Steady investment environment is a prerequisite to attract foreign investment. A right case for Foreign Direct Investment (FDI) would entail sustainable financial environment, low inflation, low fiscal deficit, low mark-up, controlled credit expansion and low forex fluctuations.
Emerging economies are competing with each other to win over foreign investors, therefore, liberalisation of the economy by freeing up markets, transparency in macro-economic policies and statistics, ease of repatriation of profits, lower import controls, removal of subsidies on export, privatisation of overstaffed organisations, streamlining of legal systems and allowing prices to come on international standards are some of the essentials to attract FDI.
Other measure include effectiveness of regulators, implementation of policies, steady tax policies, fair allocation of scarce resources (Spectrum), un-building of networks, interconnection regime, susceptible to technological changes, political stability and social set up of a country.
FDI is important because it supplements low domestic savings and provides substantial parts of the shortfall in capital needed to finance economic growth and development. Deterrents of FDI in recipient countries are:
-- High-perceived risks.
-- High transaction cost.
-- Fear of policy reversals.
-- High degree of economic volatility.
-- Civil strife and political instability.
FDI is not only about moving the capital beyond boarders but is generally termed to have a range of advantages to both host and the recipient country. The recipient country is benefited from expanded business activity due to increased employment, transfer of technology, enhanced competition, introduction of international standard and improved management techniques.
While the donor country gains access to raw material, diversification of businesses and markets for operations and increased profits. Historically speaking development of telecom infrastructure has played an important role in supporting the economic development of a country. There is a direct relationship between investment in telecom infrastructure and economic growth.
The growth of telecom development globally has brought rapid expansion of new and advanced information services, domestic and foreign investments and proliferation of global business. Growing globalisation and economic integration across regions have actually changed the trends in world economy especially in terms of increased international trade and cross boarder investments.
Policymakers and governments around the globe have been considering Foreign Direct Investment as an instrument for economic growth of the country. However, countries do fear disadvantages of unrestricted FDI in strategic industries, which generally results in capital flight from the country.
Telecommunication plays a dual role as a services provider and as a catalyst for the growth of forward and backward linkage industry thus paving the way for increased investments in flow of capital and transfer of technological skills. The benefits accrued to telecom sector include accelerated network build-out, increased access to un-reached areas, provision of new services, improvements in quality of services, better choices to consumers and lower rates.
Traditionally the Telecoms have remained public entity for years together. Two organisations the WTO and ITU played major role in restructuring of telecom markets across the globe. The WTO agreement support foreign and domestic investment in the telecom sector and, as a consequence, the development of each country's telecommunication infrastructure and services.
Under the WTO, GATTS on Telecommunication which was concluded on February 1997 and which entered into force on February 1998 commits 72 countries to a program of progressive opening of their basic telecommunication service markets to competition and increased foreign investment. Those agreeing countries made commitments to liberalise their telecommunication market to open them to foreign investment in basic telecommunication services, provision of voice, telephone, telex, telegraph, data transmission and privately leased circuits.
With the signing of GATTS a series of deregulation started in telecommunication and thus the cross boarder investments took off around the globe. The countries that have been opening up their sectors with the help of their regulators have been successful in attracting foreign investors, keeping in view the array of advantages associated with it.
After considering the degree of stability in macroeconomic scenario and political situation of a country, effectiveness of a regulator is of prime importance in terms of implementation of policy, regulations, transparency and providing level playing field to all stakeholders in the sector. Sometimes regulators have to plead with government on issues relating to operators, which helps in augmenting investor's confidence.
The tax regime, foreign ownership policy and competition policies are the corner stones of making a viable case for attracting FDI in a country. In addition local government stance on repatriation of capital and policy on mergers and acquisitions also influence the decision of investors.
Any investor equally considers the availability of basic infrastructure, unbundled network elements of the incumbent operator and its mindset towards new operators before joining the sector. Getting into the more technical aspect the strict license conditions, Quality of Service (QoS) standards, interconnection regime, spectrum policy and basis of tariff are areas to be looked into before making investment decisions.
Similarly dispute settlement mechanism and right of way have become increasingly important in order to attract the FDI in already liberalised market with number of foreign players. Investors also weigh innovative ability of regulator in addressing the upcoming issues and introduction of new technology in local sector. On the other hand transnational investors also weigh the opportunities, risks and returns involved in making investments outside the home country.
PAKISTAN SCENARIO
While taking the case of Pakistan, the local telecom market was liberalised in 2003-04 since then every possible regulatory measures has been taken into account in order to attract maximum FDI in the country. Table shows the total FDI in telecommunication sector of Pakistan, in relation to revenue generated and growth in teledensity since the introduction of liberalisation.
CONSISTENCY IN TELECOM POLICIES
The government of Pakistan announced telecom deregulation policy and mobile cellular policy in 2003 and January 2004 respectively, followed by broadband policy in 2004. Till this date the policies are in place and have been implemented by the regulator in its true letter and spirit.
Companies like Telenor (Norway) & Etisalat (UAE) and Warid (UAE) brought huge investments as a result of confidence in the local market. The telecom policy has expired in January 2009; the government is working on framing the new telecom policy shortly.
MARKET ENTRY
There are no barriers to enter the local market whereas transparency in licensing process and ease in obtaining license are there for the both local and foreign investors. 100% foreign ownership rights of telecom operations in Pakistan supplement this. In addition there are no ceilings for capital repatriation from the country.
EFFECTIVENESS OF REGULATOR
The effectiveness of a regulator can be measured by the influence it has on the degree of competition and vibrancy of the market by the number of players and the level playing field it provides. The Pakistan Telecom Authority implemented the telecom policies and since then has been following up in increasing competition in the sector.
In this regard rules and regulations as and when required by the sector have been framed and implemented. These rules include the interconnect agreement, anticompetitive practices, access promotion charges, universal service obligation etc.
Similarly on the other hand the Authority is presenting sector issues to the government for its growth, which includes reduction in taxes on telecom, grant of status of an industry to telecom, subsidies on import of telecom equipment etc. The authority thus is playing the role of mediator between the operator, the government and the telecom consumers.
MERGERS & ACQUISITION
For the stability in competition, more consolidation and integration of market structure, mergers and acquisitions must take place. The government of Pakistan and the Authority do not restrict and encourage mergers and acquisitions in the telecom sector except where there is a possibility of anticompetitive conduct by operators.
TARIFF REGULATION
One of the major considerations of the investors is degree of dependence on market forces of demand and supply for the purpose of getting price for the services provided. The Pakistan Telecom Authority does not regulate tariffs for any telecom service in the retail markets, however the wholesale market ie mainly the interconnection is slightly regulated where the interconnection rates are cost based and the Authority sets ceiling for it.
ANTICOMPETITIVE PRACTICES The two main players who can be involved in anticompetitive practices are the incumbent operator and the significant market power operator in all the segments of the sector. Anti competitive practices include price discrimination, unavailability of essential facilities, cross subsidisation, non-availability of information on timely basis and economic distribution of bottleneck facilities. The Authority under the policy can regulate the tariffs of SMP operator, and to deal with a range of anti competitive practices/ regulations are in place.
GOVERNMENT STANCE ON SCARCE RESOURCES While making decision scarcity of availability of spectrum and its management, right of way and numbering issues are foremost in the minds of investors. The authority has a very clear view on all these resources.
Spectrum for commercial services including mobile and WLL had been auctioned. The spectrum available has been allocated to the operators, the authority has provided spectrum for latest telecom services, which include 3G & 4G mobile services.
While Pakistan Telecom sector has smoothly liberalised its telecom sector and in the process huge inflow of FDI has been witnessed. This has not only set new records in telecom growth in Pakistan but also increased the telecom share in GDP upto 2%. The stakeholders of the sector have now position themselves for long term presence in the country.
Although the world is going through a phase of recession, the US government is making recovery plans for its own economy and for the underdeveloped world. One can only benefit from the upcoming opportunities if they have prepared themselves by removing any impediments that are left in the inflow of FDI.
(The writer is member (Finance) Pakistan Telecom Authority)