CCP Terms Implementation of ICH Illegal, Asks MoIT to Withdraw Directive on ICH

CCPDespite a ruling from Competition Commission of Pakistan earlier this year, which had said that LDI operators could withdraw themselves from International Clearing House agreement, directive issued by Ministry of IT and Telecom’s on August 13th, 2012 for implantation of ICH has been challenged by CCP again.

Competition Commission of Pakistan has reportedly issued a Policy Note to the Ministry of Information Technology (MOIT) and Pakistan Telecommunication Authority (PTA) recommending the withdrawal of the Directive dated 13 August 2012 issued by the MOIT proposing establishment of international clearing house exchange for international incoming calls for long distance international, fixed-line local loops, wireless local loops and mobile operators (Proposed ICH Arrangement).

CCP in its policy note said that implementation of ICH is anti-competitive in nature as LDI operators would be allocated quota for incoming international calls and revenues based on their current market share, leaving them with no chance to increase sales and revenues.

CCP noted that PTCL will be in holding position to negotiate termination rates with foreign operators, creating a monopoly for local industry.

Thus, the implementation of ICH is considered illegal being the most pernicious anticompetitive conducts.

Following is the excerpt from CCP Statement on Policy Note regarding implementation of ICH:

CCP, in its policy note, said that while it may be within the domain of MOIT to issue policy directives on establishment of ICH, but such directives need to be appreciated that any such policy decision/directive/circulars are in fact subject to the substantive provisions of the statute in force.

Regarding the amicable settlement aspect, CCP noted that the pre-ICH outstanding liabilities on account of regulatory and GoP dues will continue to be individual responsibility of each LDI operator i.e. ‘to be discharged as final settlement through legal process’.

Therefore, CCP has observed that it is thus not clear how the matter stands resolved when the settlement is subject to judicial review i.e. ‘final settlement through legal process’ which in any event, the parties are bound to follow.

With respect to the curtailment and elimination the grey traffic, CCP in its policy note that under the Proposed ICH Arrangement the termination rate for Pakistan is expected to go up to 8.8 cents from currently lower rates. This may provide further incentive for Grey market players to increase their traffic. Also, in future if an arbitrage opportunity exists the players operating in the Grey traffic will likely exploit that, thus ICH move is unlikely to curb the Grey traffic and may kindle its further growth.

CCP said that proposed ICH Arrangement will restrict the competition among the LDI Operators each operator will have a guaranteed quota of incoming international traffic as per their existing market share.

As for the aspect regarding regulatory regime for the telecom operators, CCP in its Policy Note observed that all relevant laws and applicable rules and regulations which includes the Competition Act must be taken into account. The CCP reiterated that it had already passed an order dated 8 February, 2012 in which the CCP made it abundantly clear that the subject matter has serious competition concerns.

The CCP further noted in its Policy directive that the Proposed ICH Arrangement directly violates Section 4 of the Act, and particularly, clause (a) & (b) of subsection 2 of Section 4 which prohibits price fixing and division of market via quotas.

Under the Proposed ICH Arrangement the consortium will designate PTCL to undertake negotiations on termination rates with foreign operators, and LDI operators also signing up to a percentage quota, will be guaranteed from the revenue PTCL collects from the incoming international terminations. Thus the consortium as such will fix price for termination rates and also via percentage quota allocated, share in the proceeds from the terminations from foreign operators, a clear violation of the Act.

It has also been observed that in this environment there is no incentive for a LDI Operators to improve sales, or enhance quality of service (QoS) or for that matter to invest in Network. With fixed quotas there will also be less incentive for LDI’s to bring in additional voice traffic from overseas operators as any upside will be shared as per quota.

It has also been observed by CCP that in terms of Para 3(d) of the Directive, the representatives of PTA and MOIT on Board as observers of Proposed ICH Arrangement, in itself curtails the free market commercial decision making of the LDI Operators and perhaps undermines the regulatory powers of PTA.

The CCP also noted in its Policy Note that a substantial advantage will be available to the existing LDI operators due to the Proposed ICH Arrangement. The incumbent LDI operators will be in a position to exploit the said arrangement through a cost advantage over potential new entrants. They may use this advantage to cut prices if and when new players enter the market. Although they will be moving away from short run profit maximization objectives, they will however inflict losses on new undertakings and thus protect their own market position in the long run unless the new entrant also agree to such an arrangement.

Once a potential entrant is successfully barred from a market, existing players are free to revert to their prior anticompetitive conduct. This will eventually have a negative impact on the end consumer, who must now face higher prices (due to monopolistic or oligopolistic pricing structures and inefficient and obsolete technology), lower quality products (the effect of less research and development) and ultimately fewer alternatives.

It has also been observed that although it has been stated in the Para 3(bi) of the Directive that the appointment of an independent undertaking to monitor the said arrangement and submit MIS reports on a daily basis to PTA or MOIT to prevent “collusive behavior” and to ensure transparency; however, under the given arrangement it seems more likely that such arrangement results in monitoring the consortium members to prevent any deviation from allocated quotas, which in itself is anti-competitive under the Proposed ICH Arrangement.

CCP in its Policy Note concludes that such practices i.e. price fixation and quota allocation are considered illegal being the most pernicious anticompetitive conducts.

Competition regime is all about applying competition policy & principles of law to make undertakings compete vigorously with each other. This fair business rivalry ensured through the competition rules brings efficiency, increased productivity, creates a wider choice for consumers and helps reduce prices and improve quality.