That Pakistan’s Next Generation Mobile Services (NGMS) auction did not bring in the revenue it could is beside the point. The real issue is that the telecom sector regulator was out of its depth before, during, and after the episode.
It has now been established beyond reasonable doubt that the Pakistan Telecommunication Authority (PTA) did not know how much revenue to expect from the auction; it did not know how to promote the auction, and it did not know how to move on from the mess gracefully.
In hindsight, it looks very much like the USD 1 billion revenue target plucked from thin air for the heck of it. A billion dollar auction certainly has a ring to it. In the event, the auction attracted exactly one market player and raised USD 279 million – just over a quarter of the overambitious target.
Small wonder Prime Minister Imran Khan regretted on the results of NGMS auction and showed displeasure over PTA’s inability to get the telcos interest.
“Telecom Companies had shown a very lukewarm response in the auction of spectrum due to the government policies”, Former Chief Executive Officer (CEO) of the Universal Service Fund (USF), Pervaiz Iftikhar said.
The only telco to buy into the proposition was PTML (Pakistan Telecom Mobile Limited), the owner of the Ufone brand of mobile telephony.
“Out of four potential bidders only one participated in the auction and government could not sell the 70 percent of the spectrum”, he said, adding, “It has been able to sell only 30 percent – meaning the industry response was not encouraging”.
PTA, on the other hand, is more focused on what it has achieved: [The successful spectrum auction to PTML] will generate USD 279 Million in revenue – excluding advance tax.
The government will receive 50 percent upfront payment (that calculates to PKR 23.44 billion) within 15 days, 20 percent of which (i.e., PKR 9.38 billion) had already been received as of 9 September 2021. The remaining 50 percent will be paid in 5 equal annual installments.
Pervaiz Iftikhar says PTA’s stringent quality benchmarks could be one reason why the telecoms remain away from the auction.
As per the Information Memorandum of NGMS, for 3G services the licensee will upgrade to an average download data rate of 512 kbps, to be further increased to 1 Mbps in two years. Upload throughput is required to be at least 25 percent of the download throughput.
This translates to an average download data rate of 2 Mbps for 4G services, to be increased to 4 Mbps in two years, with equal yearly increase. A grace period of 6 months in achieving the throughput KPI of 4Mbps will be granted from the second year of the effective date for testing.
Pervaiz Iftikhar says that PTA could have generated more than USD 1 billion either by reducing the base price or by relaxing the Quality of Services requirement.
PTA says that total spectrum won by Ufone is 9 MHz in 1800 MHz band which is 70.3 percent of the total offered spectrum in the said band during the current Auction. This addition will increase Ufone spectrum holdings from 6 MHz to 15 MHz in 1800 MHz band.
This should help Ufone enhance its quality of service and increase its network footprint for both voice and data services. The total revenue generated from this spectrum auction process for AJK & GB stands at over USD 30 million.
Pakistan Telecommunication Authority (PTA) presented two bands for auction. For 1800MHz base price was set USD 31 million and for 2100 MHz it was USD 29 million.
The 1800MHz band, which provides a preferred spectrum holding for 4G/LTE services and a better mix for urban and rural deployment, has been allocated and used in a manner which does not offer contiguous spectrum blocks to each mobile operator. Nevertheless, Ufone has now acquired 70 percent of the 1800MHz while 0 percent of the 2100MHz.
PTML, the only Pakistani mobile operator to participate in the auction out of four, is a wholly-owned subsidiary of Pakistan Telecommunication Company Limited (PTCL). Although the former terrestrial telephony monopoly is still majority-owned by the public sector, the UAE based Etisalat has had management control of the company since 2006 under a privatisation deal.
Etisalat and the government still have some unresolved issues from the PTCL privatisation. Seen in this light, the deal marks a warming up of the relations between the two.
Islamabad-based think tank Tabadlab has cited major reasons about the underwhelm- ing response of NGMS auction. A report by Tabadlab states that the sustained and continuing depreciation of the Pakistani Rupee (approximately 28 percent from 2018 to 2021 alone) affects the business case of investing in Pakistan drastically.
Investments made in foreign currency and revenue and profits generated in local currency continue to suffer from a growing delta as the PKR depreciates. Returns on investments (old and new) continue to be diluted and investors face significant risks in terms of realising returns in a timely and stable manner.
The second reason is inflationary pressures especially for food groups translate into lower spending on discretionary services like internet usage and other value-added services, squeezing the market and the potential for revenue growth for mobile operators.
Taxation is also one of the reasons. Historically, Pakistan has had one of the highest taxation rates on telecom services. The structure of import, income and sales taxes on the sector significantly impacts retail pricing for mobile devices, SIM cards and telecom services, affecting usage and Average Revenue Per Unit (ARPU).
Sales tax in the mobile sector varies across goods and services and across regions in Pakistan, with rates as high as 19.5 percent in the provinces. In June 2021, the government announced the withdrawal of twelve withholding taxes for telecom, while taxes on mobile phone calls lasting longer than five minutes were also announced at a rate of PKR 0.75 per call.
With one of the lowest ARPUs in the region at PKR 240, the case for high investment in spectrum, in the face of relatively low corresponding returns, remains weak, the report states.
According to Tabadlab, the regulatory landscape is tough for investors. The two largest operators – Jazz and Telenor – initiated legal proceedings after their license renewal in 2019 over concerns that the renewal conditions are contradictory to the original license issuance conditions with regards to the high renewal fee.
While the renewal process had been challenged, the operators were mandated to payment of 50 percent of the renewal fees and after a process of two years, the case was dismissed by Islamabad High Court against the operators and the decision has now been challenged in the Supreme Court of Pakistan.
This kind of litigious context for the government and telco operators is potentially toxic for the wider investment confidence and the increasingly bright prospects in the technology ecosystem.
According to Tabadlab: “Results of the NGMS auction should be a source of disappointment and serious concern for Pakistani policy makers”.
The auction results have also increased the economic woes of the government. Leaving an unsanctioned spectrum not only limits the upfront foreign exchange that could have been earned, but also impacts both the associated investments incapacity, and the recurring tax revenue that could be generated through consistent growth of the telecom sector directly, and associated sectors indirectly.
Limited participation by existing investors also has an important bearing on signalling to new and potential investors actively exploring the digital landscape in Pakistan.
This is especially problematic as the government attempts to market the bold reform mindset that has led to the creation of the Special Technology Zones Authority (STZA) and its vital potential in stirring the latent energy of the tech ecosystem in Pakistan.
The PTA, however, remains unperturbed. “It is not the job of the PTA to raise non tax revenue”, says Chairman Major General (R) Amir Azeem Bajwa. “But it would try to achieve maximum revenue by selling the unused spectrum”.
