreds of thousands of new mobile phones were being imported every month. Each phone was subject to 10% import tax.

Driven by volume with very thin margins, each percentage point becomes extremely important. When Siemens also became an importer/seller of mobile phones, some strangers started approaching with “offers” that they could help us save half the import tax, provided we forget about “legalities”.

At first, we ignored such offers, but then the situation became serious when smuggled phones, ironically manufactured by our own company, started competing with our legally imported phones in the local market. These phones were brought in by smugglers from third countries (serial numbers distinguished them). We found that we were not alone in this. All legal importers of mobile phones were facing the same dilemma.

Legal importers therefore started knocking at various doors of the government. We tried to explain that smuggling of mobile phones was on the rise due to which not only legal importers were suffering, and the smugglers thriving, but the government too was losing revenues.

During these discussions, several “solutions” were discussed. The solution that we gave was that since all phones were being connected to mobile networks, any tax (if there had to be one) should not be charged at the import stage, rather it should be charged at the time of activation of the phone! We argued that this would kill the incentive to smuggle, while the government would continue to get its revenues in the form of activation charge. That was how the levy came into being. Like always, it took the government some time, but ultimately it was accepted and mobile phone smugglers had no business case anymore.

Fast forward to 2008

There is a thing called Account Settlement Rate (ASR) – a combination of charges on incoming international phone calls going to the government and the long distance international (LDI) operators. Under a well thought-out policy, till 2008, the ASR had been steadily sliding towards zero. Starting from 16.5 cents per minute, it had come down to 7 cents. In fact, competition was making LDI operators contribute a couple of cents out of their own profits thus, consumers were paying around 5 cents per minute as ASR. Suddenly the newly installed government jacked up the ASR to 10 cents, and then to 12.5 cents.

Same cause-and-effect ensued, since the smugglers do not pay such taxes/charges, smuggling of international call minutes became lucrative and calls from illegal – also called ‘grey’ – channels began to flourish.

Due to big outcry against “grey” traffic, the ASR had to be cut down to 7.75 cents in April 2011. But that was not liked by vested interests – it is alleged that some influential people were also involved – therefore, someone came up with another “innovative” solution. All licensed international operators were brought together under the umbrella of “International Clearing House” (ICH). Their profits were fixed and assured.

In this “safe” environment, the ASR was increased to 8.85 cents. This made the incoming international calls expensive but provided a handsome margin to smugglers.

Before creation of ICH, the incoming calls in September 2012 were not all coming through legal channels, but even then 1.946 billion minutes per month were coming in legally. By November 2014, only 19% (367 million minutes) remained legal. After showing an initial rise, the government revenues dwindled correspondingly.

Finally, the present government – belatedly but thankfully – decided to disband ICH and slash the ASR, which took effect, after the usual court cases, in February/March 2015. Result of slashing the ASR is that by August 2015 the legal international minutes have soared to 1.36 billion minutes.

The budget saga

In the national budget, the government increased tax on mobile phones. On a low-end smart phone with a price tag of Rs10,000, tax went up to Rs1,000.

As a result, within the first quarter, the number of phones being imported and sold legally – a number that had been on the rise – declined by over 8%. Needless to say, the gap is being filled by smuggled phones.

Consequences are the same hence, the lessons learnt are the same again. Amid such taxes, it is the legal business that gets hurt, smuggling thrives again and the sector suffers. The government itself suffers through lost revenue.

It is said that the only lesson we learn from history is that we don’t learn any lesson from history. But making an attempt at rectifying a decision that has backfired is something the policymakers can do.

The writer is former CEO of the Universal Service Fund and is providing ICT consultancy services in several countries of Africa and Asia.

September 20, 2015

Last week, Finance Minister Ishaq Dar shared exciting news with the nation. He said the country would be welcoming more spectrum that would be auctioned within this fiscal year. Considering the response the last spectrum auction received and the large growth mobile broadband services have registered, this piece of news would be a boost to the rapidly expanding industry. 

UK-based Plum Consulting had forecasted in 2013 that if third generation (3G) services could start in Pakistan in 2013 then, in the best case scenario, there would be around 20 million broadband subscribers in 2015.

However, the auction was held in 2014, but subscribers in 2015 are still approaching 20 million.

In such a scenario, hoarding of spectrum in the hope that it will fetch a higher price later could not have been the best policy. Already the precious 850MHz spectrum vacated by Instaphone is lying unused for many years now.

Why more spectrum is required

More spectrum is also needed because at the time of the last auction in May 2014, the operators did not (or could not) buy enough spectrum. In that auction, at least two operators decided to grab the 5MHz 3G slots at the first available opportunity. They did not even try for a 10MHz slot – even when it was apparent that 10MHz slots were going at a price close to the base price. But they were not interested, probably because the base price was perceived to be too high.

Incidentally, this also shows that offering two 5MHz slots was a clever decision on part of the government. Had there been no 5MHz slots, at least one (may be two) operators may have refrained from bidding, with unforeseen consequences.

Even if all four had fought over three slots of 10MHz each (a highly unlikely scenario), it may have resulted in slightly better auction proceeds in terms of money, but it would not have helped in meeting objectives of the spectrum auction including making the new technology available to citizens at a fair and reasonable price – not to earn quick short-term money for the government.

This over-emphasis on earning quick money results in slower deployment of services, impacts quality negatively and makes the services costly for the consumers.

Coming back to the previous auction, one lucrative 1800MHz slot remained unsold mainly because the bidder had to buy the 10MHz slot of 3G first, in order to qualify. This was obviously expecting too much, in the eyes of professional experts, operators not showing great eagerness in buying more spectrum (despite a clean, open, transparent auction in which four top global players took part), is an indication of something needing improvement.

How to improve

One must try to examine the causes – not to blame anybody – but to learn lessons, so that the now-promised spectrum auction works even better.

Before the last auction, Islamabad based independent think tank ‘ICT Forum Pakistan’ had submitted comments on the Information Memorandum (IM) of the Spectrum Auction. The forum had proposed certain changes.

Some of those were accepted, but some were ignored. In hindsight, suggestions that were not accepted might make an interesting reading. For instance, it was suggested that if 850MHz spectrum had to be reserved for a new entrant, at least a provision should be kept, that in case no new entrant appeared, the 850 slot would become available to the existing players.

A new entrant was never really expected, because of issues with the two most obvious things that the potential investors look at – (a) the existing business climate and (b) the future outlook. There is room for improvement in both.

Pakistan, being one of highest taxed countries in the telecom, surely does not appear too lucrative. As for the future outlook, there was, and still is, a strong need of a spectrum road-map, since spectrum-investors do their calculations based on the timings of future spectrum auctions.

Yet another suggestion of the think tank was to ease the terms of payment. Bidders were given option of paying 50% of the spectrum fees in installments, but with libor + 3 % interest. In India, they ask for 33% upfront, then 2 years moratorium, then 10 annual installments based on the principle that NPV of the payment is protected.

The best thing about the last auction was that it actually happened, despite the PTA remaining practically dysfunctional for most of the earlier part of the year. This time in order to improve upon it, lessons learned should be employed so that the investors eagerly come forward to invest.

The writer is former CEO of the Universal Service Fund and is providing ICT consultancy services in several countries of Africa and Asia.

The following article was first printed in The Daily Express Tribune, August 23,  2015.