Pakistan’s telecom sector has long been in search of a profitable business case as the industry’s operators are suffering from low average revenues per user (ARPU) and high operating and capital costs. Recently, major players in the sector including Jazz, Telenor and Ufone have voiced their concerns about the sustainability of the business amid the rapid deterioration of the macroeconomic environment.
“Pakistan’s mobile sector is down to the lowest average revenue per user globally with $0.80. Industry can only survive if it stays above $1.5 as the telecom sector's cost structure is dollarized (spectrum fees, capex, fuel). Can't afford regulatory approach to restrict tariff increase anymore,” tweeted Aamir Ibrahim, CEO of Jazz.
https://twitter.com/MoitOfficial/status/1628381128376606725
The year 2022 has been one to forget due to a whole host of problems, including a severe economic crisis that has strangled spending power in the country. Therefore, businesses in Pakistan have also suffered from the trickle-down effect of the macroeconomic landscape.
All four Cellular Mobile Operators (CMOs) in the country, Jazz, Ufone, Telenor and Zong, have seen their bottom line shrink during the past year. What explains the augmented impact of the general economic deterioration on telcos is their structure, which, essentially, is to earn in rupees but spend in dollars.
Poor financial results
The only Pakistani-owned CMO in the country, Ufone, has probably been the worst performer of them all. Pakistan Telecommunication Company Ltd. (PTCL), the parent company of Ufone, has posted a massive loss of 7.7 billion rupees in 2022 primarily because of its mobile operations.
The Norwegian company, Telenor, also had a difficult time rationalizing its expenses in 2022 as its Pakistani operations posted a loss before taxation and interest of NOK 1 billion which can be valued at around Rs. 20 billion.
Jazz, on the other hand, still managed to be profitable on a service revenue base of approximately PKR 220 billion as per sources. The company’s earnings before interest, tax, depreciation and amortization (EBITDA) were around Rs. 84 billion in the first 9 months of 2022. However, the profits for the company shrank in the third quarter of 2022 by 6.8 percent.
Lastly, China Mobile Pakistan, better known by its brand name Zong, is the least concerned about profits as it is more of a strategic investment in Pakistan rather than a pure commercial play. Therefore, it has rarely posted any profits over more than fifteen years of its presence in the country.
Perpetual abysmal performance
The telecom sector’s major costs are license fees and spectrum fees, which are paid to the government of Pakistan, in dollars. Therefore, rapid rupee devaluation has had a detrimental impact on the CMOs. Further, a significant portion of operational expenses is attributed to power and fuel costs, as telco tower sites have high energy consumption.
“High inflation and the elimination of energy subsidies impacted utility prices: diesel +139% YoY, electricity +69% YoY, negatively impacting EBITDA margin,” read a report by Jazz’s parent VEON.
Additionally, multiple interest rate hikes by the State Bank of Pakistan have also raised industry-wide financing costs as the CMOs are partly dependent on commercial loans to fund their expansion and network rollout. On top of this, mobile operators also pay interest to the government on the instalments of their license fees, like PTCL paid around Rs 1 billion in the form of interest on license fees.
“50% of license fees had been paid at the time of acquisition of the license. During the year, the company has paid 3 instalments including 2 prepayments and the remaining amount will be paid in 2 equal instalments along with interest @ LIBOR + 3% per annum, due on September 15th each year in US dollars or equivalent Pak Rupee,” read PTCL’s (Ufone’s Parent Co.) financial statements for 2022.
The uncertainty around the rupee, interest costs and energy tariffs all make it extremely difficult for the telcos to draft business plans and have their yearly budgets approved by foreign investors. Also, as most of the sector has a multinational interest, the viability of operations is assessed in foreign currencies rather than rupees.
For instance, Telenor Pakistan has posted a negative 5 percent return on capital in 2022, down from 12 percent in 2021 while the cost of capital stood at 15 percent in 2021, and is likely to be even higher in 2022. This means that the company is not generating sufficient returns against the risk it is taking by investing in the country.
“We are still in a challenging environment in Pakistan. That being interest rates, energy, currency and all the macro facts that we see. How it’s going to develop this year, it’s too early for us to say. In the midst of that, we are also then continuing our strategic review, as I have talked about now in the last two quarters,” Sigve Brekke, CEO of Telenor Group, stated during an earnings call.
Moreover, operators like Jazz and Telenor have to repatriate part of their profits, as dividends, back to their parent companies and given Pakistan’s current forex situation, that is also a challenge.
“The widespread dollar shortage has led banks to refuse opening letters of credit for even food and energy imports. Foreign exchange reserves of the country are at a multi-year low, forcing the government to stop large dollar outflows, including those by overseas investors,” read an article in DAWN.
What does the solution look like?
The first and foremost demand of the telcos pertains to government fees, which include a reduction in license and spectrum fees, pegging the fees against the rupee instead of dollars, and an interest-free extension of payment terms from five years to ten years. Furthermore, telcos are seeking the regulator’s approval for a tariff hike to boost the ARPU.
On the cost side, infrastructure sharing between operators specially for the tower sites can help mitigate the adverse impact of increased energy tariffs.
Read more: Jazz Has Green Lighted The Sale Of Its Tower Infrastructure. Will The Telco Be Second Time Lucky?
However, everything boils down the fact that perhaps the Pakistani market is too saturated for four telcos to operate profitably, and that there is a need for consolidation.
“Management of the company (PTCL/Ufone) expects consolidation of the mobile operators to three players and believes that this consolidation will be good for the mobile operator business, shareholder and customers as well,” read a report by AKD Securities.
Read more about it: Telenor’s Adventure In Pakistan Is Coming To An End
“Pakistan’s mobile sector is down to the lowest average revenue per user globally with $0.80. Industry can only survive if it stays above $1.5 as the telecom sector's cost structure is dollarized (spectrum fees, capex, fuel). Can't afford regulatory approach to restrict tariff increase anymore,” tweeted Aamir Ibrahim, CEO of Jazz.
https://twitter.com/MoitOfficial/status/1628381128376606725
The year 2022 has been one to forget due to a whole host of problems, including a severe economic crisis that has strangled spending power in the country. Therefore, businesses in Pakistan have also suffered from the trickle-down effect of the macroeconomic landscape.
All four Cellular Mobile Operators (CMOs) in the country, Jazz, Ufone, Telenor and Zong, have seen their bottom line shrink during the past year. What explains the augmented impact of the general economic deterioration on telcos is their structure, which, essentially, is to earn in rupees but spend in dollars.
Poor financial results
The only Pakistani-owned CMO in the country, Ufone, has probably been the worst performer of them all. Pakistan Telecommunication Company Ltd. (PTCL), the parent company of Ufone, has posted a massive loss of 7.7 billion rupees in 2022 primarily because of its mobile operations.
The Norwegian company, Telenor, also had a difficult time rationalizing its expenses in 2022 as its Pakistani operations posted a loss before taxation and interest of NOK 1 billion which can be valued at around Rs. 20 billion.
Jazz, on the other hand, still managed to be profitable on a service revenue base of approximately PKR 220 billion as per sources. The company’s earnings before interest, tax, depreciation and amortization (EBITDA) were around Rs. 84 billion in the first 9 months of 2022. However, the profits for the company shrank in the third quarter of 2022 by 6.8 percent.
Lastly, China Mobile Pakistan, better known by its brand name Zong, is the least concerned about profits as it is more of a strategic investment in Pakistan rather than a pure commercial play. Therefore, it has rarely posted any profits over more than fifteen years of its presence in the country.
Perpetual abysmal performance
The telecom sector’s major costs are license fees and spectrum fees, which are paid to the government of Pakistan, in dollars. Therefore, rapid rupee devaluation has had a detrimental impact on the CMOs. Further, a significant portion of operational expenses is attributed to power and fuel costs, as telco tower sites have high energy consumption.
“High inflation and the elimination of energy subsidies impacted utility prices: diesel +139% YoY, electricity +69% YoY, negatively impacting EBITDA margin,” read a report by Jazz’s parent VEON.
Additionally, multiple interest rate hikes by the State Bank of Pakistan have also raised industry-wide financing costs as the CMOs are partly dependent on commercial loans to fund their expansion and network rollout. On top of this, mobile operators also pay interest to the government on the instalments of their license fees, like PTCL paid around Rs 1 billion in the form of interest on license fees.
“50% of license fees had been paid at the time of acquisition of the license. During the year, the company has paid 3 instalments including 2 prepayments and the remaining amount will be paid in 2 equal instalments along with interest @ LIBOR + 3% per annum, due on September 15th each year in US dollars or equivalent Pak Rupee,” read PTCL’s (Ufone’s Parent Co.) financial statements for 2022.
The uncertainty around the rupee, interest costs and energy tariffs all make it extremely difficult for the telcos to draft business plans and have their yearly budgets approved by foreign investors. Also, as most of the sector has a multinational interest, the viability of operations is assessed in foreign currencies rather than rupees.
For instance, Telenor Pakistan has posted a negative 5 percent return on capital in 2022, down from 12 percent in 2021 while the cost of capital stood at 15 percent in 2021, and is likely to be even higher in 2022. This means that the company is not generating sufficient returns against the risk it is taking by investing in the country.
“We are still in a challenging environment in Pakistan. That being interest rates, energy, currency and all the macro facts that we see. How it’s going to develop this year, it’s too early for us to say. In the midst of that, we are also then continuing our strategic review, as I have talked about now in the last two quarters,” Sigve Brekke, CEO of Telenor Group, stated during an earnings call.
Moreover, operators like Jazz and Telenor have to repatriate part of their profits, as dividends, back to their parent companies and given Pakistan’s current forex situation, that is also a challenge.
“The widespread dollar shortage has led banks to refuse opening letters of credit for even food and energy imports. Foreign exchange reserves of the country are at a multi-year low, forcing the government to stop large dollar outflows, including those by overseas investors,” read an article in DAWN.
What does the solution look like?
The first and foremost demand of the telcos pertains to government fees, which include a reduction in license and spectrum fees, pegging the fees against the rupee instead of dollars, and an interest-free extension of payment terms from five years to ten years. Furthermore, telcos are seeking the regulator’s approval for a tariff hike to boost the ARPU.
On the cost side, infrastructure sharing between operators specially for the tower sites can help mitigate the adverse impact of increased energy tariffs.
Read more: Jazz Has Green Lighted The Sale Of Its Tower Infrastructure. Will The Telco Be Second Time Lucky?
However, everything boils down the fact that perhaps the Pakistani market is too saturated for four telcos to operate profitably, and that there is a need for consolidation.
“Management of the company (PTCL/Ufone) expects consolidation of the mobile operators to three players and believes that this consolidation will be good for the mobile operator business, shareholder and customers as well,” read a report by AKD Securities.
Read more about it: Telenor’s Adventure In Pakistan Is Coming To An End