How would you characterize the telecom market in Bangladesh?

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Francis Griffith
5 years ago
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1 How would you characterize the telecom market in Bangladesh? In 1971, Bangladesh Telegraph and Telephone Department was set up under the Ministry of Posts and Telecommunications to run telecommunication services in Bangladesh. This was converted into a corporate body named Bangladesh Telegraph and Telephone Board [BTTB] in The Telecom market in Bangladesh has differentiated characteristics of very low Teledensity, inefficiency and totally controlled by capitalization. The sector was first opened up in 1989 with nationwide operating licenses being issued to Hutchison Bangladesh Telecom Limited [HBTL] for mobile and fixed wireless applications for all Bangladesh for 20 years. This was followed by another licensed to Bangladesh Rural Telecom Authority [BRTA] for rural telephony for 25 years. Since then four licensed private sector mobile operators and a number of value added service providers, including Internet Service Providers [ISP] have entered the Bangladesh market. The sector was regulated by BTTB until the responsibility was transferred to Bangladesh Telecommunications Regulatory Commission [BTRC] which was established to be effective as at 31 January Since opening up the market in 1989, Bangladesh did not see any significant growth in total connections until around However, since then the growth in new connections has been very rapid, increasing from 602,660 to over 4,000,000 between 1999 and mid A pertinent point however, is that while the total number of fixed lines increased from 474,000 to only 926,000 mobile connections grew 24 fold, from 128,660 to 3,150,000 during the same period indicating the success of the private mobile operators led by GrameenPhone with almost 65 percent share of the market. The parties involved in mobile and fixed telephony business have taken appropriate measures to improve their products and services accordingly. BTTB has lowered its start up cost in small towns. They have also reduced their NWD and ISD call rates. CityCell and AkTel have launched pre paid service with PSTN access. The pattern of total private investments in to telecommunication infrastructure in Bangladesh is depicted below Cumulative Private Investments vs. New Connections US$ millions Private Investments Total Connections 2,000 1,800 1,600 1,400 1,200 1, Thousands Figure: Cumulative New Private Investments vs. Connections Source: World Bank database on Private Participation in Infrastructure Projects

2 USD 740 million in twelve years is not a substantial quantity of new private investments in a country with the potential of Bangladesh [population 140 million], compared with USD 656 million in Sri Lanka [population 19 million] and USD10,600 million [population 1,065 million] in India in new private investments for the same period excluding investments through divestiture. 1 The telecom industries that are operating in Bangladesh are GrameenPhone, Banglalink, Aktel, Teletalk, Warid Telecom, Dhaka phone, Ranks Tel, etc. Why Square obtained license for PSTN and subsequently surrendered the license? As we can see, Bangladesh has the potential for market growth in the telecom sector. At first we will analyze why Square obtained the PSTN license. Possible reasons are, Potential labor market: Bangladesh is a good market for telecom related investment, especially in the PSTN. As we have seen that land line business has not yet expanded like the mobile business. The country is producing ICT related and non IT graduate students from reputed universities. They are currently operating in the IT sector company like, GP, Aktel, Warid, Teletalk, Dhaka phone, etc. Govt. policies and infrastructure: For the development of the country s GDP as a whole government has taken several steps for the local and the foreign buyer to invest in the land line business, like giving private sector the license for fixed line telephone. The infrastructure and the related supplier are also internationally recognized figures like, Swedish company Ericsson with 3 branches in Bangladesh, and Nokia from Finland. As more revenues are going out of the country, it is a good platform for the branded local company like Square to invest in this sector. Government is liberal in its pricing policies as long as it is within the range of the prescribed government regulations. Established Brand: As Square is a established brand for the country, it will not be a tough job for the local giant to operate in its territory. If we analyze the five forces of SCP paradigm, it will be like as follows, Entry Barriers is Low, Bargaining power of customer is High Bargaining power of suppliers Low Availability of substitute High High Demand: One million new subscribers each month is a high rate of market growth which reflects the high customer demand. Therefore the demand is high enough for new investment. Factor conditions: availability of cheap and skilled labor, good infrastructure, and low tele density makes the environment more suitable for new investment. Now we will discuss why Square surrendered the license subsequently. The possible reasons are as follows, Limited access to telecommunications services: BTTB s capacity limitations constrain supply within the overall sector. Despite high fixed line connection charges BTTB cannot keep up with demand, and installation wait times average several years. Capacity constraints affect interconnection for mobile operators, who in the absence of 1 These figures exclude reinvestments for all countries. In Bangladesh, Grameen Phone has stated it reinvested USD 256 million during its entire operations period

3 adequate interconnection, offer mobile to mobile only services for a majority of their customers and are unable to expand services in line with growth in demand. Low rural tele density: Although some cellular operators like GrameenPhone have initiated a village phone program to bring connectivity to rural areas, less than one third of Bangladesh s 68,000 villages have access to phones. Poor performance of BTTB: BTTB has not improved its performance despite substantial public investments in the organization. It continues to operate under a protective regime with little accountability to both its owners and customers. For example, as an indicator of efficiency, the BTTB has approximately 29 lines per employee [in 2002], compared to the international low income group average of 69 lines per employee. BTTB, in its current structure lacks financial, technical and human resources along with the autonomy to achieve its target of meeting demand. It has very limited decisionmaking authority and needs MoF and MoPT approval for most investments and general expenditures. This has led to limited service availability, lack of new product rollout and generally poor service quality. Competition is also growing in several forms: mobile telephony is creating a viable substitute for BTTB s services, informal voice over Internet protocol and falling international settlement rates have eroded BTTB s highly profitable international monopoly. Macro Level Risk: Macro level or country risk is defined as factors that effect the entire economy, such as the stability of macroeconomic variables and political risk. In addition, this also captures other non country specific risk factors such as the dynamics of global financial markets, for instance the appetite for investments in the telecom sector at a given point in time. Regulatory Risk: Regulatory risk generally refers to the risk associated with the potential for laws related to a given industry, sector, country, or type of security to change and impact relevant investments. The Regulatory Framework in Bangladesh: A prime objective of BTRC was to be its financial and administrative independence. But appointing retired civil servants to the Board largely reduced these provisions. 2 When BTRC took over its function from the MoPT, the mobile industry had been suffering from grueling interconnection crisis. Regrettably the commission took no steps to mitigate this crisis. Finally on April 17, 2003 the frustrated mobile operators awarded a USD 2 million turnkey contract for a switch to BTTB. Commercial Risk: By commercial risk what is meant here are factors internal to the company when investment is itself internal. The point is that risk is not uniform across operators. GrameenPhone and AkTel are the only operators with substantial foreign ownership, which may explain their investment pattern over the others taking into consideration the diversification of their global telecom investment portfolio. 2 Khan, Abu Saeed [2003]. Trough the assistance of The World Bank, Matheson Ormsby Prentice Solicitor, an Irish law firm was hired to prepare the amended Telecommunications Act to create an independent telecom regulator.

4 Relationship between TRE and investment: Any investment is dependent upon its riskreward structure; higher the risk, higher the expected reward, and same way higher the expected loss. As explained before, the risks in telecom investments are made up of the general macro or country risk, the TRE and commercial risk. Do you agree with Square management s decision? We agree about the decision that Square took considering the factors below, Sources of Investment funds: This is particularly true in developing countries like Bangladesh particularly in terms of international long distance revenues being lost due to technological developments and illegal bypass. Retained profit [Reinvestment]: Retained profits or internally generated funds are a significant contributor in telecom investments. While the distinction of retained profit is not too clear in state owned incumbent operators their investments are almost always sanctioned by state budget allocations immaterial of whether the quantum reflects the profits of the operator transferred to the consolidated fund. In private operators, this amount is normally clearly identified and is related to the macro variables inside the country as well as tax structures. Equipment manufacturers: Suppliers credit is also an important contributor of investment funds particularly in developing countries. In the case of Bangladesh, this is a key contributor. Shanghai Bell of China arranged USD 213 million supplier s credit in 1999 for a PSTN switch to supply 216,000 lines with transmission and cabling. New equity: Issuing of new equity is another significant source of investment. This has been mostly the case in partial or complete divestiture of state owned operators. In all telecom investment in the last decade, one third was accounted for by such transactions. In Bangladesh however, no privatisation in the sector has taken place, thus equity investments have come only in to the new entrants. Debt: Both long term and short term debt, local and foreign is also significant sources of investment funds. Common among debt securities are debentures and bonds of telecom companies that are subsequently traded on an exchange. Regulation of Anticompetitive Practices: BTRC has not taken any measures against BTTB for its historical anticompetitive behaviour by refusing adequate interconnection, particularly after compelling the private operators to invest USD2 million on a tandem switch at BTTB s network. Tariff Regulation: As monopoly service provider, BTTB tariffs were fixed arbitrarily on the basis of how much revenue the government needed to collect instead of appropriate cost based calculations. BTTB has continued to violate the Telecom Act in arbitrarily changing tariffs.

5 Political instability: Developing country like Bangladesh is always facing problems with the political instability. Abuse of political biased rules and regulations often make the investors to rethink for investment. Another reason for the slow growth in investments in BTTB [even under tight budgetary conditions] has been, according to many, the inability to complete negotiations with vendors due to external pressures, due to political reasons. Saturated Market: As we can see that the market is already saturated. The mobile business is still growing at a faster pace than the land line business. The existing seller like, Dhaka phone, Ranks tel and others are facing problems in operating and taking profit from the market. Besides the customers in public are generally shifting towards the mobile services then land line, though the cost of acquiring a land line is less costly. The telecom market share can be viewed like below, Telecom Market Share 23% 6% 2% 12% 16% 41% GrameenPhone Aktel City cell Banglalink Teletalk Warid What is the future of fixed line telephone in Bangladesh? The future of fixed line telephone in Bangladesh is not too broad, in the sense that the market is already saturated with the mobile technology and people are switching to it. There will be fixed line telephone system but the usage will be less than the mobile. The parties involved in fixed telephony business have taken appropriate measures to improve their products and services accordingly. BTTB has lowered its start up cost in small towns. They have also reduced their NWD and ISD call rates. But still the growth of fixed line is not noticeable. While there has been some amount of investments flowing in to the Bangladesh telecom industry, it does not appear that they have been made based on any serious evaluations of the market for possible unfavorable changes in the TRE. Instead most appear to be based on nonmarket based decisions. Again, the unreliable economic condition of our country means that main investors often refrain from investment.

6 BTRC does not appear to have applicable policy on any of the dimensions that constitute the TRE. In market access, BTRC seem to be dictated by the government where ad hoc licensing is still prevalent be it in the fixed sector or the mobile sector. The technology is changing at a rapid pore and it is very hard to keep pace with technology and it gets difficult for the poor country like Bangladesh to afford it. The only ray of hope is the recent transparent guidelines for WLL licenses for nationwide operation. But there again, previous exclusivities may hamper the ideal market based riskreward allocation procedure. In access to scarce resources, BTRC record has been one of inefficient allocation and failure. References Reference material supplied by Professor Dr.Fouzul Kabir Khan, Business School, North South University. He was Secretary, Power Division, Ministry of Power, Energy and Mineral Resources, Government of Bangladesh ( )

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