Literature Review

Literature Review Telecom sector is the most prominent and dominant sector in Pakistan since past 5 years. Although the sector had suffered a lot in the current recession but still it had gained to a huge extent as compare to the other emerging sector in Pakistan like Textile sector. When Paktel lauched its services in 1990 there was a monopoly of Pakistan Telecom Company Limited PTCL, the land line phone, prevail in the country. In initial stages the users were too less that the cost of the firm could hardly be fulfilled. But as the time passed by Mobilink and then Ufone joined the race. They educate the public about the telecom sector and tried to grab more and more users in their network. After the millennium the then government attract more foreign firm to invest in Pakistan and they succeeded in their act and the telecom sector became highest contributor in the GDP. Evolution of Telecom Reform in Pakistan

Amount in Millions

50

45

40

35

30 20 10 0

2.1 2.3 2.4 2.5 3.1

4

4.6 6.3

7

11

1996 199719981999 2000 2001 2002 2003 20042005 2006 2007

Despite the difficult time in Pakistan economy, generally the telecom sector had exhibit a positive and emerging growth in term of revenue and subscribers. From the above analysis we see that in start of the millennium the teledensity in year 2003-04 was 6.25% and it jumps to 58.8% in 2007-08. The major portion that makes this sector to 58.8% is of Foreign Direct Investment in Pakistan these days. In other words Pakistan kept on relaxing investment-related policies for its telecom industry, FDI in the sector boosted up. The difference between nature of policies in early 90s and in 2000 onwards is reflected in the difference in the level of foreign direct investment in telecom, especially cellular phone, sector of Pakistan. Facts on policy reforms provided evidences that government of Pakistan is taking serious steps for the growth of Foreign Direct Investment in the country. It also witnessed that investors are given proper incentives and protection. They are considered back bone of growing economy of the country. Steps for the liberalization, privatization and deregulation of the telecom sector were specially appreciated by investors and considered as rational thinking of the current government. The liberal FDI policy by the Government of Pakistan and deregulation and privatization of the sector has triggered a wave of international acquisitions in the sector. During the last year about US $ 2 billion worth of acquisitions were made in the telecom sector. After liberation of the sector a large number of firms are found working in Pakistan’s telecom sector. Information on the environmental factors also observed same kind of trends which are targeted toward increase in FDI in the country. Moreover, our government is very much

keen to provide investment friendly environment for the investors. Solid steps of PTA as regulatory body of telecom sector and support from the government enhanced the level of confidence of foreign investors and stimulate the investment environment of the country. Due to satisfaction of the investor Pakistan enable to have 19th position out of 175 countries in securing investors. PTA has proved a conducive and investor friendly environment in the telecom sector by awarding licenses in a fair and transparent manner. All operators mostly foreign are rolling out their networks rapidly all over the country, which requires huge investments. The foreign investment has created an environment of competition in the mobile sector and the tariffs have reduced substantially with improved telecom services. Since international investors learnt it worthwhile opportunity to invest in Pakistan and especially in the telecom sector, telecom companies have invested over US $ 8 billion during the last four years in Pakistan. In 2006-07 Cellular Mobile sector has invested over US $ 2.7 billion. This sector of economy is in its boom in these days and it is generating chunk of profits for the investors and revenues for the government in the form of taxes. Pakistan Mobile industry is witnessing increasing net addition to total subscriber base for last five years. In 2006 the net addition was more than 21 million in one year showing 1.75 million average addition per month whereas in 2007 the net addition was more than 27 million increasing average addition to 2.3 million per month.

Foreign Direct Investment (FDI) in Telecom Foreign Direct Investment is considered an important source of economic growth in this globalized world. PTA has created a conducive and investor friendly environment in the telecom sector by awarding licenses in a fair and transparent manner. In the last 2-3 years the telecom sector has attracted record inflows of FDI. During 2005-06, telecom sector received over US$ 1.8 billion FDI and emerged as the only sector of the economy to attract such huge investment where its share in total FDI crossed 54%. During 2006-07, telecom sector has received above US$ 1,824 million FDI, which was about 35% of total FDI in the country.

Comparision of FDI in Telecom Sector with Total FDi 6000

5125

5000 4000 3000 2000

5153

3521 1905.1

FDI in Telecom 1824

1524 1438.6 949.4 798 494.4 207.1 0 13.5 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Total FDI

1000

It is expected that the trend of investment may continue in the next 5 years because large potential market still exists in Pakistan and all operators intend to grab their share. China Mobile acquired Paktel which has contracted out US$ 500 million worth of project to renowned companies like Ericsson, ZTE and Alcatel to roll out their networks. Similarly Mobilink also plan to invest US$ 500 million in 2007-08 for improving and expanding its quality of service.

Employment in Telecom Sector The telecommunication sector in Pakistan has undergone considerable transformations following the award of two new mobile licenses, FLL & WLL licenses and privatization of PTCL, the incumbent. Stiff competition among operators to grab the market share has compelled operators to roll out their infrastructure rapidly, which has created huge employment opportunities (direct and indirect). The telecom sector has vast linkages with all other sectors where it is producing large employment opportunities such as civil work for installation of towers, support service providers, SIM and handset retailers etc.

Taxes on Telecom Sector Telecom sector is a major contributor in generating revenues for the Government in the form of taxes, duties and regulatory charges. To generate adequate level of revenues government is undergoing large tax reforms which include broad based tax policy and tax administrative reforms which aimed to reduce indirect taxes that are considered regressive taxes. During 2006-07 total revenue collected by the Government in the form of taxes and Regulatory fee was more than Rs. 100 billion which is about 30% higher than the last year. Indirect tax in the form of GST/CED has the major share in total government collection from telecom sector which was Rs. 26 billion in 2005-06 and its share in total was 34%. In 2006-07 Government collected Rs. 36.3 billion GST from the telecom sector and its share in total telecom taxes has increased to 36%. The increase in these government revenues are attributed to increased teledensity and increase in the usage of telephony for voice & data.

GST/CED Collection from Telecom Sector

Amount in Millions

40,000

36,282

30,000

26,770 20,397

20,000 10,000 0

8,810

2001-02

12,119

2003-04

2004-05 Years

2005-06

2006-07