SAARC Report: The Cradle For Evolution

After a brief period of sluggish growth, Asia has recently, shown strong
consolidation in the telecommunication sector.  The developed economies of Asia have moved ahead into
advanced networks and value added services (VAS), reaching maturity in those
markets.  It is again China and the
SAARC countries that are the real potential for growth in Asia, if not in the
world. 

Many domestic subscriber bases have doubled in recent years with tariff
prices in the region, amongst the lowest in the world.Â
The business plan for most of the telcos in the region is to build a
profitable business model even when voice tariffs fall to one of the lowest in
the world-a one cent-a-minute level, when the US and Europe tariffs are
considered low at 20-25 cent-a-minute level; with the purchasing power parity
also amongst the lowest globally.  This
has placed enormous stress on margins in the industry, but many Original
Equipment Manufacturers (OEMs) are now setting up manufacturing facilities
locally to offset this pressure.

Today, global players in the telecom industry are developing interest, and
are increasingly investing in SAARC markets. Manufacturers are discovering the
region as a lucrative manufacturing center; Nokia and Ericsson have successfully
done this and now. Motorola too has announced a $100 mn plant in Chennai. Global
service providers are buying stakes in local players. Having said this, it is
the largely unapproachable rural sector in these areas, where there are
opportunities for growth. Innovative delivery options, a favorable regulatory
regime, and aggressive pricing stances will ensure that these opportunities are
cashed in on.  

India

India is clearly the leader in terms of penetration and its growth in the
SAARC region. India's mobile subscribers double the number of fixed line
subscribers. The telecom story continues to be the best advert of the
country's reforms process.  In
about nine years the teledensity has increased from 1.94%  in 1997 (achieved post 50 years of independence) to 13.25% on
March 31, 2006.  

In the last six years, the number of mobile subscribers has gone up from just
about 1 mn to 100 mn, a subscriber base that only four other countries-China,Â
US, Japan, and Russia can boast of.Â
The explosive growth in numbers is directly juxtaposed to the steep
decline in the cost of mobile phones and effective tariffs, bringing the phone
within reach of people even below the middle-class. 

The setting up of the Universal Services Obligation Fund (USOF) to grant
subsidy to telecom operators is a huge step, which will increase the teledensity
in the rural areas. This step will be responsible for reaching the magic
teledensity 25% by 2010.

Government has set aside nearly Rs 12 bn (from USO Fund) to grant subsidy to
telecom operators, and infrastructure providers who are willing to set up
telecom network in rural areas.

For India's rapidly growing telecom sector, 2005 was a year of high tempo.
Mobile connections grew faster than ever before and value added services made
their presence felt and accounted for a notable share of revenues.Â
On the regulatory front, FDI limit was hiked from 49% to 74%, long
distance entry barriers were lowered, new uniform tariff structure for the
entire country called 'IndiaOne' was announced, and subsidies were announced
by the government for operators to promote rural telephony.

Pakistan

Pakistan's telecom market is in the process of evolving to come to grips
with the transition from a regulated, state owned monopoly to a deregulated,
competitive structure.  Penetration
of telecom services remains low.  The government has ambitious plans to increase the fixed line
teledensity of 2.5% in 2003 to 7% in 2010 (they have achieved 3.8% in 2005).Â
This includes installing a million lines annually. Currently, competition
is driving growth in the telecom market and a major impact has already been
felt.

Currently, Pakistan is witnessing massive growth in its telecom industry.Â
In the four-year period up to 2009, nearly $4 bn of investment is
expected in the sector.  Pakistan's
telecom sector today, employs 20,000 people and this is set to grow rapidly in
the near future.  The country's
investment friendly policies such as the fixed line Deregulation Policy (July
2003), Mobile Policy (2004), and the Broadband Policy (Dec 2004) have created an
atmosphere favorable for investment.

Pakistan's telecom sector employs 20,000 people and this is set to grow rapidly in the near future. The country's policies such as the fixed line Deregulation Policy (July 2003), have created an atmosphere favorable for investment

Growth in the market was reflected in the fact that $1.3 bn revenue was
raised in the auction of frequency spectrum in the mobile, wireless, and local
loop sectors, while fixed line subscribers base grew from 4 mn in 2003 to 5.9 mn
in 2005.  Mobile services saw a boom
with the base swelling from 2.4 mn in 2003 to 21 mn in 2005. And the overall
teledensity grew from 4.63% in 2003 to almost 18% in 2005.

There is an opportunity for massive growth in the country, as 70% population
living the rural areas are largely un-approached by modern telecom.

Sri Lanka

Sri Lanka's Telecommunications sector development has been embroiled in
the face of a nearly two decade long conflict between the government and
separatist Tamil Tiger Rebels.  The
Tsunami and other natural calamities in recent years have also affected both
existing physical assets and investment as well.  With the hope of enduring peace and a general improvement in
the country's socio economic well-being, the sector is poised for rapid
progress.  At present, the focus
areas are to open the market to competition) and to build the network
infrastructure.  There is a range of
significant initiatives, such as the government has funded the installation of
payphones across the countryside.  By
2004, there were already 204,000 payphones installed.  At that time there were 4.8 mn telephone lines in the country
and an installed capacity of 5.8 mn lines.
Digitalization has almost reached 100% .

There have been severe supply restraints that have stunted the growth of the
sector. At the end of 2005, the fixed line teledensity was a low 5%, in
comparison to the bludgeoning demand. There were 250,000 fixed lines
subscribers, waiting for basic telephone services in 2002, which grew to 400,000
towards the end of 2004.  The
Emerald Isle has a teledensity, far lower than other countries with similar per
capita GDP.  Sri Lanka has the
dubious distinction of having a fast-dropping investment level in the telecom
sector. It dropped from $190 mn in 2000 to $50 mn in 2001. This too is in a
nascent phase of its development.

Bangladesh

Bangladesh is one of the more underdeveloped, densely populated countries in
the world.  It has one of the lowest
numbers of fixed phones per hundred people in the world.
It is one phone per 150 people, which is 6 times lower than that in
neighboring India.

Besides, a host of natural calamities having adverse effects on the
country's economy, and the slow growth of telecom network is compounded by
highly inefficient public owned telecom industry. The country also needs
economic and regulatory reforms.

The fixed line industry is dominated by state owned operators, and so is the
ISP market. The mobile industry has few private players.

Nepal

Nepal is another country that has seen slow progress in the telecom space.
The weak economy means that most investment has come through foreign
institutional aid such as World Bank loans etc.
The county's mountainous topography has made it an uphill task to set
up basic telecom infrastructure. Socio-political instability in the region also
affected the development process.

Moreover, more than 98% of the population has no access to telephones. More
than 60% of the existing phones are in Kathmandu alone. Rural services have been
neglected largely as the setting up of a rural network would require significant
investment. Overall 50% of the demand in the country for telephone access
remains unmet.

But there have been some signs of progress. Progress has been made since
1995, accruing from foreign loans and the introduction of transparent tendering,
which have increased threefold the number of lines that can be purchased for the
same money. The state-owned Nepal Telecommunication Corporation is the dominant
operator in all sectors.

Other SAARC Countries

Bhutan had been in isolation from the rest of the world till very recently.
The country's only link with the outside world had been the trunk-call
facility to India since 1974.  It
was only in June 1999 that the first television station was set up in the
country. And that was the beginning of television sets, satellite dishes, and
antennas making an appearance on the Himalayan Kingdom's regal, mountainous
landscape.  It had been this terrain combined with a low economic
capability that had hindered any development at all, in the telecom field.
There has been a burst of growth in the recent past, with fixed line
subscribers doubling annually in recent years (teledensity still remains at 4%).
Investment has grown and there has been basic progress with
infrastructure-building as well. Mobile, Internet networks, and markets remain
highly undeveloped, with there being only a minute presence even today.

The Maldives archipelago boasts of a modern, and efficient telecom network.
There is now complete land coverage with fixed line connections. There was a
monopoly in the market till very recently, a telco owned jointly by the Maldives
Government and a Cable & Wireless plc (UK) that is accredited with the
building of this impressive infrastructure came in the picture. The company is
the sole operator of fixed line services and of mobile services, (49%
penetration of mobile network) and was until recently the sole ISP as well.

At SAARC Communication Ministers' Meeting held on May 22-24, 1998 in
Colombo, a SAARC plan of action was finalized.
This, inter-alia, included calls for reduction of telecom tariffs to the
lowest extent feasible, complete digitalization of inter-country links amongst
SAARC countries preferably by December 1999, allocation of sufficient bandwidth
for regional telecommunication links, setting up of websites/databases to
exchange information on telecom standards, policies and technologies, adoption
of Mutual Recognition Arrangements for equipment standards, and consultations to
evolve common SAARC positions on telecommunication issues of regional concern at
international fora. It would be fair to say that some amount of cooperation in
the area would help the progress of the telecom industry.

Broadly speaking, it is socio-political factors that are the last roadblock
in the way of extensive telecom development in the region. Most governments have
been enthusiastic towards telecom progress and have created favorable
environments for this. The region shall need highly innovative business
practices, technology and services to address the real potential. The urban
markets will reach its saturation soon, but it is the rural interiors that
display the real opportunity and challenge. The area could prove to be a
lucrative ground for telecom boom in the long run. And the telecommunications
industry could contribute significantly to the development of these economies.  

The governments in the SAARC region may rightfully applaud itself as coming
out a winner in the mobile phone segments with a combination of rightful
de-regulation in regulatory framework and a focus on to increase the teledensity
in the region.  This region
gradually continues to be one of the most interesting platforms for the telecom
evolution.  

Prashant Singhal, Industry Leader
(Telecommunications), Ernst and Young

vadmail@cybermedia.co.in