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Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking

(ME15Dubai Conference) ISBN: 978-1-941505-26-7

Dubai-UAE, 22-24 May, 2015 Paper ID: D532

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Impact of Liberalization of Sri Lankan Telecommunication Industry

on the Industry, Consumers and Employment Generation

S.K.T.I.Prabath,

Telecommunication Regulatory Commission of Sri Lanka,

Sri Lanka.

E-mail: [email protected]

S.C.Thushara,

Faculty of Commerce and Management Studies,

University of Kelaniya, Sri Lanka.

E-mail: [email protected]

___________________________________________________________________________

Abstract

There are many studies done on the subject of liberalization and its impact on economies.

Liberalization means relaxation of government restrictions or regulations in the areas or

boundaries in a country or an economy. The main purpose of liberalization is to promote the

private sector participation (local or foreign) in the economy as it is believed that the private

sector is more efficient than the public sector. Currently telecommunication industry is a

major service industry in Sri Lanka. Although telephone was considered a luxury good in the

past, it has now become an essential good in Sri Lanka due to several factors. Despite the fact

that Sri Lanka embraced liberalization in 1977, the telecommunication industry was

liberalized in 1996.The main purpose of this study is to examine the impact of liberalization

on the telecommunication industry, consumers and employment generation. The study is

mainly based on secondary data before and after liberalization of the telecommunication

industry collected through various sources. Descriptive statistics and t-tests were mainly used

to analyze data. It was found that tele-density has increased rapidly while average revenue

per user declined sharply As a result of intense competition consumers enjoy lower tariffs

rates and value added services. An employment opportunity in the industry has also gradually

increased after the liberalization. In conclusion liberalization of telecommunication industry

in Sri Lanka has had significant impact on the industry, consumers and the employment

generation.

___________________________________________________________________________

Key words: Liberalization, Telecommunication Industry, Sri Lankan Economy, Privatization

JEL Classification: E 30 ; E 65 ; E 66 ; L5 ; L10 ; L86





1. Introduction

Currently telecommunications industry is a major service industry in Sri Lanka. In the past

telephone has considered as a luxury good. Due to numerous factors such as expansion of the

coverage of telephones, fallen of the equipment prices, increase communications requirement

among people, telephones bundle with the other services (internet, TV, radio, camera,

recordings) and dropped the usage charges currently it has become as an essential good in

Sri Lankan peoples life. The subscriber base (penetration) of the industry has exposed an

upward trend in last few years.

As a result of liberalization the telecommunications market, the government monopoly for

fixed telephony service had been broken in 1996 since Suntel Ltd and Lanka Bell Ltd started

operations as fixed telephone service providers in Sri Lanka. Further during this period there

were four mobile telephone service providers. However at that time they were unable deliver

proper competition for fixed telephony due to numerous factors such as high equipment cost,

low coverage, high call charges etc. When start the 21st century there were seven

telecommunications service providers played in Sri Lankan market as four mobile and three

fixed lines service providers. At that time telecommunications industry was a higher

profitable industry in Sri Lanka. However from 2006 the call charges have shown a

downward trend. As a result, 2008 and 2009 the industry incurring loss and some service

providers faced difficulties to survive in the market. According to the above facts it is

questionable how far the industry stability was safe guard by the liberalization. Thus, this

study investigates how to effect the liberalization for industry stability.

According to the history of Sri Lankan Telecommunication industry, up to 1996 it was a

pure government monopoly. Institutional reform of the Sri Lankan telecommunication

industry began in 1980 with the separation of the Department of Telecommunications from

the post office. Both institutions continued to report to the Minister of Posts and

Telecommunications. The Department of telecommunications functioned as a normal

government department, subject to limitations on the ability to hire, fire and discipline

employees, to raise funds independently and to retain earnings for internal use. In 1984 a

presidential committee was appointed to make recommendations to liberalize the

telecommunications market. This committee was chaired by Mr. K.K. Gunawardene who

served as Director of Telecommunications at that time. This can be identified as the initial

stage of market liberalization in telecommunications industry. The report of the committee

had been recognized to privatize the Department of Telecommunications and to introduce

competition and regulation. Further it recommended to creation a regulatory body and

granting licenses to the service providers. The main intentions were the above process





provides better service for the customers, introduce new technology for Sri Lanka and

increase the telecommunications facility in Sri Lanka.

In 1989 Sri Lankan first mobile telephone service provider namely Celltel Lanka (Pvt) Ltd

started the operations. However during this period mobile telephone has considered as a

luxury good and the price of the mobile handsets are highly expensive (around Rs. 100,000/-)

when compare with the fixed telephones. The call charges were also higher and the customers

had to pay the both incoming and outgoing calls. Therefore mobile telephones were unable to

deliver sufficient completion for fixed telephone service providers.

Due to the development of the technology mobile telephone handset prices have

significantly dropped. Further the call charges have significantly fallen from 2005.

Accordingly mobile telephony could be able to deliver a proper competition for fixed

telephony. This situation has caused to form a completion among the telecommunication

service providers (fixed and mobile). Finally the above scenario has caused to create some

anticompetitive practices in the Sri Lankan telecommunications industry which harms for the

some industry players long term stability. Further, as a result of introduction of the newest

technology of Code Division Multiple Access (CDMA) for the fixed telephone industry in Sri

Lanka significantly reduce the installation cost of fixed telephone handsets. Accordingly it

has reduced the customer’s entry barrier in fixed telecommunications industry. The above

situation has caused to growing the completion among the telecommunications service

providers. Due to the price reduction of mobile industry, the fixed telephone service providers

had also reduced their prices to stop the customer migration to mobile industry.

During the period end of 20th century and beginning of the 21st century most

telecommunications companies recorded sufficient profit margin. However 2008 and 2009

some service providers recorded losses which were earned higher profit prior to 2008. As a

result of the above scenario some service providers of Sri Lankan telecommunications

industry faced difficulties to survive in the market. By considering the above

Telecommunications Regulatory Commission of Sri Lanka (TRCSL) had taken a decision to

impose a floor price to protect the Going Concern of the service providers. However the floor

price regulation is harmful for the consumers since they cannot get the benefit of the price

reduction. Further as a result of the floor price the dominant market players become more

powerful since the other players cannot reduce the price beyond the floor price level.

The main intentions of liberalization are to provide a better service for the customers

through the competition and the industry development through private sector participation

Palihawadana (2007). There were many industries liberalized in Sri Lanka after the free trade

policy reforms introduced in 1977. As a result of the above trend Sri Lankan

telecommunications industry was also liberalized in 1996. When considering the initial stage





of liberalized telecommunications industry it has provided some benefits for not only the

customers but also the society such as reduction of call charges (tariff), introduction of new

technologies, employment generation opportunities, increased the telephone usage, improved

the telecommunication coverage in rural areas, dropped the equipment costs, grew the

industry profitability, increased the government revenue etc. However after 2007 some

telephone service providers have been suffering losses and it was difficult to survive some

service providers in the market. There was an evidence to prove above scenario since fixed

telephone operator namely Suntel Ltd has acquired by another fixed operator namely Dialog

Broadband Networks (Pvt) Ltd in 2012.

According to the above facts it is understood that within a shorter period (10 Years) after

liberalization industry stability has been broken in the telecommunications sector in Sri

Lanka. As per it is questionable that how to affect the process of liberalization for

telecommunications industry. Further currently the telecommunication industry has become

the one and only industry which apply floor price in Sri Lanka which is harm for the

consumers as well as some service providers. This study attempts to find empirical evidences

on the relationship between liberalization and the telecommunications industry stability in Sri

Lanka. Currently there is no proper study to evaluate the above issue of the

telecommunication market liberalization and it can be identified as a research gap. More

specifically the following research questions will be addressed by the study.

What is the industry effect of liberalization on telecommunications sector in Sri Lanka?

What is the social effect (consumers and employment) of liberalization on

telecommunications industry in Sri Lanka?

This study mainly consists of following objectives.

1. The primary objective is;

To evaluate the impact of liberalization on telecommunications industry.

2. The secondary objectives are;

To examine impact for the consumer of the liberalization on telecommunications

industry.

To examine the impact of the telecommunications market liberalization on employment.

2. Literature Review

The trend of liberalization and privatization of infrastructure facilities commenced in few

countries in the 1970s and 1980s, it never turned into a worldwide wave until the 1990s. This

wave swept the world during the decade of 1990s opening and deregulating most of

infrastructure activities in developed as well as developing countries. Developing countries

have been at the peak of this wave, pioneering better approaches to providing better





infrastructure services, reaping the benefits of increased competition and customer focus,

which have lead higher efficiency and easing of fiscal constraints (Roger, 1999).

When consider the world history of liberalization former British Prime Minister “Margaret

Thatcher” has provided a huge contribution for liberalization. As the Prime Minister, she

implemented conservative policies that have come to known as “Thatcherism”. As per she

introduced economic policies emphasizing deregulation mainly flexible labor market, the

privatization of state owned companies and reducing the power and influence of trade unions.

During the period of Thatcher’s (1979-1990) the United Kingdom followed highly liberalized

economic mechanism. These liberalized based policy reforms has caused to acquire rapid

economic growth to United Kingdom. In addition to Margaret Thatcher former British Prime

Minster “Tony Blair” has also followed highly liberalized economic mechanism for United

Kingdom. According to his words liberalization indicates as follows.

“Success will go to those companies and countries which are swift to adapt, slow to

complain, open and willing to change. The task of modern governments is to ensure that our

countries can rise to this challenge”

The concept of Washington Consensus coined by the economist “John Williamson” has

provided strength and foundation for liberalization. The Washington Consensus has provided

Ten Commandments which provide sustenance for spread of liberalization. Accordingly the

Ten Commandments provided by Washington Consensus namely, fiscal discipline, reordering

public expenditure priorities, tax reforms, liberalizing interest rates, liberalization of inward

FDI, trade liberalization, competitive exchange rates, privatization, deregulation and property

rights.

There is a hot debate among people the appropriateness of the terminology “management”

instead of “administration” in the public sector. As a result of the above, the reform for public

sector management is being occurred in different levels, different methods and different size

commencing from 1970s, replacing the traditional public sector model. Some researchers has

identified that due to lack of sufficient funds in government sector, the government has

facilitated private sector to participate economic activities (industries) in different ways such

as public-private partnerships, privatization, liberalization etc. This has caused to broken the

government monopolies in most industries. When consider the Sri Lankan history, after

introduction of the free trade policies some government monopolies has broken through

privatization such as transport, telecommunication, electricity, fuel, gas etc.

Reddy (1998) pointed out as the logic of privatization from the perspective of good

governance is centered around the assumption that transfer of property rights in favor of more

active shareholders may improve the economic value of the firm on a sustainable basis. Thus,

partial privatization (public private partnerships) for finding the finances of the government





without changing the control structure will not necessarily result in better governance. As per

the above statement, it has indicated that the failure of the government sector. This fact has

caused to more world intervention for liberalization. Further Wellenius (2000) highlighted

that the Cost effective measures to achieve widespread access focused on removing obstacles

that prevent the market from working well, letting users decide what they need and can afford

and using market mechanisms to allocate responsibility for extending service beyond the

market and to quantify and allocate any necessary funding.

As a result of success the East Asian economies through industrialization, the other Asian

countries also turned to more industrialization of their economies. Further most of the

countries followed the free trade policies and the liberalization policies to success the

industrialization. The main intention was the above reforms to promote private sector more

participation in the economy. Sri Lanka has also faced this reality during mid-1970s. In 1977

the government converted the Sri Lankan economy as an open economy instead of more

restricted economy policy. This was a more outward looking policy system. According to

Patabandige (2006) lower economic growth, high unemployment and some other unfavorable

trends seen in the Sri Lankan economy under extremely stringent control policies indicated

that Sri Lanka was moving in the opposite direction of its development spectrum by the

middle of the 1970s. As per the above statement it is understood that the economic policies

followed prior to 1977 were more restricted and it was failed middle of 1970s. The new

policies introduced after 1977 were more free economic system for entrepreneurs and more

flexible for private sector participation. As indicated by Vidanapathirana (1991) the main

objectives of the 1977 liberalization policy included a) achieving a higher level of economic

performance through a diversion of resources to the export sector by making especially

industrial (non - traditional) exports more attractive than import substitution, b) diversifying

the economy and achieving a progressive improvement in the balance of payments c)

generating greater employment and income opportunities for the growing population d)

ensuring a more equitable distribution income and improving the physical quality of the life

of people.

As a result of the 1977 economic reforms the private sector participation significantly

expanded in Sri Lankan economy. As per more government own corporations or departments

such as Tire, Electricity and Telecommunications has been privatized. Ranawaka (2002)

emphasizes this as privatization or disinvestment of public enterprises involves transfer to

entitlement to profits (residual income) from the public sector to private sector. Within the

principle – agent framework, it represents a shift in property rights to a new group of

shareholders or principle. However most of the privatized industries were earlier government

monopolies. After privatization them, again created a monopoly which owned by private





sector. As a result of the monopoly, the customers could not able to get the benefit of

competition. Further it has also caused to slow the industry growth.

Due to the above reason the government took a decision to liberalize the most of industries

to pass the benefit not only customers as well as industry. Jayawardena (2004) the above

situation describe as follows. “Sri Lanka’s growth experience in the dirigiste period of the

1960s and early 1970s was not a happy one with only 3% percent GDP growth annually. The

incoming UNP government, and in particular President J.R. Jayawardene, wanted to liberalize

the economy, abandon import licensing and convert food subsidy into investment”.

According to the above statement it is understood that the government needs to increase the

capital expenditure through liberalization since it is important to reach a considerable GDP

growth in the future.

As pointed out in the above the trend of liberalization spread also to the4

telecommunication industry. This has indicated by Li and Xu (2004) as in 1980 only 2% of

telecommunications service providers in 167 countries had private owners; by 1998 the

number went up to 42%. The above statement confirmed that the trend of liberalization also

drastically gathered the telecommunications industry.

A common scenario in most countries that the telecommunications agency that is

privatized the previously government owned monopoly. Until early 1990s, in most countries,

telecommunications services were provided by the state-owned and operated institutions.

However privatizing a government monopoly will cause to create another monopoly instead

of the previous government owned monopoly. This will be harm for the customers since they

cannot get the benefit of rivalry among the competitors. The policy makers believe that to

face this situation the telecommunications market should be liberalized so that competition

could reduce the monopolistic power of the incumbent operator. As a result of competition

the customers would be able to get the benefit such as high quality product, better price,

newest methods and technologies etc. The above facts can justify through the history of Sri

Lankan Telecommunications industry. During the period of Government monopoly there has

been heavy criticism on the quality of the services not only the public but also by the

Government. At that time it has recorded that there was a huge queue to get the telephone

facility in Sri Lanka. However after the liberalization of the telecommunication industry the

many of the above problems have solved. Since during the 21st century there was no queue to

get telephone it can be identified as an on demand service. Further the customers could enjoy

more benefits through the competition such as price reduction, newest technologies, high

quality service etc.

One of the benefits of liberalization is expansion of the service availability. As explained

in earlier, prior to liberalization the telecommunications industry service availability was very





less since there was a queue to get telephony at that time. Using panel data in 23 countries,

Ros and Banarjee (2000) argue that a positive relationship could be established between

privatization and network expansion and efficiency of telecommunications sectors in the

Latin American region. This fact has also confirmed by Ranawaka (2002) as competitive

markets go a long way toward making telecommunications services available to the entire

population. In addition to the above Ros and Banerjee (2000) have reported that privatization

of telecommunications entities in several countries in Latin America during the 1980s and

1990s altered significantly the prospects for the development of the all-important

telecommunications sector in that part of the world. This has confirmed by Jianqiu and Hailan

(2005) as after China started to implement the economic reforms policy in 1978, China’s

telecommunications industry has been in a highly increasing period. The increasing rate of

Chinese telecommunications operator’s revenue goes far beyond than that of GDP for a quite

a long time. As per the above facts it is apparent that liberalization has caused to develop the

telecommunication industry. Further it has cause to increase the quality of service in the

industry which is beneficial to the customers.

Selvarajah (2000) suggests that strict regulatory measures should be taken including

prevention of anticompetitive practices, monitoring service quality, unbundling incumbents’

network as much as possible etc. Since the main intention of the private sector firms is profit

maximization and they are not concerning industry stable or competitor’s status. According to

the above statement it is apparent that after liberalization not only consumer protection as

well as the industry protection also important to succeed it. Inzaguirre (1999) highlights as

markets do not function ideally; regulation is required to provide a substitute for that element

of perfect competition. Establishment of Regulatory bodies, especially for the

telecommunications sector, followed the wave of privatization throughout the world. Most

countries with little or no competition are concentrating in the short term on generating a

surplus to rapidly expand the network rather than on reducing prices.

According to Mody (1997) the popular prediction is that the technologically less advanced

low efficiency Department of Telecommunications will become the provider for the poor by

reducing its rates to capture the numerically large lower-middle class residential market and

rural market. The private operator will offer more technological innovation and a more

reliable and efficient service at a higher price for business and residences of the middle and

upper classes. The above statement proves that the private sector service provider is high

quality and active than the government sector service provider. However it’s charges for the

service is higher than the government sector. As per the above incident it is observed that

there was no proper competition in the industry and it may have caused to raise the price for





the service. Through liberalization the industry it may cause to reduce the price for the

service since it would build completion among the service providers.

3. Methodology

The main intention of the study is to evaluating the industry impact of the

telecommunications market liberalization in Sri Lanka. The industry impact measure based on

three aspects and they are as follows.

Trend of the Subscriber base in the Industry

Trend of the Revenue in the Industry

Trend of Employment Opportunities in the Industry

To evaluate the above aspects, it is compare the data prior to liberalize and after liberalize

the industry. The annual trends of revenue, subscriber base and employment opportunities

consider as the industry impact.

In addition the above aspects, some facts were described to get apprehend about

liberalized telecom industry. They are market strategies used by telecom industry, regulatory

involvement in telecom industry and future trends in telecom industry

At present there are eight telecommunications service providers in Sri Lanka. There are

two main categories in the Sri Lankan Telecommunications market and them as Fixed

Telephones and Mobile Telephones. As per the above first three organizations are fixed

telephone service providers and the others are mobile telephone service providers.

The main objective of the study is to evaluating the industry impact of the

telecommunications market liberalization in Sri Lanka. To achieve the main objective, there

is no sample design the population consider to evaluate it.

Based on the data available the following hypotheses were formed for evaluate the

industry impact of liberalization by using the statistical techniques.

H0: The average subscriber base is equal before liberalization and after liberalization.

H1: The average subscriber base after liberalization is greater than before liberalization.

The study is mainly based on the secondary data. Accordingly the data collected through

annual financial statements of telecommunications service providers, annual reports of

Central Bank of Sri Lanka, data available in the Census & Statistics Department and

statistical data published by Telecommunications Regulatory Commission of Sri Lanka

For the purpose of data analysis simple statistical techniques (descriptive statistical

techniques) mainly use to analyze the data. Accordingly mainly graphical method and tables

use for analyze and presented data.

The hypotheses were tested to understand the impact of liberalization for the subscriber

base of telecom industry. The statistical technique of two population means (before

liberalization and after liberalization) at 5% significant level was used to test the hypotheses.





4. Analysis and Discussion

4.1 Impact on Telephone Connections and Teledencity

The figure 4.1 shows the trend of telephone connections in Sri Lanka from 1985 to 2013.

Accordingly, it has exposed that there was no significant growth in telephone connections

prior to liberalization of telecom industry which was taken place in 1996. From 1997 (after

liberalization) the industry has shown a significant upward trend of telephone connections.

Figure 1: Number of Telephone Connections (Fixed & Mobile) in Sri Lanka (1985 – 2013)

Source: Author’s Construction from the Data Extracted from TRCSL, Central Bank and Census &

Statistics Dept.

The nature of the statistical data was considered as a small sample. Accordingly two

population means were tested for 5% significant level. The telephone connections for five

years period were considered both before and after liberalization. The year 1997 was

considered as the time line for liberalization. The natural growth, technological development

and growth of per capita income are some of the other factors affect in changing the telephone

connections. To minimize the influence of the other factors, five year period was conceded

both before and after liberalization for this analysis. Hence with these assumptions the test

was carried. Based on the two population mean test, it can be concluded that the average

subscriber base after liberalization is significantly higher that of before liberalization.

Figure 2: Waiting List to Get a SLT’s Telephone Connection (1985 – 2004)

Source: Author’s Construction from the Data Extracted from Central Bank of Sri Lanka.





Liberalization of the telecom industry resulted three ways to reduce the waiting list.

Firstly, as a result of the liberalization Suntell and Lanka bell reduces the waiters list and then

secondly, mobile industry and finally, due to the neutrality of the technology resulted to

abolish the waiting list. Hence impact of liberalization assisted to reduce waiting list. There is

no waiting list after 2004.

Figure 3: Average Revenue per User in Telecom Sectors (1995 – 2012)

Source: Author’s Construction from the Data Extracted from TRCSL Reports.

Average revenue per user has significantly dropped after the liberalization.

Liberalization of the telecom industry resulted three ways to reduce the waiting list.

Firstly, as a result of the liberalization Suntell and Lanka bell reduces the waiters list and then

secondly, mobile industry and finally, due to the neutrality of the technology resulted to

abolish the waiting list. Hence impact of liberalization assisted to reduce waiting list.

As per the above data the initial era after liberalization fixed telecom sector revenue

shown a growth trend. However after 2008 there is a decline trend of fixed telecom sector

revenue. When consider the ARPU of fixed telecom sector it has reduced up to 2010 and

thereafter it shows an upward trend. According to the figure 4.6 there is a decline trend of the

fixed telecom subscribers after 2011. This fact has directly caused to reduce the fixed telecom

sector revenue. In addition to that the customers more are willing to mobile telephone than the

fixed phone since it has provided more value added services. This fact also can affect to

reduce fixed telecom revenue. Further they have migrated to mobile sector.

When consider the mobile telecom sector it shows a continuous upward trend for the

revenue. As an industry it is favorable for its long term establishment. While its ARPU

indicates a decline trend, the subscribers indicates growth trend in figure 4.7. Further ARPU

has also shown an increase in 2012. As per the above facts it is apparent that the liberalization

has favorably affected for mobile sector than the fixed sector.





Figure 4: Average Revenue per User in Telecom Sectors (1995 – 2012)

Source: Author’s Construction from the Data Extracted from TRCSL.

Note: Unable to find the data prior to 1995

Figure 5: Revenue Trend in Sri Lankan Telecom Sectors (1995 – 2012)

Source: Author’s Construction from the Data Extracted from TRCSL.

Note: The data is not available prior to 1995

Figure 6: Fixed Telecom Sector Subscribers (1990 – 2013)





Figure 7: Mobile Telecom Sector Subscribers (1992-2013)

0

5000000

10000000

15000000

20000000

25000000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Dec

As explained in the above from the initial period of liberalization mobile telecom market

was competitive. Therefore the service providers tried to retain their existing customers and

capture new customers by using the strategies. Accordingly the initial stage of the

liberalization of the mobile sector, it has used technology as the strategy to capture market.

The classic example is how the Dialog established in the Market. They have commenced their

network using Global System for Mobile (GSM) technology where the other operators with

Analog technology. GSM technology provides facilities to provide value added services

other than basic services. They have used technological advantage to attract customers to their

network. In line with this they have marketed their motto as “future today” to create customer

mindset that they provide the up to dated new products. However the other three service

providers reacted for Dialog’s strategy with immediate effect to protect the market share.

Hence the all Sri Lankan mobile operators had converted their networks to GSM technology

in 2000.

As the second market strategy the mobile operators applied to expand their network

coverage. They tried to provide network coverage for un-served areas of the country and

capture the customers of such areas. Accordingly the mobile operators could be able provide

their network coverage not only urban areas but also some rural areas in the country. At that

time mobile operators earned high profit margin. However they spent more money as capital

expenditure for investments to increase the network coverage. The above fact has been

confirmed by the annual financial statements of the services providers from 2001 to 2006

indicating more investment on telecom network infrastructure.





From year 2005 to Sri Lankan mobile industry started to apply price as the market

strategy. As a result of that it can be identified a huge price reduction in Sri Lankan mobile

market. Each operator tried to retain their customers in their network and tried to grab

customers from the other networks. As a result the Mobile operators started practicing

“anticompetitive practices”1 and “predatory pricing mechanism”2 . As an example it can be

identified Mobitel’s “Upahara”3 tariff plan and Dialog’s “Blaster”4 tariff plan. Both these

tariff plans are very attractive. The other operators have to apply pricing strategies to prevent

churning their customers. They also reduce prices. This went on for several months which

have a feature of “Price War”5 . Further there were another two service providers entered to

the Sri Lankan telecom market during the highly competitive stage that is Dialog Broadband

Networks (Pvt) Ltd in 2005 as fixed telecom service provider and Bharti Airtel Lanka (Pvt)

Ltd as a mobile service provider. Therefore the fixed service providers increased up to four

and the mobile service providers increased up to five. As a result of this the mobile telecom

sector became more and more competitive and the fixed telecom market was also become as a

competitive sector. The following graph (figure 4.8) shows the data about the price reduction

in Sri Lankan mobile market.

Figure 8: Trend of Mobile Call Charges (2000 – 2013)

Source: Authors Construction from the Data Extracted from TRCSL


1 Business practices which harm for fair competition in the sector. 2 Price of the Product is below the cost. 3 Special tariff plan offered for government employees offering 1000 minutes free for onnet and fixed

lines for Rs.240/- monthly rental. 4 A tariff plan where 1000 on net outgoing minutes per month with Rs. 300/- monthly rental. 5 The firms continuously rivalry in the market by reducing price of the product.





Figure 9: Profitability of Mobile Telecom Industry (2005 – 2013)

Source: Author’s Construction from the Data Extracted from TRCSL


By considering the industry scenario TRCSL has imposed a floor price for local call

charges in Sri Lankan mobile market to govern the unhealthy completion and protect the

going concern of the sector. The floor price was not affect for the existing customers who

subscribe the tariff plans below the floor price prior to 2009 approved by TRCSL. However

the service providers were not allowed to offer such tariff plans for the new subscribers after

imposed the floor price in 2009. The floor price regulation that implemented in 2009 for Sri

Lankan mobile market is as follows.

Table 1: Floor Price Regulation - 2009

Category Charge (Tariff)

On Net Call Rs. 0.50 per Minute

Off Net Call Rs. 2.00 per Minute

Source: Computed Using Data Extracted from TRCSL

In 2010 TRCSL has revised the floor price. This time the regulator imposed floor price as

per the billing mechanism i.e. per second and per minute. In addition to that it has

implemented a floor price for Short Message Service (SMS) since the service providers

significantly reduce the SMS price after 2009. The SMS charge was Rs. 2.00 per message in

2009 and it was reduce up to Rs. 0.25 per message in 2010. Further TRCSL has imposed

same floor price for fixed telecom sector. Since it also more competitive after 2009 and they

also reduced their call charges up to mobile floor price in 2009. The floor price revision

implemented in 2010 is as follows.

Table 2: Floor Price Regulation - 2010

Category

Charge (Tariff)

Per Minute Billing Per Second Billing

On Net Call Rs. 1.00 per Minute Rs. 1.25 per Minute

Off Net Call Rs. 2.00 per Minute Rs. 2.50 per Minute

On Net SMS Rs. 0.10 per message

Off Net SMS Rs. 0.25 per Message

Source: Computed Using Data Extracted from TRCSL





Based on the market situation TRCSL has revised the floor rate in 2011 and it applicable

for Sri Lankan telecom market (fixed and mobile) up to date. This time TRCSL has permitted

to the service providers to reduce their off net call charges Rs. 0.50. The other rates remained

unchanged.

4.2 Employment Opportunities Generation in Telecom Industry

As a whole the initial years after liberalization it has shown a growth trend in the

employments. However the recent years, there is a declining trend in the direct employment

in the telecom sector. The annual reports of the telecom service indicated that they have fired

some employees since their profit margins are shrinking. The above scenario is not healthy

for the economy since the unemployment is a core issue in Sri Lanka. By considering the

above as a hole it can be further proved that the floor price regulation is still needed for

telecom sector. Further it may generate again more employment opportunities when the

industries get the long term stability.

5. Conclusions and Recommendations

5.1 Conclusions

One key parameter to identify the telecom market is the change of teledensity. In this

study it was clearly identified that the number of telephone connections were very minimal

until 1996. Thereafter slide growth until 2002 and exponential growth after 2002. Which

clearly shows that the liberalization resulted increasing the telephone connections and thereby

the teledensity. Hence, it can be concluded that the liberalization has positively impact to the

telecommunication industry.

Another indicator considered in this study was the waiting list to get a SLT telephone

connection. Before liberalization telephone line was considered as a luxury item since a

potential customer has to wait years to get the connectivity. By that time SLT maintain a list

of their potential customers called waiting list. It was increasing sharply until 1997 and small

down trend in 1998 due to appearance of new operators Suntel and Lankabell as a result of

liberalization. After 2004 the waiting list was abolished due to two reasons. That is consumers

were able to obtain the mobile telephone connectivity and the boost of CDMA connectivity.

Hence it can be conclude liberalization has positively impacted to the telecommunication

industry in Sri Lanka.

Average Revenue Per User (ARPU) is another indicator which shows how the benefit of

liberalization passes to the customers. It was identified from the study that the ARPU has

dropped over the period. Hence liberalization improved the competition where the benefit

passes to the customers.





Market and non-market strategies adopted by the operators as a result of liberalization. Before

the liberalization there was a monopoly hence no strategies required to increase the

subscribers. Rather in this era excess demand exist in the market. However after liberalization

the market competition push operators to adopt strategies to increase their subscribers.

Accordingly, they have adopted technological strategies by introducing latest technology

where customers could use value added services.

Together with the liberalization Sri Lanka telecom was privatized and conducted five

tariff rebalancing process. It mainly concentrated on liberalizing IDD tariffs. Further market

competition went up radically. The local call changes are also came down. The operators

started to excessive pricing strategies to attract customers. Accordingly lot of innovative tariff

plans was introduced to the market. Further they dropped the price rapidly even below than

the cost. The regulator has to impose a floor price and control the market. Hence it can be

concluded that the liberalization assists to droop the telecom prices.

It is a general phenomena that the growth of an industry creates more employment

opportunities. It was found from this study a gradual increase of employment opportunities

recorded in the telecommunication industry. Which is a positive indicator of the

liberalization.

5.2 Recommendation

Before liberalization of the telecommunication industry, it was controlled by the

government. Therefore the government is responsible on satisfying the stakeholder’s interests.

The consumer interests were looked after by the government. After the liberalization, the

foreign and local private entities were licensed as telecom operators. Hence, the independent

Telecom regulator had to play a vital role in safeguarding the consumer interest and to

achieve government objectives. Due to the increase of the competition the role of the

regulator became important than ever before. Hence it can be recommended to straighten the

regulator to achieve the objective of the Government, consumer’s interest and to safeguard

the industry.

The operator’s prime objective is to earn profits. Therefore when they invest, they look in

to the business model whether the investment is profitable. Investing in remote areas will not

generate enough revenue for them to promote investments. It is a government requirement to

give the connectivity to these unnerved or underserved areas. Hence It can be recommended

that the government should encourage the operators by giving subsidies to provide

connectivity to unserved and underserved areas.

As a result of liberalization more and more operators started their operations in Sri Lanka.

The new entrants struggling to increase the market share. They cut down the prices and

introduced attractive tariff plans. As a result existing operators have to tie-up their customers





by dropping the price. It is a threat for the sustainability of the industry. In order to keep

sustainability of the industry the rules relating to tariffs should be updated in timely manner.

The scare resource like spectrum has to be managed in effective and efficient manner to

deliver better service. It enhances resource availability to introduce new technologies and

managing existing services without interference. Hence it can be recommended to manage

scare resources allowing telecom operators to provide their services in optimal manner.

In line with the technology development the avenues were open for people to misuse the

service. Hence it is recommended to increase customer awareness on the services in

liberalized market environment in order to stop the vulnerability of misusing the services. The

service provider has to properly communicate the servicers and has to strengthen the

surveillance. The government has to impose proper legislations.

5.3 Further Study Areas

Telecommunication is an important service industry in an economy. Further this is a

dynamic industry. As per the industry need more modern ideas for its future success. The

following areas can be mentioned as the further study areas of the telecom industry.

Specific model for measure the telecom industry development.

Indirect employment opportunities generated in telecom industry and its impact for

unemployment issue in Sri Lanka.

The impact of the Floor Price regulation for telecom industry

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