Owing to downfall in revenues, most of the telecom operators adopted "cost-cutting measures" during the year 2008-09 with Ufone the only exception reporting a profit while the rest landed with negative earnings. Throughout the year, the sector's financial health could not be improved in accordance with the expectations owing to heavy taxes and falling exchange rates, which placed unprecedented burden on the operators' import bills.
Due to economic slowdown, saturation in the market and global financial crisis, the total investment in the telecom sector during 2008-09 reduced by nearly 47 percent. Despite the fact that the operators have speedily rolled out their infrastructure, reaching out to most of the population, there still remains huge areas like Broadband, WLL and manufacturing, where investment opportunities exist.
To cope with the financial crunch, telecom operators adopted optimisation of human resources, cut in employees' perks and temporarily froze statistics obtained from Ministry of Finance and State Bank of Pakistan to avoid negative impact of economic slowdown on the sector. As per data provided in the yearly report of PTA, the leading mobile operator, Mobilink, slipped from green to red zone in earnings because of the falling exchange rate and rapid drop in the subscribers' base.
A dismal situation in fixed-line penetration is the major area of concern for the policy-makers and the regulator in Pakistan. After issuing a number of licenses to the fixed-line operators, the regulator believed that the market forces would play their due role for its expansion, but unfortunately, this could not happen.
However, despite these difficulties, the sectors revenue grew by 19 percent which poses confidence in the government and regulators' policies. Unlike expectations, most of the fixed-line operators could not roll out the infrastructure maintaining the incumbent operator still the dominant player with its old copper based infrastructure a main hurdle in the sector's growth.
It was also expected that a rapid roll out by wireless technology (WLL) would compensate the declining fixed line penetration, which too did not happen due to lack of investment by WLL operators. Furthermore, the WLL operators like Wateen and Wi-tribe have smartly diverted their resources to Broadband expansion in 3.5 GHz and invested on new technology like WiMax.
This, too, caused slow growth in the fixed line sector. Issues like right of way and lack of unbundling also proved major hurdles in the fixed line sector's growth. A huge investment is required to roll out new generation of fibre networks in Pakistan.
This gives a major opportunity to a large scale investors to secure their investments in Pakistan in this segment of the industry. During the current year, a total of $1.6 billion worth of investment has been made by all the operators, of which the cellular mobile share is about 75 percent.
The WLL has marginally increased investment from $52.8 million in 2007-08 to $82.11 million in 2008-09. However, the rest of all of the sectors have reduced the level of their investment. During this period, Pakistan attracted FDI worth $3.7 billion altogether. In the current year, the telecom sector received over US $815 million FDI, which is 22 percent of the total FDI in Pakistan.
Major countries which invested more than 70 percent in last five years in Pakistan's telecom sector included United Arab Emirates, United States of America, Norway and China. The UAE emerges as the leading country investing over 36 percent of the total FDI in the telecom sector in the last five years. UAE invested in companies like Wateen, Warid Telecom and PTCL.
Etisalat, UAE based company, bought out 26 percent shares of the PTCL worth $2.4 billion. The UAE has invested over $2.3 billion in the telecom sector of Pakistan since 2004-05. China Mobile has its first overseas adventure in Pakistan cellular mobile sector, in addition to telecom manufacturing, through companies like ZTE and others. Investment from China exceeded US $599 million in the telecom sector of Pakistan during the last five years.
Telenor, a Norway based company, also brought about half a billion US dollars foreign investment into Pakistan during the last five years. The telecom sector contributes 1 to 2 percent in the total GDP, making its share in total tax revenue as 6 to 7 percent per annum. During the year 2008-09, the sector continued to contribute handsome amount in national kitty through various taxes and regulatory charges.
Telecom sectors' contribution to national exchequer rose to Rs 112 billion in 2008-09 compared to Rs 111 billion the previous year. The sector has been overburdened with taxes by contributing over 31 percent of its revenue through GST and Withholding Tax.
Resultantly little space has been left to spend on infrastructure expansion. Major tax measures were introduced in the budget for the fiscal year 2008-09. GST/FED rate was revised from 15 percent to 21 percent for telecom sector while this raise was only 16 percent for rest of the economy.
Import duty on mobile handsets was imposed at the rate of Rs 750 per mobile hand set (Rs 500 custom duty and Rs 250 Regulatory duty). Activation Tax on cellular mobile sector continued at Rs 500 per new connection. The enhancement in taxes, along with economic slowdown, had an adverse impact on telecom sector.
PTA took cognisance of the situation and suggested to the tax authorities and the Prime Minister that the government should reduce taxes on the sector. PTA's efforts proved fruitful, as the government provided relief in taxes to the operators in the budget 2009-10 as GST/FED rate on telecom sector was brought down from 21 percent to 19.5 percent.
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