Shakir Husain May 28, 2001

Tags: Internet , Technology , Business

If the Privatization Commission in Pakistan has a real asset then it is the telecommunications infrastructure of this country.

href="/tag/Pakistan">Pakistan Telecommunications Corporation Limited (PTCL) remains the only “real” asset that the Government of Pakistan has to offer any international investor(s). The telecommunication business’ real value and assets are derived from its infrastructure and network. The Privatization Commission and the Government of Pakistan are realizing that the global telecom scenario is such that trying to sell a 26% strategic stake in the state-run monopoly is not going to be an easy task. The sale is going to be even more difficult given the fact that the present government is displaying a complete lack of backbone by not “right-sizing” PTCL, and waiting for the investor (whoever it may be) to do all the dirty work. Not an attractive proposition when a new management team would have to fire at least 20,000 excess employees who have an extremely effective labor union, and another 10,000 on daily wages. Essentially PTCL will be looking to attract an investor based on the excellent infrastructure and network that is in place along with the ever-growing population of the Land of the Pure. So what happens when the value of this infrastructure is diluted severely? Apart from disaster, any investor will definitely ask for a revaluation of the 26% stake, which is up for sale and even pros like Goldman Sachs will not be able to weasel out of that one on the negotiating table.

This dilution is not rhetoric but is on the verge of being made reality by a Joint Venture between PTCL and an UK-based PC assembler, Akhter Computers Limited (ACL). According to a press release on the PTCL website, PTCL and Akhter Computers will set up tele-housing facilities in the country, which will require a US$ 30 million investment. Tele-housing is defined as, “A marketplace where major carriers, ISPs and ASPs network together, a Service and Network Exchange Point (SNEP) now known as secure Internet exchange (SiX). In brief: a safe house for interconnectivity.” While the tender and the initial bid by ACL called for setting up tele-housing facilities in the country, the scope and the breadth of the project subsequently mutated into something which has been appropriately described by some as “Akhter Telecommunications Corporation Limited or ATCL”. The revised business plan, and there have been quite a few of them, calls for the joint venture to engage in the following activities: 1) National Deployed Port – an NDP is what Paknet, PTCL’s subsidiary is, 2) Virtual ISP – again Paknet has the expertise to provide this service, 3) Rack Hosting – the only activity which Paknet is not currently providing, 4) Corporate VPN (virtual private network) Services – a service PTCL is already providing, 5) E-Commerce Services – for these services to be put in place, the State Bank, regulatory bodies, commercial banks and merchandisers would need to work on the framework before the required infrastructure is put in place, 6) Bandwidth Services – PTCL is already working on these services, 7) International Bandwidth Data Connection – already provided by PTCL, 8) Wholesale Voice Traffic Handling – the bulk of PTCL’s revenues come from the provision of these services. What is incredulous is that of the eight services falling under this Joint Venture Agreement (JVA), there is only one that PTCL is not currently offering. In essence, under this JVA PTCL would be setting up a competitor for its own services; rather than add new revenue streams through services where PTCL has no experience or expertise. It doesn’t take a financial wizard to see that PTCL would be jeopardizing it’s own bread and butter by engaging in this venture with Akhter Computers.

The icing on the cake comes in the form of what Akhter Computers has to shell out for setting up this joint venture, which would give them access to most of PTCL’s revenue streams. The amount is a paltry US$ 4.48 million invested over a period of three years and not the US$ 30 million as stated by press release on PTCL’s website. Under the terms of this Agreement PTCL will have a 51% stake in this venture, while ACL will hold a 49% stake. These numbers were verified by Herald sources and documents acquired by this magazine. Under the terms of the existing Joint Venture with Akhter Computers Limited, PTCL will be setting up a direct competitor rather than offering new services and adding to its revenues – which is usually the point of any Joint Venture Agreement. Apart from the ridiculous terms that PTCL is so keen on accepting for an equally absurd sum of money, there are serious concerns about the lack of expertise on the part of ACL in setting up this joint venture. As mentioned earlier ACL assembles and supplies PCs and has dabbled in software, and is in no way qualified to undertake this project. This can be verified by visiting the Company’s own corporate website (www.akhter.co.uk), which does not even mention any expertise in network infrastructure consulting, the telecom sector or otherwise. Mr. Mazhar Ali, a Director of PTCL, reinforced this by adding, “The experience requirements in the terms of reference (TOR) for this Joint Venture have not so far been produced or established.” Clause 5.1.3 of the TOR called for “Documentary evidence of past experience in establishment of tele-housing facilities established with performance record…Full details of contractual or business relationship with other telecommunication operating companies…Copies of approvals, permission, and licenses granted by regulatory authorities in Pakistan or abroad.” Clause 5.15 called for “The prospective JV partner(s) of PTCL must have established capabilities with minimum of three years operational experience in using state of the art technologies, operations, marketing, and management of the tele-housing facilities and evidence and details of the same shall be provided.” Dr. Altamash Kamal, another PTCL Director, when contacted by the Herald added that the TOR for the Tele-housing JV was badly defined by PTCL and as such allows all manner of activities to be included in the guise of being associated activities of the venture. Despite repeated requests by some members of the Board of Directors of PTCL, none of these requirements have been met by ACL, nor have they managed to show any sort of telecom or infrastructure expertise to date.

The actual tender for this Joint Venture was far from transparent as participants were given one month to submit their papers and since the prequalifications for any bids were kept so high a lot of local ISPs and infrastructure providers could not bid even though they have far more experience than Akhter in this sector. Judging from the business plan for this venture, which the Herald obtained, it was strange from the revenue projections, that such a lucrative venture would only attract one bid – from Akhter Computers Limited. This has to be a record low number for any government contract, let alone a highly lucrative one. In their initial proposal Akhter Computers claimed that they were a major backbone provider in the UK, while our investigations suggest that ACL is not even recognized as an Internet Service Provider (ISP). ACL holds only 4 class C IPs while even a medium ISP in a developing country like Pakistan owns scores of these. If ACL is operating a backbone or ISP service in the UK by another name then these should have been provided to the PTCL management for verification. Herald sources have alluded to the fact that this joint venture was meant to blindside PTCL, as one of the main objectives of this venture is to gain access to PTCL’s infrastructure and network through what has been called a “Trojan horse”. Once an infrastructure company has access to these circuits, they can, with very little investment set up a Voice over Internet Protocol (VoIP) and terminate voice traffic over the Internet, which would give them a huge advantage over PTCL. Currently PTCL terminates long distance voice calls via pre-Internet technology which is far more expensive than using the Internet. Again this would make a huge dent in PTCL’s US$ 392 million that the corporation collects in terminating long distance calls from abroad.

Being a PC assembler and distributor of Pakistani-origin, the Herald investigated and spoke to a senior executive at Jaffer Brothers Limited and found that on at least 3 different occasions (August 1999, July 2000, and December 2000) Akhter tried to supply PCs to the Pakistan Revenue Automation Limited (PRAL), a subsidiary of the Central Board of Revenue (CBR), and NADRA. In the first instance these machines were rejected as ACL could not provide proof of certification by Microsoft or Oracle. In the second instance, ACL could not supply the machines in time to NADRA hence other suppliers were used, and in the third instance NADRA was “requested” by the government to acquire ACL machines in order to attract investments from them. The machines were delivered but were found to be below requirements and were rejected. To this date the machines stand rejected and NADRA has not released the payment for the equipment. Not an excellent track record to base a joint venture on by any standards even if they are PTCL standards.

This entire Joint Venture shows some basic flaws in the PTCL managements’ due diligence process along with questioning the rationale behind entering into a JV Agreement with a company that has no visible expertise in the arena of telecommunication infrastructure. A freshman, after taking a Finance 101 course in college, can question the business rationale behind accepting US$ 4.5 million and effectively setting up a competitor to all the services that PTCL is currently providing. As Dr. Altamash put it, “This negates the whole rationale of the JV, since it was meant for PTCL to gain expertise in areas where it had none. Instead, if this comes to pass, it will create a competitor for PTCL itself.” In addition, the Government will be sending negative signals to two very important types of investors: 1) local investors who have bought 1100 data and related licenses for Rs. 600 million, and have invested an estimated US$ 100 million to date and growing, and 2) foreign investors who are considering the purchase of the 26% stake in PTCL. The message is clear and simple to them – we are going to allow a PC manufacturer with no infrastructure experience to walk in, drop US$ 4.48 million, and create a parallel telecom company which will be a direct competitor that is going to erode a significant portion of PTCL’s fast evaporating revenue streams without doing any sort of due diligence. If this Joint Venture manages to be bulldozed through, then the PTCL management may well be looking at Columbian investors to take the 26% stake in the company because no business enterprise worth their salt (or cocaine) would want to acquire an eroded revenue stream and an organization where transparency and good business models are thought to be a mere formality. Mr. Zafar Usmani, member of the Board of Directors at PTCL, put it succinctly, “The entire deal is not transparent, and the whole process has been used to facilitate ACL’s entry. The only way to redress this situation is to re-tender the whole venture in order to ensure that it is fair and that all interested and qualified parties are allowed to participate.”

Authors self introduction:

I have been a freelancer for the TFT, Aurora, and now the Herald and Dawn for

around 4 years. I also write a regular column for Spider - Pakistan's largest circulating technology magazine along with being a contributing editor for them. The attached piece was written for the Herald and printed as well but it sustained a lot of "creative" editing. This is quite a big story and I think it deserves to be reproduced the way it was written. Being a Chowk reader since its inception I'd like to throw it on the boards to let chowkwallas and walis do their thing.