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SAZH-TAF Report on FDI

Industry - Telecom

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The telecom sector in Pakistan has been growing and expanding at an impressive rate for the last 15 years. FDI has had a huge role to play in this. Reports show that most of this FDI amount comes from United Arab Emirates, United State of America, Norway, and Republic of China with more than 70% of the Total FDI in Pakistan telecom sector. The leading country, which has shown great interest in Pakistan telecom sector is UAE. (Pannu, 2010)

 

One of our key members is the Head of Mergers and Acquisitions in the leading telecom company in Pakistan. He shared that for an investor the hardest problem is that they cannot take their money outside. This is due to wavering policies and decisions pertaining to foreign exchange control, exercised by the State Bank of Pakistan. For instance, if they have to pay 100 million dollars as dividends, they must process it into installments depending on what the SBP policy at the time allows.

 

Furthermore, he shared that inflation and the change in USD price against PKR, creates greater uncertainty as the company earning in PKR has to remit profits and payments in USD. With further devaluation of the currency, our expert shared, the return ought to be so high that it can cover the devaluation, as well as give a real return to the investor. The real problem, though, is that if there is a continuous trend of devaluation, it can be adjusted in the cost of capital and discount rates, but the devaluation we have seen in the last two years was not predictable, and due to the sheer size, it is something for which they could not account. Hence, the revenue that they are earning in PKR becomes quite risky and makes their business unviable.

 

On top of that, as per our expert, the State Bank has increased the interest rate, and people who had borrowed are finding it extremely onerous to pay back. Any investor that comes, brings equity, and takes debt, a combination of which creates cost of capital, which has increased massively hence for the investor it is unprofitable already.

 

A critical issue for this sector along with various others, is the above-mentioned requirement of security clearance and the fact that the investors are not notified of their approval, if any. Only when certified copies are given would an investor know that he has been approved. Our expert told us that the Telecom sector requires security clearance from Pakistan Telecommunication Authority (PTA), which can take months to years for security clearance, in the process of which it most likely asks the Ministry of Interior and others before giving the clearance. Recently, some foreign investors interested in investing in his company applied for PTA’s approval and the process had been going on for a long time. Due to this delay, the investor left, only for the PTA to then share that he had received approval, at which time it was useless. He stated that they needed a transparent system that can provide feedback and not leave the companies in the dark about their applications for security clearance.

 

Another issue, shared by our expert, is that PTA has been ineffective in implementation of the right of way policy and the lawmakers do not even include PTA in the decision-making. An example was shared that when the Telecom operators want to launch a Tower in DHA, they are asked a different amount than when they want to launch a Tower in Bahria. The prices vary and this goes against the policy. Yet there is no remedy or accountability.

 

Another substantial concern faced by the Telecom industry is their need to buy Spectrum to operate, yet they shared that they are obligated to purchase the spectrum in USD as opposed to PKR from the government, specifically PTA. This is unfair because the whole purpose of buying Spectrum in Pakistan is for the country. The telecom company is earning in PKR yet is being forced to not only pay their investors in USD (which is justified as they are foreign investors), yet they are expected to purchase USD and pay the Pakistan government as well in USD (which is unjustified in their eyes as both entities, telecom and government, operate under PKR). The price of spectrum, 15 years ago was USD 291 Million, yet now it has escalated to USD 450 Million. (Business Recorder, 2022) They were able to cite no justification for this practice or this policy. Beyond which he shared that, it is difficult to resolve this and other issues because regulatory bodies like the PTA, FBR, etc. targets Telecom industry as an easy cash cow. Hence any concern or issue raised is met with scorn and the assumption that the industry is attempting to waylay its responsibilities under the law. To which, he shared, that telecom is the most heavily taxed industry in Pakistan, and his company has been regularly dealing with the FBR and PTA or various disputes.

 

Our expert shared that Telecom is an easy target for the government as it is a highly organized sector and there are only four to five big operators in Pakistan. Everything they do is documented and everything is electronic. He cited that sustainability in such an environment is not positive, nor are his investors citing any positive indication of their interest in continuing to invest in Pakistan, as they feel the government itself is hostile to the sector.

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