Discouraging Govt Policies Resulting into Decline in Telecom Investments

The telecom sector remains one of the top sectors that contributes in bringing foreign direct investment (FDI) in Pakistan. However, the sector’s investment currently stands at $25.8 million in the first quarter of 2015-16.

Statistics from the State Bank of Pakistan (SBP) stated that the foreign investment inflows brought by the foreign telecom companies stand at $25.8 million as against $27.9 million outflow of investment, mainly carried out through local companies or with joint-ventures with multinational companies, showing negative FDI of $2.1 million.

The investments of the telecom operators were recorded as $16.4 million in July but gradually reduced to $4.6 million in August and $4.8 million in September, which showed that the market players of the sectors have slowed down their investments.

The imposition of 19.5% general sales tax (GST) on mobile Internet (3G/4G services) by the Punjab government has curtailed the usage of the Internet services. On the other hand, the targets for subscriber acquisitions are not being achieved by the operators.

There were 15.7 million 3G/4G Internet users in Pakistan by August 2015, out of which more than 60% of the users belong to Punjab.

The mobile operators have slowed down investment in the sector because the profits of the companies have declined as compared to the previous year, which witnessed quite impressive and encouraging growth when it came to return on investment made by cellular operators, a senior official of a mobile phone company said.

He said in the first half of 2014-15, the telecom operators made record revenue of Rs. 300 billion, however the rest of the half was not good as it was expected to touch revenues Rs 600 billion, but the entire sector saw a correction stage and spent Rs 3 billion on setting up biometric verification of subscribers for SIM sales. This period also include no-sale of new SIMs, no growth and no acquisition of new subscribers for three to four months, he added.

“The mobile phone operators were optimistic that the new investment would drive their revenues to new heights; hence, they also embraced the government’s will to change the entire system for the sake of the country’s security,” he said on the condition of anonymity.

He said the government did not recognise their investment and taxed the telecom sector, which is already heavily taxed. “It is a double whammy for the telecom operators who invested heavily but in return were slapped with taxes. How much and how long the headquarters of foreign companies would support their subsidiaries in terms of investments because they believe that the companies should manage their expenses themselves through reinvestment of the profits they earned from the market,” he remarked.

The cellular operators are looking towards the telecom authority and the ministry to take up the issue with the provincial government that would set the future course of action of operators, said an official of another mobile phone operator, which made highest investment to launch the next generation technologies.

The operators are not happy at all with heavy taxation but the government is looking for new entrants in this situation with a purpose to generate investment, he added.

“We have planned for investment in the future but the government should realize its policy for investors,” he said optimistically.

In the financial year of 2013-14 and 2014-15, the operators made an investment of $904 million and $948 million, which shows that an average quarter investment stood at $226 million and $237 million respectively; however, numbers for first quarter investment of current financial year were nine times less than that of previous year.

This also depicts the plunging imports of overall telecom equipment which declined significantly by 46% to stand at Rs 8.9 billion in July and August against values of previous year which stood at Rs 16.3 billion, according to available figures of Pakistan Bureau of Statistics (PBS).

Though the net FDI numbers portray a very negative picture of the telecom sector, it’s clear that foreign operators did not stop their investments in Pakistan but have continued their investments which stand at mere $25.8 million in the first quarter of 2015-16. If a similar trend continues in later three quarters, it will translate into $100 million FDI in the whole year.

While mobile phone operators introduced 3G/4G services in dozens of cities, there is still a lot of room to explore many locations of these cities including new locations.

The slowdown of the investment also affected existing users of 3G/4G users who are not experiencing a high quality service of mobile internet services in many parts of those cities where 3G/4G network was available.

There is still a large room for investment in the telecom sector as there are only 15.7 million subscribers of 3G/4G services out of 120 million subscribers of GSM service.

The government should review its taxation policy to attract investment not only from existing players but later for new entrants which will definitely consider Pakistan as a lucrative market.