Development of International Clearing House to bring in $37.5 million in foreign exchange each month: PTA Chairman

Following are edited excerpts of a conversation with Farooq Awan, Chairman, Pakistan Telecommunication Authority. BR Research: The auction of 3G licenses to telcos has been awaited for more than two years now. Now that the guarantee given to Etisalat that new entrants will not be licensed until March 2013, is set to expire, when can we realistically expect this auction?
Farooq Awan: Given that we are now at the end of August 2012, by the time the auction is conducted and the roll out starts, we shall be passed March 2013. Although the Government of Pakistan had even budgeted the amounts to be generated through the 3G license auction, for various reasons the auction has not been held yet.
The process was initiated in December 2011 but hit snags in May 2012. At that time the Prime Minister instructed that an independent consultant of international repute must be hired to proceed with the auction, including the valuation of the spectrum, qualifying the bidders and conducting the auction. This would bring transparency and expertise to the auction, improving the integrity of the whole process.
The search for a suitable consultant was initiated but that selection itself was also done in a questionable way as the assessment was not transparent. As a result, red flags were raised by the Cabinet Ministers who are members of the Auction Supervisory Committee and the entire process was halted.
The hiring process for a consultant was eventually re-initiated by the PTA in August and advertisements were published in local as well as international publications including the Wall Street Journal and the Financial Times. This time we have made public the attributes along which the interested consultancies will be assessed.
It is worth mentioning here that the PTA has devised a formula whereby the financial bids submitted by bidders will carry 80 percent weight while 20 percent of the consideration shall be based on the technical expertise of the bidders. We are confident that this will ensure the best service delivery at the best price for the Government of Pakistan. Since the consulting firm will also be conducting the auction on behalf of the government, the fee to be paid to the consultants shall be a function of the revenues generated through the 3G auction.
The PTA is keen to boost transparency in this process for which purpose we shall sign an integrity pact with the successful bidders. We are also creating an oversight committee comprised members of the media who cover the telecommunications and information technology sector. These representatives of the media will be authorised to attend all meetings and access all records pertaining to the 3G auction.
BRR: The license used earlier by Instaphone has also been dormant for some time now. When does the PTA intend to auction it?
FA: We have left this decision to the spectrum auction advisor. Once the independent experts have gone through the policy documents, we expect them to suggest the alternative that can help maximise the returns from the auction.
BRR: How receptive are the existing players in the telecom sector towards the 3G license auction? What sort of response is expected from them whenever the 3G auction is conducted?
FA: I am sure that at least some of the existing players in the sector are quite motivated to acquire these licenses. In fact, as far as I know there are certain players that are interested in acquiring more than one of the three licenses that are to be auctioned. There will also be others that are content to drudge along without acquiring these licenses.
Keep in mind that besides the cost of the license, the rollout of 3G will entail huge capital expenditure which may not be preferred by each and every player in the market. But personally I do not expect any mergers and acquisitions in the near future. I am also quite confident that we can expect new entrants from among well reputed international telcos.
Content will be king in the future and the advent of 3G technology will also boost the local IT industry. We already have a budding IT sector whose exports are up to one billion dollar per year already. Going forward we expect local demand for the sector's products and services will also mushroom.
BRR: International investors consider the overall investment climate and its regulatory environment before committing to such gargantuan investments. An outstanding NAB case against the telcos is pending whereby they have been accused of deviating from the prescribed procedure for tax collection. How may this impact the investor sentiment in this sector?
FA: Wherever there is an ongoing inquiry against not just one or two players in an industry but the whole of it, there are definitely concerns raised in the minds of prospective investors. Having said that it should be noted that this is a procedural issue whereby the companies have been flagged for deviating from the prescribed procedure of tax collection.
In essence it is a revenue neutral issue. According to my understanding, it is a matter of who should have collected and paid the tax, not a matter of the taxes not having been paid at all.
If any party is guilty of tax embezzlement, then the authorities must take them to task. The underlying issue in my opinion is that we have myriad authorities, each with their own purview. We need to boost co-operation and co-ordination between the various departments of the government so that they gain from each other's expertise.
To date we have not held any such interaction with the National Accountability Bureau, but I am hopeful such dialog can be held soon, perhaps under the supervision of the Finance Ministry so that this issue can be resolved soon. If they are genuine culprits, then they must be reprimanded but the issue must not be allowed to linger and cause needless negativity regarding the country's telecom sector which holds immense promise.
BRR: What is the extent of grey trafficking and what is being done to arrest this problem?
FA: The Government of Pakistan is losing about 800 million dollars each year in foreign exchange. Raids against firms engaging in grey trafficking have been carried out in collaboration with the Federal Investigation Agency which helped to bring more minutes of long distance calls into the legal fold. However the issue persists.
Adjusting the tariffs will affect the number of minutes negatively; however it will bring in about $20-25 million in foreign exchange into the system each month. For this purpose the PTA shall establish an International Clearing House very soon. This will provide a single gateway for all incoming international traffic and improve monitoring.
Basically there are three measures for checking grey traffic. Firstly there are the fiscal measures; adjusting rates brings down grey traffic but lowering them too much cuts down on the foreign exchange that is received as a consequence.
Secondly, we require adequate technology to be able to monitor all the incoming international traffic. At present only 30 percent of this traffic is being monitored so the possibility of grey trafficking within the remaining 70 percent of incoming international calls still exists. Thirdly, enforcement has to be beefed up so that we are able to take to task all those cases where wrong doing is exposed. This is necessary to create an adequate detriment against malpractice.
With the new ICH, we shall be better able to recover costs from the LDI operators which will in turn help us pay for better technology and enhanced infrastructure. As a consequence the country shall save foreign exchange of about 800 million dollars each year.
Grey trafficking is already a criminal offence, punishable with three years imprisonment and Rs 10 million in fines. But we have recommended to the Parliament that maximum sentence should be made harsher with a maximum prison sentence of seven years and a fine of up to Rs 50 million. The incidence of prosecution is also low at present and for that to improve we need to co-ordinate better with law enforcement authorities. But the real push in this context must come through better monitoring with the help of technology.