Adding to telecom sector’s wobbles is now a NAB inquiry, On Mobilink-Warid merger

Adding to telecom sector’s wobbles is now a NAB inquiry. At its heart is Auditor General of Pakistan’s recent observations that the exchequer lost tens of billions on account of irregularities in the sector in recent years. In particular, it is pointed out that Warid Telecom offered 4G/LTE services in 2015 without acquiring a license; besides, question marks have been raised over regulatory go-ahead for the Mobilink-Warid merger in 2016. The NAB “inquiry” is reportedly in its final stages and may lead to arrests.

Perhaps, the concerned authorities need to be aware of the proper context of why and how the two events took place. Recall that Warid did not acquire 3G or 4G spectrum in the April 2014 auction, as it was financially struggling at the time. Years of under-investment by its last sponsors had resulted in Warid being unable to fully monetize its spectrum holding, which was purchased as a license back in 2004.

However, as Warid carried a smaller number of users for a large spectrum holding, its network quality was perceived to be better than rest of the market players. That’s why Warid users’ monthly spending (ARPU) was better, on average, than other operators five years ago. As other operators started rolling out 3G services in mid-2014, later that year Warid shrewdly “re-framed” the spectrum to offer 4G/LTE services, without causing network issues.

The regulator did not object to Warid offering 4G/LTE services at the time, because it could not. Just as other operators, Warid had also acquired a license in 2004 that was “technology neutral”. Back then, only 2G network technology was available, with different standards, so all operators went for 2G. When 3G technology came online, other operators needed new spectrum for their networks due to congestion issues. Whereas, Warid, as highlighted earlier, did not need new spectrum, as its user base was low.

So, Warid went ahead and offered 4G/LTE without bringing the network quality drastically down. Hence, after Zong in late 2014, Warid became the second player to offer 4G. And this development, along with Warid’s presumed lucrative post-paid user base, suddenly made the operator a catch for prospective buyers. Jazz moved fast and closed the deal, in which Mobilink acquired 100 percent of Warid’s shares in exchange for Warid shareholders receiving 15 percent of the combined Mobilink-Warid entity.

It would serve Pakistan’s investment environment well if accountability authorities interpreted long-standing, sector-specific policies in the right manner. They also need to understand that a merger or acquisition happens when the parties perceive benefits of strategic, operational or commercial synergies. That’s what led Jazz to absorb Warid’s millions of users, thousands of telecom towers, and hundreds of retail outlets into its fold. And it worked: Jazz built scale and became resilient in a low-ARPU market.

There is also a suggestion that Jazz acquired an additional license post-merger without paying anything. But there is no free ride: the consideration was paid in kind to Warid’s shareholders. The government only gets to have the license renewal fee. And Jazz has paid roughly Rs35 billion as partial payment towards renewing Warid license; rest of the tab is under litigation with government. (For more on that, read: “Telecoms: renewal saga isn’t over,” published November 13, 2019). Recall, even after absorbing Warid, Jazz felt the need to purchase 10MHz 4G spectrum at a price of $295 million in 2017.

The Jazz-Warid merger had received the necessary regulatory approvals as well as the competition watchdog’s (CCP) nod at the time. But that is apparently not enough for NAB. Now the telecom authorities have an obligation to provide a forceful explanation. It is important for this issue to be decided on merit, if further proceedings take place. Otherwise, an inquiry that continues without leading anywhere would likely cause irreparable damage to the country’s business environment.