PTCL-Before & After Price Analysis

Fahd Hussain, Fatima Ikram, Sana Abid, Saniya Raza, Urooj Tariq

2011
This Paper focuses on the profitability analysis of PTCL. It takes a comprehensive approach to investigate their market structure, product diversification, privatization and customer base.

Pakistan Telecommunication Company Ltd. [PTCL]

Headquarters Building, Sector G-8/4, Islamabad

Acknowledgement This research report has been prepared during Spring-2011 at Bahria University, Islamabad in fulfillment of Managerial Economics [ECO-310] project. It was arguably one of the most thrilling experiences of this semester and we would like to acknowledge all those people who helped us throughout and made this work possible.

2|P ag e

Table of Content
Page Number I. Chapter One Introduction Problem Statement4 Purpose...4

II. III.

Chapter Two Literature Review6 Chapter Three Methodology..9 Sample size.9 Research Instruments...9 Scope and Limitations.10

IV.

Chapter Four Analysis & Results Results...11 Analysis.13

V.

Chapter Five Conclusions & Recommendations Conclusion........18 Recommendations...19

VI.

Chapter Six Annexure Questionnaire21 Reference Articles21

3|P ag e

Chapter One Introduction

Problem Statement
This report focuses on the profitability analysis of Ptcl by studying its market structure. It involves studying the impact of privatization. It also involves carrying out a before and after analysis of price of Ptcl products.

Purpose
The purpose of this study was to investigate the y Market structure of Ptcl

PTCL has been a major player in telecommunication in Pakistan since the beginning of Posts and Telegraph Department in 1947 and establishment of Pakistan Telephone & Telegraph Department in 1962. In 1995, Pakistan Telecommunication (Reorganization) Ordinance formed the basis for PTCL monopoly over basic telephony in the country. y Product diversification

The breakage of their monopoly directed them to diversify their products. In addition to their wire-line line operations they branched out towards fixed line service. Furthermore they started with providing internet services like broadband, wireless and EvDO. Most importantly, Ufone is a wholly owned subsidiary of PTCL. It also provides High Definition TV services under their brand of Smart TV. y Privatization

PTCL was privatized in year. A total of 26% shares were sold to Etisalat in year 2002, while 62% still remain with PTCL, and 12% of the shares are with the general public. The effects of privatization had been imminent and crucial. To some extent, it was beneficial for the organization to privatize since ptcl was becoming a red ink just like Pakistan Post.

4|P ag e

Customer base

PTCL has large number of customers. Ever before the breakage of their monopoly, all the telecommunication had been through wire-line telephones, so there was no way out other than having a Ptcl phone at home. Later, after the breakage of monopoly, their customer base has increased exponential growth.

5|P ag e

Chapter two Literature review In our study of market structures we found that there is no one ideal market structure that fits everywhere. Bringing in a new market structure is much harder than modifying an existing one. Also an existing market structure must be modified according to the prevailing business conditions, keeping in mind the local environment and the regulatory policies of the government. It is necessary for concerned parties to convince law makers to have more regard for cross border issues when drafting legislation. However quite some legislation in the securities industry and company law is lagging behind the recent developments in the internationalization of capital markets. A concerted action is imperative to keep trading cross border as safe and efficient as trading at home. [1] There are four different types of market structures: monopoly, perfect competition, monopolistic competition and oligopoly. In a monopoly there is only one firm operating in the market, a few in an oligopoly, many in a monopolistic competition and very many in a perfect competition. It is impossible for another firm to enter into the market where a monopoly exists and the rest of the market structures have varying levels of ease of entry for new firms. A monopoly has absolute price-setting power while the rest of the market structures have little or no price-setting power. However monopolies have extremely low allocative and productive efficiency but at the same time have high long-run profits. [2] Secondly what exactly determines market structure? That greatly depends on the ease of entry into the market. Other factors are control of the necessary resources or inputs, government regulations, economies of scale, network externalities, or technological superiority. It also depends on how easy it is to differentiate goods from one another. [2] PTCL is a government-owned joint stock company that has a complete monopoly over telecommunication services such as fixed line phones, telex and telegraph. Without any regard for improving its existing services PTCL has introduced a number value added services to facilitate current demands. Despite its increasing revenues and all around profitability PTCL's portfolio of bad debts is also on the rise. The volume of its doubtful trade debts has risen drastically and it keeps on heavily relying on traditional voice transfer services remaining
6|P ag e

oblivious of changing demands for data/text transfer. Those related to IT industry in Pakistan never fail to blame PTCL for not making use of modern technology. PTCL lacks hi-speed and high-capacity digital lines and offers services and tariffs for only 2 megabit which results in increased costs. Better quality ISPs say that they have to use multiple of separate services to provide the 16 megabit service each of which is proving expensive to maintain due to individual maintenance, works and rental costs. Without its value added services PTCLs revenues would drastically decline and would not be able to improve its infrastructure and increase the lines, both of which require considerable investment. [3] President of the Internet Service Providers Association of Pakistan (ISPAK) Asif Luqman Qazi, Ministry of Information Technology and Telecommunication (MOITT) told senior association members at a meeting that the governments deregulation policy for the telecom sector was going to help PTCL create its monopoly in the telecom sector. He said industry stakeholders were worried about the governments support for PTCL and MOITTs sluggish attitude. It was found that the government had created artificial barriers to entry for new operators by auctioning licenses to operate in the industry. High revenues in the telecom sector can only be earned if such barriers are lifted. Qazi said, MOITT only protected PTCLs interests. He said MOITT illegally protected PTCL, in total violation of the Telecom Act 1996, as PTCL did not obey Pakistan Telecommunication Authoritys decision in two cases against a ban on Voice over Internet Protocol making international and local phone calls by the Internet. MOITT was depriving millions of users from a major advantage of the Internet and it had shaken investors confidence in the industry. It was said that the government must adopt investment friendly policy and should end MOITTs intervention in the market. The government must also review and change its deregulation policy. [4] The telecommunication sector around the world has been undergoing dramatic reforms since the 1980s. Developing countries have been privatizing state-owned firms and slowly introducing competition into the telecom sector. In general, privatization, especially when combined with effective regulatory institutions, improves telecom service. However, we have almost no empirical information on the real effects of the details of the privatization transaction. Substantial evidence reveals that privatization can lead to performance improvements. The main purpose of all privatization decisions remains to address the needs of telecom modernization, attract private
7|P ag e

sector investment, reduce government involvement to ensure fair competition (to promote greater rivalry among firms, leading to improved productivity, wider consumer choice and lower prices) and growth of the sector (sector growth to act as catalyst in stimulating the competition of economy). Pakistan followed a gradual approach to liberalize its telecom market. During 1990s, as a first step, market was opened for value added services and competition was introduced in cellular mobile sector as four licenses were issued (Mobilink, PTML, PakTel and Instaphone). The government monopoly was retained in fixed line services, however, PTCL legal monopoly ended on 31 December 2002. The government announced Telecom Deregulation Policy and Cellular Mobile Policy in 2003 and 2004 respectively. PTCL has complete dominance on all essential facilities which are y y y That are required by competitors in order to compete for the business of end customers Predominantly supplied by the incumbent Technically or economically difficult to substitute, at least on a widespread basis.

A telecommunications operator that controls an essential facility often has both the incentive and the means to limit access to the facility by competitors. The Government should ensure that essential facilities are available to competitors on reasonable terms. Without such access, competition will suffer, and the sector will operate less efficiently than it could. [5]

8|P ag e

Chapter Three Methodology Sample Size This report was solely on the basis of a managerial economics perspective that is why we got to interview the director who had know-how of the mentioned problem statement. So our sample size was n=1. Furthermore, annual reports of Pakistan Telecommunication Authority and PTCL were also taken under consideration for the financial figures. Research Instrument We first prepared a list of questions (attached in the annexure). These questions were asked from the interviewer Mr. Wasi Ullah Khan. So basically our research instrument for data collection was an Interview. The main reason for choosing interview as our research instrument was to get the interviewee and ourselves in the interview, also because it was a good opportunity to probe into the problem statement. To be precise, we took semi-structured interview approach commonly termed as non-standardized for this qualitative analysis to cover a list of issues, key themes, and questions. Furthermore, we changed the direction of the interview, depending on the type of answers we were getting to get a clearer picture of the problem on hand. Additional questions which are not present on the questionnaire were also asked which has been translated in the analysis portion of this research report. Note taking and voice recording were also done to ensure the validity of the analysis. The voice recording can be provided on demand. The interviewee took a guiding approach to make our preconceived notions clear. For instance, we assumed Wateen to provide the broadband services through PTCL. But the interviewee explained in distinct terms along with various examples and case scenarios.

9|P ag e

Scope and Limitations Scope This research can help all those who are interested in studying PTCL under the approach of a market structure. It has covered all the important topics that have to be studied in a monopolist market structure. This study all focuses on the major changes that have been encountered, and whether the change has been beneficial for company as well as the customers. A profitability analysis has been done to have a broader grip on the concept. Limitations Foremost, the time constraint of interview limited this study to have a greater outlook and carry out an in depth analysis. Secondly, this study takes a qualitative approach to study the market structure of ptcl. Further study can incorporate a quantitative approach and explain the similar analysis through figures and extensive calculations. Also, questions regarding the privatization were left unanswered which made us curious. Researchers can also get to interview an ex-employee of ptcl to get to know about the innertruths.

10 | P a g e

Chapter Four Results The data collected from the Senior Revenue Officer (SRO) of PTCL was for the past six years from year 2005-2010. The following table shows how the independent variable X has been computed. Year Fixed line Rent Installation Charges X= Fixed line rent + installation charges 2005 2006 2007 2008 2009 2010 194 194 194 174 174 174 500 500 896 550 750 500 694 694 1090 724 924 674

The Independent variable X has been computed by having a sum of the fixed line rent along with the installation charges. Reasons for Variation The fixed line rent has been constant at PKR 194 from year 2005 to year 2007. Following this was an immediate reduction to PKR 174. Now, the reason for this reduction was a security waveoff that had been given to the customers. The installation charges are usually the first time charges that are charged from the customer at the time the Wire-line is installed. These charges have been constant at PKR 500 from year 2005 to year 2006. Immediately after year 2006 an increase has been visible from PKR 500 to PKR 896. From year 2008 to year 2009 there was an increase of PKR 200. And in year 2010 the installation charges rested at PKR 500 for all the NTC commercial and residential customers. This step was taken to facilitate the customers to the maximum believing that even in this era of M-commerce and Mobiles, the importance of wire-line cannot be undermined. These charges have been applicable from July 01, 2010.

11 | P a g e

PTCLs fixed line segment has witnessed decline in Sales Revenue in 2006-07 as against last year with a decrease of 452K lines during the past year. The market for the FLL (fixed local loop) segment has least amount of penetration primarily due to the major inclination towards cellular and wireless segments by users. PTCLs fixed line potential is anticipated to remain stable with its having the largest network, coverage and better quality service as compared to WLL (wireless local loop) and cellular networks. The fixed line segment is anticipated to cater the needs of the business community at large and as expected is to be driven by the countrys future economic growth.

12 | P a g e

Analysis Interpretation of the regression The regression carried out was a simple regression where only one independent variable has been taken into account. This one independent variable was a sum of the fixed line rent and the installation charges. T-Test To test the significance of the result a statistical technique namely t-test has been done, where significance means probably true (not due to chance). The t-test has found out to be -0.4049, this shows that the sales revenue (Y) is not dependant on the price of fixed-line rent and the installation charges. Rather various other factors like prices of broadband DSL, EVO and other VAS (Value added Services) have a greater impact on the sales. R-Square R-square is the relative predictive power of a model. R square is a descriptive measure between 0 and 1. The closer it is one, the better the model is. Our R square has come out to be almost 0.04. This means the model chosen has been a mediocre one. It has a relatively weak predictive power. Elasticity The elasticity for various values of X has been found out to be = -0.18, -0.11, -0.210, -0.14, -

0.213 and -0.16 respectively. These elasticities are a clear depiction that Ptcl is still a monopoly since their elasticity is less than 1 being relatively inelastic. Even if ptcl tends to increase their Prices (P), their total Revenue (TR) would still increase. Correlating this with what we found out at the interview, is a simple validation of the fact that all the telecom companies buy their space of bandwidth from PTC, thereby depicting that PTCL is a monopoly.

13 | P a g e

Before privatization After visiting the organization and collecting all the data, our views about PTCL were broadened. We learned that since the deregulation of the telecom sector, a large number of foreign investors opted for licenses in LL (Local loop), LDI (Long distance indicator) and cellular operations, identifying Pakistan as an emerging market. Investors entered the market forcefully in the cellular segment, introducing heated competition for PTCL. In this situation PTCL's counter strategy for landline service, during the year 2007-08 was aimed to increase ARPU (average revenue per user), acquire new subscribers and contain churn. To increase operations, PTCL shifted from its conventional duration based charging system to value based options, like 'Pakistan Package' that offered 5,000 minutes for on-net nationwide calls at Rs. 199/month. PTCL also launched 'International Plus' package to facilitate cost effective international calls at unmatchable rates alongside offering Voice messaging and Phone and Net services, adding more value to the landline service. To increase customers' base, 'order on phone' was introduced, allowing customer to apply for a new connection by simply calling 0800-80800. To tackle the churn PTCL established an outbound call center to reach out to potential customers with an objective to attain higher level of brand loyalty. After Privatization After privatization a decline in the profitability of the PTCL has been seen. In April 2007 control of the Pakistan Telecommunication Corporation was handed over to Etisalat (UAE based company), Etisalat assume the control of the company by paying 2.6 billion US dollar to buy 26% share with management right in PTCL. With the control of PTCL Etisalat also assume the control of Ufone, one the top class mobile service provider subsidiary of PTCL. Impacts of Privatization on PTCL  Impact on Competition

With the privatization of PTCL many competitors have entered in the market. If I rephrase this sentence, the privatization was in turn beneficial to the competitors already existing in the market. Thus, PTCL had to deal with a lot of competition as its revenues were going down, the
14 | P a g e

reputation it had was on stake. People were switching towards cellular phones, WLL (wireless local loop) users switching to Wateen and Tele-card because of better quality and better customer services. From the year 2000 there was a tremendous increase in cellular users and mobile services. Mobilink is the largest cellular company with the highest number of users as compared to Ufone. Currently 79% population in Punjab has mobile phones, 75% in Sindh, 34% in Baluchistan, 63% in N.W.F.P. and overall 73.3% of population in Pakistan enjoying this facility.  Impact on Employment

PTCL had approx. 65000 employees before privatization. The main workforce of the PTCL was unqualified and unskilled. About 50% employees were under graduate. After privatization of PTCL the new management realized that company spent huge amount on employees in giving salary and other different remunerations. In order to reduce the operational cost of the organization, to make it more effective and profitable, PTCL had to fire/retire these unskilled employees. The point to note here is, through the relevant information gathered by us, we got to know that at that time, extremely skilled professionals were also given golden handshakes. Due to which, employees felt disgruntled and the overall morale of the workforce hit the drains. This, on a great scale translated into lower performance and revenues started to get minified. PTCL had launched a scheme called VSS (Voluntarily separated scheme), under which PTCL had to pay a lump sum amount to the employee who is voluntarily willing to leave PTCL. The VSS scheme cost Rs. 34.94 billion to PTCL for the period 2007 and 2008, assuming that 60 percent of the employees avail this package. The Human Resource wing of PTCL stepped forward to facilitate the emergence of new Corporate Culture, it had to include strategies like Equal opportunity employer, inducting fresh blood from the market, improving the way PTCL runs and reducing the number of employees. The Training & Development wing of the HR Department also organized a comprehensive six months Urgent Training Needs program in technical and managerial fields to enhance soft skills. The role of training and development in a service involved organization is many times more in comparison with what it has in a manufacturing organization. This role becomes more significant in a situation where the need to transform organizational culture is identified as the most glaring and difficult impediment on the way to organizational growth. Unfortunately, PTCL customer
15 | P a g e

services were not improved, which was decreased immensely after their privatization. This resulted in hiring problems, as not many people were willing to work in the organization, decrease in employment applications from skilled workers.  I. Impact on Performance Liquidity ratios This figure shows that the liquidity decreased after privatization, the firm had a more debt paying ability before privatization Years Current Quick II. Times Times 2009 1.50 1.36 2008 1.81 1.58 2007 2.19 2.03 2006 1.66 1.54 2005 1.89 1.73 2004 2.78 2.67

Leverage Ratios

By using a combination of assets, debt, equity, and interest payments, leverage ratios are used to understand a company's ability to meet it long term financial obligations. Years Debt to Equity The earned Ratio 2009 16.84 15.43 2008 15.85 (5.26) 2007 14.86 46.54 2006 14.86 92.07 2005 13.87 86.85 2004 13.87 64.34

interest Times

Debt to equity ratio (Leverage ratio) shows that PTCL after privatization use more aggressive financing for its operations, and its debts continuously increases after privatization making owners investment more risky. In case of Interest Earned Ratio, the ability to pay its interest payments before privatization was improving but after privatization it shows an obvious decline, even that in 2008 it shows negative or unfavorable result i.e. (5.26) times. Employee performance was greatly affected after the privatization of PTCL, as mentioned earlier in this report, many professionals were given golden handshakes, cutting and permanently stopping of pensions resulted in a drastic decrease in employee performance within the organization, thus, decreasing the overall performance of the company. PTCL had to come up
16 | P a g e

with several different strategies in every department whether it was hiring and recruiting (HR), customer services or technological departments.

17 | P a g e

Chapter Five Conclusion A detailed profitability analysis of Ptcl shows that ptcl is still playing a role in the market as a monopolist. Their customer base of wire-line has had a fall down. The privatization has had major impact on their employees, competition and performance. Though there are no strong competitors, since all the telecom companies buy bandwidth space from the sole owner that is ptcl, still a continuous improvement in their internal systems is visible. They have diversified into other product lines. Ptcl has a valuable amount of share in the top leading mobile industry Ufone. Despite all this, Ptcl still holds 54% of the market share of total traffic of WLL segment.

18 | P a g e

Recommendations I. Marketing, Corporate Level, Business level strategies and new product launch can be carried on without risking a profitable business. II. Good corporate governance through accountable and economically feasible process with holistic approach towards growth besides integrity & ethical behavior, transparency and control by the BODs (Board of Directors) should be of utmost importance. III. Thirdly, a bad word of mouth can cause more havoc than any other form of negative perception, therefore Ptcl should spend more at hiring qualified candidates and then training them. IV. V. VI. Quick service should be given at the customer help centers. Complaints should be attended to at the earliest. Lastly, new packages with lower rates should be introduced to take the customers away from other telecom companies like Wateen that offers free Wateen-to-Wateen calls.

19 | P a g e

Chapter Six Appendix Questionnaire

I. II. III. IV. V. To what extent do you think PTCL is a monopoly? Does it have any major competitors? What other major threats is PTCL currently facing? How do you retain your customers and what sort of unique services do you provide them? Since PTCL already has a monopoly in the market is it necessary for it to continually improve and expand its services? VI. VII. VIII. To what extent has PTCL faced changes in price after privatization? What other factors have been affected by the privatization of PTCL? How does PTCL manage to deal with the adverse effects a monopoly has on society and social welfare in general? IX. X. How had the quality of your products been affected when PTCL was still a monopoly? What were the effects on the following before and after privatization: satisfaction on behalf of customers, revenues, cost on behalf of PTCL, employees? XI. XII. XIII. How PTCL is dealing with the negative effects after privatization? PTCL still provides broadband services to many of its competitors like wateen etc. Is that true? Mobilink was, at one time, a monopoly, but later due to increase in competition it no longer is, as a result it had to cut down its costs and rates all together. Can we relate PTCLs monopoly with that of Mobilink?

20 | P a g e

References
[1]

Gerrit de M arez Oyens, April 2002, Market Structures for OECD Round Table on Capital

Market Reform in Asia, Tokyo.

[2]

Different Types of Market Structures, Unit 3: Microeconomics, National Council on

Economic Education; Visual 3.1 http://apeconomics.ncee.net

[3]

Syed M. Aslam, June 2001, PTCL monopoly: Is there any justification? Industry and

Economy- Pakistans leading Business Magazine for the last 25 years)

[4]

Daily Times; Friday, January 24, 2003, Government urged to end PTCL monopoly, Staff

Report.
[5]

Telecom Deregulation and Post PTCL privatization Teralight Ltd

21 | P a g e