The Pakistan Telecommunication Company Limited PTCL had always enjoyed a monopoly in the communication sector, as this company was initially a corporation owned by the government. Later on it was converted into a listed company and the general public was also associated with this company.
The government still holds almost 88% of the capital of this company. The government itself appoints all its directors, Chairman and Chief Executive officer.
The purpose of its being converted into a company was to bring in the desired efficiency and to privatise it at an appropriate time to bring in an element of competition that should be in favour of the consumers.
Due to its monopolistic and dominant role in the telecommunication sector, it has been successful in charging its own tariff and made profits irrespective of any inefficiency that existed in its operations.
PTCL is expected to post an after tax income within the range of Rs 27.92 billion to Rs 30 billion for the year ended June 2004 as has been estimated by various securities analyst. This shows a gain of over 25% over the last year. It is being argued that during the year PTCL has increased the customer base by increasing the telephone connections. Increase in subscribers base is one of the key drivers for growth in to line and has a favourable impact in the bottom line.
The company is expected to show reasonable increase in Access Line In Service (ALIS) during 2004, upto the extent of 4.5 million lines, representing 15 percent growth.
UNFAIR PRACTICES: Recently the company has started reducing its call charges drastically. Certain timings have been declared free call times to encourage more consumers. The company has also started a scheme to install free telephones without any connection fee that was previously being charged at the rate of rupees 750 per connection
PTCL is trying to provide a tough competing ground for the new entrants into this field right from the first day. Is it moral or ethical remains a question to be discussed.
Despite the fact that the free telephone connections would cost PTCL a huge amount in lost revenue that is estimated to be well over 200 million rupees annually, yet it is meant to retain the new customers and a constant flow of income stream in the future that would be provided by these new connections.
Uncompetitive behaviour
A company that is enjoying a monopolistic position in the market and is regarded as a dominant player should not be doing any acts that is against the public interest by curtailing competition. The dominant player is deemed to be a company enjoying at least a market of 25% of the whole market.
It is not only the fixed line PTCL company that is getting unfair advantages by its being in a dominant position but also there is another state owned cellular company which had disturbed the upcoming companies by offering free connections on Pakistan Independence Day. In a free scheme from 14th to 16th August 2004, Ufone had also sold out millions of free connections to people. They did it because they may be able to afford it as compared with others or the new entrants.
During the current year the company had reduced nation-wide and international calling rates by 15% and 23% respectively, which enhanced the revenue base owing to the high elasticity of demand for the service. This tariff cut coupled with expansion in the calling card business, gave a boost to the domestic proceeds that contributes around 75% of the total revenue. However a 33% cut in the line rent is expected to cause Rs 5 billion in revenue.
The mobile communication sector registered more than 100 percent growth in the year and augmented the revenue base of the incumbent through an upsurge in the interconnection revenue from mobile companies. The contribution received from CPP Calling Party Pays regime as a result of increased PTCL to mobile call traffic is also expected to supplement the revenue base.
PTCL's profitability is expected to enhance mainly on the back of a rise in sales revenue emanating from notable growth in traffic and new connectivity as a result of reduction in its line rent and installation charges. This step has been undertaken by the telecom giant in order to safeguard its revenue stream in a deregulated environment amid growing competition with the issuance of the LDI and LL Licenses.
PAKISTAN TELECOMMUNICATION AUTHORITY (PTA): In order to create more competition within this telecom industry, the Pakistan Telecommunication Authority was established. This Authority started issuing LDI, wireless spectrum and mobile phone licenses to other parties that wished to come into this business and compete with the already existing PTCL.
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PTCL earning statistics (in billions)
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Year ending 2002 2003 2004
Gross revenues 66.426 67.747 74.124
Operating cost 34.715 32.095 32.186
Gross margin 31.710 35.652 41.938
Profit after taxation 19.811 23.081 29.169
Earning per share (Rs) 3.88 4.53 5.72
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PTA has totally failed to play an effective role in stopping this activity that may be declared against the public interest later on because that may effectively curtail competition which is the very purpose of bringing in new entrants into the market. The PTA has a neutral role to play and that is nowhere seen.
It is being argued that this may be due to the reason the PTCL is owned 88% by the government and the Authority is not geared to be tough with a company that is owned by the government itself. This belief is strengthened by the fact that one day after the PTA warned Significant Market Players (SMPs) to desist from offering deals and incentives that could be seen as undercutting their new rivals in the telecom business, the PTCL launched a countrywide free connection drive.
This action of the PTCL undermined the authority of the PTA and caused substantial concern among the new operators that had paid huge licenses fees to the PTA to enter into the business.
If this perception is correct then it negates the very basic concept of the PTA's existence and this must be proved wrong through its actions and policies.
The PTA is a regulatory body and its main objective should be to encourage further investment in Pakistan by providing an even ground for fair play. It could only be achieved in case fair competition is provided to existing and new companies.
There is a concern among prospective investors and new companies that intend to operate in this area that the PTA has no doubt acted in a manner conducive to its role as a regulatory body by not restraining those telecom operators that enjoy the status of Significant Market Players (SMPs) from indiscriminate tariff reduction and indulging in other practices prejudicial to their status.
Under the current situation, the new entrants could have a strong case against the PTA that due to its unfair policy, charging high fees and then allowing the dominant players to indulge in unfair competition they mean to drive them out of the market and therefore they have been deceived. This will be regarded as unfair play and the international community would take it seriously as a violation of competition laws prevailing throughout the world.
WHY NOW?
PTCL's reduction of line rental, and reduced nation-wide and international calling rates and providing free connection for Ufone and fixed line phones have been initiated at a time when there was serious concern that the new entrants would capture the market by lower rates and the provision of better and fast services that may benefit the consumers. It is strange to see that free connections are being given whereas the existing phones are not working to the satisfaction of the customers. There are hundreds of fixed line phones that are lying out of order and the repeated reminders to put them in working conditions are ignored.
These measures have only been taken to either give a tough time to the new entrants who have to establish themselves in the market and may not afford the price-cutting or the intention may be to drive them out from the business so that PTCL would come up again as a winner by being a dominant player in the market. If PTCL has that intention then, it is arguable if we are ready to invite foreign telecom operators to come and invest as we have already taken a position to drive them out or to operate at prices that are too low for the new entrants that means that they will not come to compete with the PTCL.
REVENUE INCREASE BY ELASTICITY OF DEMAND: It is being debated and argued why the PTCL did not realise in the past when it enjoyed complete monopoly and a dominant role that the demand is elastic and that by reducing the rates that the demand would go up and that the increased customers base would drive up the earnings of the PTCL. In other words, it meant that the entire nation has been paying PTCL for its inefficient working, poor service and bad customers relationship for the last several years through the payment of higher tariff, as there were no other options available. This is visible from the following financial statistics.
The above statistics confirm that during the last two years alone, PTCL has lost substantial revenue by the earning of rupees 3.88 per share, in the year 2002, instead of the expected earning of rupees 5.75 per share in the year 2004, that it should have earned, had its old perceptions of not accurately realising the extent of the elasticity of demand in this sector had been followed. Had they been innovative in their thinking, the public would have benefited from a reduction of tariff rates much earlier than those followed due to the threat of competition.
In that situation, it could have been successfully argued that the PTCL did not alter its reduction of tariff and other measures to improve its operations. It was due to eliminate competition and therefore the competition laws should be applicable in this case.
As is visible from the reduction of tariff, the motive of this giant company seems clear that it has to keep its customers base intact or increase it, giving a tough time to new entrants and possibly to drive them out of the market as soon as possible to enjoy the same position as it had earlier. This seems to be contrary to public policy and the PTA must intervene to stop this abuse of its dominant role to reduce competition from the market. It is a clear violation of the competition law as accepted world-wide and that is prevalent in EC countries, United Kingdom and United States. EC competition law very clearly states the following.
ARTICLE 82 OF EC COMPETITION LAW: The Article deals with dominant undertakings that abuse directly or indirectly by imposing unfair trading conditions for their competitors to the prejudice of consumers; thereby placing them at a competitive disadvantage by various means.
Dominant has been explained as an undertaking that has a market power. Without that market power, the undertaking will be constrained by its competitors and competition law will not intervene. To establish whether an undertaking has such power it is necessary first to establish in which market they operate and to establish that the undertaking is a dominant player in that market.
It may be argued that the PTCL has a market power in the telecom market and therefore has a dominant role. Any unfair trading may be seen as abuse of its market power and the competitions laws of EU may be applicable. Although, it is understood that these laws may not be applicable in Pakistan but there is every reason to believe that the activity of PTCL may be judged from that standard if we are going to compete with world market players in the telecom sector. Just to cite some of the cases relating to the abuse of power, the following cases could be reviewed:
RELEVANT EXAMPLES OF UNFAIR COMPETITION: Hilti AG was the largest European producer of PAF nail guns, nail and cartridge strips. Complaints were made from undertakings supplying Hilti compatible nails that they were being excluded from the market by Hilti's behaviour, the European Commission instigated an investigation and it was found that Hilti was dominant on the nail gun, cartridge strip and nail markets. (Hilti AG v Commission [1991] ECR II-1439)
The court put great importance in market share as an indication of market strength. The larger the market share, the stronger the undertaking must be in comparison to its competitors in that market. Market share is usually established by calculating the undertakings share of total sales in the relevant market. Hoffmann-La Roche was the largest producer of vitamins within the Community and was challenged by the Commission for a number of allegedly abusive discounting practices within a number of vitamin products. (Hoffmann-La Roche v Commission [1979] ECR 461)
AKZO was a large Dutch chemicals group who were active on the market for flour additives. It was accused of abusing its position on the market to exclude a competitor.
(AKZO CHEMIE BV V COMMISSION [1991] ECRI-3359): During the court's discussion of United Brands dominance on the banana market, the market share was also reviewed in detail alongwith other factor to determine if the company enjoyed a dominant position in that market. (United Brands v Commission [1978] ECR 207)
Irish Sugar was the sole producer of sugar beat in Ireland and Northern Ireland, having a suspected 88% share of the total market. The Commission challenged the company for abusing its position through the use of targeted rebates. (Irish Sugar Plc v Commission [1999] ECR II-2969)
Looking at the above case law, it may be argued that the PTCL has a dominant position in the market and abusing this position through offering discounts, price cutting or other incentives may be against the public interest and therefore may violate the competition laws. We should not forget that our competition laws should be compatible with other international laws, if we are to remain a competitive nation and a member of WTO.
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