MNP Could Heighten Risk to Sri Lanka's Telecom Industry

The implementation of Mobile Number Portability (MNP) in Sri Lanka - as proposed by the local Telecommunications Regulatory Commission of Sri Lanka (TRCSL, "the regulator") - could further pressure industry profitability, says Fitch Ratings.

Severe price competition in the Sri Lankan mobile space since mid-2005 has significantly eroded the telecom operators' profitability. However, price-based competition has eased since 2009 given the operators' weakened financial profiles, and an unofficial tariff floor implemented by the TRCSL. 

"While the present unofficial tariff floor should help curb the continued deterioration in the mobile operators' financial profiles, the implementation of MNP could increase subscriber acquisition and retention costs within the industry. This would exert further pressure on the operators' balance sheet quality," notes Hasira De Silva, Associate Director with Fitch's Asia-Pacific Corporates team.

MNP would allow subscribers to switch mobile service providers while keeping the same mobile number, and is seen as a tool to encourage competition and operator efficiency. Over 80% of Sri Lanka's 12.7 million mobile subscribers (60% headline penetration) at end-December 2009 were pre-paid users, and Fitch notes that a sizable share of these pre-paid customers uses multiple SIM cards and arguably have little or no loyalty to any one operator. "With MNP, there will be more competition for post-paid and premium pre-paid users who are arguably more profitable for the operators" adds Mr. De Silva. 

While MNP could force the operators to improve service standards, its implementation could also provoke greater expenses pertaining to loyalty-based rewards, brand-building and product differentiation. Furthermore, those operators who currently maintain a premium above-the-floor tariff, on account of greater investments in network capacity and coverage, and prior brand name investments, could be forced to match competitors' lower tariffs, in order to retain market share. Fitch believes the threat from MNP to larger and more established operators is higher, including Sri Lanka Telecom PLC (Foreign Currency Issuer Default Rating: 'B+'/Stable; National Long-term Rating: 'AAA(lka)'/Stable Outlook) and Dialog Telekom PLC (National Long-term Rating: 'AA-(lka)'/Negative Outlook). 

Falling industry profitability was neglected by TRCSL for several years, in favour of higher competition. In a special report published in December 2009, entitled "Telecom Regulatory Risk - South and South-East Asia", Fitch identified Sri Lanka as having the highest regulatory risks in the region due to weak and uncertain regulations. 

Fitch however considers TRCSL's recent actions, such as the introduction of floor tariffs for voice services, as positive for operators' credit profiles. However, to limit further damage to the industry, the agency believes formal price floors and strict laws that enforce healthy competition should precede the implementation of MNP.

Applicable Criteria available on Fitch's website, at www.fitchratings.com: "Corporate Rating Methodology", dated November 24, 2009.