Home Latest News Currency Devaluation, Rising Operational Costs Driving Telecom Sector’s Earnings into Negative

Currency Devaluation, Rising Operational Costs Driving Telecom Sector’s Earnings into Negative

Telecom subcommittee recommends delinking spectrum price from U.S. dollar, increasing number of payment instalments to prevent looming digital emergency

by Staff Report

Jazz CEO Aamir Ibrahim

A recent meeting of the Prime Minister’s I.T. and Digital Economy Advisory Council’s Subcommittee on Telecommunications, headed by CEO Jazz Aamir Ibrahim, was informed that the telecom sector’s earnings in Pakistani rupees yielded negative growth for foreign investors when considered against the U.S. dollar, with persistent increase to spectrum installment payments a key contributing factor.

The government’s decision to link the spectrum price to the U.S. dollar instead of the rupee, said the meeting’s participants, was a pressing concern for local cellular mobile operators and the financial health of the sector, as it had remained unaddressed in all spectrum auction policies and license renewals. The rising costs, they stressed, now risks cellular access load shedding and could push the country into a digital emergency.

Detailing the reasons behind the risks involved, the meeting noted that as customers are charged in Pakistani rupees, all earnings are in the national currency, which is then re-invested by operators to pay for costs such as spectrum price and equipment imports—in dollars. Denominating spectrum costs in dollars, the participants emphasized, exposes operators to currency devaluation risk, as even annual spectrum license installment payments can become unpredictably expensive due to factors outside their control. This limits their ability to plan for network, service and even further spectrum investments.

The prevailing trend of the rupee’s devaluation against the dollar, the operators warned, coupled with exorbitant license/spectrum renewal price was placing the sector in double jeopardy. Noting that in purely dollar terms, the increase in spectrum price for individual frequency bands did not appear substantial, a holistic examination factoring in the overall package of frequencies in a license painted a different picture. An example, they said, was the 2019 renewal price of approximately $450 million for the $291 million licenses issued in 2004 to Telenor, Warid and Zong. With the recent devaluation of the rupee, they said, the cost of 1Mhz of spectrum in 1800 band had increased from $21 million to $31 million between 2007 to 2022, or 388% increase in rupee terms from Rs. 1.27 billion to Rs. 6.65 billion.

“Adequate spectrum is a key factor in driving cellular growth but unfortunately, it has not been cost effectively allocated in Pakistan leading to an artificially driven scarcity of spectrum,” said Aamir Ibrahim, CEO of Jazz. “Although there is significant amount of spectrum available with the government, stringent and expensive conditions set for its allocation and continued denomination of spectrum price in U.S. dollar instead of rupee, has made spectrum almost inaccessible for operators despite the apparent need for more spectrum to achieve digitalization and connectivity objectives,” he added.

Citing global best practices, the subcommittee said no other sovereign country set initial or recurring payment for spectrum award in U.S. dollars, preferring to use local currency even if the original spectrum valuation and benchmarking was done in dollars. Even in Pakistan, recurring regulatory fees such as annual regulatory duties, Universal Service Fund and research and development contribution, and spectrum administrative fees, all are in the national currency.

The subcommittee stressed that the telecom industry was unique in Pakistan for having its license based on the U.S. currency. Licenses awarded by authorities such as the State Bank of Pakistan, Civil Aviation Authority, and Pakistan Electronic Media Regulatory Authority are in the local currency, it noted, adding the government had even negotiated to rupees unutilized capacity payments in dollars to local investors to reduce foreign exchange exposure of IPPs. The government, it was discussed, recognized the need to have cost and revenue in local currency to reduce costs but used different measures for foreign investors, which hurt confidence in foreign direct investment, at least in the telecom sector.

Further, imports that are paid for in dollars, such as crude oil, are reliant on free-floating market-based prices. However, there is no U.S. dollar-based input in case of frequency spectrum so there is no justification for denominating spectrum usage in that currency, it was emphasized.

According to the subcommittee—which was formed by the incumbent government last month to enhance the digital economy—the spectrum costs have also spiked due to an exponential increase to the cost of doing business in Pakistan, with the past year of inflation inflicting a 116% hike to fuel; electricity rate 49%; interest rate 68%; and forex rate 42%. This has resulted in “disappointing” profitability of operators despite a massive investment of $3.2 billion in recent years. This kind of market volatility cannot be factored into any business plan, regretted the participants, and urgent and innovative policy interventions were needed to help the industry ensure its survival.

In a bid to overcome the crisis, the meeting proposed staggering license payments over 10 annual installments rather than the existing 5 and denominating spectrum payments in rupees. Alternately, it was proposed to freeze the exchange rate at the date of the last license fee payment, with future installments paid accordingly. “These measures will provide critically needed fiscal space to the operators and enable them to continue to serve over 195 million subscribers and to further grow the market to the benefit of economy and to meet Pakistan’s digital inclusion objectives,” Jazz CEO Ibrahim added.

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