State-corporate nexus: The unholy alliance in the telecom sector

Establishment of clearing house will reduce competition significantly.

LAHORE: Recent developments in the telecom sector indicate that the federal government is undoing its own acts by inviting, coercing and facilitating private sector players to form a cartel, thus not only ruining the gains made from competition, but also potentially robbing off consumers.

The Ministry of Information Technology has issued a policy directive for the establishment of International Clearing House (ICH) for incoming international calls for long distance international, fixed-line local loop, wireless local loop and mobile operators.

The ICH and the policy directive will not only reduce competition significantly, but are also in direct violation of the ministry’s own deregulation policy of 2003, which says “Increase service choice for customers of telecommunication services at competitive and affordable rates and liberalise the telecommunication sector by encouraging fair competition amongst service providers.”

This directive disregards the proceedings held earlier by the Competition Commission of Pakistan (CCP), which were initiated on the request of long distance international (LDI) operators themselves. As per the policy note of CCP, available on its website, the LDI operators, who had earlier requested CCP for its approval, were warned against creation of ICH.

At present, there are 13 LDI operators in addition to PTCL who are licensed to originate and terminate voice traffic in Pakistan. The sector dynamics are such that incoming international voice traffic dominates the outgoing international voice traffic despite the fact that international dialing is now easily available on pre-paid SIMs and on PSTN lines.

Under ICH arrangement, all incoming traffic in future will terminate on PTCL infrastructure, which will lead to less incentive to use international bandwidth from PTCL’s competitors. This will not only eliminate competition, but also further strengthen PTCL’s dominant position.

Presently, it is possible to call overseas high-volume destinations in US, Canada, UK and Australia for Rs2 plus tax or around 2 cents, so termination cost to foreign operator has to be less than that. Similarly, termination costs for Pakistan are presently under 8.8 cents. With the ICH agreement, the termination rates for Pakistan will be increased by the consortium to approved PTA levels, which will likely result in foreign operators increasing outgoing termination rates.

This potential increase to around 8.8 cents will affect consumers in Pakistan, who are likely to pay more for making international calls in future under ICH arrangement and it can also foreclose the option for the remaining LDI operators to negotiate.

Through ICH, it appears that competition among LDI operators is prevented as each operator will have a guaranteed quota of incoming international traffic as per their existing market share. This is a typical example of cartelisation. In this environment, there is no incentive for an LDI operator to improve sales or enhance quality of service or for that matter to invest in network.

In the instant matter, a substantial advantage will be available to existing LDI operators. They will be in a position to exploit the arrangement through cost advantage over potential new entrants. They may use this advantage to cut prices if and when new players enter the market.

The policy directive of the ministry mentions the appointment of an independent undertaking to monitor the said arrangement and submit MIS reports on a daily basis to PTA or the IT ministry to prevent “collusive behaviour and to ensure transparency”. This is ridiculous, impractical and in fact counter-productive.

In fact, such monitoring tools are typically used by cartels to monitor the observance of the common policy and not otherwise. Monitoring essentially is a regulatory role entrusted to the sector regulator and should be discharged accordingly.

The ICH will reduce choices for the consumers, enhance entry barriers, increase dominance of PTCL and facilitate cartelisation in the telecom sector.

It is apparent that the federal government, instead of protecting interests of public at large, which are guaranteed through competition in a free market economy, has itself colluded with the corporate sector. It has not happened for the first time and examples of a similar state-corporate nexus abound, for instance in fertiliser, sugar, cement, banking, etc. This nexus not only brings bad name to market economy, it also denies fruits of economic development to the public.

The Competition Act 2010 was a step in the right direction. It is time that its scope should be widened to include the policy directives and frameworks issued by the government with a punitive clause. The CCP should be authorised to refer to any such policy directives to parliament, which is the mother of all institutions, for corrective action.

The writer is a managing partner of economic research organisation Development Pool, and a founding member of the Economic Freedom Network Pakistan

Published in The Express Tribune, September 17^th, 2012.